Q4 2019 Earnings Call
At this time, all parties that selling to listen only mode. Later, we'll conduct a question answer session and instructions will follow a decline if anyone should be quality status. During the conference. Please press Star then zero on the Touchtone telephone as a reminder, this conference call is being recorded.
No like to turn the conference over to your host Speaker, Michael Girls, Chairman and co CEO. Please go ahead Sir.
Thank you very much a good morning welcome to for capital.
Earnings call for the quarter in year ended December 31st 2019, I'm joined here today by Bruce for our co CEO and Richard <unk>, Our Chief Financial Officer, Richard for began would you. Please start by covering the webcast and forward looking statements.
Of course.
Thanks, Michael.
I would like to remind everyone that today's call than webcast are being recorded.
Please note that they are the property of solar capital limited and that any unauthorized broadcast in any yeah, Oh strictly prohibited.
This conference call is being webcast on our website at Www Dot solar cap Ltd dotcom.
What do you know replays of this call will be made available later today as disclosed in our earnings 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 our future performance financial condition or results and then 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.
Solar capital limited undertakes no duty to update any forward looking statements unless required to do so by law.
To obtain copies of our latest SEC filings.
Please visit our website.
I'll call. It sets you want to nine I agree one 670.
At this time I'd like turn the call back toward Chairman and co Chief Executive Officer, Michael growth.
Thank you rich.
Good morning, everyone and thanks for joining us today after market close yesterday, we reported fourth quarter net investment income of 41 cents per share. This resulted in full year net investment income of $1.71 per share exceeding or enter distribution of $1.64 per share.
Earnings power continues to reflect the benefits for capitals migration to a multi strategy commercial finance platform that combined cash flow asset base and specialty past businesses.
Despite the extended frothy credit markets in sponsored based cash flow lending solar capital's benefited from a diversified origination platform that gives us the flexibility to invest and less competitive commercial finance that's markets, where the risk return profile is more compelling.
During 2019 over 72% of our gross investment income generated commercial finance businesses.
December 31st commercial finance assets represented 75% of our 1.8 billion dollar total comprehensive portfolio.
At December 31st our net asset value with $21 at 44 cents per share down roughly 1.4% per share from the year end 2018.
The year over year declined primarily due to an unrealized losses on our one nonaccrual investments, partially offset by excess earnings of net investment income over distributions paid to shareholders well Bruce I and the entire solar team are extremely disappointed by the NAV decline. We believe there was a solid foundation to sell.
Our capital net asset value.
The weighted average risk weighting of our current portfolio supports his belief and reflects the highest fundamental credit profile in the last five years.
Across the portfolio fundamental credit performance continues to be solid supported by ongoing stable economic conditions and sustain corporate earnings growth in the U.S.
Within cash flow lending, we continue to prioritized investments that are first lien.
Focus on upper Middle market, it's worth backed by strong financial sponsors and avoid companies operating in cyclical industries.
Notably at year end, our second lien castle exposure, we're down to 4.8% will further de risked the portfolio by continue to allow our meeting second lien investments to roll off I.
At December 31st 2019, 98.4% of our portfolio is performing on a cost basis with only one investments on nonaccrual status.
In 2019, we originated $736 million and new senior secured investments almost 90% of for your originations when commercial finance assets, reflecting continued tightness in the upper middle market Caslen market, where we see elevated risk and compromised structures that do not meet our underwriting.
The plan.
December 31st the weighted average asset yield of our comprehensive portfolio was 10.7%.
Our barbell approach to portfolio composition, combining lower yielding first slane castle loans with higher yielding firstleap specialty finance investments has enabled our portfolio to maintain superior yield in a declining rate environment offering, allowing our second lien castle investments to roll off.
In 2019, we made significant progress on two important initiatives that we believe create long term strategic value for solar shareholders first we enhanced the platform scale, the company's investment advisors solar capital partners.
Last week, we held a final closing on institutional private credit funds that will have approximately $1.2 billion incremental capital to co invest alongside solar.
With this final closing so its investment adviser now manages approximately $6.5 billion of investable capital solely focused on first lien cash flow and specialty finance investment opportunities.
This enhanced scale is particularly important given our investment preference for first lien investment and larger middle market companies, we believe our better resource to withstand economic cycle, then the smaller peers.
Hold sizes of up to $200 million across the platform creates a competitive advantage well like allowing us to make appropriate portfolio diversification across the various funds.
The increase scale by plasmas already possibly impact origination efforts, we expect solar capital to significantly benefit from this development in the future.
