Q3 2019 Earnings Call

Well, ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience once again, ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 solar senior capital earnings call.

This time, all participants are in listen only mode.

After the speaker presentation, they won't be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance. Please press star Zero I would now we see in the conference over to your Speaker Mr., Michael gross Chairman and co CEO Mr. Girls. Please go ahead.

Thanks, very much a good morning, welcome to source Peter capital earnings call for the fiscal quarter ended September Thirtyth 2019, I'm joined here today by Bruce Spohler My co CEO enrichment Tico, our Chief Financial Officer. Richard You. Please start off a couple of the webcast and forward looking statement.

Of course, thanks, Michael.

I'd like to remind everyone that he's calling webcast are being reported.

Please note that they are the property as solar senior capital limited and that any unauthorized broadcast in any for strictly prohibited.

This conference call is being webcast on our website at Www Dot solar senior capital calm.

What do you replays of this call will be made available later today as disclosed in our press release.

I would also like to call your attention to the customary disclosures in our press release regarding forward looking information.

Statements made in today's conference call and webcast may constitute forward looking statements.

Which relate to future events for our future performance all financial condition.

These statements are not guarantees of future performance financial condition or results and involve a number of risks and uncertainties.

Additionally, past performance is not indicative of future results.

Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the FCC.

So its senior cap of limited undertakes no duty to update any forward looking for me it [laughter] statements unless required to do so by law.

Okay copies of our latest SEC filings. Please visit our website or call. It said Q1 two.

993.

One 670.

At this time I'd like to turn the call back to our co CEO .

Michael growth.

Thank you rich.

We're pleased to report the solar senior capital continued its solid operating performance during the third quarter 2019, net asset value was $16 in 31 cents per share.

GAAP net investment income of 35 cents per share fully covered our distribution for the quarter.

Overall, the fundamental four portfolio companies remain strong and SUNS portfolio is 100% performing at September Thirtyth.

At quarter end, our comprehensive portfolio was approximately $650 million a slight decrease in the prior quarter due primarily to approximately $6 million net portfolio repayments across the platform importantly over 98% of a comprehensive portfolio, our first lien senior secured loans, which.

Almost half are in first lien specialty finance loans.

We're pleased with the progress you've made her efforts to evolve sons' into a diversified specialty finance company.

The market and economic environment have changed significantly over the last year with the fed moving from rate increases to rate decreases.

The backdrop of elevators, such concerns and a host of child is headlined by trade wars Brexit in an uncertain political environment.

Castle, let it remains competitive given the persistent supply demand imbalance fueled by inflows of capital of private credit funds and reduced year over year middle market transaction volume.

We believe it is paramount to maintain our discipline in castle lending in the face continued aggressive structures type pricing and elevated overall risk.

Well facing frothy market conditions and castle lending, our specialty finance businesses, namely General Health care Finance, North no capital and Lifesize lending, which Bruce will talk a later provide investments would collateral coverage strong structural protections and low double digit asset level yields.

These niche businesses have higher barriers to entry required specific asset class knowledge and underwriting experience our back office intensive and are more difficult to scale than castle lending.

Having to specialize an experienced teams across the specialty finance asset vehicles provides a competitive advantage for SUNS creates a wider organizational origination funnel and enhanced flexibility to allocate capital most attractive risk reward opportunities.

The asset covered modification approval last year provides funds with additional flexibility and capacity to make control equity investment, especially finance businesses. We continue to act reevaluate additional portfolios of asset based loan specialty lending platform through acquire.

So our capital partners the investment advisor to SUNS currently has over $6 billion of investable capital, including anticipated leverage across illicit bdcs private credit funds and separate managed accounts.

The increase scale across the platform for cheese repositioned sep to be a solutions provider within an ability speak up to $200 million into given transaction well maintaining diversified portfolios.

The greater hold level across the platform has already resulted in more attractive investment opportunities for sons.

At quarter end solar senior isn't a strong liquidity position with net leverage a 0.8 times debt to equity.

