Logan Ridge (LRFC) is a BDC that invests primarily in sr. secured debt that trades at 50% of NAV (despite its healthy portfolio and balance sheet).  The company has largely completed its turnaround and I think next year it will be acquired at a premium by its “sister” company,  Portman Ridge (PTMN), in a stock for stock deal priced at NAV.  This would result in each LRFC share (which currently trades at $19.50) being exchanged for a number of PTMN shares that combined currently pay a $3.45 dividend, which would imply Pro Forma LRFC is trading at 18% dividend yield.  If Pro Forma LRFC were to trade at a 11% dividend yield like PTMN currently does, it would imply a price for LRFC of $30 or a 50% premium to its current price.  When I say a takeover priced at NAV I mean LRFC shareholders will receive consideration equal to 100% of NAV and the consideration will be PTMN shares valued at 100% of PTMN’s NAV.   

Some backup numbers:

                LRFC NAV: $37.31

                PTMN NAV: $ 27.26

                PTMN Annual Div: $2.52 (although it may increase)

So under my assumed takeover scenario, each LRFC share would be exchanged for (37.31/27.26 or) 1.37 PTMN shares and those 1.37 PTMN shares receive $3.45 of annual dividends.

LRFC was formerly known as Capitala, a BDC that was not well managed and ran into serious problems.  A year ago, the management team that runs another BDC, Portman Ridge (PTMN), took over management for LRFC.  The PTMN team has done an outstanding job at PTMN organically and has also grown through acquisition with the takeovers of other BDCS (KCAP in 2019, OHAI in 2019, GARS in 2020 and HCAP in 2021) using the same playbook of lowering the cost of capital and repositioning assets to higher quality and more sr. secured securities.  PTMN ($215 mm equity cap, trades at 80% of NAV) should acquire LRFC ($55 mm equity cap trades at 50% of NAV).  Both BDCs are run by the same people, share the same office space/back office/audit firms (Deloitte.. who ain’t cheap), have similar boards and increasingly are investing in the same debt securities (I estimate there is a 30%+ overlap in portfolios and that will increase overtime as LRFC deploys more capital).    The cost saving of a merger would be significant and the merger would give added scale to PTMN (and perhaps a higher multiple).  Management has often said a merger would be a logical outcome.  However, for optics I think the merger won’t happen until LRFC is NII positive and that should happen in the next or the following quarter. 

LRFC was previously written up ele2996 but since then several important events have occurred.   Although the stock is down significantly since that write up, the story has actually gotten better.  Many of the problems that resulted in poor performance under LRFC’s old management have been resolved including repositioning many of the company’s debt investments into higher quality securities,  monetizing the largest and some smaller equity investments (that had limited Capitala’s ability to pay a dividend), and refinancing the company’s liabilities to lower its cost of capital. 

Today the stock remains mispriced because it is small, illiquid and yet to report a “clean” quarter during which it has been able to deploy its excess cash (its balance sheet is under-levered) and show its lower costs (interest rates) that resulted from the recent debt refi. 

While one waits for the takeover the stock price should appreciate since the company will report significantly better operating results in the next few quarters as the company (1) invests more of its excess cash into interest bearing investments (at June the company had $30mm of cash and $35mm of unused borrowing availability) and (2) benefits (on its existing investments) from increasing interest rates (LRFC’s debt liabilities are mostly fixed rate but most of its debt investments or assets are at floating rate).

One of the more important events that has happened at LRFC occurred in July when the company completed the sale of Eastport which was the largest equity position LRFC owned.  The equity component of Eastport was $16mm out of a total $58mm equity book (or 28%).  The sale (which resulted in a slight gain to NAV) was important because it monetized $16 million of non-interest bearing equity which can be redeployed into interest paying securities and it reduced investors’ concerns that NAV (particularly on the equity investments) may have been inflated. 

In addition, over the past few months LRFC completed a major refinancing of its own liabilities that should lower its cost of debt capital and give it increased financial flexibility.  Details can be found at : https://finance.yahoo.com/news/logan-ridge-finance-corporation-announces-213400447.html

LRFC has a very healthy portfolio with very few investments on non-accrual (the 2 have a fair market value of $6.4 million and were made by the previous management team).   Debt to equity is only 1.0x so the company can lever up if it sees worthwhile investments.  The company’s investor presentation does a good job highlighting the portfolios diversity (both among industries and individual credits).  PTMN also has a healthy portfolio and generally out-earns its dividend, although it did not earn its dividend last quarter, management, who is very conservative, indicated that it was just a timing issue.  Anyone who speaks with management will see they are cautious about the overall economic outlook but believe that they are seeing some very interesting opportunities in the sr. secured space (and have the cash to capitalize on them) as other traditional market participants are stepping aside.

The below table shows the investments for each company and the pro forma company as of 6/30/22: