Q3 2020 Solar Capital Ltd Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Solar capital <unk> 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 to ask a question. During the session you will need to press star one on your telephone.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.
My pleasure to introduce <unk>, chairman and co CEO like gross.
Thank you very much and good morning, welcome to solar capital Limited earnings call for the quarter ended September Thirtyth 2020.
I'm joined here today by Bruce Spohler, our co CEO and rich protect our Chief Financial Officer before we begin rich could you. Please start by covering the webcast and forward looking statements.
Sure. 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 are strictly prohibited.
This conference call is being webcast on our website at www.
But solar cap Ltd dotcom.
What are your replays of this call will be made available later today as disclosed in our earnings press release.
I would also like to call your attention to the customary disclosures in our press release regarding forward looking information.
Statements made in today's conference call and webcast constitute forward looking statements.
Which relate to future events or future performance or financial condition.
These statements are not guarantees of future performance finance Dickson 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.
Our 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 SEC.
Solar capital limited undertakes no duty to update any forward looking statements unless required by law.
To paint copies of our latest SEC filings.
Please visit our website <unk>.
I'll call it that to one to 993.
670.
At this time I'd like to turn the call back to our chairman.
Co Chief Executive Officer, Michael gross.
Good morning, and thank you for joining us today during these hectic times the store capital team hopes to find you and your family friends and colleagues healthy and safe.
Our thoughts to remain with all of our stakeholders, including the dedicated employees across solar capital and the Companys investment adviser solar capital partners would again like to express our gratitude to all the health care and other frontline and essential workers and we continue to send our sincere condolences to those families who have lost loved ones.
Turning to our third quarter performance I am pleased to report that solar capital's portfolio remains 100% performing and our net asset value at September Thirtyth of $20.14 represented a modest increase over the prior period.
We attribute the resiliency of our portfolio during this crisis to our longstanding investment thesis that asset based loans in niche markets and first lien Castro loans and upper middle market companies in defensive sectors provide meaningful downside protection during challenging economic periods.
As our long time investors know, we embarked on an issue to initiate a eight years ago with the acquisition of Crystal financial to broaden and diversify our origination capabilities be a niche ABL strategies that are complementary to our cash flow businesses.
With the majority of our comprehensive portfolio at September Thirtyth comprised of loans originated by our specialty plants verticals, we are truly a diversified commercial finance company.
And now I'm pleased to report that we are furthering the strategic initiative to the acquisition of Kingsbridge holdings and existing debt portfolio company.
Based in Lake Forest, Illinois, Kingsbridge is a leading independent less or of information technology, industrial healthcare and commercial essentially use equipment to a diverse set of investment grade customers.
Junior during our two year investments in the kindred loan we gained a deeper understanding of the business and develop a terrific relationship with his distinguished and experienced management team.
With this acquisition solar capital will have invested approximately $216 million in a combination of approximately $136 million of equity and $80 million of debt.
Acquire 87.5% of the company in partnership with the King's management team, which is rolling a portion of our equity ownership as part of the transaction.
The acquisition expands our direct origination capabilities and provide differentiated sources of growth for solar.
Pro forma for the came through acquisition approximately 84% of solar comprehensive portfolio consists of specialty finance investments and 16% from directly originated investments in senior secured cash flow loans to sponsor owned companies.
Kingsbridge was founded in 2006 by the current management team and is underwritten over $1 billion of leases since inception.
At September Thirtyth, 2020, Kingsbridge highly diversified portfolio of leases totaled approximately $440 million with an average funded exposure of approximately $850000 per obligor and it was 100% performing.
Over 70% of Kings portfolio is invested in assets leased by investment grade borrowers.
Importantly, Cambridge is strong track record has continued through the current health and economic crisis.
The acquisition is another important step in solar capital's expansion of its direct lending investment strategies and provides a differentiated source of growth.
The addition of Kingsbridge with its highly experienced team and scalable infrastructure further enhances our diversified specialty finance platform.
Solar capital now directly sources, and underwrites cash flow asset based life science loans and equipment financings and now lease transactions with primarily investment grade rated counterparties.
