Description

     This idea has a market cap of less than $75 million.

     BC Partners Credit is a good-sized private lender with over $5 billion under management. BC's credit business is run by Ted Goldthorpe who joined BC in 2017. He had previously been a senior executive at Apollo and Goldman Sachs. One of the businesses that he has developed at BC is the take-over of the management of busted BDCs. When a BDC fails, losses are rife, dividends are cut, share prices decline, shares trade at sharp discounts to NAV, investors are unhappy, boards of directors are threatened with lawsuits, and, ultimately, management contract are transferred. BC Partners Credit is in the business of bidding for those contracts. Their first win is a BDC now known as Portman Ridge Finance Corp (PTMN). PTMN is the result of the roll-up of several failed BDCs - KCAP, Harvest Capital, Garrison Capital and OHA Investment. Over time the stressed portfolio has been cleaned up, dividends reinstated, dividends raised, and the discount to NAV narrowed. Investors are happier and BC Partners Credit is happy banking fees. PTMN presently trades at a 16% discount to NAV. The predecessor BDCs traded at 50% discounts to NAV.

     Logan Ridge Finance Corp (LRFC) is the successor to Capitala Finance (CPTA). Capitala Finance's portfolio cratered in 2017, 2018, 2019 & 2020 going from NAV per share $83.46 to $40.19. 2021 year-end NAV was $39.48, so the portfolio seems to have stabilized. Capitala ceased paying dividends in 2020. Its portfolio was taken over by BC Partners Credit on 7/1/21. BC charges a fee of 1.75% on gross assets of the portfolio plus an incentive fee on distributions in excess of 8%. While I am not particularly happy with the 1.&5% fee, I would gladdy pay the incentive fee.

     On 12/31/21, NAV per share was $39.48. With the shares at $23.26, they are trading at a 40%+ discount to 12/31/2021 NAV. Dividend payments remain suspended. As the portfolio is reconfigured, dividends will be resumed and the discount should narrow. If NAV remains where it is, and LRFC trades at a discount similar to PTMN, the share price should increase to around $33.00 - 37.5% above where it stands today, plus any dividends that might be paid. That is a lot of "ifs" for a 37.5% return, but I believe that I have the downside covered by the current discount to NAV. On 12/31/2021 total assets were $242mm of which $39mm was cash. Against this is $125mm of debt and accrued expenses of $10mm of which $9mm was for an unsettled trade. 44% of the portfolio has turned over since BC took over on 7/1/2021 but a lot remains to be done. At 12/31/2021 the portfolio was:

• First Lien Debt - $98mm Fair Value - $104mm Cost - 49.6%
• Second Lien Debt - $30mm Fair Value - $30mm Cost- 15.2%
• Subordinated Debt - $5mm Fair Value - $5mm Cost - 2.6%
• Equity & Warrants - $64mm Fair Value - $52mm Cost - 32.6%

The largest equity holdings are:

• Eastport Holdings (communications) - $16mm Fair Value - $3mm Cost - 8.2% of portfolio
• LJS Partners (Long John Silvers) - $8mm Fair Value - $2mm Cost - 4%
• American Clinical Solutions (testing lab) - $6mm Fair Value - $3mm Cost - 2.8%
• GA Communication (communications) - $4mm Fair Value - $3mm Cost - 2.3%
• BlueStem Brands (fintech) - $4mm Fair Value - $0mm Cost - 2.1%
• Ram Payment (debt relief) - $4mm Fair Value - $1mm Cost - 1.9%
• Vology (tech) - $3mm Fair Value - $5mm Cost - 1.6%
• Burke America Parts (hardware) - $4 Fair Value - $1mm Cost - 1.5%
• Burgaflex Holdings (hardware) - $3mm Fair Value - $2mm Cost - 1.3%
• Eight additional holdings make up the balance of equity

     LRFC has $125mm of debt. Of that, $75mm is due 6/30 2022. At 12/31/2021, the company had $30mm of cash. The portfolio has positions that should mature between year-end and 6/30, and BC is in the process of selling its legacy debt and equity positions. I do not believe that there will be a problem with the 6/30 maturities. The remaining $50mm of debt was raised last year in a private offering. It carries a 5.25% coupon, is unsecured and matures in 2026. LRFC also has an undrawn line with Key Bank at LIBOR +325. Last, LRFC received an investment grade rating last year. 

     LRFC's portfolio has been greatly cleaned up since BC took over. I believe that by year-end 2022 the restructuring will be substantially complete, that a dividend will have been paid or announced and that the 40% discount to NAV will have shrunk.      

Catalyst

Continued portfolio repositioning.

Declaration of a dividend.