We intend to move closer to our target leverage range of 1.25 to 1.5 times debt to equity by growing our portfolio over time, but only with investments that meet our strict underwriting criteria.

Well, it's when considering the combined credit facility of SUNS balance sheet at north on Geminos, there's over $150 million were available debt capacity across the funds platform subject to borrowing base limitations, we continue to be highly disciplined to deploying available capital at this time, we'll turn the call over to our Chief financial Officer risk Vertica.

Thank you Michael.

[noise] solar senior capital limited net asset value at September Thirtyth was 261.6 million or $16.31 per share.

This compares to a net asset value of 262.1 million or $16 in 34 cents per share at June Thirtyth 2019.

So a seniors balance sheet investment portfolio at September Thirtyth, 2019 had a fair market value of 469.2 million.

50 portfolio companies operating in 19 industries.

Pad to a fair market value of 474.2 million in 50 portfolio companies operating in 22 industries at June Thirtyth 2019.

At September Thirtyth sums net leverage was 0.8 times similar to the prior quarter.

As a reminder, sourcing your target leverage is 1.25 times to 1.5 times.

Debt to equity under the reduced asset coverage requirement.

From a piano perspective.

Gross investment income for the three months ended September Thirtyth 2019 totaled 10.4 million.

Versus 10.0 million for the three months ended June Thirtyth.

Net expenses for the three months ended September Thirtyth were 4.7 million compared to 4.4 million for the three months ended June thirtyth.

Accordingly, net investment income for the quarter ended September Thirtyth 2018 was 5.7 million with 35 cents per average share.

As compared to 5.7 million with 35 cents private share for the three months as at June Thirtyth.

Noted for the quarter ended September Thirtyth, the investment advisor voluntarily waived fees of 602000 compared to 984000 for the quarter ended June Thirtyth.

[noise] below the line solar senior had a net realized and unrealized loss for the third fiscal quarter totaling 0.5 million.

Compared to a net realized and unrealized loss of 1.1 million for the three months ended June Thirtyth 2019.

Accordingly.

Solar senior had a net increase in net assets, resulting from operations of 5.8 million.

With 32 cents per average share for the three months ended September thirtyth.

This compares to a net increase in net assets, resulting from operations of 4.6 million.

Or 29 cents per average have for the three months ended June thirtyth.

Lastly.

Our board of directors declared a monthly distribution for November 2019 of 11.75 cents per share.

Payable on December Threerd 2019.

To stockholders of record on November 21st 2019.

At this time relates to turn the call over to our co CEO Bruce bowler.

Thank you rich.

Before I review the portfolio activity.

I'd like to highlight a change in the way in which we're reporting the SUNS portfolio information.

We're now breaking out our life science senior secured loan investments as a separate business unit.

The increase scale of the Sep platform that Michael reference, which allows larger hold sizes combined with the expanded 30% nonqualified basket at SUNS has enabled SUNS to invest selectively in senior secured loans of larger enterprise value life science companies.

We believe the life science senior secured lending asset class provides a differentiated growth opportunity in a niche asset class, which offers attractive risk reward characteristics and further diversified SUNS portfolio as well as enhancing the opportunity to increase its investment income.

As a reminder, sep entered into life science lending business in 2014.

After exploring various ways to gain exposure to this attractive asset class. We hope we hired a financial services veteran with over 25 years of experience and a stellar track record investing in life Sciences.

Prior to joining us who launched and ran the life science lending business at GE capital over 13 years and successfully invested 2.2 billion in the asset class with no losses in the venture loan product.

From launch of a life science strategy Sep has invested over 900 million in 65 transactions into late stage development or early stage commercials commercialization pharma and medical device companies.

Since inception, the Sep life Science investment track record as produced mid to high teen higher ours with no losses.

The ability to invest in these larger enterprise value life science companies provides.

Incremental origination opportunities for sons.

The market opportunity for lending to public late stage life Science companies has grown and now represents over half of the opportunity set.

Typically the loan Traunches arse, our larger and spreads are a bit tighter for these larger enterprise value life science companies.

Loan to values are attractive with LTV against cash equity generally falling in the range of 10% to 30%.

