Q1 2020 Earnings Call
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Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily onto that times. Your line will be placed on music code.
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Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily onto that time Joanne will again be placed on music.
Hello, Thank you for your patience.
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Ladies and gentlemen, thank you for standing by welcome to the Q1.
In 20 Solar capital Limited earnings Conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
Ask a question during the session. Please press Star then one on your touched on telephone.
Please be advised of today's conference is being recorded.
If you acquire any further questions. Please press Star then zero.
I'd now like turn the conference over to Michael Gross Chairman and co Chief Executive Officer of Solar Capital Limited. Please go ahead.
Thank you very much and good morning.
Welcome to still a couple of Limited's earnings call for the quarter ended March 31st 2020, I'm joined here today, but Bruce bowler, our co CEO and Richard <unk>, Our Chief Financial Officer Rich before we begin would you. Please start recovering the webcast and forward looking statements.
Of course, thanks, Michael.
I would like to remind everyone that today's call and webcast are being recorded.
Please note that they are the property of solar capital limited and that any unauthorized broadcast in any form strictly prohibited.
This conference call is being webcast on our website at Www Dot solar cap Ltd Dot com.
What are your replays of this call will be made available later today.
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.
Our future performance will continue to condition.
These statements are not guarantees of future performance financial condition or results and involve a number of risks and uncertainties.
Including the impact of Kogan, 19, and related changes in base interest rates and significant market volatility on our business.
Portfolio companies and the global economy.
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 FCC filings.
Please visit our website.
At this time I'd like to turn the call back toward Chairman and Chief Executive Officer.
Michael gross.
Thank you very much rich.
Good morning, and thank you for joining us today first and foremost we hope that you when your family friends and colleagues remain healthy and safe during this pandemic.
Our thoughts were all with our stakeholders include the dedicated employees across solar capital <unk> companies investment advisor Solar capital partners, who continue to work from home with full business continuity.
Also we would like to express or heartfelt gratitude to all the health care and other few frontline workers in our sincere condolences those families of lost loved ones.
The global spread Cobot 19 led to an unprecedented level of market volatility and dislocation in March.
The shutdown response clubs the world into recession in financial markets into a broad base and deep sell off.
The resulting fed rate cuts steep drop and inflation expectations and a flight to safety drove the U.S. Treasury 10 year to yields below 1% for the first time in their more than 150 year history.
Your turn liquidity issues have been partially mitigated by rapid inexpensive U.S. monetary and fiscal policy response, what uncertainty and volatility or expect to remain for the foreseeable future given the lack of clarity and time, you're getting or economy back to work.
Good best Surber stakeholders. During this evolving crisis, we everybody detail on our first quarter results as well as an update at April Thirtyth.
As we outlined dinner stakeholder letter issued on April 1st our conservative management or both or assets and liabilities have resulted in a defensive portfolio stable funding low leverage strong liquidity and favorable positioning to make new investments.
At March 31st our net asset value per share it with $19.24, representing a 10.3% decline from your rent.
This is inclusive of a mark to market gain on her hundred $50 million watch secured notes, which we apply fair value accounting.
Excluding this gain our net asset value would have been $18.97 per share representing an 11% decline.
Unrealized depreciation represent the vast majority decline was primarily driven by mark to market losses related to the impact that spread widening undervaluation of our portfolio.
Well our portfolio the whole with knocking immune to the severe economic disruption call caused by Cobot 19 pandemic, we expect to recoup significant portion of this unrealized depreciation.
The secondary market technicals, an economy improve.
Overall, our portfolio companies are proving their business models and that liquidity, though enable them to successfully withstand this crisis.
We attribute the strong positioning of our portfolio toward longstanding got through disciplined centered in the philosophy that we embed educator always late in the credit cycle.
In addition, we undertook a multiyear effort to build an acquired niche asset based lending businesses, which historically exhibited lower default and loss rate through business cycles compared to castle lending.
Importantly, our ABL business Crystal financial provides a counter cyclical capability to our platform. The team has expertise Lenny distressed companies. It's historically achieved outsize returns during downturns.
Team is over 25 years of experience much of which has been focused on for girls situations, specifically deep expertise to consumer and retail lending stuck as we expect will have a need for their structured solutions overcoming 12 to 18 months.
In addition over the past several years, we migrated the company's portfolio. It's predominantly first lien senior secured loans, we remain patient and intentionally under Levered in order to preserve liquidity for market dislocation when risk adjusted returns are generally more attractive.
At March 31st 2020, 92% about $1.6 billion comprehensive investment portfolio at fair value was completed the first the first lien loans and 80% of the total fair value consisted of loans and especially plans strategies.
$172 million or the contraction or portfolio fair value during the quarter resulted from net prepayments in the portfolio.
During Q1, we had $256 million repayment at par or higher consisting of early <unk> refinance activity.
The borrower took advantage of the frothy market issue, new get it spreads in terms, which caused us to pass on participating.
None of the Q1 pit repayment activity represented secondary markets sales.
During the first quarter Oliver borrowers, excluding one or one non accrual at December 31st major interest payments.
As of March 31st 2020, we had only one loan comprising 1.3% fair value with a partial pik component with interest rate.
Cash interest in cash Gibbons represented over 99% or first quarter 2020 gross investment income.
Also at March 31st, 100% and 98.2% on a fair value it cost basis, respectively of our portfolio is performing.
For the first quarter solar capital's net investment income per share totaled 38 cents.
The modest decrease in our eni per share quarter over quarter, where the result of negative portfolio activity and yield compression in Q1, which reduced the size of the income or any portfolio.
With our net leverage I'd, just 0.56 times at March 31st and our estimated net leverage April Thirtyth <unk> 0.58 times, we're significantly under Levered, both an absolute basis and relative to our BDC peers.
