Q4 2019 Earnings Call

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<unk> systems during the conference. Please press Star then zero on your Touchtone telephone.

Every mine during this conference call is being recorded I would love to try to confident over to host like Liberals Chairman and co CEO. Thank you. Please go ahead.

They care about dropped quite a good morning, everyone welcome to our earnings call for the fiscal year ended December 31st 2019.

Joining me today by Bruce for co CEO Rich Perky car Cole, our Chief Financial Officer richly please start off by covering the webcast and forward looking statements.

Of course, thanks, Michael.

I'd like to remind everyone that today's call and webcast are being recorded.

Please note that there are the property of solar senior capital limited.

Got any unauthorized broadcast in any form of strictly prohibited.

This conference call is being webcast on our website at www Dot solar senior cap dotcom.

What are your 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 or future performance financial condition.

These statements are not guarantees about 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.

Solar senior capital limited undertakes no duty to update any forward looking statements and that's required to do so by law.

To paint copies of our latest SEC filings, please visit our website or cause that to one too.

Nine three.

One 670.

At this time I'd like turn call back for co CEO.

Michael gross thank you rich.

We're pleased to report a successful quarter 2000, <unk> fourth quarter dealt my team for solar senior capital, which culminated another year of continued solid operating performance net asset value with $16.32 per share at December 31st consistent with the prior quarter.

GAAP net investment income was 35 cents per share overall, the fundamentals work portfolio companies remain strong and SUNS portfolio was 100% performing at December 31st.

Our year end, our comprehensive portfolio was approximately $665 million inline with the prior quarter.

Importantly, almost 99% of our comprehensive portfolio investments aren't first lien senior secured loans.

Which 49% on first lien specialty finance loans, 50% aren't first lien caseloads and just over 1% consists of one second lien Castro alone.

We're pleased the progress we have made our effort to Bob's funds into a diversified specialty finance company.

Recent recessive concerns have abated due to continued overall positive economic data.

Capital money remains competitive given the persistence supply demand imbalance fueled by inflows of capital the private credit bonds and reduced year over year middle market transaction volume.

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

Should U.S. economic conditions deteriorate, our conservative, 100% <unk> performing for portfolio and access to capital should enable us to continue to maintain attractive portfolio.

Well free well spacing frothy market conditions in castle lending, our specialty finance businesses, namely General Health care, North belt capital and life science lending provide investments with the collateral coverage.

Strong structural protections and low double digit asset level yields.

These niche businesses have high barriers to entry.

Rather than cash for one thing.

I haven't specialize in experienced teams across the specialty finance asset classes provides a competitive advantage first times creates a wider origination funnel and enhances the flexibility to allocate capital to most attractive risk reward opportunities.

Over the past year, we have grown, especially finance AB our portfolio by 28%.

The asset coverage modification provides tons of additional flexibility and capacity to make control equity investments and stuff to finance businesses. We continue to evaluate additional portfolio about the based loans, especially lending platforms to require.

During 2019, we enhanced the platform scale, the company's about Sun Visor Solar capital partners last week, we held a final closing on a proxy $1.2 billion of incremental and vessel capital for an institutional private credit upon which we're calling Beth alongside funds.

The final closing this fund SUNS investment advisor now manages over $6.5 billion, that's what capital solely focused on firstly in cash flow and specialty finance investment opportunities.

Did have scale is particularly important given your best from preference for larger middle market companies, we believe our better resource to withstand an economic Cline then they're smaller peers.

Hold size up to $20 million across the platform creates a competitive advantage, what allowing us to maintain appropriate portfolio diversification.

The increased caliber platform is already possibly impacted origination efforts and we expect solar senior capital to significantly benefit from this development.

December 31st the company has a strong liquidity position with net leverage <unk> 0.78 times debt to equity we tend to move closer to our target leverage range of 1.25 to 1.5 times debt to equity the only with its investments that meet our strict underwriting criteria.

We continue to be highly disciplined in deploying our available capital at this time I'll turn the call <unk> Chief Financial Officer Rich Perdigo.

Thank you Michael.

Solar senior capital limited net asset value at December 31st was 261.8 million.

Or $16 in 32 cents per share.

This compares to a net asset value of 261.6 million.