The second initiative is optimizing our capital structure and diversifying our funding sources in the fourth quarter, we issued $200 million of unsecured notes in a private placement comprised of $125 million a five year notes in $75 million of seven your notes, we now have approximately 450 million.
Dollars of unsecured fixed rate nodes at an average costs under 4.5%.
At December 31st 2019, our net leverage would 0.64 times with approximately $450 million of unused borrowing capacity under its credit facilities.
When including Crystal financial and Neff Holdings. The company has approximately $600 million of unused borrowing capacity owns credit facilities subject to borrowing base limits.
Solar is relatively low current an average levered leverage is deliberate we're significantly below most of our BDC peers and as a reflection of our conservative approach and defensive portfolio positioning and what we believe it's the latter stages of the current credit cycle.
We intend to move closer to our target leverage range of 0.9 to 1.25 times, but only as a market opportunity presents itself.
In addition to our bottoms up that investing we continue to actively pursue control equity possess investments, especially finance portfolio companies.
Add on acquisitions and purchases of portfolio. The commercial loans, we will be prudent with decent leverage remain disciplined and our underwriting.
At this time I'll turn the call over to our Chief Financial Officer, Rich boutique got to take you the financial highlights.
Thanks, Michael.
Solar capital limited net asset value at December 30, Onest 2019 was 905.9 million.
$21.44 per share.
Compared to 925.4 million was $21, a 90 cents per share at September thirtyth.
At December 31st Solar Capital's on balance sheet investment portfolio had a fair market value of 1.5 billion.
In 108 portfolio companies across 28 industries.
Compared to a fair market value of 1.5 billion in 110 portfolios companies across 28 industries at September Thirtyth.
At 12, 31 solar capital in 593.9 million of debt outstanding.
And leverage of 0.64 times net debt to equity.
When considering available capacity from the company's credit facilities combined with available capital from non recourse credit facility that Chris on now.
So a capital has approximately 600 million to fund future portfolio growth.
Subject to borrowing base limits.
Moving to the piano.
For the three months ended December 30, Onest 2019, gross investment income totaled 37.1 million.
Versus 39.7 million for the three months ended September Thirtyth.
<unk> expenses totaled 19.9 million for the three months ended December 30, Onest 2019.
Compared to 21.3 million for the three months ended September Thirtyth 2019.
Accordingly, the company's net investment income for the three months ended December 31st 2019 totaled 17.1 million or 41 cents per average share.
Compared to 18.4 million were 44 cents per average share for the three months ended September thirtyth.
Below the line the company had net realized and unrealized losses for the fourth quarter totaling 19.3 million versus net realized and unrealized losses of 4.7 million for the third quarter.
Alternately the company had net decrease in net assets, resulting from operations of 2.2 million or five cents per average share for the three months ended December 31st.
This compares to a net increase of 13.7 million was 32 cents per average share for the three months ended September Thirtyth 2019.
Subsequent to year end.
The company received an additional 75 million commitment under its accordion feature of its credit facility, bringing total commitments to 620 million.
I'm pleased with the recent steps, we've taken to optimize as far as these financing facilities, which provide invaluable flexibility and further enhance solar capital limited strong balance sheet.
In addition.
Post year end.
Solar capital limited investment grade corporate rating was affirmed by Fitch ratings, which is further testimony.
So a capital partners Conservative investment management philosophies and strong underwriting track record.
The investment grade rating from both Moody's and Fitch provide important flexibility in efficiency in financing the company's growing balance sheet.
Finally.
Our board of Directors recently declared a Q1 distribution for 2020, a 41 cents per share payable on April Threerd 2020, the shelves of record on March 19 2020.
And with that I'll turn the call over to our co Chief Executive Officer, Bruce bowler. Thank you rich.
In 2019, we continue to execute.
On our key themes, including.
10, you'd run off of our second lien cash flow portfolio.
Growth in our specialty finance verticals and further migration up market in both our first lien cash flow and commercial finance strategies.
As the cycle continues to lengthen we're increasingly focused on positioning the portfolio defensively to whether any potential downturn.
We're accomplishing this by staying senior in the capital structure and targeting larger borrowers.
To Echo Michael's comments, Michael Hi, and the entire solar team are extremely disappointed by our recent decline in NAV due primarily to the write down of our investment in Hs.
Aside from this marked down the overall financial health of the portfolio companies remain sound.
At year end weighted average.
Investment risk rating for soldiers portfolio was less than two based on our one to poor risk rating scale with one representing the least amount of risk.
Based on this scale the portfolio at year end is the highest quality rated.
In over five years.