As a result, our core current portfolio is meaningfully under its full earnings potential.
Our decision to run the business under leverage was founded in our conservatism and belief that markets were overheated.
Only when this economic crisis has run its full course, we'll be able to quantify the benefits were shareholders about conservatism, but we're confident that are low leverage will translate into greater net asset value preservation.
Now that the market has shifted the new investment opportunities, we are seeing carry higher expected returns and better and better structural protections. This is an ideal time to grow our income or your portfolio.
The investment opportunity set in our castle lending business is the most attractive we've seen in many many years.
Our capital has expanded its investment teams right borrowers junior secured liquidity facilities and refinancing solutions for the stronger more durable businesses.
This while many of our peers reduced leverage and sell assets to remain within financial covenants or regulatory limitations.
Today solar capital has approximately $700 billion available capital to invest.
Combined with the available capital at solar sister, BDC Solar senior capital and the private funds with solar capital partners manages the platform has over $3 billion available capital to support existing investments. So we do not believe there will be significant need and to provide liquidity and capital solutions to U.S. middle market companies.
But if sustainable business models.
Well, many lenders are burdened by portfolio concentration and struggling industries and or lack of liquidity, we're poised to deploy capital to support our valued sponsors and management teams.
As you evaluate new opportunities our underwriting teams are collaborating to form a unique you have collateral and breast provide that's an additional competitive advantages.
Yesterday, consistent with the past eight quarters, our board of directors declared a 41 cents per share dividend payable in Q3.
No low leverage in earnings part, we expect to maintain stable dividend for the foreseeable future.
Well, we expect the Q1 decline in or net investment income per share as result of being under levered to be a dynamic that may persist for a few quarters as we maintain or patient best approach drinks such uncertainty. We believe me, we will grow where and I specifically, we expect to fully covered distributions as you go the portfolio.
Based on their current assessment of the opportunity set and the solid fundamentals of our existing portfolio. We believe it as we approach target leverage our eni per share ever reached the mid to upper 40 cents per share.
[noise] early this week, we announced the addition of for professionals to the solar capital partners cheap.
Expansion of both or investment and business development team speak tore competence and strength of the platform and conviction in investment opportunity set.
On a final note our investment advisors alignment of interest company stakeholders has always been one of our guiding principles.
Two significant SLR see share purchases since inception, including recent purchases by all of our executive officers are seen imagine she now owns apociii, 7% of our outstanding common stock.
Additionally, all members in senior investment team have a significant percentage <unk> annual can compensation invested in our stock.
We do it our management investment teams recent share purchases in the states. This crisis, demonstrating our confidence in the company's defensive portfolio stable funding strong liquidity it favorable position to make new investments.
At this time I'll turn the call back over to our Chief Financial Officer, Rich Partyka ticket the financial highlights the specific emphasis on liquidity and funding profile.
Thank you Michael.
Solar capital limited net asset value at March 30, Onest 2020 was 813.1 million were $19 in 24 cents per share.
Pat to 905.9 million.
For $21.44 per share at December 31st 2019.
At March 31st to 10 20.
Well the capital is on balance sheet investment portfolio had a fair market value of 1.3 billion.
In 105 portfolio companies.
26 industries.
Compared to a fair market value of 1.5 billion in 108 portfolio companies across 28 industries at December 31st.
Turning to our funding profile and leverage.
31st 2020, the company had no borrowings under its 620 million and 50 million revolving credit facilities and had approximately 16 million of cash on hand.
As previously announced.
Every 2020 solar capital's secured an additional 75 million commitment to the company's primary credit facility.
A month into the second quarter. The company continues to have zero borrowings under these facilities.
And had 39 million of cash on hand at that time.
Currently our borrowing base far exceed the capacity of our primary credit facility, which provides us with full access to this capital.
As of March 31st because then 20 solar capital had 446 million of fixed rate unsecured notes, including the issuance in December 2019.
I have 200 million of unsecured notes consisting of 125 million of five year notes.
35 million of seven year notes.
At March 31st two then 20, approximately 86% of the company's funded debt is comprised of unsecured term notes, which gives the company significant unencumbered assets and provides meaningful overcollateralization.
Oh, that's combined 670 million secured credit facilities.
So what has used the same deliberate construction with our liabilities as with our portfolio.
As a reminder.
The company is no near term debt maturities, having termed out its primary credit facility 2024.
In addition, it a staggered maturities of its unsecured fixed rate knows from 2022 excuse me 2022.
As an in 26 with a weighted average maturity of mid 2023.
Since inception solar capital is taking a conservative approach to leverage and has consistently operated well below its stated target range.
On March 31st 2020, the company's net leverage was 0.56 times.
As of April Thirtyth 2020, the company's estimated net leverage is 0.58 times.
Based on quarter to date portfolio activity and assuming no change to solar Capital's March 31st fair values.
Solar capital's current leverage provides a significant cushion to covenant levels and the regulatory limited to the one.
Total debt to equity.
During April both Moody's Investor service, and Fitch ratings affirmed their investment grade ratings of solar capital limited.
Which we believe is a testimony to our conservative balance sheet in our portfolio's early result resilience to the crisis.
Importantly, these investment grade ratings provide the company with access to the investment grade term note markets.
So a capital liquidity remains strong.
With approximately 700 million of available capital today.
As of April Thirtyth 2020.
So a capital had unfunded commitments of approximately 118.5 million.
Which included 44 million designated potential growth capital to solar capital <unk>.
I'm, sorry to Crystal financial he portfolio company that the company controls.
At this point.
Less than $12 million or the company's 118.5 million of unfunded commitments or for revolvers that can be fully drawn by the borrowers.
Moving to the piano.
For the three months ended March 31st to them 20.
Gross investment income totaled 32.9 million.
Versus 37.1 million for the three months ended December 31st 2018.
