Q3 2020 Solar Senior Capital Ltd Earnings Call

Require assistance during the conference. Please please press Star then zero on your Touchtone telephone.

A reminder, this call is being recorded.

I'd now like to turn the call over to your host Mr., Michael gross chairman and co CEO Sir.

Thank you very much good morning, welcome to Stuart's Senior Capital's earnings call for the fiscal quarter ended September Thirtyth 2020, I'm joined here today joined here today by Bruce Spohler, Our co Chief Executive Officer, Richard <unk>, Our Chief Financial Officer, Rich would you. Please start off by covering the webcast and forward looking statements.

Of course.

Thanks, Michael.

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

Please note that they are the property of solar senior capital limited and that any unauthorized broadcast in any form.

Let's see prohibited.

This conference call is being webcast on our website.

At Www Dot solar senior cap Dot com.

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

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

Statements made in today's conference call and webcast may constitute forward looking statements, which relate to future events or future performance or financial condition.

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

Including the impact of COVID-19.

And related changes in base interest rates and significant market volatility on our business portfolio companies in the global economy.

Additionally, past performance is not indicative of future results.

That's correct.

Really as a result of a number of factors, including those described from time to time in our filings with the FCC.

Solar senior capital limited undertakes no duty to update any forward looking statements unless required to do so by law.

To obtain copies of our latest SEC filings. Please.

Please visit our web site.

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Hi, nine three.

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

Michael gross.

[noise] they drew much rich the solar senior team hopes to find you and your family friends and colleagues healthy and safe.

Our thoughts remain with all of our stakeholders, including the dedicated employees across all their capital and the Companys investment advisor solar capital partners.

Like to express our gratitude to all the health care and other front line essential workers and we'll continue to send their sincere condolences to those families who have lost loved ones.

I'm pleased to report that solar senior capital or SUNS portfolio is 100% performing for the third quarter, which is supportive of our investment thesis that asset based loans in niche markets and first lien capital loans upper middle market companies provide meaningful downside protection during.

Challenging economic periods.

Our portfolio companies are performing proving have resilient business models and access to liquidity that we believe will enable them to successfully weather the current economic recovery.

We attribute our healthy portfolio foundation to our disciplined and conservative underwriting deep experience of our investment teams and sons diversified origination platform across cash flow asset based lending and lifestyle verticals.

Credit market valuations continue to your true third quarter and our portfolio companies benefited from the gradual reopening of the economy and the proactive steps taken by management teams and sponsors tomorrow liquidity reduce costs throughout the downturn.

For SUNS net asset value improved by 24 cents per share or approximately 2% compared to the prior quarter.

At September Thirtyth, our fair value marks represented an approximately 70% recovery of the unrealized depreciation recorded at March 31st.

Importantly, we currently anticipate that are existing investments will result in solar senior capital ultimately receiving their expected returns and 100% of par in repayments.

At September Thirtyth over 98% of our comprehensive investment portfolio fair value was invested in first lien loans.

Approximately 49% of a total fair value consisted of loans in our specialty finance verticals. These.

These loans historically exhibit lower default and loss rates throughout business cycles compared to traditional cash flow lending.

Notably the NPL and life science teams have each managed through multiple cycles over career spanning 20 to 30 years.

In the third quarter solar senior produced 30 cents per share of net investment income fully covering our distributions.

At September Thirtyth SUNS remains significantly under Levered at 0.52 times net debt to equity reliv towards to our target range of 1.25 to 1.5 times.

We expect portfolio growth in the coming quarters from the increased pipeline of both first lien cash flow as well as asset based loan investment opportunities.

As we invest our available liquidity, we expect SUNS net investment income to cover distributions without the support of fee waivers by the advisor.

As we approach our target leverage of one and a half times, we expect net investment income to exceed the current distributions.

Given the improving economic climate and stabilization of markets. Our investment pipeline is ramping up our diversified investment platform spanning castle blending multiple they'd be all strategies and life science venture lending positions SUNS at a solutions provider to borrowers.

Importantly, we are in a unique position to allocate capital across our strategies the most attractive risk adjusted return investments.

It also enables us to originate attractive risk that is unavailable to firms, which only underwrite cash flow.

We expect portfolio growth to come in the form of higher yielding assets with more lender friendly terms, which will hopefully drive increased net investment income.

We also have the available capital to support the expansion of our portfolio at September Thirtyth over 60% of our funded debt was comprised of unsecured term notes, which gives us significant unencumbered assets and provide meaningful over collateralization of its combined $300 million senior secured.

