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

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Mount Logan Capital Third 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 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. At this time, I'd like to introduce your host for today's conference, Mr. Ted Goldthorpe, Chief Executive Officer of Mount Logan Capital. Mr. Goldthorpe, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us for our third quarter 2020 results call. During the call, we'll be referring to information provided in the financial statements, the MD&A, the associated news release for the quarter, all of which were released yesterday and are available on our website and on SEDAR. Joining me this morning is our Chief Financial Officer, Ted Gilpin; [ Mitch Schinbein ]; Matthias Ederer and Henry Wang, our co-Presidents and myself. Overall, we are pleased to announce that Mount Logan had another solid quarter. Over the quarter, our investment portfolio rose in value experiencing a $1.3 million unrealized appreciation, exemplifying the continued normalization of market conditions. Before we speak to our financial results for the quarter, I will provide a brief overview of our portfolio positioning before discussing our equity capital raise, our recently completed CIF transaction. From a macro perspective, while we do not believe we are out of the woods with respect to COVID-19, we experienced improved market sentiment during the quarter as portfolio companies began to gain a better sense of near-term financial visibility and their prospects. As we discussed during our last earnings call, we expect our portfolio to remain resilient through any near-term economic turmoil. In terms of industry exposure, excluding Cline, which, as you know, is structured as a CVR, our portfolio has no direct exposure to the COVID-19 affected sectors, such as automotive, energy, metals and mining, hotel, casinos and leisure, advertising, restaurants and cruise lines. We have a diversified portfolio of investments, spanning 16 borrowers. And as of September 30, 2020, excluding Cline, 77% of our portfolio was concentrated in first lien senior secured debt, which we have purposely focused on to be well positioned. Since quarter end, we've opportunistically divested our exposure to the Great Lakes Unitranche Joint Venture and our exposure to the SCIM promissory note. While we have conviction in the underlying credits and as part of our broader portfolio, we believe the net proceeds can be better deployed in pursuing potential strategic transactions to transition Mount Logan to an asset-light model. Furthermore, both of these positions were divested at cost or above par, a testament to our valuations reflecting current market value. On the capital raise side, on October 27, 2020, we completed a private placement raising CAD 16.8 million at a share price of CAD 2.75 per share. Greatly aided by Canaccord Genuity, ATB Capital Markets and Stifel GMP, we are pleased to welcome new major shareholders to Mount Logan in addition to incremental participation from existing key shareholders and from the directors and officers of Mount Logan. The net proceeds of the capital raise were used to fund our transaction with the Resource Credit Income Fund and for the purchase of public and private debt securities. In regards to the Resource Credit Income Fund, or CIF, as I refer to it throughout these comments, we are pleased to close the transaction on October 30, 2020, following a very successful vote by the underlying shareholders of CIF. As a reminder, CIF is a U.S.-based continuously offered closed-end quasi-permanent capital vehicle that invests credit assets that are highly complementary with Mount Logan's mandate, including direct lending, private credit and public credit. Upon funding approximately $12 million at close, Mount Logan is now entitled to the net economic benefits associated with the management contract for CIF, a fund that has 1.85% annual base management fee on approximately $240 million of assets under management. Our transaction with CIF is a major step towards fulfilling our transition to a diversified credit manager. We view the CIF transaction as a significant milestone towards the market ascribing value to the asset management fee streams associated with our business and thus, transitioning to being valued similarly to our asset management peers as opposed to being valued on a price-to-book basis. We believe there is an extraordinary market opportunity right now. And with our recently raised capital, we look forward to a transformative period for Mount Logan over the next 6 to 12 months. On November 6, our wholly owned subsidiary, Mount Logan Management, received approval from the United States SEC, and is now a registered investment adviser. This important step paves the way for us to complete our acquisition of certain investment management contracts related primarily to 2 CLO funds currently managed by Garrison Investment Management. We expect this transaction to close very shortly, and we will issue a press release when that happens. Lastly, we maintained our dividend for the quarter, and we will be paying CAD 0.02 per share for shareholders of record as of November 30 -- November 23. With that, I will turn the call over to Ted Gilpin, our Chief Financial Officer, who will review the financial results for the quarter.