We expect that our debt and equity investments in Kings bridge will generate a blended cash yield.
Approximately 10% to 11% consistent with our other specialty finance assets across the solar platform.
Kingsbridge will distribute substantially all of its earnings to SLR see on a quarterly basis.
And we expect our investments in this company to generate approximately $20 million of gross income in 2021.
Solar capital funded its investment with available liquidity, including borrowings under solar capital's existing credit facility at an approximate marginal effective interest rate of 2%.
Had the acquisition of Kings, which closed on September Thirtyth, our pro forma leverage ratio would have been <unk> 0.77 times net debt to equity.
Pro forma for this investment solar Src and a significant subsidiaries still have approximately $725 million of available capital under its existing credit facilities subject to borrowing base availability to finance future portfolio growth.
Yesterday, our board of directors declared a 41 cents per share distribution for the fourth quarter 2020.
At this time I'll turn the call over to our CFO rich for T. got to take you through the third quarter financial highlights.
Thank you Michael.
Solar capital limited net asset value at September Thirtyth 2020.
Was $851.1 million.
Or $20.14 per share.
Compared to $849.8 million or $20, an 11 cents per share at June thirtyth.
At September Thirtyth 2020.
Solar capitals on balance sheet investment portfolio had a fair market value of 1.35 billion.
In 105 portfolio companies.
Across 26 industries.
Compared to a fair market value of 1.36 billion in 108 portfolio companies across 27 industries at June Thirtyth.
At September Thirtyth, the company had nothing drawn on its $545 million and $50 million revolving credit facilities and had 47 million of cash on hand.
Therefore, the marginal cost of incremental debt from our revolving facilities is approximately 2%.
Which enhances operating leverage as we grow our income producing portfolio and move towards our target leverage.
As a reminder.
The company has no near term debt maturities and its investment grade rated.
Which should provide us with continued access to the unsecured debt markets.
Since inception.
Solar capital has taken a conservative approach to leverage and has consistently operated well below its stated target range.
On September Thirtyth, the company's net debt to equity ratio was 0.56 times.
Pro forma for the Kingsbridge acquisition, our net debt to equity ratio at 930 would have been 0.77 times.
Solar capital liquidity at September Thirtyth remains strong with more than $900 million available to invest when including its balance sheet cash it's undrawn capital on its credit lines and the nonrecourse credit facilities of Crystal financial and any EPS holdings.
Subject to their borrowing base availability.
Pro forma 932020 for the Kingsbridge acquisition solar capital would have had approximately $725 million of available capital.
That said.
Solar capital did have only a small amount of unfunded revolver commitments outstanding at September thirtyth totaling approximately 16.5 million.
These.
Could have been drawn but haven't been drawn since September thirtyth.
Moving to the Pinedale.
For the three months ended September Thirtyth 2020.
Gross investment income totaled $28.9 million.
First is $28.6 million for the three months ended June thirtyth.
For the quarter ended September Thirtyth 2020.
Cash interest and dividends represented more than 96% of the Companys third quarter 2020 gross investment income.
Expenses.
Expenses for the quarter ended September thirtyth totaled $14.6 million.
This compares to $14.4 million for the three months ended June Thirtyth.
Accordingly.
The company's net investment income for the three months ended September Thirtyth 2020 totaled 14.3 million or 34 cents per average share.
Compared to $14.2 million or 34 cents per average share for the three months ended June Thirtyth 2020.
Below the line.
The company had net realized and unrealized gains for the third quarter totaling 4.4 million.
Versus net realized and unrealized gains of $39.8 million for the second quarter of 2020.
Ultimately the.
The company had a net increase and net assets from operations of $18.6 million or 44 cents per average share for the three months ended September thirtyth.
This compares to a net increase of $54 million or $1.28 per average share for the three months ended June thirtyth.
Now Bruce Spohler will take us through.
Through and provide us an update on our portfolio.
Bruce Thank you rich.
First and foremost let me just emphasize how extremely pleased we are with how well our portfolio as weather the crisis to date.
