Logan Ridge Finance Corporation (LRFC) is a Maryland-based non-diversified closed-end management investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940. The company's primary investment objective is to generate both current income and capital appreciation through debt and equity investments in lower middle-market and traditional middle-market companies.
History and Evolution Logan Ridge was incorporated in Maryland on February 21, 2013, and commenced operations on May 24, 2013. The company completed its initial public offering (IPO) on September 30, 2013, selling 4 million shares of common stock at $20 per share, resulting in net proceeds of $74.25 million. LRFC was formed to acquire an investment portfolio from several affiliated CapitalSouth Partners funds and continue expanding their business by making additional investments in lower middle-market and traditional middle-market companies.
In the Formation Transactions of September 2013, LRFC acquired 100% of the limited partnership interests in CapitalSouth Partners Fund II, CapitalSouth Partners Fund III, and CapitalSouth Partners Florida Sidecar Fund I, as well as certain assets from CapitalSouth Partners Fund I and CapitalSouth Partners Fund III Parent. During the fourth quarter of 2017, the Florida Sidecar fund transferred all of its assets to LRFC and was legally dissolved as a standalone partnership.
In 2019 and 2021, LRFC's SBIC subsidiaries, CapitalSouth Partners Fund II and CapitalSouth Partners Fund III, repaid their outstanding SBA-guaranteed debentures and relinquished their SBIC licenses. The company has also formed certain consolidated taxable subsidiaries to make equity investments in pass-through entities while maintaining its status as a regulated investment company (RIC) under the Internal Revenue Code. In 2020, LRFC established its wholly-owned subsidiary, Capitala Business Lending, LLC, to hold certain investments pledged as collateral under the company's credit facility.
In 2021, the company underwent a significant transition when Capitala Investment Advisors, LLC, the previous investment adviser, entered into a definitive agreement with Mount Logan Management LLC, an affiliate of BC Partners Advisors L.P., for the latter to become the new investment adviser. This change in investment adviser, along with the company's name change from Capitala Finance Corp. to Logan Ridge Finance Corporation, marked a new chapter in the company's evolution.
Financial Performance and Positioning As of September 30, 2024, Logan Ridge's investment portfolio had a fair value of approximately $175.6 million, with exposure to 59 portfolio companies. The company's debt investment portfolio represented 86.8% of the total portfolio at fair value, with a weighted average annualized yield of approximately 12.3% excluding non-accruals and collateralized loan obligations. This compares to 80.0% of the total portfolio at fair value with a weighted average annualized yield of approximately 12.7% as of the prior quarter.
Financials Regarding the company's financial position, Logan Ridge reported net investment income of $1.0 million, or $0.37 per share, for the third quarter of 2024. This represents an increase from the prior quarter's net investment income of $0.8 million, or $0.28 per share. The company's net asset value (NAV) as of September 30, 2024, was $86.3 million, or $32.31 per share, a decrease from the prior quarter's NAV of $88.7 million, or $33.13 per share.
For the most recent quarter, Logan Ridge reported revenue of $4.87 million and a net loss of $1.35 million. The company generated operating cash flow (OCF) and free cash flow (FCF) of $29.63 million each. The decrease in total investment income from the prior quarter was primarily driven by a decrease in PIK interest income, while the decrease in operating expenses was largely due to lower professional fees incurred in the prior quarter.
Liquidity During the third quarter of 2024, Logan Ridge successfully exited its largest equity investment, Nth Degree Investment Group, LLC, for $17.5 million in cash, which was $2 million above the previously reported fair value as of June 30, 2024. This transformative event represented 7.9% of the company's investments at fair value prior to the sale and has allowed Logan Ridge to redeploy the proceeds into interest-earning assets originated by the BC Partners Credit Platform, thereby enhancing the long-term earnings power of the portfolio.
As of September 30, 2024, Logan Ridge had $5.04 million in cash and $35.9 million available on its credit line. The company's debt-to-equity ratio stood at 0.1088, with both current and quick ratios at 0.5907. Logan Ridge had $39.10 million outstanding on its KeyBank Credit Facility as of the same date.
Strategic Initiatives and Noteworthy Events Logan Ridge amended and extended its existing senior secured revolving credit facility with KeyBank, securing more attractive terms, including a reduction in the applicable margin during the reinvestment period and an extension of the reinvestment and maturity periods. The amended facility has a $75 million aggregate commitment, with an accordion feature allowing up to an additional $125 million. The applicable margin was reduced from 2.9% to 2.8% during the reinvestment period, and the reinvestment period and maturity date were extended. These improvements have reduced Logan Ridge's overall cost of capital, created additional borrowing capacity, and provided the company with greater financial flexibility.