As further indication of the strong underlying fundamentals of our portfolio 99 half percent of our portfolio at fair market value was performing and 98.4% at cost.
Our 1.8 billion portfolio is highly diversified encompassing over 200 borrowers across 90 industries.
The average investment per issuer was just over eight and a half million or 0.5% of the portfolio.
At year end.
98.6% of the portfolio at fair value consistent of senior secured loans comprised of approximately 92% first lien and 8% second lien senior secured loans of the 8% second lien loans, only 4.8% or cash flow loans.
3.1% where asset base slots.
Bringing our second lien cash flow portfolio to below 5% highlights our continued focus on reducing exposure to investments would carry more risk and we believe is prudent in today's environment.
Based on our current visibility, we expect our second lien cash flow exposure to be under 1% by mid year.
At year end, our weighted average asset level yield was 10.7%.
By focusing on our niche commercial finance verticals, we've been able to maintain asset level yield above 10%.
Despite the decrease in LIBOR as well as spread compression and cash flow lending.
Notably we've been able to maintain these double digit yields while actively reducing our exposure to second lien cash flow investments.
Including or activity across all four business lines originations for the year totaled 735 million and repayments were 645 million, resulting in net portfolio growth of about 90 million.
Due to our ongoing selectivity and cash flow lending.
In the face of continued frothiness in this segment approximately 90% of our originations in 2019 or in our specialty finance strategies.
Let me now update each of our investment verticals.
Cash flow at yearend cash flow portfolio was 450 million or approximately 25% of our comprehensive portfolio.
Invested across 23 borrowers with an average investment 20 million.
These companies had a weighted average EBITDA of 65 million, which again highlights our commitment to finance larger businesses, which we believe will be better positioned to withstand a potential downturn.
During 2019.
We originated 90 million a first lien senior secured cash flow loans and experienced repayments and amortization of approximately 67 million.
Our investments in 2019 came largely in the form of delayed draw fundings and increasing our investment in existing credits a continuation of our preference to grow with companies that we know unlike.
During the fourth quarter.
We further markdown.
Our second lien cash flow investment in I, Hs, which we had placed on non accrual in the third quarter.
The company as a provider of wellness solutions and is currently evaluating strategic alternatives with the support of the sponsor as well as our co lenders.
Across the rest of our portfolio, we are continuing to see healthy financial performance.
At year end, the weighted average trailing 12 month EBITDA grew over 9% reflected this continued growth.
For the portfolio companies in our cash flow segment leverage to our security was just under five times, which is a downtick from third quarter, where it was about 5.2 times and our interest coverage is approximately 2.6 times.
In addition, the weighted average yield of this cash flow portfolio was 8.7%.
Now turning to equipment finance.
Our nations Finance strategy invested just under 150 million for 2019 and had repayments of just over 140 million.
At year end the portfolio was approximately 396 million funded equipment loans. The portfolio was invested across 134 borrowers with an average exposure just under 3 million.
As a reminder included in this business segment, our equipment finance financings helped both directly on soldiers balance sheet as well as in our 100% on portfolio subsidiary that pulled certain investments for tax efficiency purposes.
The equipment financing asset class represents 22% of our total portfolio.
100% of Ness investments are in first lien loans and the weighted average yield was approximately 10%.
2019 comprehensive investment income.
For the Neff segment totaled 21.7 million.
Now, let me turn to our asset base segment.
At year end, our asset base portfolio totaled approximately 644 million, representing 36% of our total portfolio.
It was invested in 36 borrowers with an average loan size of 18 million.
The weighted average yield was 12.7%.
During 2019, we funded approximately 315 million of new asset base loans and have repayments of just under 280 million.
During the fourth quarter, one of our asset based companies experienced fraud.
We have been exiting this investment to a bankruptcy process and fully reserved for this last year and are currently working to maximize recovery of this investment.
Crystal our ABL platform is solar capital.
Dividend for 2019 equating to 10.7%.
Now finally, let me turn to our life Science segment.
At year end the portfolio totaled just under 290 million.
Portfolio consisted of 16 borrowers with an average investment of approximately $18 million.
Our life science portfolio represented 16% of the total portfolio and over 26% of soldiers 2019 gross investment income.
During 2019, the team originated 182 million of new investments, while repayments in amortization totaled just under 160 million to.
The weighted average IR RAR on our life science investments realized during this past quarter was just under 15%.
The weighted average yield on the current portfolio was approximately 10.5% excluding any success fees and warrants.
In conclusion. So this portfolio activity in 2019 represents a continuation of the investment themes that had been driving our portfolio over the last couple of years.
