Q2 2020 Solar Capital Ltd Earnings Call
Ladies and gentlemen, this is the operators today's conference is scheduled to begin momentarily until then your lunch will again be placed on musical. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Solar capital earnings Conference call.
At this time, all participants are in listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today, Michael gross chairman and CEO. Thank you and please go ahead.
Thank you very much.
Welcome to build a couple of.
Oh.
Yes.
I'm joined here today by Bruce fall.
Our co CEO and Richard Pititto Solar Capital's Chief Financial Officer, Rich before we get would you. Please start to recover the worker.
He said.
[laughter].
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 for our strictly prohibited.
This conference will be.
Website at Www Dot Com LTV.
[laughter].
Okay.
[laughter] what are your we.
It would be made available later today is disclosed in our earnings press release.
I would also like to call your attention to the customary disclosures.
Oh yeah.
[laughter] today's conference.
Webcast may constitute forward looking statements, which relate to future events for our future performance or financial condition.
These statements are not guarantees of all future performance financial condition or results and involve a number of risks and uncertainties.
Including the impact of Cobot 19, Andrew related changes in based interest rates and significant market volatility on our business.
Our portfolio companies and the global economy.
Additionally.
Past performance is not indicative of future so.
May differ materially.
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Described from time to time filings with the FCC.
Solar capital limited undertakes no duty to update any forward looking statements and that's required to do so by law.
Okay.
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Please visit our website for costs that you want to 93.
One 670.
At this time I'd like to turn the call back to our chairman and Chief Executive Officer, Michael gross.
Thank you rich.
Good morning, Thank you for joining us today.
We hope is find you and your family friends and colleagues healthier.
Never made with all stakeholders, including the dedicated employees across all where capital and the company's investment advisor solar capital partners.
We would also like express or gratitude to all the health care and other front line.
Central workers, and our fear consult condolences to those families who have lost loved ones.
Before turning fourth quarter results I'd like to take a moment to reflect back on the initial months public health care and economic crisis, which tested off as a nation and the global community.
Hello.
Okay.
Oh, it's bar.
Management teams and financial sponsors.
On a human level, the collaboration and dedication of our employees.
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Pricing.
The people.
Nothing short breathtaking.
Well or death professionals and the sponsors imagine team.
Yeah.
[laughter].
Cycle the added emotional toil does health crisis has been a first for everyone.
Yet despite the added stress.
Oh.
Oh.
Hi, Kerry for young ones suddenly homebound, our colleagues internal and external.
Across our portfolio are working tirelessly to ensure that on this.
Borrowers.
The quick constructive actions of our portfolio companies look at the beginning of this crisis to preserve liquidity in short their balance sheets are testament to the high quality other management teams and sponsors.
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Employees dedication beat to the resilience of the human spirit.
In the year, that's been dominated by negative news, we believe it's important to recognize we.
That's how that progresses, because this message to successfully what the remainder of the storm.
For couples performance to the crisis. Thus far has supported our long term investment thesis, but I suppose.
Niche market.
First.
Upper middle market companies provide meaningful downside protection during challenging economic periods.
Solar Capital's primary objective it's consistently.
Okay.
[laughter] portfolio is 100% performing at June Thirtyth 2020.
Overall, our portfolio companies are proving to everybody.
Models and access to liquidity that should enable them to successfully navigate this crisis.
Solar capital's healthy portfolio as a result of course strategic.
It's a niche E B O verticals.
As well as our longstanding investment discipline country. The philosophy that we always investors. If we are late in the credit cycle.
Importantly, we remain patient unintentionally under Levered in order to preserve liquidity for market dislocation when risk adjusted returns are generally more attractive.
As a result of improving credit market technicals I mean, he also massive fiscal <unk>.
Good stuff, taking about imagine sponsors.
Our capital June Thirtyth fair valued represents a 40% recovery.
That's a pretty sure.
Okay.
The company reported.
$20, an 11 cents per share at June Thirtyth, a 4.5% increase or 87 cents per share.
I forgot corner.
June Thirtyth, 92% of our 1.6 billion dollar comprehensive portfolio at fair value was comprised of first lien loans.
[laughter].
She finished strategies.
Do you have historically exhibit lower default loss rate throughout business cycles compared to traditional capital.
Importantly, TBL equipment finance in life science team each managed through multiple cycles over career spanning 20 to 35 plus years.
In the second quarter solar capital <unk>.
Once every $3 billion, when we had $118 million repayments across <unk> investment strategies, Bruce provides additional detail the portfolio activity during the quarter.
Our Oh.
Castle loan portfolio, essentially stayed flat quarter over quarter for men for many years of frothy current market conditions, Weve espoused expected benefit of maintaining adequate dry powder Indian banks have a market dislocation.