Credit facilities of which over 80% our currently undrawn.

However, long term investors know, we have managed the company in anticipation of an economic downturn.

No that is right and the and the economic recovery is a process. We are fortunate to have a solid portfolio Foundation.

We are poised to deploy capital to support our valued sponsors and management teams.

Finally, our investment advisors alignment of interest with the company's stakeholders has always been one of our guiding principles.

Two significant share purchases since inception, our senior management team now owns approximately 6% of our outstanding common stock.

Additionally, all members of the investment team have a significant percentage of their annual compensation invested in our stock.

Senior management investment alongside fellow stakeholders demonstrates our confidence in the company's defensive portfolio stable funding strong liquidity and favorite position to make new investments.

At this time I'll turn the call over to our CFO rich petticoat to take you through the third quarter financial highlights.

Thank you Michael.

Solar senior capital limited net asset value is at September Thirtyth 2020.

253.4 million or $15.79 per share.

This compares to a net asset value of 249.5 million.

For $15.55 per share at June Thirtyth 2020.

Boy seniors balance sheet investment portfolio at September Thirtyth, 2020 had a fair market value of 389.5 million in.

In 44 portfolio companies operating in 19 industries.

Compared to a fair market value of 416.4 million.

46 portfolio companies operating in 21 industries at June Thirtyth.

Turning to our funding profile and leverage.

SUNS continues to have a very strong balance sheet.

Which we believe is serving us well in the current downturn.

At September Thirtyth 2020.

And had 139.3 million of debt outstanding.

And net leverage of 0.52 times.

Down from 0.68 times in the prior quarter.

SUNS has no near term debt maturities, having turned out both its primary 225 million credit facility and the secondary 75 million credit facility to 2023 and 2024, respectively.

In addition, sunset.

Hi, This is 85 million of unsecured notes with a maturity of March 31st 2025.

Solar senior capital has over $250 million available to fund portfolio growth subject to borrowing base limits.

As a reminder, solar seniors target leverage is 1.25 times to 1.5 times debt to equity onto reduced asset coverage requirement.

As of September Thirtyth 2020.

The company is unfunded revolver commitments of approximately 4.1 million.

That can be fully drawn by the borrowers.

Some significant liquidity allows us to be opportunistic in our originations during this market dislocation.

From a piano perspective.

Gross investment income for the three months ended September Thirtyth 2020.

Totaled 7.9 million.

Consistent with the 7.9 million for the three months ended June Thirtyth.

Net expenses for the three months ended September Thirtyth were 3.1 million compare.

Compared to 2.8 million for the three months ended June Thirtyth.

Net investment income for the quarter ended September Thirtyth, 2020 was 4.8 million or 30 cents per average share.

As compared to 5.1 million.

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

For the quarter ended September Thirtyth 2020.

The investment advisor voluntarily waived management fees of 722000.

Compared to 959000 of management and incentive fees waived for the quarter ended June thirtyth.

Below the line.

Solar senior had net realized and unrealized gain for the third fiscal quarter totaling 3.8 million.

Compared to net realized and unrealized gains of 15.4 million for the three months ended June thirtyth.

Accordingly.

Solar senior had a net increase in net assets, resulting from operations of 8.6 million.

With 54 cents per average share for the three months ended September thirtyth.

This compares to a net increase in net assets, resulting from operations of 20.5 million.

Well $1.28 cents per average share for the three months ended June thirtyth.

Well actually.

Our board of directors declared a monthly distribution for November 2020 of 10 cents per share.

Payable on December 2nd 2020 to stockholders of record on.

On November 19th 2020.

With that I'd like to turn the call over to Bruce Spohler, Our co CEO. Thank you rich.

Most importantly, SUNS portfolio has remained 100% performing <unk> the current economic slowdown in early stages of recovery.

This performance is a tremendous complement to the financial sponsors and portfolio companies and management teams that we have invested in.

In addition, SUNS defensive portfolio and performance supports our underwriting thesis minimizing risk of loss by investing in first lien loans.

At the top of the capital structure.

Non cyclical industries as well as.

Allocating a significant portion of our exposure to.

Two collateralized loans to our specialty finance verticals.

At quarter end, the weighted average investment risk rating of our portfolio improved to 1.9 based on our one to four risk rating scale with one representing the least amount of risk.

SUNS comprehensive portfolio totaled 522 million at quarter end was highly diversified encompassing over 200 borrowers across 120 industries.

Roughly 50% of the portfolio was invested in first lien asset based and life science loans with the remaining 50% in senior secured first lien cash flow loans.