<unk> expenses totaled 17.1 million for the three months ended March 31st 2020.
This compares to 19.9 million for the three months ended December 31st 2018.
Accordingly.
The company's net investment income for the three months ended March 31st 2020 totaled 15.9 million with 38 cents per average here.
Compared to 17.1 million well 41 cents per average here for the three months ended December 31st.
Below the line the company had net realized and unrealized losses for the first quarter totaling 91.3 million.
Adjusted net realized and unrealized losses of 19.3 million for the fourth quarter 2019.
Ultimately the company had a net decrease in net assets, resulting from operations for 75.5 million.
A $1.79 cents per average share the three months ended March 31st 2020.
This compares to a net decrease of 2.2 million or five cents per average here for the three months ended December 31st 2019.
Now I'll turn the call over to Bruce Fuller Who'll provide you with an update on our portfolio.
Thank you rich.
Solar capital's portfolio has benefited greatly from soldiers initiative to expand its origination platform through the development and acquisition of specialty finance businesses.
At quarter end, only 19% apart total portfolio exposure was in senior secured cash flow loans with the remaining 81% of our portfolio invested in or specialty finance strategies.
At March 31st our 1.6 billion dollar portfolio, it's highly diversified encompassing over 190 borrowers across beauty different industries.
Our largest industry exposures, our health care providers in services.
Diversified financial services, which are predominantly insurance brokerage platforms.
Pharmaceuticals.
The average investment per issuer was 8 million, 4.5% of the portfolio.
At March 30, Onest, 99% of our portfolio at fair value consisted of senior secured loans.
This was comprised of approximately 92% first lien assets.
And 7% second lien assets.
Our second lien loans, 3.7% or cash flow loans to 3.5% or asset based loans, which were subject to borrowing basis.
We believe that our portfolio predominantly first lien loans, again, 92%, which carry less risk that second lien and does it tend mezzanine loans will result in greater capital preservation during this crisis.
At quarter end, a weighted average asset level yield was 10.6%.
By focusing on our commercial finance protocols, we've been able to maintain our asset level yield above 10%.
Despite the sharp drop in lie bore resulting from the federal reserve's efforts to aid the economy.
Approximately 77% of our portfolio floating rate based.
Have these 80% have a LIBOR floor with a weighted average fly port floor of 1.1%.
The 23% of our portfolio, which are fixed rate loans are primarily in our equipment financing vertical.
Today's solar has 446 million to fixed rate term debt.
And it's $620 million floating rig credit facilities as well as our 50 million dollar floating rate credit facility to not have LIBOR floors.
At quarter end, 14% of unfunded liability for floating rate would know lied port for.
The company's net interest margin declined by approximately 40 basis points during the quarter, which compares favorably to an approximately 80 basis point drop in one more one month LIBOR during this quarter.
At March 31st the weighted average investment risk rate when our portfolio was 1.9 times based on our one for risk rating scale with one representing the least amount of risk.
As further indication of the current resiliency of our portfolio, 100% see on balance sheet portfolio was performing at quarter end.
Including activity across our four business lines originations for the first quarter totaled 84 million why repayments were 256 million.
Originations for the quarter, where a mix of new deals as well as upsizing to existing borrowers.
New investment activity was a combination of cash flow deals weighted towards the health care.
Dismissed service sectors as well as life science investments.
Our outsize realizations during the quarter repayments at or above par.
And were primarily the result of refinancings that we the opportunity to participate in but opted not to due to the floppy market conditions that continued in January and February.
We now have the opportunity to recycle this capital into investments with higher yields and better structures.
Now I'll provide an update of each of our for investment verticals, including details around our valuation process.
Let me start with our cash flow segment.
Well the disruption to the economy as a result colder 10 damage has been unprecedented we believed that our cash flow portfolio is well positioned to withstand kroll prolonged recession.
Our cash flow portfolio does not have direct exposure to cyclical industries, such as energy commodities travel retail leisure heavy manufacturing for consumer discretionary sectors.
We've been active dialogue with our management teams and sponsors are portfolio companies regarding business prospects as a result of cogent.
We're encouraged by the steps taken by our four portfolio companies to preserve liquidity.
As well as their continued strong sponsor support.
All predominantly first lien portfolio.
With that relatively modest first lien leverage approximately five times.
As well as significant junior capital beneath our investment tranche and strong sponsor support positions us well to withstand the prolonged economic headwind.
We view our portfolio companies as generally providing essential services and non cyclical sectors that we'll continue to be required as the stay in place restrictions are used.
So were conducted.
A rigorous covert stress test across our cash flow portfolio as part of our first quarter valuation process.
Our valuation framework incorporated sector specific market spread movements during the quarter.
Adjusting for the existence of LIBOR floors.
The expected weighted average life as far investments.
Existence of covenants and other issue were specific factors such as industry liquidity profile.
Sponsor support of the business and all position in the Companys capital structure.
The vast majority of the finding our cash flow Port Neal Mark.
It's reflective of market spread movements that we expect to reverse over time.
To provide further context market spreads for the LCD first lien single B indexed widened out approximately 400 basis points.
During the first quarter.
Since quarter end that has tightened back approximately 150 basis points or 35% recovery as of April thirtyth.
At March 30, onest or cash flow loan portfolio.
It was 291 million or approximately 19% of our total portfolio.
It's invested across 18 borrowers with an average investment size of 16 million.
These companies had a weighted average EBITDA of 57 million.
Which highlights our longstanding commitment to finance larger businesses, which we believe are better pits position to withstand a downturn.
The weighted average yield of our cash flow portfolio was 10%.
For the first quarter or cash flow segments contributed 9.6 million to gross income representing 29% of our total gross income.
During the first quarter, we wrote down I stress.
Second lien investment.
Zero, we had placed this investment on non accrual back in the third quarters last year.