Spring weather U.S. and they went to lock down we.
Expected financing opportunities to about however, the unprecedented level government support created something overheating or the market.
Translating into an under pricing given uncertainties in the steep contraction of economic activity.
Simply put.
Right.
Let the risk inherent imports restructured loans to borrowers suddenly facing stress.
Consistent.
That's a philosophy, we remain patient to avoid catching falling.
Good.
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It's a time in capital to support their controller companies, you negotiate amendments to existing facilities and contributing additional equity in hopes of afforded dilution and owns the terms with rescue financings.
With a focus on existing portfolio companies. There was very light I'm an activity during the quarter, our patience coupled with this lack of news activity resulted in modest Sponsler Castle investments true.
That's a country a transition from India, Universal corn team to pockets of escalating cobot cases, and accompanying stall business activity, we have seen investment opportunities.
And maybe increase.
Well, maybe underwriting processes have been somewhat slowed that limitation of the virtual pieces landscape, we expect to see our portfolio expand meaningfully.
Okay.
Now, let's we're cautious and the new investment opportunities, we're seeing carry higher expected returns in federal structural protections, creating a more trucking environment to grow our income for any portfolio.
That said uncertainty and volatility are likely remain elevated for the foreseeable future. We believe remaining disciplined and maintaining a senior secured well diversified portfolio across [laughter].
With that the classic is as important as ever.
For the second quarter solar Capital's net investment income per share totaled 34 cents.
The decrease in net investment income quarter by quarter resulted from a combination of yield compression.
Lower freight fee income in a smaller income producing portfolio.
Since year end 2019, one in three month LIBOR declined by 160, Im wondering six one basis points, respectively, triggering a number of LIBOR floors across our floating rate portfolio.
Very good over 300 military payments to date.
We tend to grow our portfolio only when new investment opportunities meet our strict underwriting criteria you, but if it meets operating the portfolio had a size where the manager is not.
Second quarter.
We believe it's the right decision and isn't the best interest.
How about long term fellow shareholders.
Yesterday, our board of director declared a 41 cents per share distribution payable in third quarter.
But.
Separately.
Adult being significantly and purposely under Levered and the underperformance of our portfolio.
We view this as a temporary condition will continue for a few more quarters, but we're not necessary necessitate a dividend cut.
We remain we will maintain or disciplined impatient investment approach during this period.
Certainty.
Yeah.
Thank God.
At quarter end or leverage was just 0.59 times net debt to equity.
Our decision to run the business under Levered was founded in are conservative approach and bleep that markets were over.
A period of time.
Only when this economic crisis has run its course will be well, we'd be able to quantify the benefit to our shareholders about conservatism, but we're confident that the credit quality, but current portfolio.
<unk> leverage will translate into that bucket preservation, notably higher net investment income.
[noise], you're kind of recovery continues in markets stabilize our investment pipeline to increase the cost.
Yes.
In the pipeline of platform and portfolio acquisition opportunities and specialty finance.
We expect the next 12 to 18 months to present, an abundance of compelling that's not to do.
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You bet structural protections and it's an ideal time to for both our specialty fats platform and increased our income producing portfolio.
Our diversified investment platform positions.
Solutions provider to borrowers. It also enables us to originate attractive risk that is unavailable to firms, which only positioned to underwrite cashflow loans.
We expect portfolio.
[laughter] higher yielding assets with more friendly lender terms, which ultimately drive net investment income higher in future quarters.
Finally.
Well I mean, if interest with the Companys stakeholders, that's one of our guiding principles.
Through significant that's still our seeks every share purchases since inception, including recent purchases by Oliver Executive officers are senior management and investment team at approximately 7%.
Common stock.
Additionally, all members and that's something of a significant percentage of the annual compensation invested in our stock.
We believe our management and investment teams recent share purchases in the face this crisis demonstrates our confidence in the company's defensive portfolio stable funding strong liquidity, if every position to make new investments.
At this time Oh workforce.
Okay.
Highlights.
Thank you Michael.
[laughter] workout limited net asset value at June Thirtyth 2020.
Was 849.8 million.
$20, an 11 cents per share.
Pass through 813.1 million were $19 in 24 cents per share at March 31st doesn't it's one.
[laughter] Thirtyth.
So.
On balance sheet investment portfolio at fair market value of 1.36 billion.
In 108 portfolio companies.
Across 27 industry.
[laughter] Mark.
2 billion.
In 105 portfolio companies.
Cross 26 industries as of March 31st 2020.
At June Thirtyth, the company had nothing drawn on its 545 million and 50 million revolving credit facilities and had 18 million of cash on hand.
The company has full access to this on drawn capital.