$16 in 31 cents per share at September Thirtyth 2019.

It's always seen your balance sheet investment portfolio at December 31st 2019 had a fair market value of 460.3 million.

In 48 portfolio companies operating in 21 industries.

Compared to a fair market value of 469.2 million in 50 portfolio companies operating in 19 industries at September Thirtyth.

At December 31st 2019, SUNS net leverage was 0.78 times compared to 0.80 times for the prior quarter.

As a reminder, solar seniors target leverage is 1.25 times to one and a half time.

Net debt to equity under the reduced asset coverage requirements.

In December of last year.

DBRS Morningstar assigned a long term issuer rating and a long term senior debt rating of Triple B to the company.

With a stable trend on both ratings.

This rating position SUNS could diversifying its liability structure.

For a piano perspective.

Gross investment income for the three months ended December 30, Onest 2019 totaled nine and a half million.

Versus 10.4 million for the three months ended September Thirtyth 2019.

Net expenses for the three months ended December 31st 2019, the 3.8 million compared to 4.7 million for the three months ended September thirtyth.

Okay.

Accordingly, net investment income for the quarter ended December 31st 2019 was 5.7 million or 35 cents per average share as compared to 5.7 million what 35 cents per average share for the three months ended September thirtyth.

For the quarter ended December 31st 2019.

The investment advisor voluntarily waived fees of 671000.

Compared to 602000 ways for the quarter ended September Thirtyth.

Below the line.

Solar senior had a net realized and unrealized gain for the fourth fiscal quarter tolling 0.1 million.

Compared to net realized and unrealized loss of 0.5 million for the three months ended September thirtyth.

Accordingly, solar senior had a net increase in net assets, resulting from operations of 5.8 million or 36 cents per average share for the three months ended December 31st 2019.

This compares to a net increase in net assets, resulting from operations of 5.2 million was 32 cents per average share for the three months ended September thirtyth.

Lastly, our board of directors to pay monthly distribution for March 2020 of 11.75 cents per share.

Payable on April Thirtyth, I'm, sorry payable on April 3rd 2020 to stockholders of record on March 19th 2020.

At this time I'd like to turn it over our co CEO.

Bruce Spohler.

Thank you rich.

Before I give a portfolio update I'd like to take a moment to highlight our four core strategies.

First.

Is investing in first lien senior secured cash flow loans to upper middle market sponsor on companies.

Second strategy is to invest in first lien asset based loans.

Secured by accounts receivable to mid sized companies operating exclusively in the health care industry toward Geminos subsidiary.

Third.

Investing in first lien asset base loans and factoring facilities secured by accounts receivable to mid sized companies operating primarily in the manufacturing services and distribution industries to our subsidiary North Mill.

And finally.

Highly structured first lien senior secured life science loans, primarily to late stage development public life science companies.

We just recently started to breakout our life science business as a separate unit.

Last year.

As a reminder, the increased scale of the FCP platform that Michael mentioned.

Which allows larger investments sizes.

Combined with expanding our 30% nonqualified basket has enabled SUNS to invest selectively.

In senior secured loans to larger enterprise value life science companies.

We believe the life science senior secured lending asset class provides a differentiated growth opportunity and then nish, which offers attractive risk reward reward characteristics that further diversify SUNS portfolio and enhances the opportunity to increase its investment income.

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

In the aggregate at year end, our portfolio across our four businesses.

Totaled 665 million encompassing 227 different issuers.

Portfolio is highly diversified with an average investment of just under 3 million.

4.4% of the portfolio.

Measured at fair value.

99.9%.

Of our portfolio consisted of senior secured loans of which 50% or first lien senior secured cash flow loans.

48%, our first lien specialty finance loans.

And approximately 1% is invested in one second lien.

Secured cash flow loan.

We expect to be repaid on this loan this year.

Our equity exposure was de minimis at less than 10 basis points of the portfolio.

Sounds weighted average asset level yield on a fair value basis was 9.7%.

For the first for the full fiscal year, including investments in repayments across the four business lines originations totaled just under 260 million and repayments totaled 185 million, resulting in 72 million of net portfolio growth.

Which was almost entirely invested in our specialty finance businesses.

Given the continued heated market environment in cash flow lending, we chose not to increase our allocation to that asset class.