It presents 1.8% of the cost of our balance sheet at 331.
During the first quarter, we originated at 32 million or first lien senior secured cash flow loans and experience repayments of approximately 160 million because we continue to allow our cash flow portfolio to organically run off.
Our investments during the first quarter included loans in the health care and business services industry.
As well as upsizing to existing credits.
We're very encouraged by our available liquidity at Src take advantage of the current market dislocation, we expect to persist.
Over the last few years, we opted to shrink our cash flow portfolio, hoping to frothy market conditions, which resulted in highly levered capital structures and lose documentation structures.
We've begun to see opportunities to finance large upper middle market companies at lower leverage.
With better covenant protections and at wider spreads.
We will continue to maintain or discipline of investing in non cyclical sectors focus on the upper end of the middle market.
Now, let me turn to our asset base sector segment.
Overall, our portfolio companies in this asset class continued to perform according to its special expectations at the time of our initial underwriting.
At quarter end whole issuers, where current on their interest payments.
As Michael mentioned.
Our ABL business Crystal financial specializes in financing companies that are in transition.
And who have reduced access to traditional financing options.
Our email loans, our underwritten at a discount to net liquidation value of the underlying collateral.
As a result, they have historically been very active in challenged sectors with significant working capital assets, such as retail and consumer goods industries.
Accordingly, we believe their business is exceptionally well positioned in the current environment.
The senior management team of Crystal has worked together for over 20 years and has experience managing through several economic cycles.
We believe the opportunity set for the strategy will only grow over the next 12 months.
At quarter end, our asset based loan portfolio totaled approximately 620 million representing approximately 40%.
Of our total portfolio.
To invested in 35 borrowers with an average loan size of approximately 18 million.
The weighted average asset level yield for this portfolio was 10.6%.
And for the first quarter our E. B L segment contributed approximately 9 million to the gross income representing 20% of the total.
The portfolio statistics, I, just outlined to garner look through basis to crystal's underlying loan portfolio.
For GAAP reporting we list or equity position in the Crystal financial subsidiary upon our schedules investments and we fair value it on a quarterly basis.
Our valuation framework incorporates both a comparable company analysis of other JBL finance companies that have recently been sold or our publicly traded as well as an analysis of crystal's underlying loans.
Including the company's fundamentals as well as the loans maturity yield collateral coverage and structural protections such covenants.
In accordance with this framework, we marked our investment in Crystal finance down by 7% at quarter end.
We expect to recover this unrealized losses, the economy and valuations for comparable asset based companies improve.
During the first quarter, we funded approximately 11 and a half million new A.B.L. investments and had repayments of just under 34 million.
Our ABL capability.
But through Crystal with its senior team, who has expertise in financing stress companies over the course of 30 years together fives us with an extremely valuable capability during the current economic disruption.
Not only has there.
Opportunities have increased dramatically.
What we are able to work with our cash flow clients to create structured solutions for their liquidity strapped to portfolio companies.
We are currently focusing our origination efforts on companies that have stayed classic values indefensible business models.
Now, let me turn to equipment finance.
This vertical is led by a team of seasoned professionals, who have an average of close to 30 years of experience having managed through several economic cycles.
A large portion of our equipment portfolio finance portfolio has invested in industries that had been deemed a central businesses such as construction.
Those issuers are showing stability. However, neps that's performing segment is transportation.
In this sector has been impacted.
School tour in charter bus Lasik.
Many of our equipment fans bar of qualify for loans under the carriers Act. It is important to remember that we provide financing to a borrower on specific equipment financings are at.
Loan to values that are typically in the 70% to 80% of liquidation value.
And are well within the borrowing base during normal.
Markets.
In addition, a large portion of our investments have personal guarantees and other forms of credit protection from the owners.
Present.
It is not the time to liquidate our collateral as the market for this type of equipment is limited during an economic shutdown.
At quarter end nets out a portfolio of over 345 million.
Of equipment.
So based loans at fair value.
The portfolio is it fair sit across 115 borrowers with an average.
Exposure of approximately 2.8 million.
As a reminder included in this line of business. Our equipment finance is that are held directly unselfish balance sheet as well as in our wholly owned subsidiary F Holdings.
Portfolio company that for tax efficiency purposes hold some of the next investments.
Our valuation framework for Nash incorporates both the comparable company analysis of other equipment finance companies that have recently been sold or a publicly traded.
Well as an analysis of each of Neps underlying loans, including the company fundamentals as well as the loans maturity yield structural protections such as covenants and importantly collateral coverage.
In accordance with this framework, we have marked our aggregate investments from the equipment finance segment down by 11%.
From the prior quarter.
We expect to recover the majority of this unrealized depreciation as the economy and valuation for copper equipment finance companies improve.
The equipment finance asking class asset class represents 22% of our portfolio.
100% of.
These loans are first lien and at quarter end weighted average asset couple of yield on our equipment loans was just under 11%.
Additionally, 99% of the portfolio was fixed rate.
And this is not impacted by recent rate reductions.
For the first quarter. This segment contributed 5 million to our gross income representing 15% of the total.
During the quarter.
We invested in $19 million, new equipment loans and had just under 40 million of repayments.
Our equipment finance team remains focused on managing the existing portfolio through this challenging time.
Additionally, the team is working with our broader origination team to offer equipment financing solutions to sponsors and their portfolio companies.
Finally, let me turn to our life science lending business.
Overall, our life science portfolio has been largely insulated from short term market can economic dislocations, given the long dated equity investment periods and product development cycles.
At the present time impact of called it.
Just had a de minimis impact on the portfolio, 100% for loans in this segment are performing.
We continue to expect to incur no losses in this segment.
As a reminder, we have never realized loss in our life science portfolio, nor has the team and their prior.
Period of time at GE capital.