Our largest industry exposures, where health care services professional services and insurance services.

The average investment per issuer was two and a half million or less than <unk>, 0.5%.

Total portfolio.

At September Thirtyth.

Approximately a 100% of our portfolio consisted in senior secured loans comprised of 98.4% in first lien.

And 1.5% in second lien secured loans.

Approximately 87% of our portfolio.

Has a LIBOR floor and at quarter end.

All of our bars made their interest rate payments.

We believe that our efforts to position this portfolio.

First lien loans, which carry less risk than second lien and subordinated loans will result in greater capital preservation during the ongoing economic recovery.

At quarter end, our weighted average asset level yield was 9.4% at fair value.

Focusing on our commercial finance verticals, we've been able to maintain a portfolio yield approaching 10%.

Despite the sharp drop in library.

Including activity across our business lines originations for the third quarter totaled 40 million and repayments were approximately 55 million.

Now, let me provide an update on our investment verticals.

Let's start with cash flow.

We believe that our cash flow portfolio is well positioned to perform during.

During a continued economic recovery.

More mild downturn, given our lack of direct exposure to cyclical industries.

Substantially all of our cash flow companies are outperforming their coven provides budgets for the year.

As a rebound in revenues as well as cost cuts have had a positive impact on their overall financial performance as well as liquidity position.

We view the majority of our portfolio companies as providing essential services in non cyclical sectors that will continue to be required during peak periods of regional stay in place mandates.

That may lie ahead.

During the third quarter.

None of our borrowers experience payment defaults.

In particular health care cash flow loans have been performing extremely well we attribute this both to the recession resilient and essential services nature of the health care industry as well as our underwriting edge.

Stems not only from our experience health care cash flow team.

But also the proprietary reimbursement and industry insights through both our life science and Geminos healthcare asset based lending team.

At quarter end, our cash flow portfolio was just over 267 million or approximately 51% of the total portfolio.

It encompass 30 or 30 issuers with an average investment of approximately 9 million.

Over 97% of this portfolio is first lien assets.

With only one second lien in that portfolio.

Post quarter end.

Our one second lien investment was repaid at par.

Which now results in a 100% first lien portfolio.

Our cash flow portfolio companies had a weighted average EBITDA of.

Over 110 million.

The weighted average yield on our cash flow portfolio was 6.6%.

During the quarter, we originated 7 million.

First lien loans.

And experienced repayments of approximately 39 million.

We are encouraged that sponsor activity has picked up with higher M&A volumes during the fourth quarter.

We expect.

Sponsor led momentum to carry forward into the end of this year and the beginning of next year, which we believe will provide opportunities to invest in attractive upper midmarket companies.

Now, let me turn to our asset based lending businesses.

As a reminder, sun zones too.

Commercial finance companies that specialize in making.

As a base loan secured by accounts receivable.

These companies led to lend to small and mid size U.S. businesses that typically have limited access to more traditional bank financing.

Jim and I'll just focus on providing.

Accounts receivable lines of credit to healthcare service providers, such as hospitals skilled nursing.

Medical laboratories and others.

Collateral includes.

Receivables from Medicare Medicaid as well as private pay.

North Mill Financers companies operating primarily in the distribution business services and manufacturing industries.

North mill is typically the sole lender to its bars and its financing structures.

Dominantly include accounts receivable financing and factoring agreements.

Both Jim and I wouldn't or smell or led by teams of seasoned professionals who have.

Build careers and asset based lending.

For anywhere from 25 to 40 years.

The teams are therefore experienced risk underwriters across multiple economic cycles.

Their business models are highly resilient relationship driven and serve as a lifeline working capital to small businesses across the U.S.

In prior economic downturns asset based loans collateralized by accounts receivable have generally provided.

Hi recovery rates than those supported only by cash flows.

Let me now provide an update.

Both north mill in Germany.

At quarter end.

North Mills portfolio was approximately 155 million, representing just under 30% of Sun's total portfolio.

The portfolio rebounded during the third quarter from the second quarter lows.

Led by increased utilization of the facilities as well as new originations.

The portfolio consists of over 130 borrowers with an average investment of 1.2 million.

Over 99% of its borrowers are deemed essential businesses and the P.P.P. has been highly beneficial to north mills portfolio companies.

North smell has performed well and has not had a single payment default during the pandemic.

We're very pleased with its credit quality.

Fourth mills portfolio yield during the third quarter was approximately 13%.

During the third quarter, North mill funded 32 million.

Of new investments and had repayments of two.

12 million.

North Mills pipeline remains strong heading into the fourth quarter.