Through the third quarter, our portfolio remains 100% performing and has experienced minimal number of amendments. Most of these have been related to audit extensions.
For the third quarter, the weighted average investment risk rating of our portfolio was 1.9 based on our one to four risk rating scale with one representing the least amount of risk.
This supports our thesis of minimizing the risk of loss by investing in first lien assets at the top of the capital structure in.
In both cash flow loans to non cyclical industries.
As well as Alec.
Allocating the majority of our investments to collateralized loans to our specialty finance lending verticals.
At quarter end, just under 20% of our comprehensive portfolio was invested in senior secured cash flow loans with the remaining 80% invested in are senior secured asset based equipment finance and life science investments.
Pro forma for the acquisition of Kingsbridge, our specialty finance investments would have accounted for 84% for comprehensive portfolio.
At quarter end, our 1.5 billion comprehensive portfolio was highly diversified encompassing over 170 borrowers across BT industries.
Our largest industry exposures or health care.
Diversified financial services.
Pharmaceuticals.
All having the common theme of being defensive sectors.
At September Thirtyth, 99% of our total portfolio at fair value consisted of senior secured loans.
This was comprised of approximately 91% first lien loans and just 8% second lien loans.
Post quarter end, we were repaid on one of our remaining second lien loan investments, which accounted for 1.5% of the September Thirtyth portfolio.
Pro forma for this repayment as well as the acquisition of Kings Bridge.
Only 5.3% of our portfolio.
Would have been invested in second lien loans.
Comprised of 2.2% cash flow second lien loans and 3.1% of.
Second lien loans.
We believe that our portfolio of predominantly first lien loans, which carry less risk than second lien and subordinated loans.
Will result in greater capital preservation during this crisis.
At quarter end, our weighted average asset level yield was 10.1% compared to 9.9% in the prior quarter.
By focusing on our commercial finance verticals, we've been able to maintain asset level yields of approximately 10%. Despite the 170 basis point drop in linerboard since year end.
Approximately 77% of our portfolio is floating rate.
Of which 90% of these loans have a LIBOR floor with a weighted average floor of 1.1%.
The 23% of our portfolio invested in fixed rate loans are primarily in equipment financings.
Including activity across our four business lines originations for the third quarter totaled just over 66 million.
And repayments were approximately a $160 million.
Resulting in net portfolio reduction of 93 million prior to the acquisition of Kings Bridge.
Originations for the quarter.
Or a combination of new transactions as well as add on investments with existing borrowers to finance a tuck in acquisitions across our cash flow.
Ill and life science segments.
Now, let me provide an update on each of our four investment verticals.
Let me start with cash flow.
100% over cash flow loans were performing.
Validating our thesis of investing in first lien loans to a central businesses.
Which has proven out thus far during this pin demick.
Substantially all of our cash flow companies are outperforming there.
They're covert to revise budgets for this year.
Rebound in revenues as well as cost cuts have had a positive impact on their financial performance and liquidity.
None of these borrowers experienced payment defaults during the third quarter.
In particular, our health care cash flow loans have performed extremely well.
We attribute this both to the recessionary Brazilian an essential service nature of this industry as well as our underwriting edge stemming from our experienced healthcare cash flow team as well as the access to our proprietary industry insights to our life science team as well as our health care asset base.
Lending platform that our sister PTC solar senior capital.
Our predominantly first lien portfolio with significant junior capital beneath it and strong sponsor support.
Positions us well to withstand any further restrictive.
Measures in response to the rising covert cases.
We view many of our cash flow loan companies as providing essential services and non cyclical sectors, which will continue to be essential during any potential periods to stay in place mandates.
Overall, we are cautiously optimistic on this portfolio. Despite the severe disruption caused by the pandemic.
At quarter end, our cash flow portfolio was just under 300 million equating to 16% of our total portfolio pro forma for the acquisition of Kings Bridge, it's invested across 16 issuers with an average investment of over 18 million.
These companies had a weighted average EBITDA of $54 million, which highlights our focus on financing larger businesses, which we believe are better positioned to withstand the downturn.