Thanks, Ted, and good afternoon, everyone. I will now summarize our key highlights for the third quarter of 2020. As a reminder, all figures I reference today on this call will be in U.S. dollars, Mount Logan's functional and presentation currency. For the third quarter ended September 30, 2020, we generated $971,000 in total investment income aligned with income generation levels from the prior year. On the expense side, professional fees related to legal, audit and tax consulting amounted to $115,000 for the quarter. Other costs, including directors fees, marketing, regulatory and shareholder relations and other general and administrative costs totaled $290,000 for the third quarter. Utilizing our leverage facility, Mount Logan incurred $414,000 in interest and other credit facility expenses as a result of drawings under the loan facility. Aggregate interest and operating expenses are down approximately 16% quarter-over-quarter. In the quarter, we faced a net realized loss on investments and foreign currency of approximately $83,000. However, this is outweighed by an unrealized appreciation on our investment portfolio of approximately $1.3 million. This rebound in valuation is a function of the continued recovery of credit market conditions since the market volatility experienced earlier this year in light of the COVID-19 pandemic. Our total and comprehensive income was just -- was approximately $1.3 million for the quarter or $0.12 per weighted average share. As of September 30, 2020, Mount Logan's balance sheet reflects total assets of $77.3 million, total liabilities of $44.6 million and shareholders' equity of $32.7 million, resulting in a net asset value per share of $3.08, an increase of $0.10 quarter-over-quarter. Our 5% 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 $55.1 million in our investment portfolio, $11.3 million balance in cash and restricted cash and $2.9 million in a deferred tax asset. 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 or CVRs. 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 on Cline on October 27, 2020, Marret Asset Management announced that the Cline transaction was completed on October 26, 2020, whereby Allegiance acquired all of the shares of the New Elk Coal Company, which holds all the mining assets of Cline. We understand that it is Marret's intention to direct Cline to remit the net proceeds from the transaction, less a prudent provision for any ongoing minimal Cline operating costs to Mount Logan and the other senior bondholders as soon as practicable after receipt. The distribution by Mount Logan of any proceeds received from the Cline transaction will be made in accordance with the terms of the indenture governing the CVRs. With that, I will now turn it back over to Ted Goldthorpe for some closing remarks.

Thanks, Ted. Overall, we are pleased with our results for the quarter and the recent momentum we've experienced this quarter end. Following the completion of our private placement, the CIF transaction and recent portfolio divestitures, we believe we're well on our way towards scaling our business and transitioning into an asset-light business model. We continue to develop a strong pipeline of actionable asset management opportunities that have the potential to be highly accretive to Mount Logan. While markets have improved since March 2020, conditions remain uncertain. However, we have conviction in the quality, security and diversity of our underlying portfolio and believe we are well positioned to take advantage of the current market environment. With that, we will now transition the call to Q&A, if the operator could please coordinate.

[Operator Instructions] And our first question today comes from Scott Chan from Canaccord Genuity.

Ted, in the quarter, you had some kind of reversals on your portfolio, just based on the better market. But post-quarter, with the pandemic and the second wave is -- maybe can you provide an update on what you're seeing in your portfolio? And does it impact like your -- what's the impact on potentially investing in new loans or disposing of some loans in your portfolio?

Yes. Thanks, Scott. That's actually a great question. So we have not seen any discernible impact on the credit quality of our portfolio despite some of the recent news. And the flip side is, as we mentioned in our script, we're able to offload 2 of our most bespoke illiquid assets. And what we found in the market is, despite the fact that there's uncertainty and we're pretty negative in general, as people know, there's a real pent-up demand for investment. So we were able to monetize a big chunk of our portfolio at or above our NAV. And those are amongst our most illiquid assets and also one was subordinated and one was equity in a joint venture. So I think it shows there's a pent-up demand for these type of assets. And to your point about what we're seeing, we in March were pretty bearish on what was going to happen, probably too bearish. And so when we looked at all the results of all our portfolio companies, generally speaking, the portfolio is performing much better than we expected 6 months ago, and the companies have been relatively resilient, mostly through expense control, but also surprisingly decent revenue trends as well. So outside of 1 or 2 names, which we watch a little more closely than the rest of the portfolio, the portfolio continues to be in very, very good shape.

And then you talked about your current portfolio not having any kind of COVID-impacted sectors. Is there opportunities for potentially new investments in these sectors? Or are these sectors you're going to stay away from kind of relative to what you have right now?

Yes. I mean I think the answer is, given what we're trying to do with the business, I think we're going to avoid those sectors. Just we want to provide investors very stable NAV, good ROEs and stable business model. And those tend to be a little more volatile. So not saying that people shouldn't invest in them, it's just not what we're going to do. And secondly, we have looked at a lot of opportunities in those sectors to provide capital. And we just feel like the forward visibility/ability to underwrite these are very hard. So we may get comfort in the 5-year view of some of these businesses, but have less of a view of what's going to happen over the last -- next 6 to 12 months. And so for our shareholders, we don't think that's the right use of their capital. I think what you'll see us do over the next couple of months is any investment activity for us will most likely be strategic. And we're hoarding cash to close a number of these transactions that we're hoping to announce imminently.

Okay. And just lastly, Ted, now that CIF is closed, is there an update there? Any kind of recent developments on maybe the industry or the fund? Anything you can provide there would be helpful.

Yes. I mean the fund has done really well. So since March, it's performed very, very well. And even over the last couple of weeks, post election, the portfolio has done really well. So as of right now, the fund is actually, again, for the last 6 to 8 months has performed very well. A lot of that was just recovery of marks. So obviously, the loan market was way down in the first quarter, and the loan markets come back. But the CIF performance has done very well, particularly over the last few weeks. And then just in terms of stability of the assets, I mean, we don't really have an update. I mean since we did our last update, there is -- we are in the market fundraising for this fund at all times. The redemptions come in every quarter. So we won't have visibility on that for another couple of months.

[Operator Instructions] Our next question comes from Charles Burns from CIBC Wood Gundy.

Just wondering, the provision that you made in the first quarter, has all of it been now reversed? Is there still some provision for some of the loans?