Now I'd like to <unk> provide an update on the credit quality in earnings power of the portfolio.

At year end, 100% of our portfolio was performing our internal risk assessment on a weighted average basis was approximately 1.8 based on our one to four risk rating scale with one representing the least amount of risk.

[noise] at year end, our watch list represent a historical low for sons of only 1.8% of the total portfolio, which at this stage or the credit cycle.

Highlights, our strong underwriting and positions us solidly for the future.

Now let me provide a brief update on each of our investment verticals.

Cash flow segment.

At year end, our cash flow portfolio totaled just under 340 million, representing just over 50% the total portfolio <unk>.

Cash flow portfolio is comprised of loans 36 bars with an average loan 9.4 million.

The weighted average asset level yield to the portfolio was 7.2%.

In addition, the majority of our cash flow loans have LIBOR floors.

Our weighted average floor is 1%.

Our second lien exposure is down to one issuer, representing approximately 8 million.

Principal amount up our $665 million total portfolio.

Again, we expect to be repaid on this investment this year.

At year end, the median EBITDA of her first liens cash flow investments was approximately 80 million.

The first lien leverage through our security was 4.7 times and the interest coverage was 2.4 times.

The weighted average LTM revenue growth.

Was over 6% and EBITDA growth was over 3.5%.

For the portfolio companies.

I think lower topline growth, but increased cash flow generation relative to the prior quarter.

For the first for the full fiscal year, we had 98 million of cash flow loan originations and 93 million prepayments.

During 2019, SUNS benefited from Sep, the Sep platform's ability to take larger investment positions across the platform, which some parts sounds participate said.

It should enable them to better withstand a downturn.

With our recent fundraising efforts, we expect this trend to continue with SUNS, having access to larger investment opportunities.

Now, let me turn to Geminos.

At year end Geminos portfolio was just over 131 million.

Which is an all time loan balance high loan balance for the company.

It represented just under 20% of sums total portfolio.

It's comprised of.

Loans to 34 borrowers with an average loan of approximately 4 million.

The weighted average asset level yield of Geminos portfolio was 11%.

During the fourth quarter, we funded 17 million.

New investments and had repayments of approximately one and a half million.

Net portfolio growth for the quarter totaled just under 16 million, which is an approximately 14% increase from the prior quarter.

For the full year geminate funded $40 million of new investments and had exits of 17 million, representing an increase of 21% in the portfolio on a year over year basis.

For the fourth quarter Geminos paid sons of cash dividend of 900000, which equates to an 11% annualized dividend yield consistent with prior quarter.

Now, let me turn to North mill.

At year end North Mills portfolio was just over 170 million, which represented 25% of our total portfolio at SUNS.

For 2019, North mill funded.

Absolutely 100 million of new asset based loans, including its acquisition of summit financial resources.

They experienced 57 million of repayments, which resulted in net portfolio growth of 42 million.

The portfolio consists of approximately 150 borrowers with an average investment.

A million dollars.

The weighted average yield for North Mills portfolio was just under 14%.

This increase in yield was driven in part by the acquisition of summit, which has higher yielding factoring assets.

Well, it's still early in the integration of North Mill Capitol acquisition of summit.

We are encouraged by the broader geographic coverage and expanded pipeline of opportunities across both asset base and factoring.

We view factoring is a highly attractive asset class and this portfolio as well as the addition of the summit team increases North mills exposure to an expertise in the factoring asset class.

Summit team has a very strong credit culture, consistent with North Mills, and we anticipate that they're addition will result in continued portfolio growth for North mill.

For the fourth quarter, North no paid a cash dividend of 1.4 million.

Now, let me touch on life science at year end, our portfolio was 23 million or 3.5% of the total SUNS portfolio for the fourth quarter. We funded just over 5 million into life science companies and had $7 million of repayments.

For the full year, you funded 20 million of life science loans and had $18 million of repayments, resulting in portfolio growth of 3 million.

The life science portfolio had seven different bars with an average investment for 3.3 million in a weighted average yield of 10%, which excludes any exit fees or warrants.

Science business contributed 7.5% SUNS income for 2019, which reflects the higher yield to this asset class.