As of June Thirtyth 2020, solar capital also had 446 million unsecured notes.
Oh.
The cost of incremental debt from our revolving credit facilities is currently less than 200 basis points.
Which should enhance operating leverage as we grow our income producing portfolio and move towards our target leverage.
Uh huh.
Yes.
Sure.
<unk> investment grade rated which should provide us with continued access to unsecured debt markets.
Since inception.
So what capital is taking a conservative approach to leverage and has consistently operated well below its baby target range.
On June 35 to 20 accompanied [laughter].
Well it was <unk> point.
Net debt to equity.
Solar capital's liquidity, therefore remains strong with over 800 million a bell.
[laughter].
Credit facilities of Crystal in any of holdings subject to their borrowing base availability.
So as of June Thirtyth 2020.
So what capital had.
Limited unfunded revolver commitments of only 17 million that could be fully drawn by borrowers.
Ultimately moving to the piano.
For the three months ended June Thirtyth 2020.
Gross investment income totaled 28.6 million versus 32.9 million for three months ended March 31st.
[laughter] told what.
The three months ended June Thirtyth 2020.
This compares to 17.1 billion for three months ended March 31st 2020.
Accordingly.
The company's net investment income for the three months ended June Thirtyth 2020.
Yeah, well 34 cents per average share.
Compared to 15.9 million was 38 cents per average share for the three months ended March 31st 2020.
Below the line the company had net realized and unrealized gains for the second quarter totaling 30 and.
Okay.
Versus net realized and unrealized losses of 91.3 million for the first quarter 2020.
Ultimately the company had a net increase in net assets, resulting from operations of 54 million.
Dollar 28.
Okay.
Right.
This is compared to the net decrease of 75.5 million $1.79 cruciate every share for the three months ended March 31st 2020.
Now with that I turn the call over to Bruce School for portfolio Safi.
Thank you rich.
First and foremost we're extremely pleased with how well our portfolio has weathered this crisis so far.
This supports our underwriting thesis of minimizing the risk of loss by investing at the top of the capital structure and cash flow loans to non cyclical industries.
And Alex hitting a majority of our exposure to collateralized loans to our specialty finance lending verticals.
At quarter end, just under 20% over a comprehensive investment portfolio.
It was invested in senior secured cash flow loans with the remaining 80% invested.
In our senior secured asset based equipment finance and life science lending strategies.
The weighted average investment risk rating of soldiers portfolio was 1.9 based on our one to four risk rating scale.
With one representing the least amount of risk.
100% of soldiers portfolio on a cost and fair value basis was performing at quarter end.
At June Thirtyth, our 1.6 billion investment portfolio.
Highly diversified encompassing over a 180 borrowers across guidi industries.
Our largest industry exposures, our health care pharmaceuticals, and diversified financial services all defensive sectors.
The average investment was 8.6 million, 4.5% the portfolio.
At June Thirtyth, 99% of the portfolio.
Comprised of senior secured loans, 92% first lien and just over 7% in second lien secured loans.
Up to 7% second lien investments approximately half or 4% of our total portfolio were invested in cash flow and the remaining were invested in asset base, secondly loan subject to borrowing basis.
We believe that our portfolio of predominantly first lien loans, which carry less risk and second lien and subordinated investments.
Will result in greater capital preservation during this crisis.
At quarter end for weighted average asset hopefully yield was 9.9% compared to 10.6% in the first quarter.
By focusing on our commercial finance verticals, we've been able to maintain asset level yield of approximately 10%.
And that's despite the 160 basis points dropped in life purchased since the beginning of the year.
Approximately 77% the company's portfolio is floating rate based.
Of which 85% of these loans have a LIBOR floor with a weighted average floor up 1.1%.
The 23% of the portfolio invested in fixed rate loans are predominantly equipment financings.
Including activity across our four business lines.
Originations for the second quarter totaled just over 100 million and repayments were approximately 120 million, resulting in a modest net portfolio reduction a 15 million.
Originations for the quarter were mix of new deals and upsizing to existing borrowers.
And they were focused on the NPL and life science strategies.
Now, let me provide an update on each of our four verticals.
Cash flow.
We believe our cash flow portfolio is well positioned given the limited direct exposure to cyclical industries, such as energy commodities travel retail.
These your heavy manufacturing for consumer discretionary sectors.
We're in a consistent dialogue with the management team and sponsors of a portfolio of companies regarding their business prospects. During covance and are extremely encouraged by steps that they have taken to preserve liquidity as well as the strong sponsor support.
In fact, many of these portfolio companies are performing ahead.
Their post coated revised budgets.
As a rebound in revenues as well as cost cuts have had positive impact on their financial performance.
Our predominantly first lien portfolio.