Currently none of the Lifesize portfolio companies have less than three months of cash runway and 85% of our portfolio have more than 12 months of cash runway.
This is larger were largely result of our investment focus on public and venture capital backed late stage Multiproduct pharma and medical device companies that are close to entering or in commercialization.
It's important to remember there are a life science investments or low loan to values, 15% to 20% generally where value is defined as the actual cash that has been invested in the business.
Not the enterprise value.
Most of the most recent round a funding.
Or the market capitalization, if it's a public company.
Well the FTD may be slowing trials in favor of fast tracking koby treatments for vaccines and patients may be reluctant to participate in trials given the pandemic.
The projected to read in the nine month potential delays for some of these companies is small in relation to the 10 to 15 year development process and significant capital invested in these companies prior to us making alone.
In addition, there are some late stage development companies, whose revenues may be delayed as a result of delays and medical procedures are surgeries considered elective or non essential.
The financial viability of many hospitals doctors in health care providers rely on these sources of revenue and we expect these services to begin to ramp back up over the next few months and into the second half of 2020.
At quarter end, our life science portfolio totaled just under 285 million.
The portfolio consisted of 16 borrowers with an average investment.
Just under 18 million.
10 minute half percent, excluding successfully isn't warrants.
Evaluation framework for the life Science segment is based on marking each investment.
Close to its advertise costs, including the final fee, which is due at repayment.
In addition to cash liquidity of each of these bars is a significant valuation input.
There was no liquid market for private life science venture debt, we do not use equity benchmarks for determining the fair either.
During the first quarter or life science team originated approximately 20 million of investments and had repayments approximately 24 million.
The health care sector in general continues to be extremely attractive and we're not seeing any slow down and new life science investment opportunities.
Also the increase scale of the solar platform enhances the opportunity set for this team.
<unk>, where many medical device companies in public farm of businesses require larger blown sizes.
We will however continue to be highly disciplined as we make new investments.
In conclusion, we believe solar portfolio is well positioned to whether the crisis.
As we continue to navigate this challenging environment. We you remain in close contact with our portfolio companies, there management and sponsor teams to support them.
As well as we are working closely with our extensive networks of relationships to source new investment opportunities.
Soldiers commercial financed platform and significant drypowder enables us to provide structured solutions, including both cash flow and asset base loans for capital constrained companies in this environment.
So, we'll we'll be able to participate in these financings, while maintaining significant versus diversification cross our portfolio.
Now, let me turn to call back to Michael.
Thank you Bruce in closing all of a solar Catholic partners of like the thing our shareholders, but continued support during this difficult time.
We believe our teams expertise and ability to provide financing across cash flow and A.B.L. solutions should enables tiller capital continue to support the existing portfolio companies and importantly make new investments during this period of turmoil.
R.A.B.L. team is highly experienced in working with company on the financial stress, including after liquidation and bankruptcies.
Crystal financials model of originating at the base loans for companies to transition.
Dork, we thrive during previous economic downturns.
Additionally, our senior castle loan investment professionals have significant probably decker experience and I've managed credit portfolio through several economic cycles.
As a result of recent fund raising the solar capital partners platform now has over six and a half a million dollars.
For capital, including potential leverage with over $3 billion currently available to make new investments.
S.C.P. private funds maintain a co investment strategy was solar capital would provide the company acceptable attractive call investment opportunities in upper mid market companies that otherwise would not have been able to make with its capital base alone.
Specifically, the collecting drypowder enables a platform to speak with large positions and provide rescue financing as well as at an equity financing when m. any activity resumes.
Now more than ever F.T.P. scale should serve as a competitive advantage for solar capital.
Importantly for solar capital the scaling flexibility to finance cash flow and that's the based solutions for larger companies.
<unk> significant advantage today.
Traditionally the greatest investment opportunity exists during periods of market just location when capital is scarce.
With approximately 700 million dollar from available capital and a strong foundation, given our current high quality portfolio and low leverage we believe the company's position to originate attractive new investments, while also supporting our existing portfolio companies as needed.
Our patience and willingness to remain under invested provides us the foundation opportunistic.
Given the magnitude of the economic disruption, we believe that the improve investment opportunities that will persist for several quarters. It's companies continue to require financing solutions.
In conclusion.
The team is competent and solar capitals defensively position portfolio stable funding sources strong liquidity.
Tends to make new investments. Despite the market was we took on a portfolio a quarter and because of the large amount of repayments received engendered February our net leverage.
Actually decrease from year round to the end up to one.
As a result, we have no anticipate a need for this liquidity or capital and accordingly, we have no plans to issue dilute of equity or expensive on secured debt.
Each year for the past nine years, our shareholders of granted that's approval to issue shares below net asset value subjects. The board approval at that time.
We've always be this trust.
As a great responsibility and manage because of the quarterly and I've never taken evangelists.
Given our belief in the company's ability successfully navigate the current challenges we are disappointed in the current surprise remain confident the quality of our portfolio or result in a stable net asset value.
Ultimately.
Be reflected in the higher absolute and relative share price.
We hope that all you're in good health and would like to say the unsung heroes and it helped her profession and the essential service workers on the front lines of this crisis.
To support their efforts.
In our homes in New York of New York currently the center of the epidemic. We still are capital partners investment manager a bestseller c. have donated $1 million to them out of hospital in Columbia University Irving Medical center collectively to be used for the picture in the P.P.E. Cobra research and the mental how of those frontline help.
Care workers and their families.
11, 30. This morning, we'll be hosting and earnings call for the first quarter 2020 result, solar senior capital or something.
Our ability to provide traditional middle market see a script and things to this vehicle continues to enhance originated give the ability to meet our capital needs.
Clients and we continue to see benefits this value proposition in silver capital Dealflow.
They figured time this morning, operator at this time could you please over the lines of questions.