Reducing our second lien cash flow exposure.
Focusing on new origination activity on first lien loans to existing portfolio companies in defensive sectors and increasing our investments in specialty finance assets, where we are able to get both tighter structures and more attractive risk adjusted returns.
Given the current market environment, we intend to remain patient and deploy capital selectively preserving our flexibility to capitalize on compelling opportunities that may arise from a market dislocation.
Now I'll turn the call back to Michael Thank you Bruce.
In closing, we would like to thank our solar capital shareholders for their support over the last 10 years, many who have whom I've been with us since inception.
Over the last decade, we've been able to deliver a nearly 12% internal rate of return to those shareholders, while increasing net asset value since our IPO.
We believe that our success is largely driven by our conservative and disciplined approach to underwriting combined with our made great migration to a diversified multi strategy platform.
Our priority is to manage risk and to not chase returns.
Our conservative philosophy is let up on a differentiated path for many of our BDC peers.
We have built a multi strategy direct lending platform with senior professionals that a deep asset class experience and expertise invested across and through cycles.
Together with our enhanced scale, our ability to address comprehensive financial requirements across the bars capital structure enables us to be solutions provider to middle market companies.
Most importantly, it gives us the flexibility to allocate capital of most attractive risk adjusted investment opportunities.
For solar capital. This has resulted in a differentiated portfolio with a mix of asset classes, having lower correlation lower volatility lower risk and built in counter cyclical protection compared to a pure castle portfolio.
As we move deeper into the current credit cycle, our portfolio become much more diversified and much more defensive today only 25% our portfolio exposure is a senior sit to senior secured cash flow loan lowest exposure in our history and 75% into our asset based and lifestyle lending strategies.
Our specialty finance loans have many structure protection through barring base would covenants are less correlated liquid credit markets provide greater downside protection historically have probably less volatile than cash flow lending through market cycles. In addition, we believe our asset based lending and lender finance platforms at an element of counter.
Cyclicality as investment opportunities in those vertical should become more attractive and an economic downturn.
Meanwhile, we have the flexibility to pivot towards cash flow loans when conditions in the sponsor finance market improve.
We believe our vision investment philosophy, and conservative portfolio approach have served solar capital shareholders well.
Bruce I in the solar team remained committed to enhancing long term value for solar capital shareholders in all of our decisions.
We believe that our advisors ability to hold up to $200 million across the platform provides a competitive advantage that we're increasingly benefit SLR C.
With the final closing a solar capital partners institutional private fund. This month the increase scale provides should positively impact solar in the form incremental investment opportunities through an enhanced origination efforts.
The results should be both increased diversification and even greater ability to be highly selective across our asset classes.
We believe we are uniquely positioned to navigate the current environment take advantage of market dislocations and can outperform across market cycles on a relative and absolute basis at 11 o'clock. This morning, we'll be hosting and earnings call for the fourth quarter. In 2008, the result of solar senior capital or SUNS, our ability to provide traditional middle market senior secured financing. So this.
Nickel continues to enhance our origination teams ability to meet our clients capital needs and we continue to see the benefits of this value proposition in our deal flow.
We appreciate your time operator would you. Please open the line for questions.
Ladies and gentlemen, if you'd have a question at this time. Please press the star and the number one on your Touchstone telephone. Even question has been answered all you wish to remove yourself into Q. Please press the pound cake.
Your first question comes from the line up rich Shane of JP Morgan.
Line is open.
Hey, guys. Thanks for taking my question this morning.
I'd like to talk just a little bit about.
Portfolio rotation and investments if we look over the last year.
I think top sort of back at the envelope you've had one new name Andrew Your top 10 investments in terms of size.
And given sort of a steady maturity of the portfolio, we would expect more rotation that.
I realize that you're investing in different strategies, but I am curious, if you're sort of not continuing to plant seeds in that top 10, how you think about the sustainability of the dividends until you see an opportunity to become more.
Aggressive.
Yeah, I think it's in a couple of comments Rick.
You know as you mentioned, our focus really in particularly in the cash flow segment, but throughout our segments has been to take advantage of the increased scale of the platform to take larger aggregate positions across our platform between our various pools of public and private cap.
Total.
So that we can continue to take larger holds and be more of a solutions provider to our prospective borrowers.
You know, we believe that in most of our segments larger is.
Lower risk.
Whether it's a b L life sciences or cash flow, but importantly, the larger capital base allows us to increase the diversification across each pool of capital. So for SLR see our average hold positions have been coming down and yet across the entire platform our position our whole position in the given invest.