Regarding the broader private credit market, the company has observed that activity levels in the core middle-market, defined as companies generating between $10 million and $50 million of EBITDA, have remained elevated relative to 2023, although the majority of the activity has consisted of refinancings, add-ons, or amended and extended transactions. While truly new buyer financing has remained at depressed levels through 2024, Logan Ridge believes that a combination of dry powder, sponsors looking to return capital to LPs, and the ongoing rate cuts by the Federal Reserve are all tailwinds to activity in the sector.
Investment Portfolio Logan Ridge's investment portfolio consists of two main segments:
1. Investments in Non-Control, Non-Affiliate Portfolio Companies: This segment represents 171.70% of LRFC's total investments at fair value as of September 30, 2024. The majority of these investments are in the form of first lien senior secured debt (69.30% of the total portfolio), with smaller allocations to second lien debt (4.70%), subordinated debt (12.80%), collateralized loan obligations (0.90%), and equity investments (12.10%). The companies within this segment operate across a diverse range of industries, including healthcare, financials, information technology, business services, industrials, and consumer discretionary, among others. Notable investments in this segment include first lien senior secured debt in companies like Hudson Hospital OpCo, LLC, Keg Logistics LLC, and Wealth Enhancement Group, LLC.
2. Investments in Affiliated Portfolio Companies: This segment accounts for 27.31% of LRFC's total investments at fair value as of September 30, 2024. The majority of these affiliated investments are in the form of first lien senior secured debt (38.90% of the affiliated portfolio), second lien debt (3.20%), preferred stock and units (27.80%), and common stock and membership units (28.80%). The affiliated companies operate in industries such as advertising and marketing services, healthcare, industrials, and financial services. Key affiliated investments include first lien debt in American Clinical Solutions, LLC, second lien debt in V12 Holdings, Inc., and preferred and common equity in companies like MMI Holdings, LLC and GreenPark Infrastructure, LLC.
The overall investment portfolio had a weighted average annualized yield of approximately 12.30% as of September 30, 2024, excluding income from non-accruals and collateralized loan obligations. The company's debt investments were 89.40% variable rate and 10.60% fixed rate.
During the three months ended September 30, 2024, LRFC made approximately $0.90 million in new investments and had $19.00 million in repayments and sales, resulting in net repayments and sales of $18.10 million for the period. Over the nine-month period, the company made $12.20 million in investments and had $25.50 million in repayments and sales, resulting in net repayments and sales of $13.30 million.
As of September 30, 2024, LRFC had debt investments in three portfolio companies on non-accrual status, with an aggregate amortized cost of $17.20 million and an aggregate fair value of $8.20 million, representing 8.80% and 4.60% of the investment portfolio, respectively.
Risks and Outlook As Logan Ridge navigates through economic uncertainty and a dynamic interest rate environment, the company remains confident in its prudent investment strategy, strong pipeline, and experienced management team. While the company has made significant strides in rotating out of its legacy equity portfolio and enhancing the long-term earnings power of its assets, it continues to monitor the potential impact of market conditions on its portfolio companies and their ability to service their debt obligations.
Looking ahead, Logan Ridge has declared a fourth-quarter distribution of $0.36 per share, representing a 9% increase compared to the third-quarter distribution. This decision highlights the company's successful turnaround story since the change in investment adviser in July 2021 and its confidence in the long-term outlook for the portfolio. The company has doubled its distribution from $0.18 per share in Q1 2023 to $0.36 per share for Q4 2024, demonstrating the progress made under the new management team.
While Logan Ridge did not provide specific forward-looking guidance for future quarters or the full year 2025, management expressed confidence in their strategy and pipeline. They stated that they continue to see attractive opportunities and believe they are well-positioned to continue delivering positive returns for shareholders.
Conclusion Logan Ridge Finance Corporation has navigated a period of transition and market challenges with resilience and strategic execution. The company's exit of its largest equity investment, the amendment and extension of its credit facility, and the sustained performance of its debt investment portfolio have positioned Logan Ridge to continue delivering value for its shareholders. As the company remains vigilant in managing risks and capitalizing on opportunities in the evolving private credit market, its experienced management team and prudent investment approach provide a solid foundation for its future growth and success.