The scale of as Cps platform with a hold size of up to 150 million per investment.

Allows us to be more competitive and also creates attractive investment opportunities for SUNS to participate in.

Our intention is to expand SUNS portfolio through four.

Core strategies first lien senior secured cash flow loans to upper middle market sponsor owned companies.

Highly structured first lien senior secured life science loans.

First lien asset based loan secured by accounts receivable operating exclusively in the healthcare industry to our Geminos subsidiary.

And lastly to North mill first lien asset based loans secured by accounts receivables to midsize us companies operating primarily in the manufacturing services and distribution industries.

In addition, we're actively evaluating opportunities to further expand our specialty finance business lines, both through control equity Stakes in new finance businesses as well as through organic growth.

In the aggregate at quarter end, our investment across these four businesses totaled just under 650 million encompassing 230 distinct borrowers the portfolio is highly diversified with an average investment per issuer.

Just under 3 million, 4.4% of the total portfolio.

Measured at fair value, 99.7% of the portfolio consists of senior secured loans of which 52% or first lien cash flow loans, 47% our first lien.

Asset based loans.

And just about 1% is in a single second lien secured cash flow investment.

Our equity exposure was de Minimis.

Less than 1%.

So the weighted average asset level yield on a fair value basis was 10% consistent with the prior quarter.

Including investments and repayments across our four business lines third quarter originations totaled $36 million and repayments were $42 million, resulting in de Minimis contraction of $6 million of our total 650 million portfolio.

Now, let me provide an update on the credit quality and earnings power of the portfolio.

At quarter end, 100% of SUNS portfolio was performing.

Our internal risk assessment on a weighted average of the loan portfolio remained at approximately two.

Based on our one to four risk rating scale with one representing the least amount of risk.

At quarter end, our watch list represented under 4% of the portfolio.

Trending down from last quarter.

Now, let me discuss our investment verticals.

Cash flow.

At quarter end, our cash flow portfolio totaled 342 million, representing 53% of the total portfolio.

The cash flow portfolio is comprised of loans to 39 borrowers with an average investment size of just under 9 million.

The fair value weighted average asset level yield on the cash flow portfolio was 7.5%.

Which is down approximately 40 basis points from the prior quarter.

Largely reflecting the drop in LIBOR during this period.

In addition.

Roughly 80% of the cash flow and life science loans have LIBOR floors.

With a weighted average LIBOR floor is 1.1%.

Our second lien exposure is down to one borrower, representing just over 1% or $8 million of the totaled 650 million portfolio.

At 930, the median EBITDA of our first lien cash flow investments was approximately $80 million.

On a fair value weighted average basis first lien leverage through our investment was 4.8 times and interest coverage was 2.4 times.

The weighted average latest 12 month revenue growth across the cash flow portfolio was just over 3% with EBITDA growth approaching 10% at quarter end.

During the third quarter, we originated cash flow investments of just under $17 million and had repayments of just under 28 million.

Semantically two thirds of our new investments our continued.

Upsizing of our investments to existing credits that are performing well.

Of note during the third quarter SUNS realized on its investment in SP. When the company was sold to a strategic buyer during the third quarter.

The value received by SUNS resulted in a complete recovery of our initial investment and a moisture above one times for this investment that was originally made back in 2011.

In addition, during the third quarter SUNS receive full repayment on its loans to Miller heiman, otherwise known as 28 co.

The company was sold during the quarter.

And post quarter end announced that he completed previously announced sale of some some smaller operating segments, which resulted in the majority of our proceeds being repaid to signs at the beginning of this quarter.

The remainder of the proceeds will be distributed next year and SUNS expects to earn a positive IR and moisture in excess of 1.1 times on this challenged investment.

These two outcomes reflect the advantages of our patient capital investing in first lien senior secured loans that are dollar one risk.

As well as SUNS ability to work effectively with owners and management teams to challenging situations.

Now, let me touch on our life science portfolio.

At quarter end, the portfolio was $25 million or 4% of the total portfolio.