As I My mind, you to ask a question you we need to press. So I want on your telephone keypad. Please stand by why we <unk> again, <unk> and the number one.
And your first question comes from Ryan Lance.
Hey, good morning in.
Thanks for taking my questions and hope you guys. All there are.
During your from are doing well.
My first had a question quick on on Crystal. This corridor looked like Crystal income style that <unk>.
Corner or or at least that all those loans are still on a cruel status mccracken or on the dance you can you just talk about what drove the decline in recognizing you know the same level of income you have an astronaut empty.
Sure Yeah, we did have a little bit of portfolio shrink pitch early on.
Ryan, which led to less income down there and I think just in general well being a little bit more conservative as you know velocity really drives in certain assets with crystal a fair bit of pre payment finish we weren't seeing that and we don't know that we're going to see that in this environment and so we sort of right. So as the dividend to reflect.
The current runrate until we begin to ramp that portfolio.
Okay.
It makes sense.
You guys are obviously sitting in a in a very advantageous position both with the low leverage on your balance sheet as well as the the very flexible liability structure of a lot about secure gathering a senior from nine to pass it on your on your credit facility.
So capital Playmate, you know is going to be be key for you guys.
Generally a good position, but right now.
I know you guys into cash flow, then need market seems like that that that's becoming a a more favorable environment. It should be the plane capital M.Q.
It doesn't seem like there's really much activity you know going on in that market. Today. So you can you just talk about the level of Dealflow you are seeing and what are your thoughts on kind of knowing that this is a very fluid situation kind of you know the the taste of capital employment going forward gestures, given that it feels like.
Primary market insurances are pretty locked down right now.
Sure Great question. There's you know the last couple of years, we've been training or cash flow portfolio stuff Tonight.
Per cent of comprehensive portfolio and yet until the first quarter, where we really shrunk to portfolio. We we have largely had been running in place and that's because we're blessed with the especially finance strategies that have been extremely active while we've stayed on the sidelines in cash flow and you know too.
Sure you know 12 18 months from now we think we'll look back and we'll see growth not only in our specially finance verticals, but also in the cash flow book, you're right Ryan and that it's not ramping up today, we are seeing some selective opportunities and cash flow either from some of our peers, who who are selectively.
Selling assets to create liquidity for their own platforms. So that's a good opportunity for us to add to things that we already like and no and then I think as we get deeper into 2020, we expect them an activity will pick up you know not so much for new platforms.
But for add ons, you know, we'd been uptick an active participant in putting more capital into situations that are growing and we're hearing from our sponsors that has their stabilizing the existing companies. They are looking to take advantage of market. This location to deploy the substantial.
Private equity capital that has been raised over the left last couple of years into sitting on the sidelines to add on acquisitions at lower acquisition multiple so we expect to be extremely active in the cash flow.
<unk> over the next 12 months.
Okay that makes sense and then just one more you know in the past obviously made several.
Form you know acquisitions took roll out you know different <unk> minding verticals Cross your path warm I would think there's probably going to be you know several platforms. You know under stress you know as broadly in the market you know somebody specialty lending bertels not in your portfolio, but it but across.
The landscape and stress you guys have always been active in engaging in looking for different platforms can you just talk about your guys willingness and ability to potentially add on a different additional especially lending platforms. You know given the dislocation that though that's oncoming yeah.
That's that's a great questions. You know we have a team that is a dedicated 100% to both looking for acquisitions, but also importantly lending money to other specialty lenders we have a.
Fairly diverse portfolio, that's perform incredibly well since inception in fact, we've never had the fall for payment to fall in that half the class and so our our team right. Now is is actively looking at situations, where all this stuff for lenders may need liquidity and the nice thing about those is many times we make.
Those loans.
And it gives us a real window into those companies to figure out whether they are in an acquisition opportunity going forward. So yeah. We are very active there and given you know the breath. The platform today, we're protecting computer buyers now and and and many of the segments that were.
Okay that makes sense.
Those are all my questions Bruce had to just want to say I. Appreciate the out that you gave on all the special need money verticals I thought that that provide a lot of detail and insights into how you're thinking about those businesses going for so I really appreciate that but but those are all my questions. I appreciate that the time today you guys all stay well.
Thank you take your questions.
And your next question comes from K.C. Alexander.
[noise] Hi, good morning, first of all morning to think well let me. Thank you <unk> your donation to the health care providers as father of a front line individual I can't tell you how much I appreciate your generosity on that front and and.
That [noise].
Ryan asked a couple of my questions, but what are the things that I was wondering about cash flow and as you know an economic theory. There is late cycle defensive investments.
<unk>.
And it would seem to me that that some of that mentality might shift more towards early cycle recovery type industry targets, how does sort of here, especially on the cash beside your industry target focus change now that you're going on the offensive.
And arguably because this is happening so quickly were likely transitioning to something more early cycle on the way out on the other side over the next couple of quarters, how does that industry target change and create an opportunity and also in the cash flow side.
Given some of the distress would you also considers you know starting to take some equity slices as a way of helping to assist rebuilding now have over the cycle.
Sure Great question so.
Where we are today is really in a transition period to your point Casey where people are are frequent owners or what do they own and what are they going to support in which sectors that are going to you know again, perhaps near term pressure. It you know I don't know what business won't away from some of the essential services. So <unk>.
And then you know to your point focused on recovery capital and so what we're doing right now is using alright, how should based extra keys.
Two in sectors that we already are very comfortable with we're we're not going to go into.
Timing certain sectors you know that's just not R.D.N.A., we're gonna stay true to the high free cash flowing businesses, albeit when businesses are open and less cyclical businesses were not cyclical timers, but what we were doing is we're using R.A.P.L. expertise to partner with our cash flow teams to go into big sponsored companies.