The weighted average yield of our cash flow portfolio was 8.5% compared to 8.6% at the end of Q2.
And our cash flow loan segment contributed 6.8 million of gross income representing 23% of the third quarter total.
During the quarter, we originated approximately 20 million.
First lien senior secured cash flow loans and experienced repayments and amortization of approximately 33 and a half million.
On the back of rebounding private equity activity, we're seeing an increase.
And our pipeline of upper Midmarket cash flow investment opportunities compared to the first two quarters of this pandemic.
Now, let me turn to our asset based lending strategy.
Overall, our portfolio companies continue to perform according to expectations at the time of initial underwriting.
As a reminder, our ABL platform Crystal finance specializes in financing companies in transition who have reduced access to traditional financing options.
They are asset based loans are underwritten at a discount to net liquidation value.
As a result, they have historically been very active.
And challenged sectors with significant working capital assets, such as the retail and consumer goods sectors.
While we don't expect to foreclose on any of our borrowers.
The liquidation markets have reopened following the Lockdowns earlier, this year, which provides crystal with an alternative exit strategy if necessary.
At quarter end, the senior secured asset based portfolio.
Total approximately 530 million, representing 36% of our total portfolio.
It's invested across 31 borrowers with an average investment of approximately $17 million.
The weighted average asset level yield of our portfolio was 11%.
For the third quarter. This segment contributed just under 9 million of gross income representing 31% of our total gross income.
The portfolio statistics that I just mentioned include balance sheet assets.
As well as a look through to crystal's underlying loan portfolio.
During the third quarter, we funded 30 million of new asset based investments and had repayments of just under 87 million.
Our <unk>, our asset based capability through Crystal.
Has expertise in financing stressed companies over the course of 30 years together and provides us with an extremely valuable capability.
During the current volatile economic times.
In the late third quarter early fourth quarter, we have begun to see increased deal flow.
And we expect elevated levels of demand to continue.
Now, let me turn to our equipment finance business.
This vertical is led by a team of seasoned professionals.
Who averaged 30 years of experience, including managing through multiple economic cycles.
A large portion of this portfolio is invested in industries that have been deemed essential businesses, such as machinery and construction, which are our largest exposures.
Those issuers are showing stability.
Howard However, neps best historically performing segment transportation has been impacted school.
Schools tour in charter bus leasing of all felt pressure.
While the majority of our equipment finance bars have been beneficiaries PPP and other government assistance programs.
The unprecedented decline in economic activity requires a long term view and patients and working with our buyers borrowers to help them get to the other side of this crisis.
We are already seeing signs of recovery and are encouraged by both the return of the liquidation market for our equipment.
As well as the health of our underlying borrowers which has been improving.
It's important to remember that we provide financing on specific equipment.
Financings are at low loan to values, typically 70% or so and are well within the borrowing base in normal market conditions.
In addition, a large portion of our investments come with personal guarantees and other forms of credit protection beyond the equipment.
At quarter end Neff had a portfolio of approximately 328 million port.
Portfolio was invested across 100.
Borrowers with an average issuer exposure of approximately 3 million.
As a reminder included in this business our equipment financings held directly odds sold its balance sheet as well as financings held in NDF holdings, a portfolio company that for tax efficiency purposes hold certain of nation equipments assets.
Better than expected performance for the third quarter led us to Mark up our investment in equipment finance by 1% from the prior quarter.
The equipment financing asset class represents 22% of our total portfolio.
100% of our equipment financings are in first lien positions.
At quarter end, the asset level yield was 10.3%.
Additionally, 99% of this portfolio is fixed rate and is not impacted by the drop in LIBOR over the last several quarters.
For the third quarter are.
Our equipment finance segmented contributed four and a half million to gross income representing just over 15% of our total gross income.
During the quarter.
We invested just under $12 million had repayments of approximately 37 million.
Our equipment finance team is focused on managing the existing portfolio and helping its partners through this challenging time.
However, as we sit here today, our pipeline has also increased and EPS continues to work with our broader platforms origination team offer equipment financing solutions to price.