Men might be growing and so as we've been raising more capital we have actually been adding onto positions, but most of them have been across the platform and trying to continue to take down any.
Concentration we may have so that we're fully diversified across soldiers balance sheet.
Got it okay. So the expectation so what we're seeing empirically is consistent in the idea is that actually in till solar gets substantially larger.
In hold sizes, Gowalk, you'll see more granularity in smaller.
Small bites.
Yes, but increased the number of physicians because were.
Pursuing more opportunities, where we are relevance where solar on its own and not be able to participate because we would never take a 100 million dollar hold for example, you will see solar take 25, rather than what might have been 40 in the past and yet the platform, we'll take 100 and be positioned to grow with that investment and so that.
Thats, where most of our new capital has been growing is too small positions.
In solar at new investments and topping up in investments that are more seasons on the platform.
Okay, great. Thank you very much.
Okay.
Your next question comes from the line of crews get those give other nine Oppenheimer. Your line is open.
Yeah. Good morning, Thanks for taking my questions.
The.
First thing is I had is kind of on a linked quarter basis gross investment income was down nearly $3 million and I was wondering is is there a reversal from a meaningful reversal from i. Hs or is it.
Yeah.
What what kind of.
Drove that decline in particular.
Sure. There was a there was not a reversal related to I Hs there was a one time reversal rated related to an investment.
Where we thought we had a warrant gain.
That actually Didnt come to pass.
And so we backed that out in Q4, so but it was not related digest.
And I don't suppose you can.
Size that for us.
But the warrant gain.
It was probably about.
Wanted to have sense.
Sure Okay.
And then you've mentioned.
Fraud loss at Crystal.
Yeah and I'm.
Well I am curious in particular, well whatever color you can give a us on that and then I guess my question really is.
Does that.
Flow through to NAV or does that just show as a reduction of income at the crystal level on but does not closer to the parent company.
Sure now so so.
As we mentioned it's been fully reflected.
Although we are pursuing.
Remedies.
Not a lot I can say because its with the Justice Department.
But we have fully reflected in the NAV. Fortunately Crystal also had some onetime gains last year in some of their assets and some warrants that were also realized and somewhat mitigated this fraud, but it's been fully reflected in their NAV.
And we're pursuing a remedies.
Okay, Alright, that's it for me thank you.
Thank you.
Your next question comes from the line of Casey Alexander <unk> point Your line is open.
Hi, good morning.
I'm trying to sort of foot with what seems like.
A contradiction to certain extent did you know for the year you had total originations in cash flow loans of $90 million and a lot of those were add ons and you've you've very capably described your conservative attitude towards the cash flow market.
Particularly in relation to.
Covenants and structures of deals.
And at the same point in time.
You had closed on a on a billion dollar institutional private credit fund, which is clearly geared to competing in the very market, where the structures in terms are the most difficult.
And so I'm I'm, having trouble sort of putting that Matt contradiction in terms and and maybe you can clear that up for me.
Sure So just.
To clarify for a moment.
The institutional fund is investing across our our strategies. So it. It is capital that is flexible and whose investment mandate is to go where SLR see goes and so effectively as our life science team is looking to compete in 7500.
Third million dollar holds.
To my earlier comments, we wouldn't put that in SLR C. And therefore wouldn't have been able to compete for that investment opportunity some of which are the lower risk best opportunities as you go to the larger public life science companies for in for example, and so this now allows you should think of it as a.
Co invest vehicle alongside of SLR see that allows each of our strategies bit commercial finance, where we have been mostly focused more cash flow should we find better opportunities to scale up as SLR see is looking to be nimble in these strategies. So it is exactly.
A mirror fund.
And is not focused on to your point, the frothy cash flow market.
But that's fun to doesn't own and equipment finance originator and it doesn't own an A.B.L. company. So how can it replicate that portion of the portfolio.
Yes, it co invests alongside and SLR say.
So when a transaction for example is too big for Crystal.
They're hold sizeable Matt $25 million.
Brazil appointed was a deal bigger than that historically, we don't really have a chance to compete in that now we have the ability to bring the cap alongside and do as much $100 million across that and in the institutional funds we have.
Okay.
Andy.
Origination funnel even larger.
All right and I appreciate the comments on crystals.
No in just to clarify because crystal was marked down 4 million quarter over quarter. That's the reflection of the issue that happened within the crystal portfolio.
Yes.
Okay, and then lastly.
Ppt management Holdings, you added to the position, but mark to the position from 99, and a half down to 92, which is somewhat inconsistent with each other do you have any color on that one.
Yes, so protiviti has a small pick element to loan that was restructured about a year ago.