During the third quarter, we funded just over $5 million in three life science investments and had no repayments.

At quarter end the portfolio included eight different borrowers with an average investment size of $3 million at a weighted average yield of 10% excluding any exit fees are warrants.

For life Science business contributed just under 6% of SUNS investment income for the third quarter.

Reflecting the higher yield of these investments.

Now turning to North mill, our north no portfolio at quarter end was just over $160 million.

Representing 25% of SUNS total portfolio.

During the third quarter, North Mill fund to $12 million of new asset based investments and had repayments I'm just over 9 million.

The portfolio consists of 151 different borrowers with an average investment size of just over $1 million.

The weighted average yield at north more north most portfolio was 14.2% compared to 13.5% the prior quarter.

This increase was driven in part by the acquisition of summit at the end of the second quarter with its higher yielding portfolio.

When we were to include certain one time fees that we realized during the third quarter.

The portfolio yield was actually closer to 15%.

While it's early in the integration of summit, we are encouraged by the broader geographic coverage and expanded pipeline of attractive investment that it brings.

The acquisition of this portfolio as well as the addition of the summit team increases North mills scale and origination capabilities.

The team is some it has a strong credit culture, consistent with North Mills, and we anticipate that their edition will result in continued portfolio growth for North mill.

For the third quarter, North mill paid sons, a cash dividend of 1.4 million.

Now, let me touch on Geminos.

At quarter end Geminos portfolio was 116 million, representing just under 18% of SUNS total portfolio. It was comprised of loans to 32 bars with an average investment size just over 3.5 million.

The weighted average asset level yield for Jim and I was 10.7%.

In the third quarter, we funded 2 million of new exist, new and existing asset based investments and had repayments of approximately 5 million.

During the quarter ended.

December Thirtyth.

And then also refinance its credit facility through a new for your credit facility at LIBOR, plus 225 compared to the prior late of lot rates of LIBOR plus 260.

During the third quarter Geminos paid SUNS cash dividend 900000, consistent with the prior quarter.

As Michael mentioned in the middle market cash flow lending environment remains property.

We benefit from our diversified origination sources across both cash flow and asset based lending verticals, which allows us to allocate capital to investments that meet our strict underwriting criteria.

In addition, we believe the growth.

Of the investment advisors platform.

Has and will continue to result in more investment opportunities across both cash flow and specialty finance asset classes for songs.

We will continue to be prudent and disciplined in deploying our available capital now let me turn the call back to Michael.

Thank you Bruce in closing, we've always maintained an investment philosophy of assuming that we are late in the credit cycle and believe it pays be cautious in a period of sustained frothy credit markets. We have purposely taking a defensive approach to investing focusing on protecting capital to investments in senior secured floating rate cash flow and asset based loan.

Yes.

The result is a solid portfolio foundation from which to grow.

We are confident our disciplined approach differentiated origination platform and diversified portfolio position us well to navigate in any environment.

At approximately <unk> 0.8 times debt to equity we are under Levered relative to our target range of 1.25 to 1.5 times net debt to equity we have substantial dry powder to deploy be our differentiated investment verticals and we continue to actively evaluate additional portfolios of asset based loans specialty lending plan.

Firms to acquire.

When the credit cycle does shift we believe our history of conservatism will enable enable us to outperform on a relative and absolute basis, and we will be well positioned to take advantage of market dislocations.

Last night's close of $17. Its expect cents per share SUNS carries a yield of 8%, which represents a significantly high return than the 6.2% implied yield of the S&P LSTA leverage loan 100 index.

Given the overall credit quality of SUNS diversified portfolio, our differentiated origination engines and our different investment philosophy, we believe SUNS represents an attractive investment on both the relative and absolute value basis.

Well. Thank you for this time this morning, and look forward to speak into next quarter. Operator at this time would you. Please open up line for questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pankey. Please standby, while we compiled acuity roster.

Speaker I'm showing no questions from the queue at this time I would like to turn the call back over to Mr., Michael gross chairman and co CEO .

We take all be through time. This morning, and if you have follow up questions. Please feel free to contact us directly and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.