Relatively modest first lien leverage at 5.4 times.
And significant junior capital cushion together with strong sponsor support.
Positions us well to withstand prolonged economic headwind.
We view the majority of our cash flow loan portfolio companies as providing essential services and non cyclical sectors. They will continue to be essential during periods of staying placement.
As a reminder.
We should framework incorporate sector specific markets spread movements in the quarter adjusting for the existence of LIBOR floors.
Expected weighted average life existence covenants and other issuers specific factors such as liquidity profile sponsor support.
And our investment position in the capital structure.
The majority of the increase in our portfolio marks this quarter are reflective of market spread movements.
To provide further context market spreads for the LCD first lien single B index tightened approximately 300 basis points, where 68%.
From March 31st June Thirtyth.
Given the fundamental strength of our portfolio.
We expect to recoup the remaining unrealized depreciation over the coming quarters.
At quarter end, our cash flow portfolio was just over 300 million.
We're close to 19% of the total portfolio.
It's invested across 17 borrowers with an average investment of 18 million.
These companies had a weighted average EBITDA of 60 million, which highlights our focus on financing larger businesses, which we believe are better position to withstand a downturn.
The weighted average yield for cash flow portfolio was 8.6%.
And our cash flow loan segment contributed just under 7 million to gross income representing 24% of the total Q2 gross income.
Out of our 17 cash flow borrowers.
Two loans had a short term covenant waiver during the quarter to support the decline in revenues as a result of stay home orders.
We are encouraged with these companies recent performance with revenues recovering strongly.
Greater than 80% in both cases.
Overall, we're confident in our portfolio, which is required no capital support from solar despite the severe disruption caused by the pandemic.
During the second quarter, we originated just over 6 million, a first lien cashflow loans and experienced repayments.
Actually seven and a half million.
Our investments during the second quarter work upsizing to existing cash flow credits.
We are thrilled by our available liquidity at a similar see that will allow us to take advantage of the market dislocation, which we expect the persist for some time.
As Michael mentioned, we opted to shrink or cash flow portfolio over the last several years, owing to frothy market conditions that resulted in highly leveraged deals with goose documentation.
We have begun to see opportunities to finance larger upper mid market companies at lower leverage levels, and with better Covenant productions and at wider spreads.
We'll continue to maintain or discipline of investing in non cyclical sectors focused upon the upper end of middle market.
Now, let me turn to asset based lending.
Overall, our portfolio companies in this asset class continued to perform according to our expectations.
As a reminder.
Our <unk> platform Crystal finance specializes in financing companies in transition who have reduced access to traditional financing options.
Their email loans, our underwritten at a discount to net liquidation value.
As a result, they have historically been very active in challenged sectors, but significant working capital assets, such as retail and consumer goods.
Accordingly, we believe their business is exceptionally well position for the current environment.
The opportunity set for this strategy will only grow over the coming months.
At quarter end.
The senior secured as it pays portfolio.
Totaled approximately 585 million representing over 37% of our total portfolio.
Invested in 35 borrowers with an average investment from just under 17 million.
The weighted average asset level of yield, but this portfolio was 10.2%.
And for the second quarter. This segment contributed 9 million to gross income contributing over 31% of our total gross income.
For GAAP reporting, we list or equity position in crystal on our schedule of investments and fair value with on a quarterly basis.
At quarter end, the fair value of our investment in Crystal was marked up 5% recovering approximately two thirds of the unrealized depreciation from the first quarter.
And in line with improved valuations.
Comparable finance companies.
In the second quarter, we funded.
56 million of new asset based investments had repayments of just under 92 million.
Credit challenges facing several of our El peers allowed us to upsize, our exposure to existing companies on an opportunistic basis.
In addition, we're encouraged that the liquidation market for underlying collateral.
As reopening after being completely shut down at the start of the pandemic.
Our ABL capacity.
Through crystal with its senior team, whereas expertise in financing stress companies over the course of 30 years together provides us with an extremely valuable capability during the current economic disruption.
Not only is there opportunity set increased.
But we are able to work with our cash flow clients to create structured solutions.
Are there liquidity strapped portfolio companies.
We are currently focusing our origination efforts on companies that have stable asset values indefensible business models.
Conversion of these opportunities into portfolio investments will take longer than normal given a more cumbersome due diligence process in this cope environment.
As a result, we expect to see portfolio growth over the coming quarters.
Now, let me turn to equipment finance.
Our equipment finance businesses led by team of seasoned professionals, who averaged close to 30 years of experience.
Which includes managing to multiple economic cycles.
A large portion of our equipment finance portfolio is invested in industries that had been deemed essential businesses such as construction.
And machinery, which are our largest exposures.
Those issuers are showing stability.