With E.D.L. solutions that we still get a tell when the door and businesses that we like but land at you know, 10% plus type rates against receivables enlarge mid market companies, where they're carving out collateral for liquidity lines, because they're B.S.L. credit facility allows them to pull capital away from.
The current term loans and then we're positioning ourselves on the recovery P. your point to put capital from a casual perspective. Once we have visibility on cash flows into these companies, but I think the industry focus is going to be similar to what we see today and what we've done over the last several years, there's so much.
You know to do and health care, it's served us incredibly well.
But again not immune in this environment. There are a lot of non essential services that had been delayed but we'll be reopen once the emergency rooms, and 10 dollar medical facilities are open for noncorporate relate to treatment. So we're going to stick tore knitting on industries, but we're going to position ourselves.
For recovery investing route.
Rescue financing would already be o. capability.
It's a a great answered secondly, I mean of the Bdcs that I cover your liquidity position is is likely as strong and your leverage is low and you've you've made an argument for maintaining the dividend I don't recall was ever.
In the past at the borders ever considered share repurchase program I hear your dissatisfaction with the stock price and perhaps that's another way to creatively build some now have while you're waiting to get more of your available liquidity to work has that ever been a consideration at the board.
So so just going back in history, a little bit it's quite a while back we we had a a quarter. Many many years ago, where we had 25% of our court goal there literally repaid in one quarter all with yields now.
Loan that had come out of the crisis. So they were no double digit yielding loans and it took a real dense into our our earnings we actually cut her dividend but.
I've third as a result of that because we did not see a path to reinvest in a reasonable time period back then you know the only strategy <unk>. So we did not have the luxury of all these different ways to invest in under right and so because of that we did cause didn't significantly and we did actually by.
Back stock because we did not see kind of the ability to Reramp and then before period of time I think that the difference now is you know capitalist so dear.
That and we have the investments ready to be able to put it to work that you know we don't want to put that at risk locked in you know incredibly cheap financing and you know it's it's math if you if you lose your equity whether through.
Bad investments because the default or you kind of payback shareholders with it you can lose access to you know.
That that capitalism literally irreplaceable today.
Okay.
Atlas and I appreciate your answers and look forward to seeing out developed for the next couple of quarters. Thanks for taking my questions Thanksgiving.
Yeah next question comes from Chris <unk>.
Yeah.
Yeah. Good morning, Thank you.
<unk> good morning, it it sounds like we should be expecting like for the next 123 quarters. Most of the growth is going to come from.
A.B.L. lending <unk>, if that if that's the correct assumption and I'm I'm wondering are there.
It sounds like a more labor intensive process than taking part of of cash flow alone and.
Monitoring of the collateral and and all that and are are there volume constraints, there or is that.
That's something you can ramp reasonably well.
Yeah. That's it that's a great question and Chris you know as as a supporter of both solar and our sister P.D.C. Solar senior you appreciate that we have multiple H.P.L. platforms cross.
The from the end so actually we.
Are looking at situations where.
North mill or receive pulls back business over at Sunset is starting to source much larger facilities that we are sharing over at solar.
In a small piece it sounds as appropriately sized for that portfolio. So we have tremendous capacity, whereas 175 people is you know most of them actually are dedicated to the blocking and tackling in monitoring and underwriting of collateral in the A.B.L. sectors as opposed to the cash flow.
So we we feel very well positioned and if anything what we have been doing.
We announced earlier this week as beefing up origination.
And particularly origination and you know specialty vertical like life Sciences, where we've had a tremendous track record with a team, but also origination that can source transactions across our sect, that's both cash flow N.A.B.L.
Okay.
Alright, that's it for me thank you.
Thank you.
Yeah next question comes from the line a rabbit that.
Hi, guys getting back.
The the the cash.
See that's in something you you eat happens a little some time you know one of the things you mentioned you seem like you know Oh geez it to to buy essentially.
But no no liquid market stuff, but loans from some other credit shops that that selling it gained liquidity.
<unk>, you'll you'll approach on I mean, obviously that <unk> you can you can get maybe have it said if they're selling it it just kind of set up but one of the hesitations you've had in cash that was the last couple of years, it's not just the two on but the structure and and <unk> Yeah is that a a.
I live in the secondary market or <unk>. The slice is worse, it's a weakness on on on structure.
How how how should we we view that it's so it's only cycle maybe this structure.
<unk>. So that's a great question when we talk about looking at buying secondary pieces from other credit funds have either loans that we've been in or loans. We looked at we're talking about loans that restructuring away we'd be comfortable with so we actually bid on a couple of pieces that were being sold.
By public B.D.C., and we got outbid, but it wasn't a company that were already a lender to solve its we'd like structure.
To your question when we go by you know.
The S.L. that a discount.
The answer is it the extremely were rare if we did that because again, having no covenants you basically going to going to sit there until the you know the the the thing works itself out I think that one exception would be if.
And it should it be new extremely well kind of maturity coming up in the next to 12 month 18 months. We knew there was an event that we could possibly play a role and refinancing, but I I think it's highly unlikely you'll see go participate in the second in the in the liquid secondary market.
The shape and then all the the kind of the the forward and and you said you know you seeing some initial signs and and having discussions with overseas sponsors who are looking potentially later this year to do add on some things like that.
What's the the action being so on on on that instead of just like either the the the pricing talk and to that point again, but the structure talk because I.
Thing you'd be willing to fund on that structures is the <unk> I finagle it yet but.
Financing site. So can you give us any <unk> on on how those very preliminary I'm sure that way Yeah. I think you know from high level structure is not even a negotiation. It's just thrown on the table right away you know having lived through cycles for 30 plus years, my but I I've seen this place.
Where the first thing that comes back and structure.
So there's there's really not much of a negotiation.
