Logan Ridge Finance (US:LRFC)2022-11-08 21:06Financial Performance - Total investment income for the three months ended September 30, 2022, increased by $0.4 million, or 11.2%, to $3.748 million compared to $3.372 million in the same period of 2021[263]. - For the nine months ended September 30, 2022, total investment income decreased by $3.0 million, or 22.1%, to $10.389 million compared to $13.342 million in the same period of 2021[264]. - Operating expenses for the three months ended September 30, 2022, decreased by $1.3 million, or 27.0%, to $3.566 million compared to $4.882 million in the same period of 2021[265]. - For the nine months ended September 30, 2022, operating expenses decreased by $3.4 million, or 21.9%, to $12.186 million compared to $15.601 million in the same period of 2021[266]. - The company recorded a net decrease in net assets resulting from operations of $3.0 million for the three months ended September 30, 2022, and $8.9 million for the nine months ended September 30, 2022[269]. - The company recognized $5.2 million of net realized losses and $10.3 million of net realized gains on portfolio investments during the three and nine months ended September 30, 2022, respectively[267]. - The net change in unrealized appreciation (depreciation) on investments was $2.0 million for the three months ended September 30, 2022, and $(17.3) million for the nine months ended September 30, 2022[268]. Investment Portfolio - As of September 30, 2022, the fair value of the investment portfolio was approximately $193.1 million, consisting of investments in 54 portfolio companies[249]. - The debt investment portfolio represented 79.4% of the total portfolio fair value, with a weighted average annualized yield of approximately 8.9% as of September 30, 2022[254]. - As of September 30, 2022, 6.0% of the investment portfolio's fair value was in non-accrual status, with an aggregate fair value of $8.9 million[257]. - The portfolio composition by industry as of September 30, 2022, showed healthcare investments at $33.3 million, representing 17.3% of the total portfolio[258]. - The fair value of first lien debt investments was $119.4 million, representing 61.9% of the total portfolio fair value as of September 30, 2022[258]. Financial Obligations and Capital Structure - The Company had approximately $83.8 million in repayments and sales during the nine months ended September 30, 2022, resulting in net repayments of less than $0.1 million[253]. - Total contractual obligations as of September 30, 2022, amounted to $110.8 million, including $50.0 million for 2026 Notes and $15.0 million for 2032 Convertible Notes[288]. - The Company issued $15.0 million in aggregate principal amount of 5.25% fixed-rate convertible notes due April 1, 2032[273]. - The Company issued $50.0 million in 2026 Notes with a fixed interest rate of 5.25%, maturing on October 30, 2026[277]. - The Company had approximately $50.0 million in aggregate principal amount of 2026 Notes outstanding as of September 30, 2022[279]. - The Company redeemed $50.0 million of the 2022 Notes on December 6, 2021, and had no 2022 Notes outstanding as of September 30, 2022[280]. - As of September 30, 2022, the company had drawn $45.8 million from the KeyBank Credit Facility, with an aggregate principal amount of up to $75.0 million available[272]. - The outstanding amount on the KeyBank Credit Facility was $45.8 million, with a variable interest rate of one-month SOFR + 2.90% and an interest rate floor of 0.40%[304]. Tax and Regulatory Compliance - The company has a requirement to distribute at least 90% of its net ordinary income to maintain RIC tax treatment[199]. - The company must distribute at least 90.0% of its investment company taxable income to qualify as a RIC under U.S. federal tax law[240]. - The company will incur a 4.0% excise tax on undistributed income if it does not distribute at least 98.0% of its ordinary income in any calendar year[240]. - The tax years ended December 31, 2021, 2020, 2019, and 2018 remain subject to examination by tax authorities[242]. Valuation and Accounting Policies - The company has identified investment valuation, revenue recognition, and income taxes as its most critical accounting estimates[217]. - The company records investment transactions on the trade date, with realized gains or losses calculated using the specific identification method[218]. - The fair value of investments may fluctuate significantly from period to period due to inherent uncertainties[223]. - The company utilizes a multi-step valuation process, including market quotes, recent trading activity, and discounted cash flows[222]. - The company recognizes interest income on an accrual basis, including paid-in-kind (PIK) interest, to the extent that amounts are expected to be collected[233]. - Non-accrual investments are reviewed when they become 90 days or more past due, ceasing interest income recognition if the borrower cannot service its debt[234]. - The company recorded a valuation allowance on deferred tax assets of $2.9 million as of September 30, 2022, compared to $2.5 million as of December 31, 2021[248]. - The company recognized an increase in the valuation allowance of $0.4 million during the nine months ended September 30, 2022[248]. Risk Factors - The company is subject to financial market risks, particularly changes in interest rates, which may impact its cost of funding and interest income[303]. - In a prolonged low interest rate environment, the company's net interest income may be adversely affected due to the compression of interest income and expenses[306]. - The company’s net investment income is sensitive to changes in market interest rates, which could have a material adverse effect on its financial performance[305]. - A 300 basis point increase in interest rates could result in a net income increase of $2.56 million, while a 300 basis point decrease could lead to a net income decrease of $1.95 million[307]. - The company did not engage in hedging activities for the nine months ended September 30, 2022, exposing it to interest rate fluctuations[303]. Corporate Structure and Governance - The company was formed to expand the business of Legacy Funds through additional debt and equity investments[200]. - The company is regulated as a business development company under the Investment Company Act of 1940[195]. - The company has consolidated financial statements that include its wholly owned subsidiaries[214]. - The Investment Advisory Agreement allows the Investment Advisor to charge a Base Management Fee and an Incentive Fee[296]. - The Company entered into a new Administration Agreement with BC Partners Management LLC on July 1, 2021, for administrative services[300]. - The company evaluates strategic opportunities, including potential mergers with affiliated funds[205]. Cash and Liquidity - The Company had $11.3 million in cash and cash equivalents as of September 30, 2022[285]. - The company had outstanding unfunded commitments related to debt investments totaling $2.4 million to Accordion Partners LLC and $3.1 million to Critical Nurse Staffing, among others, amounting to a total of $12.5 million[301]. - The company held 38 securities with a variable interest rate, representing approximately 76.3% of the fair value of total debt investments as of September 30, 2022[304]. - All other interest-paying liabilities, including $50.0 million in 2026 Notes and $15.0 million in 2032 Convertible Notes, were bearing interest at a fixed rate as of September 30, 2022[304].