However, nets best historically performing segment transportation has been the sector most impacted.
Providing buses to schools tours in charter bus leasing.
Well the majority of our equipment finance bars have been beneficiaries of P.P.P. stimulus funding and other government assistance programs.
The unprecedented decline in economic activity.
Requires us to take a long term view and patients in working with our borrowers to help them get through this crisis.
We're already seeing signs of recovery encourage by.
By both the return of the liquidation market and the health of our underlying borrowers improving.
It's important to remember we provide financing on specific equipment, the financings or low loan to values typically 70% or so.
And well within the borrowing base in normal market conditions.
In addition, a large portion of our investments have personal guarantees and other forms of credit support.
At quarter end nations equipment had a total portfolio of approximately 350 million a funded.
Equipment loans the portfolio was invested.
Across 113 borrowers with an average exposure of approximately 3.1 million.
As a reminder.
Included in this business our equipment finance.
Facilities held directly on solar balance sheet as well as those held in their holdings.
Portfolio company that for tax efficiency purposes pulled certain NDF investments.
Our valuation framework for NAV incorporates both a comparable company it analysis of other equipment finance companies.
As well as an analysis of ness underlying loans, including the company's fundamentals as well as the specific structures around alone and their covenants and other protections.
In accordance with this framework.
At quarter end, we marked our aggregate investments in equipment finance.
Upwards, just over 5% from Q1.
The equipment finance asset class represents over 22% of our portfolio.
100% of Neps investments, our first lien loans.
Quarter end weighted average asset level yield was approximately 10.4%.
Additionally.
98, and half a percent of this portfolio fix rate.
And is not impacted by the drop in LIBOR.
For the second quarter.
The equipment Finance segment contributed just over four and a half million to gross income representing 16% of the total gross income.
During the second quarter.
Our equipment fan strategy invested just under 8 million in new investments and hip portfolio repayments.
Just over 17 and half million.
Our equipment finance team remains focused on managing the existing portfolio in helping borrowers through this challenging time.
As we sit here today. The pipeline has increased enough continues to work with our broader origination teams to offer equipment financing solutions to sponsors in their portfolio companies.
Finally, let me provide an update on our life science business.
Overall, our life science portfolio has been largely insulated from short term market and economic dislocations, given the long dated equity investment periods and product development cycles of this asset class.
The impact of Cove. It has had a de minimis impact but in this portfolio.
As a reminder, we have never realized loss in our life science portfolio.
Currently 96% of our life science portfolio companies more than 12 months of cash runway.
With none of the portfolio investments being less than three months of cash runway.
This is largely result of our investment focus on both public and VC backed late stage Multiproduct pharma and medical device companies that are close to entering or in commercialization.
It's important to remember that our life science investments are made at a very low loan to value typically less than 20%.
Where value is defined as actual cash invested in the business.
And not to enterprise value post the most recent round of VC funding where some.
Public market capitalization.
Well the F.D.A. may have slowed trials in favor of fast tracking koby treatments for vaccines contains may be reluctant to participate in trials given the pandemic.
The projected to read the nine month potential delays for some companies is short in relation to the five to 15 year development process as well as the significant capital invested in these companies relative to the size of our loan.
In addition.
There are some late stage companies, whose revenues may be delayed as result of delays in procedures or elective surgeries for.
Financial viability of many hospitals doctors and health care providers rely on these sources of revenues associated with elective surgeries and we are extremely encouraged by the resumption of these services over the last couple of months.
At quarter end or life science portfolio totaled just under 320 million.
Portfolio consisted of 17 borrowers with an average investment.
Of approximately 19 million.
Life Science loans represented 20% of our total portfolio contributed 8 million of our gross investment income equating to approximately 28% of the total gross investment income.
The weighted average yield on our life science portfolio was approximately 9.8%.
However, this excludes any success fees were warrants.
Our valuation framework for life Science investments is based on making each marking each investment close to its amortized cost, including the final fee that is contractually due it prepayment.
In addition.
The cash liquidity public potential of a specific borrower is a significant valuation input.
There is no liquid market for private life science venture debt investments and we do not use equity benchmarks for determining fair value.
During the second quarter the life Science team originated approximately 32 million of new investments then had pre payments of one and a half million.
The healthcare sector in general continues to be attractive and when you're not seeing any slowdown in new life science opportunities.
Moreover, the increased scale the solar platform enhances the opportunity set for investing in later stage public pharma medical device companies that often require larger hold positions.
We will continue to be highly disciplined in evaluating new investments.
In conclusion, we believe SLR she's portfolio is extremely well positioned to whether this crisis.
As we continue to navigate this challenging environment, we remain in close contact with our portfolio companies Your management teams and their sponsor teams who have supported them.