But equity sponsors and their portfolio companies.
Finally, let me provide an update on life Sciences.
Overall, our life science portfolio has largely been insulated from short term market and economic dislocations, given the long dated equity investment periods as well as product development cycles.
The impact of COVID-19 on our portfolio remains diminimus.
As a reminder, we have never realize a loss in our life science portfolio.
Currently 100% of these companies have more than 12 months cash runway.
At quarter end, our portfolio totaled 323 million.
Consisted of 17 borrowers with an average investment of just under 20 million.
Life Science loans represented 21.5% of our total portfolio and contributed 8.7 million to our gross investment income.
Equaling, 30% of our total gross income.
The weighted average yield of our life science portfolio was approximately 9.7%.
Excluding any success fees or warrants.
During the quarter the.
Life Science team originated approximately $5 million of investments and had repayments of just one and a half million.
Our pipeline for life science investments, including demand from larger more mature companies has.
Has increased going into this fourth quarter as financing needs have become clearer for these businesses.
In conclusion, we believe that so this portfolio.
Is extremely well positioned to weather this crisis.
As we continue to navigate this challenging environment weve.
We remain in close contact with our portfolio companies.
The management teams and their sponsors to support them as well as work closely with our extensive network of relationships to source new investment opportunities.
Soldiers commercial finance platform and significant dry powder enables us to provide structured solutions for.
For both cash flow and asset based loans for capital constrained companies.
So <unk> will be able to participate in these financings, while maintaining significant diversification across our portfolios.
Now, let me turn it back to Michael.
Thank you Bruce.
In closing and before we open up the questions.
We feel confident in our portfolios ability to weather the current crisis as well as in our ability to grow our portfolio and subsequently net investment income over the coming quarters.
The acquisition of Cambridge has further position solar capital and the diversified commercial finance platform that provides solutions across the capital structure to middle market businesses and now investment grade companies.
Our origination engines are broad and provide us the opportunity to source loans and specialty niches focused on collateral loan to value lending that are less competitive than traditional cash flow lending.
In addition, the specialty finance strategies are less correlated liquid credit markets and have a differentiated risk return profile that is complementary to our cash flow lending.
They afford us greater flexibility to stick to our investment discipline.
With significant dry powder is strong portfolio and low leverage solar is well positioned to originate attractive new investments and grow net investment income.
Our patients and willingness to remain under invested allows us to be opportunistic.
Given the magnitude of the economic disruption unexpected uneven recovery, we believe that the improved investment opportunities that will persist as companies continue to require financing solutions for liquidity working capital and growth initiatives.
In conclusion, the team is confident in solar capital defensively positioned portfolio stable funding sources strong liquidity and the potential to make new attractive differentiated investments.
Later on this morning at 11, 30 will be hosting an earnings call for the third quarter results of solar senior capital or SUNS as we call it.
Our ability provides traditional middle market senior secured financing through this vehicle continues to enhance our origination team's ability to meet our clients' capital needs and we continue to see benefits of this value proposition in solar capital deal flow we've.
We thank you for your time. This morning, operator would you. Please open up the line for questions.
Certainly as a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key.
He standby, while we compile the culinary roster.
The first question comes from the line of Casey Alexander with Compass point.
Hi, Good morning, I have a couple of questions first of all the portfolio for Kings Bridge I think the release said is 444 million.
Does it. The addition of it to the solar platform offered greater access to capital, which would allow that portfolio to grow to a larger number than kingsbridge had it on their own sort of you know how how big can it get as it scales and.
And also if you could.
What's the.
Average weighted yield impact on the overall solar capital portfolio of Kings Bridge.
So.
Warning Casey.
So yes, it's similar to our other commercial finance platforms Kingsbridge was owned by other private equity or hedge fund short term duration equity capitals. So its a combination of access to our investment grade capital as well as.
Having permanent capital underneath the vehicle, which gives the business the ability to grow having said that as you know we typically have been acquiring or commercial finance platforms based upon targeted are always.