It is progressing but part of the restructuring was an agreement to temporarily pick a part of the loan. So thats. The AD addition that youre seeing there Mickey.
Casey I'm sorry.
Well, our 4 million addition quarter over quarter.
Oh.
No I don't show 4 million dollar increase.
I'll take a look okay I'll I'll go back and double check thank you.
No problem. Thank you. Thanks.
Next question comes from the line Robert Dodd Raymond James Your line is open.
Hi, guys, all just going back to to Crystal and that if we can on on crystal.
I mean, your underlying see no not talking specifically about the fraud issue, but when we look at the financials for crystal.
Ex the provision for credit losses, I'm, everything looks pretty consistent year over year, but with the provision obviously without substantially.
Yes. It is is that an indicator of anything that's going on within the portfolio is that tied to that that fraud issue and.
Unfortunately, or fortunately or unfortunately, it's tied to the fraud issue and that's it.
Okay got it and that just on that same kind of issue I provision up your ex provision earnings.
Well it pretty stable year over year with supervision, obviously, a lost a little bit of money.
Can you give you the that's that's a business also where where overall size et cetera that dividend from that has come down.
18 to 19 fairly substantially is that that division declined just tied to kind of.
Economic return after the provision and you have any color you can give us comfort level or dividend sustainability coming from that because obviously at this point its.
Yeah, and 45 million.
Cost and fair value not generating a lot of income.
Directly obviously it contributes in other ways.
Yeah, I think I think it's yeah, I apologize because it goes back to you know the statement that we make every quarter to try to clarify but it is confusing as you may recall neff.
The business is in the subsidiary along with some of the assets for tax purposes. However.
The disproportionate number of their assets are on our balance sheet.
Again, whether it's in the subsidy or on balance sheet, it's 100% owned by SLR C.. So we look at it on a consolidated business.
Basis, and the income has vacillated since we've owned NEP between five and 6 million a quarter.
And continues to do so so last quarter on a consolidated basis. It was just over five quarter before it was around five and a half.
[music].
We think that that five to six a quarter. When you look at it on a segment basis between the assets on balance sheet and the assets in the subsidiary that's a very good run rate is we're looking forward.
Got it got it. Thank you and then just add another one kind of following up on on Caseys question.
And.
You know they the close of nap and the cost of Crystal that operating expenses, essentially equal and by that that bdcs since they own they own the equity and the contribution that they get is after paying the expenses at NASS and crystal as well.
So now.
What it sounds like the institutional fund seems like it's going to get the benefit of co investing with some of so some of the capital, but without damaging the expenses because they exist at the BDC managers can you can you let that he is is that correct and.
Is that going to be any any kind of.
Compensation structure to the BDC so for shed culture.
Sure and and this really goes to crystal rather than Neff as you know Neps typical loan size is about two to 3 million. So we don't see the fund as allowing them to scale up in facilitating any benefit SLR c.. So we don't expect co invest to occur there.
Crystal However.
We do believe that the primary benefit to SLR see will be increased volume in larger transactions, where on a standalone basis SLR see would not have been competitive there are number of transactions, where we have syndicated out and we will.
Increasingly you need to have that hold size to expand or opportunity set to be closer to 100 million.
So so that is one benefit for Src shareholders is.
Greater growth and we think and larger lower risk opportunities. However, the institutional funds have also agreed to pay a servicing fee back to SLR see BDC into Chris still the subsidiary to compensate for the ongoing management of those assets.
Got it I appreciate that thanks a lot.
Thank you.
Your next question comes from the line of Ryan Lynch of KBW. Your line is open.
Hey, good morning, guys.
Alright had a couple of questions today I kind of wanted to follow back up on Ah.
Net interest.
Income Oh linked quarter. So I know you mentioned there was about one a one and a half signs of a onetime reversal, which is around $600000 or sell but but going back a Christmas question. I mean interest income style by about 3 billion yet linked quarter.
Oh the portfolio was about this similar sized quarter over quarter and had a portfolio yield was was constant at about 10.7%. So I'm just trying to understand what what caused that pretty meaningful sure.
Excluding even a onetime reversal.
Sure so the other.
Major components are both the combination of linerboard coming down roughly 40, bips or so in the quarter.
And as you know we are all floating rate investments other than over it nations equipment and then Additionally, as you saw our life science business had fewer repayments quarter over quarter repayments for us in life science, given the nature and the structure of those loans with large repayment fees and success fees.
Tend to generate outside income.
It is.
Variable quarter to quarter, depending upon repayments. The good news is we didn't have as many repayments, we'd like these assets and like to keep them longer.