We're also working closely with our extensive network of relationships to source new investment opportunities.
Soldiers commercial finance platform and significant Drypowder enables us to provide structured solutions, including both cash flow and asset based loans for capital constraint companies.
That's all our C will participate in these financings alongside the rest of the platform on maintaining significant diversification.
Now, let me turn the call back to Michael.
Thank you Bruce.
In closing, we would love to think solar capital shareholders for their support during this difficult time.
Conception, we've been desperate to make the right decisions to preserve enhance long term shareholder value.
Our priority has been to construct and maintain a portfolio that will generate steady income for our shareholders and protect their capital.
We have remained disciplined in the face of significant spread compression higher leverage and lose structures all of which have elevated the risk of principal loss.
Accordingly, we have positioned solar capital defensively diversified portfolio cross cash flow and specialty finance predominantly first lien senior secured loans committed downside risk weve operated well under target fund leverage and preserve liquidity.
We believe we have taken the appropriate steps to navigate through what we anticipate to be a prolonged an uneven recovery.
Throughout we have maintained alignment for ownership of solar alongside our fellow shareholders.
Our decisions to prioritize capital preservation, rather than leveraging the portfolio and take the on more risk at the wrong come this cycle have allowed us to enter into this dislocation in a position of relative strength.
Importantly, we have confidence that our team's expertise and ability to provide financing across cash flow and specialty pencil spend and solutions should enable solar capital continue to support its existing portfolio companies make new investments with attractive risk reward profiles. During this period of turmoil.
Earlier this year, we added seasoned professionals to origination team to broaden and integrate our coverage across asset classes.
We are already seen the benefit of these additional resources in the form of or more robust investment pipeline.
In addition to providing attractive risk adjusted returns for SLR see our lender finance team is a growing source of investment opportunities for providing growth capital, making portfolio purchases and evaluating platform acquisitions.
As a provider of capital lender finance business provides unique opportunity to get to know and understand different commercial lenders and their niche markets.
We have a long history of lending to and acquiring specialty finance companies and we believe the current environment is extremely attractive.
Lender finance transactions given the market dislocation.
Our pipeline has expanded we're actively pursuing acquisition opportunities that can enhance and further diversify our specialty finance platform.
With approximately $815 million of available capital a strong portfolio foundation and low leverage solar is positioned to originate attract new investments and grow net investment income.
Our patience and willingness to remain under invested allows us to be opportunistic.
We believe that the improved investment opportunity set will persist for sometime.
In conclusion.
We are confident in our ability in our and our defensively positioned portfolio stable funding sources strong liquidity.
Potentially make new investments as a result, we have no anticipate didnt need for additional liquidity or capital. It Accordingly, we have no plans to issue dilutive equity.
Each year for the past nine years, our shareholders have Brad So that's approval to issue shares below and Navy subject imports approval at time of issuance, we've always viewed as trust in us as a great responsibility and manage the business accordingly.
11 started this morning, we'll be hosting it earnings call for the second quarter results for solar senior capital or sometimes our ability to provide traditional middle market senior secured financing through this vehicle continues to enhance our origination teams ability to meet our clients capital needs.
We continue to see benefit to the value proposition in solar capital's deal flow.
We very much appreciate your time. This morning, operator could you. Please open the line for questions.
[noise] certainly as a reminder, if he would like to ask an audio question. Please press Star then the number one on your telephone keypad again, let us start wanted to ask a question.
We'll pause for just a moment to compile documenting roster.
Your first question comes from the line up Finian O'shea.
Hi, good morning, Thanks for taking my question.
First on.
Crystal and kind of still down I know you touched on that last quarter or the income was down unrelated to.
Lower leverage and lower perhaps prepays.
Can you give an updated outlook on that should we.
We expect a return to to sort of previous levels on on Crystal Finance.
Income that is.
Yeah, I think the.
Outlook for Crystal is they're seeing a tremendous amount of activity as we mentioned finian <unk>.
The income as you may recall is a little bit lumpy and it's sometimes driven by repays given the short duration of the loans together with the fact that we don't recognized upfront fees, we accrue them over time, and then accelerate them on repay so you will see pops in their income and we try to smooth that out.
We feel very good about the prospects, but it's.
Really you should assume that this income will be sort of a steady state for the moment until we get a better sense, what repays look like.
Okay. That's helpful. Thank you and.
Question for Michael perhaps on on longer term leverage and portfolio potential you.
Noted that you expect a very strong pipeline with compelling opportunities.
But you've also obviously solar as has dislike the the middle market or cash flow market for years, and and with the capital still on the sidelines capital still coming into the market or the asset class that that might mean that the investment opportunity will be short lived so.
