Mount Logan Capital Inc. (MLCI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Mount Logan Capital's First Quarter 2020 Results Conference Call. Before we begin, I would like to remind listeners that except for historical information, the matters discussed during this call may include forward-looking statements within the meaning of the applicable Canadian Securities Legislation. Forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual financial results, performance or achievements to be materially different from estimated future results, performance or achievements expressed or implied by those forward-looking statements. All forward-looking statements reflect the company's current views with respect to the future events and are subject to risks and uncertainties and assumptions we have made in drawing the conclusions included in such forward-looking statements. The company is not obligated to update or revise any forward-looking statements, and we do not assume any obligation to do so. For a description of the risks associated with Mount Logan Capital's business as well as information about the material factors and assumptions that could cause results to differ from any forward-looking statements and other relevant factors, please refer to the company's public disclosure record, particularly the company's MD&A and annual information form for the year ended December 31, 2019, which are available on SEDAR. I would like now to introduce your host for today's conference, Mr. Ted Goldthorpe, Chief Executive Officer of Mount Logan Capital. Mr. Goldthorpe, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for our first quarter 2020 results call. During the call, we'll be referring to information provided in the financial statements, the MD&A and the associated news release for the quarter, all of which are available on our website and on SEDAR. Joining me this morning is our Chief Financial Officer, Ted Gilpin. First and foremost, we hope all of our stakeholders are healthy and safe. Before we discuss our recent financial results and our portfolio, I would like to take a few moments to discuss the state of the market as we see it and the steps we have taken at Mount Logan. March was an exceptionally challenging month in the credit markets, but I believe it highlights the importance of our team, our ability to adapt to the investing environment and our ability to invest in the investment environment. On our previous quarterly call in late March, we highlighted the volatility in the liquid markets and the likelihood that widening in credit spreads in our primary markets would be the result. To provide some context, the pricing within the Leveraged Loan Index declined from approximately 95 at the beginning of March to a low of approximately 76 on March 23, before returning to approximately 83 by the end of the month. Six of the worst seven trading days in history, including all of the Top 5 in the leveraged loan market occurred in the month of March with the only one -- with the only other one being at the depths of the global financial crisis on October 10, 2008. With that as a backdrop, the market for newly originated loans has slowed considerably. While there is limited activity from new M&A transactions, we've seen a number of attractive opportunities to provide add-on acquisition financing -- or purchase decisions in recently completed loans at attractive discounts to face value. Additionally, we have been very active in evaluating additional investments in previously underwritten companies that we believe will be minimally impacted by COVID-19 in the long term. We've also seen an unprecedented rise in demand for liquidity from middle market companies who are looking to put cash in their balance sheets as a buffer, given all the uncertainty in the economy. We are being extremely judicious in deploying capital and balancing it with respect to maintaining adequate liquidity. After market closed on Monday, Mount Logan announced its first quarter 2020 results, along with a letter to shareholders that outlines Mount Logan's positioning in the current market environment. To summarize, we believe we are well positioned to navigate this period of instability and uncertainty. All of our management team has experience managing assets through multiple credit cycles at best-in-class institutions. More specifically, we believe that our strength in a downturn can be attributed to three factors: our diverse portfolio, our sector positioning, and our capital structure and liquidity management. First of all, we have a diverse portfolio of 16 unique Investments. Excluding Cline, 80% of our portfolio is concentrated in first lien senior secured debt, which we have purposely focused to be on well positioned when times of economic stress do arise. In addition, with 14% of our portfolio in the Great Lakes Unitranche Joint Venture, this exposure is underpinned by portfolio of first lien senior secured unitranche loans, diversified across 11 middle market borrowers in a variety of stable industries. Taken together, as of March 31, 2020, approximately 94% of our portfolio is in first lien senior secured debt and in our joint venture, underpinned by first lien debt. Secondly, our portfolio is heavily skewed towards defensive sectors. Mount Logan has no direct exposure to most of the sectors that will or expected to face immediate impacts. Excluding Cline, of which Mount Logan has no net balance sheet exposure, we do not have direct exposure to sectors such as automotive, energy, metals and mining, hotel, casinos and leisure, advertising, restaurants, airlines and cruise lines. Lastly, we are well positioned from a liquidity funding profile and capital structure perspective. Earlier this year, we renewed our $50 million leverage facility for another year to mature in February 2021. As of March 31, 2020, we had $8.9 million of cash, a majority of which is committed to supporting the borrowing base for our leverage facility. In light of our liquidity, we've maintained our dividend for the quarter. Earlier this week, our Board declared a dividend of CAD 0.02 per common share with a record date of May 21, 2020 and a payable date set for June 26, 2020. In addition, with respect to unfunded commitments in our portfolio, we had less than $3 million of obligations with limitations on the unilateral funding demands from borrowers and no exposure to revolving credit facilities. Overall, we are proud that Mount Logan's existing structure and permanent capital enabled us to hold onto our investments and did not force us to sell any investments at a material discount to par, when the dislocation began in March of 2020. Despite our confidence in the quality and diversity of our portfolio and funding arrangements, we are aware that these are unprecedented times. Amid this uncertainty, we are actively monitoring our portfolio companies' performance and speaking with the respective management teams and other industry advisors to ensure we have a full grasp of the risks that may develop in light of recent trends. While we faced unrealized markdowns of certain assets in light of credit spread widening, we do not currently -- we currently do not foresee any near-term impairment risk on any of our assets. As of March 31, 2020, all of our borrowers remain current on interest and principle. With that, I'll turn the call over to Ted Gilpin, who will review the financial results.