As Michael mentioned, the middle market cash flow lending environment remains frothy, we benefit it sounds from our diversified origination sources across both the cash flow and asset based lending verticals, which allows us to allocate capital to investments that meet our strict underwriting criteria and offer the best risk reward.

We believe the growth of Sep is platform has and will continue to result in more investment opportunities across both cash flow and specialty finance assets persons.

We will continue to be prudent and highly disciplined employing our available capital now let me turn the call back to Mike.

Thank you Bruce.

In closing we have always maintained an investment philosophy of assuming that we're late in the credit cycle and believe it pays be cautious in a period of sustained frothy credit markets. We're purposely take a defensive approach to investing focusing on protecting capital through investments in senior secured floating rate cash flow and asset based loans.

The result is a conservative 100% when portfolio provides a strong foundation for future portfolio growth.

We are comping, 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 compared to our target range of 1.25 to 1.5 times net debt to equity.

We have substantial dry powder to deploy would be our differentiated investment verticals and we continue to actively evaluate additional portfolios of asset base loans and specialty lending platforms to acquire.

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

We believe that are advised the ability to hold up to $200 million across the platform provides a competitive advantage that we're increasingly benefits sometimes.

With a final closing of solar capital partners institutional private funds just this month.

The increase scale provides should positively impact funds in the form incremental investment opportunities through an enhanced origination effort.

The result should both be both increased diversification and even greater ability to be highly selective across our asset classes.

At last night's close of $18 of 16 cents per share SUNS carries a dividend yield of 7.8%, which represents a significantly higher rate of return in the 5.6% implied yield of the S&P LSTA leverage loan 100 index.

Given the overall credit quality of fund diversified portfolio, our differentiated origination engines and our disciplined investment philosophy. We believe funds continue to represent an attractive investment both the relative and absolute value basis. We thank you for your time. This morning, operator would you. Please open up the line for questions.

Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the Q. Please press the pound key.

Your first question comes from the line of Chris Kotowski from Oppenheimer. Your line is open.

Yes, good morning.

I was just a little confused about the fee waivers 'cause it looks like.

This quarter or there was a.

Like an 850000 dollar fee waiver or what you know backing into the numbers on the base management fees and kind of a reversal of some of the earlier fee waivers on the on the incentive fees and indeed, I guess just generally.

Why do you I mean, I I realize that some fee waivers are necessary to cover the dividend, but what what does it makes you decide to believe way be the base fees or the incentive fees and and how do you allocate it.

What what should we expect going forward.

Yeah No I appreciate your question Chris.

Yeah between last quarter in this quarter. There was some reclassification that you'll look that you're seeing between the incentive fee and the management fee had zero effect on the piano, it's just a classification between management and incentive fees.

So it is the if you want to think about it for modeling purposes.

We are first waving incentive fees to the extent, we need to then to the extent that the incentive fee is not sufficient then we would we management fees.

And so that that's we think about it going forward.

Okay.

And I I mean, I guess I think is it or do you intend to continued I mean, you've been obviously been waiving fees whenever you have had to I mean, what.

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When do you anticipate that at some point SUNS will be capable of covering the dividend on a on Oh, no you know a.

Fully loaded basis and in kind of what has to happen to get to that.

Sure. So so yes, we have been.

An active waiver of fees that historically.

Demonstrate our supporting our commitment.

It has been our decision to run under Levered at <unk> 0.8 times versus the target of one of the quarter to one and a half.

So I think that we have continued to put growth engines in place.

As you hear our commentary around not only the growth we're starting to see it Jim no and North mill, both organic as well as through acquisitions as well as the opportunity set this increase for SUNS through the life Science segment. We think we have the growth engines in place together with the increase scale so that selective.

We can also find even in this route the environment.

Good cash flow opportunities for first lien loans at SUNS and the rest of the platform will invest in so it's just a matter of those engines continuing to take hold and you will see the the waivers obviously decline as the Eni grows on a sustainable basis, but we have and continue to be supportive.

Okay, Alright, that's it for me thank you.

Thank you.

Good day, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone.

I'm showing no further questions at this time I would like to turn the conference back to Micropross, Chairman and co CEO.

Again, we thank you for your time this morning, and look forward to talking to you.

Next quarter or give any question interim please feel free to call anybody. 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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