You know do you think solar might have a really good 2021, and then revert back to being under invested or are you more confidence in the outlook <unk> two to grow your your company's place in the market.
I think we're pretty comfortable our longer term outlook I think.
Some of our businesses kind of away from traditional castle lending are a little more sticky.
For example, when you put out now leads for nations equipment.
We'll go.
You don't get called out early for example, and we back that we put.
Uh huh.
We're going to get better off the tests and things of that nature. So you know.
And lastly, we know we highlight little bit the lender finance business those loans tend to be extremely long term.
Obviously acquisition.
Become permanent parts of our platform. So I think we're.
Confident that we can get towards target leverage sometime next year.
Okay. That's helpful. Thank you.
Thank you.
Your next question comes from the line of Paul Johnson.
Hey, good morning, guys Paul on for Ryan here, Thanks for taking my questions.
I wanted to ask so as I look at earnings today about 34 cents no for the quarter and that's a with no incentive to see this quarter.
And I think you touched on this a few ways with your expectation for.
Subleasing good deal activity in the second half of this year I'm just curious I mean do you see the pathway just with the current environment tightening spreads low interest rates.
Beginning income.
Possibly backup of that hurdle rate this year or do you think you would need some pretty significant deployment to get there.
Yeah, I think that.
We expect to approach that <unk> 41 cents dividend over the next couple of quarters little too soon to say, whether it's a Q4 for Q1 Q2, but definitely over the next couple of quarters to Michael's point I think the combination of the diverse asset classes that we have to originate in so there.
Well, we're not dependent on activity in any one strategy such as cash flow as well as these very strong pipeline, we're seeing in acquisitions of potential spend that especially finance platforms positions us well, it's hard to pin it down to a specific quarters you can imagine.
Sure.
That's a very helpful insight and then secondly.
Just on the interest income line I'm, just curious with just a big drop quarter over quarter I'm guessing you know interest rates were you know that a big part of that.
But do you expect the current 10 to 22 million or so to be a good.
Staying nimble number sort of all else equal without you know any kind of mainly it's minimal growth.
Or how would you expect that possibly increase a little bit yeah. I mean, just to clarify the the big drop off from Q1 to Q2 was the fact that we had 200 million repayments in in Q1 installed before.
Yes.
I think it's a that assuming no portola brokers shrinking so that's a good run rate for now for where we aren't given where interest rates arc with a pretty much a zero today.
But clearly any portfolio growth <unk> profit number higher.
Okay, Thanks to that [noise].
And then I'm just curious I think you mentioned two loans during the call. They you you provided some castle as that you provided some amendments or covenant waivers to where those the only two loans that you provided any kind of relief for during the quarter.
It was the only ones in cash flow.
We did something similar for just a couple of names in life Sciences, where they had short term amendments to address short term revenue shortfalls.
And then in the equipment Finance segment.
We do give freely from time to time, that's been greater during covert than historically.
That actually has slowed in Q2 versus what we saw at the onset of the pandemic.
And tends to be very short term in nature.
Month or two.
Okay.
Those are a those are all my questions. Thanks for taking my questions today, and I think you guys deserve a lot of credit for slowly growing the portfolio and yeah designing away. It is today.
Thank you thanks for the support.
Your next question comes from the line of Chris I Totzke.
Hey, good morning. Thank you morning, Chris I guess, Oh I'm, just wondering you talked about the kind of cumbersome due diligence process, you know certainly for cash flow loans I imagine.
The same as for you when you're looking at other.
You know.
M&A opportunities for specialty.
Finance.
Companies and Oh.
I'm wondering is that right or have you been kind of had ongoing.
Due diligence pre.
Great covert that but you can piggy back on so you know that that you know there are opportunities in next couple of quarters and then I guess also related to that I think you're at 23% or there about a utilization of 30% bucket and should we think of that.
A 30% as the other current assets is that kind of hard cap or are there ways to manage the 30% bucket that would enable you know more significant acquisitions.
Sure well, we definitely you have the ability.
To make more specialty finance asset acquisitions in just a 30% will comply.
Because not all assets are.
30% assets as you know our equipment finance assets for example are not.
You are saying that 30% bucket, so we have flexibility there.
Additionally to your first question it is difficult to conduct due diligence remotely although the specialty finance platforms are effectively asset based acquisitions were underwriting pools of loans or.
Various you'd be all assets.
And that is actually easier to do remotely with teams that.
Our used to going in and doing that type of due diligence on an collateral basis.
As opposed to cure casual loan that is based upon.
A more qualitative factors exclusively.
Okay.
Alright.
That said for me thank you.
Thanks, Chris.
Your next question comes from the line of Rick Shane.
Good morning, guys, that's doing very well a lot of our question and then asked and answered but wondering now.