Both from existing utilization.

Of revolvers outstanding as well as new transactions.

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

One in a quarter million consistent with the prior quarter.

Now, let me turn to Germany.

At quarter end Geminos portfolio was $70 million, representing just under 14% of the total SUNS portfolio.

We believe the Geminos portfolio is now in a position to regrow after experiencing significant repayment activity in the second quarter, which was resulting from the borrowers choosing to pay down their credit facilities with proceeds from government stimulus programs.

The total number of Geminos clients has remained.

It could be consistent.

And is comprised of loans to 34 issuers with an average loan of just over 2 million.

The portfolio remains 100% performing.

The impairment risk remains extremely low given geminos disciplined underwriting and focused on financing.

Healthcare service providers.

With high quality accounts receivable.

Supporting the working capital facilities.

Cash collections typically go right into Geminos lock boxes, where they can deduct their fees and interest payments.

And amortization automatically.

The weighted average asset level yield of Geminos portfolio was approximately 12.5% for the third quarter.

During the quarter Geminos had.

New fundings.

Less than a million dollars.

However, repayments.

Only 5 million.

Pipeline activity is given the government's stimulus program, but it is starting to rebuild as we head towards yearend.

For the quarter Geminos <unk> sons, a cash dividend of.

Just under a million dollars consistent with the prior quarter.

As we look forward, we are confident not only in the portfolio quality geminos, but believed that the company is well positioned to capture additional growth as the market settles.

And funding under revolving credit facilities returned to more normal levels.

Finally, let me give an update on our life science business.

Overall, our life science portfolio it was largely insulated.

From short term market and economic dislocations, given the long dated equity investment periods as well as product cycles.

The impact of COVID-19 has been de Minimis, 100% of her life science loans are performing and.

We continue to expect to incur no losses in this segment.

As a reminder, we have never realize a loss in life science loans.

Currently 100% of our portfolio has more than 12 months of cash runway. So.

So substantial liquidity.

At quarter end, the portfolio totaled $28 million across eight borrowers with an average investment of three and a half million.

There were negligible originations and no repayments.

The weighted average yield on this portfolio was approximately 9.3%.

Excluding any success fees or warrants.

In summary, we believe SUNS portfolio is extremely well positioned to weather and improving but still challenging period, given the uncertainties of the pandemic and the direction of the economy.

We remain in close contact with our portfolio companies there.

Their management teams and sponsors who support them as well as work closely with our extensive network of relationships to support new investments.

Solar capital partners commercial finance platform and significant dry powder enables us to provide structured solutions, including cash flow and asset based loans for capital constrained companies.

Solar senior we'll be able to participate in these financings will be maintaining significant diversification across our portfolio.

Now, let me turn the call back to Michael.

Thank you Bruce.

At this time, let me offer a few concluding remarks from inception.

We have endeavored to make the right decisions to preserve and enhance long term shareholder value.

Our priority has always been to create and maintain a portfolio that can generate steady income for our shareholders and protect capital.

We remain disciplined in the face of significant spread compression higher leverage and loose structures, all of which have elevated the risk of principal loss in middle market leverage finance over an extended period of time.

As a result, we have positions SUNS defensively, we've diversified our portfolio across cash flow and specialty finance first lien senior secured loans to manage downside risk we have operated well under target fund leverage and we are preserved liquidity.

We believe we have taken the appropriate steps to navigate successfully through what we anticipate to be a prolonged difficult period.

Throughout your maintain alignment of interest with our shareholders by only a significant amount of Sun's stock.

With over $250 million of available capital in a strong foundation, given our defensive portfolio and low leverage we believe the company is positioned to originate attract new investments, while also supporting our existing portfolio companies as needed.

Our patience and willingness to remain under invested provides us the foundation to be opportunistic.

Given the magnitude of the economic disruption and an expected uneven recovery, we believe that the improved investment opportunities that will persist for a number of quarters as companies require financing solutions for liquidity working capital and growth initiatives.

Sponsor activity is definitely on the upswing in the P. industry is armed to significant dry powder, we believe SUNS in a great position to capitalize on this opportunity.

We hope that all of your <unk> are in good health, we would like to thank you for your time today and your support ever company.

Operator, please open the phones up for questions. If there are any questions at this time.

Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your I touched on telephone. If your question has been answered or you wish Tony moved yourself from the queue. Please press the pound key.

[laughter].

Well. Thank you operator since there are no questions. This time, we'll be able to do and thank you for your time and support and we look forward to talk to you again soon thank you.

Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you also participating you may now disconnect [laughter].

Yeah.

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