But the life science repayment income will vacillate quarter to quarter and that was down in Q4.
Okay that makes sense the life Sciences portion.
And then I wanted to go kind of a a longer term question here and I think in your prepared comments you talked about you know you would like to get up to your target leverage range of 0.9 to 1.25, but but you're only going to do that.
The market really presents good opportunities to do so.
Ah and if I look at your growth really since the first quarter through the end of the fourth quarter. It. It is really to portfolio is kind of held constant I wanted a half billion dollars.
So my question is that.
As we look at least in in the near term <unk>, There's a lot of capital being raised it continues to be a very competitive environment for private direct lending of course, I know you have especially when verticals, but but overall it just remains pretty competitive environment and that can consider that can persist for for multiple years in the future.
So are you comfortable running meaningfully below your current leverage targets for for multiple years, you know until some sort of a downturn happen sand and makes the market you know increasingly favorable or or do you guys ever plan on just you know the market is what it is an area.
And getting that leverage up close to your target range and you know just doing the market deals even if it is a a more competitive frothier environment.
That's a great question, it's something that.
Our entire team talk but all the time and I think we start from the standpoint that you know as you know we owned 6% This company ourselves and so every time our team makes alone. They take out you see there calculator now most case for iPhone and they calculate how much that loan is actually I think Chris exposed to.
And what that creates is a scenario where people say if I'm not willing to put my own money that loan or structure I'm not want to put the rest of my shareholder partners loans into it so long way of App answering the fact that we are totally comfortable running low leverage and under invested if we don't see the opportunity set that we're comfortable putting our oman.
Into that said with the benefit the larger scale we have.
We do see the opportunity to grow our specialty finance portfolio in this current environment. The way things are today. So we would expect from growth. There. We are actively looking at new acquisitions that could be episodic you can in one transaction could take our leverage up to our target as we've done things like critical enough in the past.
And there will come a point, where there will be dislocation the capital market and that will grow.
But again, we are totally comfortable running at 0.65 times leverage.
And except low returns in this environment, because we're not willing to take on the risk that's associated with just putting assets on your books.
Okay [laughter].
Thanks for the color. It's a it's a complicated issue is not.
You know one correct answer for that I appreciate the color.
And I look as you and you know it's it to state to state the obvious the.
The the party that suffer is the most from not running fully levered is our selves personally as you know for this business model Bdcs get paid on assets invested and we're sitting here today being willing to compromise our fee stream.
To make sure we put the right opportunity set in front of our investors, but to Michael's point, we are across the team significant shareholders and we're not prepared to take the short term perspective.
Gotcha, I understand that make make sense.
Those are all my questions I appreciate the time today.
Thank you.
Your next question comes from the line of Mukesh Lean of Ladenburg. Your line is open.
Good morning, everyone I was hoping to delve a little bit more into I guess I realize there's not a lot you can say, but can you perhaps expand on what are the issues that high Hs is facing and any color on timing for either a restructuring or an acquisition of the company.
Yes, Unfortunately to your opening comment Mickey.
Theres not a lot we can say.
I think that this is a company in the wellness sector. It has some real strategic value.
In terms of their positioning I think that it does require some investment in the business.
Where they have been a little bit under invested.
And so.
Suffice to say that we in the sponsor and our coal lenders are pursuing strategic alternatives to.
Figure out how to best maximizes value.
It's really the short answer but.
So we're running through processes.
I think they will come to fruition the first half of this year.
And again, it's it's about.
Trying to position the company.
And there the strength.
To make sure that they have additional capital in order to make some investments to enhance the business longer term.
Okay. That's helpful. Bruce and just going back to the Crystal portfolio turnover rate you mentioned that was low in the fourth quarter is there something seasonable seasonal about the fourth quarter or is that more of an idiosyncratic event and how's that looking in terms of portfolio turnover this quarter.
Sure. So turnover it was life science and life science in the fourth quarter.
Did not have the same elevated level of repays, but.
No it's more very systematic.
You know.
You will see companies come to market, sometimes we'll let them go sometimes they'll be an opportunity to refinance and extend we had a few of those in the fourth quarter, where businesses have performed extremely well and we decided to stay with them tap into the fact that we have this increased scale across our platform and do additional investments.
Into companies to extend our duration because as you know this is a two year average life.
Asset class and life Sciences. So it's all good long term it just didn't generate short term repayment income because we were able to keep some investments a little bit longer.
Our portfolio.
And this quarter how's that looking.