Your comments about portfolio growth.
I think not to ramp Ah I think you said in the second half for home. This year I'm wondering if that's a function of lower expected prepayments.
Uh huh.
Acquisition of another specialty finance vertical or some combination at the tail.
Well I think in general we're not expecting much prepayments at all.
In this environment, we have the bulk of prepayments in Q1 before cobot hit.
We had some repayments this past quarter, but $100 million.
We don't expect that much you're paying out till the year. So.
We expect just pure hopefully net growth and that will come from you know a variety of fourth we think the cast market will be a little more active in its been a as we shared our backlog for critical type L. deals is extremely strong right now and as you highlighted the potential for a you know acquisition would would kind of move.
Fairly dramatically.
Great. Thank you.
Thanks.
Your next question comes from the line I've met Jayden.
Hey, everyone. Good morning, and thanks for taking my questions I'm just to start off I guess on kind of a simple it looked like Pik income was up quarter over quarter could you give any color as to the source of that.
Yeah. There there was not a a significant change in pick we have been blessed that we have not had to convert cash paying loans into pick loans.
There are some cases I mentioned, we had to a covenant waivers. There are some cases, where we will for doing that takes additional yield.
And we'll take that into form of pick over and above our existing cash coupons.
But again it hasn't been a conversion of cash to pick it's been more of a yield enhancer.
Okay, and then I guess I'm on the acquisition front. So some great color. There is there any thing if you're willing within the specialty finance verticals. There is there any niche vertical that looks more favorable or more interesting than others.
No I I think look we are both a strategic buyer in terms of evaluating add on acquisitions to the existing.
Platforms that we have.
As well as new platforms that we had been evaluating as an asset class you know for some time, but it's we're coming into this environment.
What we're finding obviously is that.
Management teams and sponsors are looking for partners to add capital either on a lending or on a equity basis and so we're just finding a cross the specialty finance spectrum.
Asset based lending broadly leasing or financing et cetera, just an increase in opportunity and less competition for those opportunities.
Great I guess, and then kind of just a last one that's a little more broad on the general competitive environment. You note since kinda cobot has started.
Spread widening documentation improvement, but with record amounts of capital kind of coming into the direct lending space do you think both of those are kind of here to stay in the near to midterm.
Look I.
We have seen improvement.
But it's been improvement and structure and on the margin price and it's been on a very small.
Selection sample size of new deals of the activity just hasn't been there to call it.
The norm yet so I think everything we're hearing from our conversations with sponsored community has increased activity.
Over the next few months heading into the fall and winter.
Winter.
A lot of add on acquisitions as people are looking to make a acquisitions at lower purchase prices than they had pre cove. It but it's just too soon to be able to say, what what's sustainable structures and pricing looks like I will say that there is an increased focus on clubbing.
Both from the sponsor and from the lender community and so we think that a that also will help the competitive dynamic longer term.
That's it for me thanks, guys.
Thank you.
Ladies and gentlemen, as a reminder, if he would like asking audio question. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Tom Romero.
Hey, guys. Thanks for taking my questions and congratulations on solid quarter on my questions I'd like to focus on the life science sector could you give us sort of a an overview sample of one or two.
The credits that you have there and just in general I know I'm, assuming that your security gains patents and intellectual property and how do you. How do you look at the and have you look at this sort of them one component when when you're underwriting it and then lastly same same question on life Sciences.
Could you give us sort of a competitive matrix, who you're competing against in that space.
Yeah. Thanks for the questions that that's a mouthful and what I would suggest is would love to have a follow up call. We can take you through it in more detail and <unk>.
<unk> head of the came on that as well to take you through our strategy, but high level. Our life science business is focused on very late stage as I mentioned, that's either pre commercialization or in commercialization.
Exclusively focused on.
Developmental drugs or devices.
And the team has an incredible track record predating their experience at solar.
I'm going back to when they found that the business to cheap capital, it's been incredibly consistent because of the disciplined underwriting it's really a focus on first lien loans.
Return of principle in all cases and to your question looking at warrants or in some cases, what we call success fees, which is just the fixed price warrant.
As a way to enhance our yield as opposed to some of our peers, who were out there going a little bit earlier stage I'm also having phenomenal track records, but taking a little bit more credit risk and compensating for that with more of an equity type return, but I think it would be best and we would greatly appreciate the opportunity to follow up with you in heavy.
More fulsome conversation.
Super <unk> I'll do that and again congrats on a this sounds good.
Thank you very much.
Okay.
Again, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad.
Okay.
There are no further questions at this time.
Oh, we appreciate your time this morning and for those of you defend the solar senior call. The Spi two and half an hour. Thank you.
This does conclude today's conference call you may now disconnect your lines.
Oh.
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