Around the edges of the covenants, but not around the existence of the covenants. So that's an easy dialogue you know we're pen stand without structure and that's always been the case you know you've in a in the more frothy environment, but then the critical factor is obviously leverage you know transactions, where they were asking for five to six times leverage they're now asking.
Four to five times leverage again, we're talking about upper mid market companies.
And then on pricing I think it's fair to say that it's it's very situational.
But you know loans that <unk> seven half a percent are now you know no less than nine per cent opening conversation.
Most importantly, some call protection, which had been nonexistent as you know in cash lending, particularly for a first million loan. We're we're not going to rent at our balance sheet for 12 months and then get refinanced out if the market should recover and so we want to make sure we have a little bit of Paul protection.
Get some duration as well.
<unk> hook it up or do you appoint like the the the lab, which used to be you know five to six times adjusted either so you know hi.
Yeah, we're we're not even yeah.
[noise] adjustments.
But.
I I appreciate it.
And then stay healthy anybody.
Thank you tested it.
Again in order to ask a question press Star then the number one on yeah telephone keypad, that's star and the number one.
Hang on next question comes from Finance Oh shape.
I think is good morning.
Hi couple of questions on any.
That seemed to have more.
Cloudy remarks, or or you know <unk> optimistic understandably, given a lot of these businesses or or smaller and cyclical.
Question.
On P.P.P. eligibility is P.P.P. funding able to support equipment lease obligations.
And you know if that's the case is.
Any f. also generally not in Philly yet.
I guess.
Question is.
Is this funding available to those issuers in is that a line of support.
Yeah. That's it that's a great question. So yes on one hand, you're right. This is the portfolio hopefully you know I made clear we are watching closest you know in part because it is cyclical given the underlying borrowers and then part you know other team has 30 years experience.
You know, they're they're newer to our platform and we're not here during the Wedo nine crisis, but so we had the ability to underwrite that when we were able to partner with them and bring them on the platform. They do tied to answer. Your question 15 have access to government stimulus by and large because these are not private equity own terms. So they avoid the affiliate.
<unk>.
Issue.
Our team has worked closely with as many of our borrowers as possible possible to provide access to that Capitol and give them.
You know a little bit of a a lifeline and extend their ability to remain close. Unfortunately, a number of them actually are essential services and as you know typically construction is something that is opening up sooner than others, which states are facing through their reopenings. So you know we're we're watching it it is.
As you know a deal ideal Fortunately, it's a very diverse portfolio, but this is the nature of that business, where there is a lot of discussions you're getting monthly interest in principle, you have pulled the pressure points on a borrowers and then you work with them to get through the difficult talking so early days a lot of hand to hand combat.
But government funding will definitely be helpful.
Mmm.
<unk> and in any event that you know one.
The borrowers in you know more coded challenged industry.
You know goes through financial events bankruptcy et cetera did they continue to.
Do they do they normally continue to pay interest on your A.B.L. or is there a gap.
Usually.
So are you interested you yell or you and equipment.
Equipment, sorry, but but if you want okay coming on that.
May be out you know first of all I think it's important you hit on a great topic, it's important to understand.
You know, there's a lot of conversation over the last year too. If we were hit downturn, you know our firm's private credit firms position to handle and whether a downturn themselves.
Not just in terms of liability structure and portfolio construction, but in terms of a team skillset and you know because apart A.B.L. business is I'm not only the crystal team in the nation's pain, whatever Northumberland chairman or teams over at.
Solar senior our sister P.D.C.
That is what they do for a living they work through bankruptcy usually works for stress because they want to make sure that they particularly collateral.
And you very off into your point the companies are going to come out the other side and look to reorganize and operate they're going to work with us. So that we don't take the asset and for clothes and go liquidate the asset because they want it in the operations and so we we very often are assumed as if it's a lease.
Or reinstated or repaid to the extent that there's some reorganization refinanced out so that expertise, though of being able to take these companies through a process you know theater liquidation or reorganization is critical and it's something that it's you know he an asset hopefully we.
I don't need to use often but is critical and this time period.
So that's helpful. In it and then just one <unk> final question on the especially fans verticals any of crystal et cetera.
On.
Any view line.
The S.C.C. release granted on April 8th.
Would allow you to to to.
You know take your third party.
<unk> funds invest in into these finance companies to expands them has that been an item of discussion and have you any view on that.
<unk> actually.
First time, we will discuss that I think given the fact that we have.
You know 3 billion dollar bill liquidity across a platform and each individual fund.
Clear to public there'd be plenty of liquidity themselves. There, there's no need to do that for us at all.
Oh very well that's all for me and thank you so much.
<unk>.
Again, so it's just <unk>.
Are there any more questions.
Again, and I want to ask a question <unk> than the number one on your telephone keypad, that's star and the number one.
Yeah, No further questions that one now like to turn the called back over to Michael wealth, Chairman and see Oh and feel.
Just Bruce before I turn it back over to Michael I really just want to take a moment too.
[noise] not only to support of our investors and the research community.
But you know rich Mike when I, you guys get to spend a lot of time with us concealed something the front lines, but we would not be in this position.
A strength from a fundamental portfolio perspective and position to be in an offensive mindset. If it works for the hundred and 75 people at solar.
Senior team is really stepped up for us in a big Big way.
And I think that is a huge credit to the team and the long duration that everybody has working together. There's a good thing that has come through this is that we have accelerated the integration across the platform of all these different teams that have come together.
In a common cause a preservation of our investors capital and looking for good opportunity. So we can't paint to cause much were incredibly proud to be part of this team.
Thank you and I I reiterate that and again, we appreciate everyone's time. This morning, we know these are difficult times and.
We appreciate all of our shareholders support and you know as you know we try to be a transparent as possible. So please feel free to reach out to any of US are with any questions. You may have now or whenever you want and we hope everyone remain safe can take everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Oh.
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