I think I think we have good visibility for the first half it's hard to predict quarter quarter. Because again, we were not in control. These things, but I think we feel comfortable that we will have some nice realizations within the first six months the or we just don't know how much that we first quarter, how much we second quarter. Okay. I appreciate that just a couple more questions.
I saw that the value of so I declined I'm curious whether that was just simply due to the payment of the dividends they may to you or to something else.
Yes, exactly that the dividend. So the fundamentals are doing well. This is our airline portfolios you know and these were released.
Got a year or so ago and the fundamentals continue to be great. It's just the math to your point about reflecting the dividend out. So it was accrued to NPV and now you booked income I understand the exact Brian and lastly, I think Robert mentioned, some sort of impairment that at.
The equipment in any yet, but I'm not can you just repeat wasn't there is some sort of impairment in any after that caused the do you know he was he was reflect.
No. He was he was us very slight but that is reflecting comparable.
Valuation did move materially he was mentioning have the distributions come.
I have declined from the subsidiary and our commentary was around the need to look at it on a consolidated basis. When you look at the income collapsing the assets on balance sheet as well as the ones. In this is wholly owned subsidiary and that's been rather consistent.
In the five in the eight quarters or so that we've owned NAV at between five to 6 million on a combined basis no I do understand that Oh, Bruce but the valuation did come down did you just say that was due to comps.
Yes, Okay now I understand.
Those are all my questions for today I appreciate your time.
Thank you.
Your next question comes from the line Affinion LTL Self Fargo Securities. Your line is open.
Hi, guys. Good morning, Thanks for taking my question.
Follow on to one of Robert Dodd said earlier questions on the Crystal fees.
Understanding the servicing fees or are usually pretty nominal and de origination fees are our or <unk> engine platform et cetera is very valuable does this arrangement with the private fund suggests that you know crystal.
Cats.
Build out the capabilities to club out for syndicate itself.
You mean selling to third party.
Yeah.
She couldn't crystal sell down to a certain yes.
So the borrowers in the marketplace is such that.
You are much more competitive if you can speak for the entire transaction.
And they want to have long term the same lender. So they don't want to wake up and find that we sold off our loan to other people and that's that's in all of our asset class is not just in Crystal and life science, it's in cash flow.
So they won't be the lender to be the sole holder at the end of today.
Okay. Thank you for the color.
And another question on life Sciences understanding that there's.
No.
Amortization there.
It's been fairly stable in size you know your other specialty lines have grown.
Is there anything on is this just kind of some one off repays type thing over the past couple of quarters or is that an area that you know there's not a lot of flow out there or or not good terms out there just any context on the lifecycle.
Sure.
<unk>.
As we mentioned the lifecycle book actually has grown.
From a standing started a few years ago to just under 300 million and the challenge, though for life side is that it is a short duration asset class because they tend to lend to these businesses very late in their development. There typically being sold two strategic buyers are taken public soon after our.
Our loan and so we end up having an average hold period without 22 months and we've just benefited recently from not having as many repayments although to Michaels comment a moment ago, we do expect more repayments in that portfolio to accelerate in the first half of this year. So it is a I'm.
Short duration asset class has a lot of <unk> velocity to the underlying assets. We're thrilled that the team has been able to grow it to just under 300 million. We think there is more growth over the next year too, particularly benefiting from the increase scale. So that solar can now use this institutional Coinvest fund to.
Compete in the 100 150 million dollar investment opportunities. So we expect growth here and when you see the portfolio not facing tremendous redemptions. That's a good thing.
But they are coming.
Uh huh.
Okay. No. That's helpful. You know understanding its its short term in such and does the.
Hundreds to 150.
Bracket in that area does that Mark a.
Material difference and the nature of what you've been doing a secure generally.
Commercial stage nearing the exit is there any.
Different texture that we'll see here in that book.
Great question, no if anything they would probably be a little closer to exit because by definition of their borrowing the 100 $250 million.
That means they are well capitalized because as you know, we lend very low loan to equity value here.
Equity being defined as cash invested in the business over its life and so that means they're bigger larger companies that have been more.
Better capitalized and invested in for a longer period of time. So if anything those were probably be even shorter duration, but it's not instead of what the team has been doing already this is just expanding the opportunity set for them.
But.
Directionally, they are a little bit lower risk investments for that sector.
Okay. That's all for me. Thank you so much.
Thanks Binyam.
Thank you, ladies and gentlemen, I would like to turn the call back over to speak on Michael Girls, Chairman and co CEO Glenn it's there.
We thank you all for your attention today and all your insightful questions and we look forward to talking to those youre following sons and the next minute. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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