We know that it's not always a healthy time to be growing your credit business, let's look at the cycle.
But there is an opportunity for growth we view with though is a nice steady state.
You mentioned sort of 10% to 11% return business.
And I think the nice thing is here is given the nature of the client being investment grade.
You can grow your or are we here and grow your business would not without having to put additional significant capital into into the business.
And to your second question it doesn't really change our weighted average.
Portfolio yield because as we mentioned we expect this to yield on a blended basis, you're close to 10%, which is about what our overall portfolio yielding today.
Okay, well, that's what I thought I just wanted to verify that one other question.
You talk about a a more robust pipeline.
I don't want to compare it to the pipeline and the pandemic, which we know didnt exist, but how would you compare it to say the pipeline a year ago at this time.
And what's different about the pipeline as compared to a year ago. What are you more willing to do what do you less willing to do then then you would have been a year ago and you know do you think it is executable to continue to expand that.
Coverage ratio I know its a lot, but sure. So short answer yes, [laughter], Let me let me take the first shot at it Michael but the short answer is it's about the quality of the pipeline. There was a strong pipeline prior to Cove. It to your point Casey obviously pipeline came to a grinding halt in the first couple of quarters Post Cove. It so yes in Atlanta so.
All numbers it is up meaningfully from early Cobot days has a ways to go to get to where it was pre cove, it but I think to two very important points.
We've seen as we've always talked about Nirvana for US is a that we have diversified strategies that in some ways are uncorrelated and that's improved by virtue of the addition of Kings bridge to Michael's point blending into investment grade borrowers, but it also diversified.
As our platform from a sourcing perspective in that during the call that crisis, we have seen a pickup in l. lending against working capital assets to companies that have stressed cash flow. Most businesses have had stressed cash flow. This year, given the uncertainty in the episodic shutdowns, but nirvana for us.
Is one we can hit on all cylinders at the same time, including the acquisition cylinder as we are now with the addition of Kings bridge. So what I would say is life science has been building, it's been pretty steady throughout cove. It. Although there has been a little bit of slow down in Q2, and Q3 and the flip side is.
We haven't seen the same elevated level of repayments in life Science, which has helped our portfolio. They are maintained its size and.
And our duration there and as you know we love those assets a b L has been picking up because there is stress out there, particularly in retail so we're seeing more activity there and I think importantly in cash flow lending, we're seeing again not more opportunities, but higher quality opportunities you can see how they're performing to covert.
And so that's a phenomenal way to stress test these businesses. Unfortunately.
And so we're seeing just quality cash flow opportunities you know, we'd like a bigger.
There are a lot of businesses that are seeing this as an opportunity to do add on acquisitions at lower purchase multiples and they were seeing pre cove. It perhaps some of their existing lenders are full up on the name or have portfolio constraints and so that's the theme that we're seeing so.
Early days, but our feeling is that were starting to get into an environment, where yes. We can hit the target leverage range by virtue of some prepayment headwinds so we get longer duration as well as increased new investment opportunities across the verticals.
All right. Thank you well congrats on the acquisition and we look forward to you getting to those leverage targets. Thanks very much for taking my questions. Thanks Casey.
Okay.
Thank you and our next question comes from the line of Chris Kotowski with Oppenheimer.
Yeah. Good morning, Thank you.
I was wondering does the Kings Bridge acquisition go use your.
30% bucket and is it just the equity that uses it.
Or is that both the debt and the equity piece that.
Against your 30% bucket. So the good news is neither the company is a qualified outlet because.
Significant portion over 80% or other leased their operating leases. So both the debt and the equity are considering qualifying investments.
Wow, Okay. Congratulations yeah. That's excellent that was my main question [laughter]. Thank you.
Thank you and our guys question comes from the line of Ryan Lynch with KBW.
Hey, good morning, guys. Thanks for taking my questions.
You guys did provide some pretty good commentary on on your pipeline taking out both the quantity and the quality of deal flow I was just curious specifically on your your AB our Crystal financial business why that had picked up thus far in the third quarter.
If I look at what you guys did that you know a year ago.
