Logan Ridge Finance: Quarterly Credit Review

Portfolio Data

Logan Ridge Finance (LRFC) at the end of IVQ 2021 had 40 portfolio companies, and a portfolio with a cost of $190.5mn and a FMV of $198.2mn, a premium of 4%. Inception to date losses on $189mn of equity capital at par were ($82mn), or 43%.

First lien debt as a percentage of the portfolio at fair value was 49.6%, second lien debt 15.2%, subordinated debt 2.5%, collateralized loan obligations 3.9% and equity portfolio 28.8%.

Performing vs Underperforming

Of the 40 companies in portfolio, 36 are performing or are non-income producing. Performing investments are $176mn and underperforming investments are $22mn, of which $8mn are non-performing. (LRFC’s manager does not offer an investment ratings table. All the data here is compiled by the BDC Credit Reporter).

Underperforming investments account for 10.9% of the portfolio as whole. The percentage of underperformers has dropped from $26mn and 13.2% of the portfolio in IIIQ 2021. Note, though, that LRFC booked ($8.3mn) in realized losses in IVQ 2021 and ($8.0mn) for the year as whole. Furthermore – despite paying no distribution – net asset value per share fell for a third quarter in a row, to $39.48.

See the BDC Credit Table for further data.

Underperformers

There are two companies rated CCR 3 in our 5 point investment rating scale: Alternative Biomedical Solutions and Vology Inc, with a fair market value of $14.1mn. Both companies value trended downward in the IVQ 2021.

There are two companies rated CCR 5 – non accrual: BigMouth Inc and Sequoia Healthcare Management. The former is a liquidated business and the investment at risk is non material at $0.6mn. The latter is a hospital group accused of fraud, with a FMV of $6.4mn, down from $8.3mn in the prior quarter and with a cost of $11.9mn. All the exposure is in a term loan maturing 1/14/2022. (Cion Investment also has first lien debt to the company, which is also on non accrual but with a different maturity).

Potential Upside

As noted above, LRFC has an unusually high proportion of investments in the form of junior capital (common stock, warrants and preferred). The total cost is $51.7mn and the FMV $64.7mn. Seven performing company equity investments (not including two CLOs and Vology, which is underperforming) are valued over $2mn. The largest value by far is the $16.3mn of equity in Eastport Holdings, a full service marketing firm, which represents a quarter of the total. The value of Eastport has been trending downward for several quarters, but remains 500% of its cost.

Conclusion

By BDC standards, LRFC’s portfolio is small – the second smallest in the public universe after PhenixFin – and with an unusually high proportion of non-income producing investments and a low percentage of first lien debt. However, the number and value of underperforming companies and investments is normal by BDC standards, and the names involved are unchanged, albeit mostly being written down further. This follows a quarter where several poor performers were written off the books.

Projection

Looking forward, the underperformers are more likely than not – as a group – to drop further in value, but that may be offset by increases in the value of equity investments. The manager’s plans to decrease its proportion of equity investments should increase the proportion of income producing investments over time, but the timing and the percentage involved is unknowable.

We project that given more difficult market conditions; downward pressure on the valuations of underperformers and the decreasing value of Eastport Holdings of late that NAV Per Share is more likely than not to decrease by the end of 2022 versus the level as of December 31, 2021. Since the end of 2017, LRFC’s NAV Per Share has dropped (53%), including (2%) in 2021. That metric could reach (55%) or greater in 2022. See the BDC Nav Change Table.