Thanks Ted. Good morning, everyone. I will now summarize our key highlights for first quarter of 2020. As a reminder, we changed our presentation currency from Canadian dollars to US dollars at the beginning of last year, and as of January 1, 2020, we changed our functional currency from Canadian dollars to US dollars. We believe this now better reflects our business activities and will result in a clearer financial disclosure going forward. Accordingly, all figures I will reference today are in US dollars, unless otherwise specified. Onto our results. For the quarter ended March 31, 2020, we generated $1.1 million in total investment income, up from $483,000 for the same period last year. Of note, while interest income remains our largest contributor to revenue at $865,000 for the quarter, our investment in the Great Lakes Unitranche Joint Venture generated $215,000 in dividend income. On the expense side, professional fees related to legal, audit and tax consulting amounted to $215,000 for the quarter. Other costs, including director's fees, regulatory and shareholder relations and other general and administrative costs, totaled $318,000 for the quarter. Utilizing our leverage facility, Mount Logan incurred $648,000 in interest and other credit facility expenses as a result of drawings under the loan facility. Our overall administrative costs and credit facility costs were elevated this quarter due to a number of items that we expect to normalize and decrease by the end of the year. We also had net unrealized depreciation of approximately $2.3 million on our investment portfolio due to the widening of credit spreads, driven by the unprecedented market dislocation due to the COVID-19 pandemic. Primarily due to this unrealized depreciation, our total and comprehensive loss was $2.3 million for the quarter, or $0.22 per weighted average share. As of March 31, 2020, Mount Logan's balance sheet reflects total assets of $70.7 million, total liabilities of $38.9 million and shareholders' equity of $31.8 million, resulting in a net asset value per share of $3.00. Our 7% decline in net asset value since December 31, 2019 was predominantly driven by the unrealized depreciation on our investment portfolio. Our asset balance at quarter end primarily consisted of $58.2 million in investment portfolio, $8.9 million balance in cash and restricted cash and $2.9 million in a deferred tax asset. With respect to liquidity and unfunded commitments, as mentioned earlier, our aggregate unfunded commitments were just under $3 million at March 31, 2020. However, these remaining commitments are subject to certain restrictions such as the use of proceeds and leverage that must be satisfied before a borrower can draw down on the commitment. Liabilities predominantly include our leverage facility with an outstanding balance of $34.4 million and the fair value of the Cline investment associated with the contingent value rights. On January 31, we entered into an amendment to extend the maturity of our leverage facility for another year from February 2020 to February 2021, providing us with another year of flexible financing that provides enhanced yields on our underlying portfolio. As a reminder on Cline, this is an investment in equity and debt that remains from Marret Resource Corp. prior to the plan of arrangement. As an update, in January 2020, Cline announced that they had entered into a binding agreement to sell their shares in the New Elk Coal Company to Allegiance Coal for a total consideration of approximately CAD 55 million, consisting of cash, debt and equity in a transaction that is expected to close this year. There have been numerous public developments on Allegiance Coal's efforts to progress the deal towards closing, including the signing of agreements and term sheets related to transportation, marketing of coal and potential financings. As a reminder, the change of the value in Cline does not directly affect Mount Logan, rather former Marret Resource Corp. shareholders hold contingent value rights that entitled its holders to the net proceeds that are received from the sale of Cline or any distribution related to the investment. I will now turn it back over to Ted for some closing remarks.

Thank you, Ted. Overall, despite the recent market volatility, we are pleased with the results for the quarter and look forward to continuing to assess opportunities to raise capital and other strategic alternatives that allow us to grow book value. We know this is an uncertain time, but we have conviction in the quality, security and diversity of our underlying portfolio and believe we are very well positioned to take advantage of the current market environment. We will now transition the call to a Q&A session if the operator can please coordinate.

[Operator Instructions] And the next question comes from the line of Charles Burns from CIBC WG.