It's about 140 belly getting you guys did only 30 billion this quarter I always thought that that business from an origination standpoint, what is was kind of counter cyclical and the fact that during downturn whenever it's more stress coming off.
Central borrowers would need.
Greater access to it or could that be al Qaeda blinded. So I'm surprised we haven't seen that pick up thus far even though I know you said the pipeline is growing wife, and we see not thus far.
So the short answer is twofold.
Some of the larger businesses that had a pause in their cash flows given that shutdowns around the country were able to access capital.
From banks or on receivable inventory lending basis.
Much more cheaply than we and crystal competitors would provide so there was that end of the sector that you saw sort of the immediate need for.
<unk> liquidity and large companies that had temporary pauses in cash flows were able to still tap into the bank market on a temporary basis as this stress period and cycle extends we typically have seen this ramp up.
And as banks get more nervous as cash flow shortfalls get extended.
And so that is what we're starting to see with crystal in their pipeline, which is why we commented that it is building.
So that's part of it I think the other part of it is it does take time for these businesses to work through even those in transition to work through this for us and to actually say, okay. It's time to close so it's just a typical crystal deal might be in pipeline for three or four months before they actually.
The borrower says, okay I need to find I can't put this off any longer I know, it's expensive capital, but it is a solutions provider. So it's natural for us to see Ryan.
Flow sort of ebbing and starting to pick up as we get you know whats only been about six seven months into this.
Okay. That's helpful color, Bruce and then I just had one follow up on Kingsbridge.
Did you guys provide us more of a technical modeling question, but did you guys provide what interest rate would be on your debt in that there's there's a man I have about 20 billion of gross income you expected to generate a 2020 wide do you have any estimate as we sit here today, what's the break down that you guys will receive can now be interest income per se.
Dividends.
So yeah I think the we're funding the investment with cash on hand, I think with roughly $50 million.
Which obviously carry no interest costs and then the balance would you want to revolver, which had a marginal borrowing cost of just under 2%.
And as far as the breakdown of the earnings.
The 80 million of debt has a yield of about eight eight in the quarter percent.
And the balance will be dividends qualified dividends coming from our stock investment.
Okay.
That's all from me Congrats on me a the acquisition.
Thank you Ryan good question. Thanks.
Thank you.
And our next question comes from the line of Matt Taylor with Raymond James.
Hi, good morning, and thanks for taking my question just a quick one for me if I can on the acquisition outlook. The Kingsbridge kind of whet your appetite for acquisitions in the near to mid term is there anything you're seeing currently that's interesting.
So so so.
So the short answer is we are always looking we have a team dedicated towards both lending money to these types of companies and acquiring them.
We don't have I, we don't have anything imminent of this kind of size and scale.
Well, we certainly have the appetite to.
To do so to the extent, we find the right businesses and I would just add that similar to what we saw coming out of.
The recession in a wait.
What really led to our portfolio out then was to Michael's point, not only acquisitions in commercial finance, but lending into.
Commercial finance businesses as you can see with Kingsbridge that gave us a great R&D and actually an opportunity to buy the business in other cases, we bought competitors of companies. We went into it. So I would say our pipeline. There is incredibly active in terms of lending to other lenders which is.
Understandable given that as you move away from the liquid credit markets and into small.
Smaller niche strategies, such as lending to other finance companies. There is a real need for capital and a shortage of lenders willing to provide capital with that kind of expertise to underwrite other people's loan. So long winded way of saying the pipeline has been building there.
And that is generally.
Leading indicator for future acquisitions.
That's it for me congrats on the acquisition.
Thank you I appreciate it.
Thank you and as a reminder to ask a question you will need to press star one your telephone.
Once again to ask a question. Please press star one on your telephone.
Our next question comes from the line to make easily with Ladenburg.
Hi, Yes, good morning, everyone I'm going to beat a dead horse, but I do have some follow up questions on Kings Bridge, Michael and Bruce could you help us understand or describe the level of correlation if any.
Between Kings bridges leasing business and your existing existing equipment leases in terms of credit risk.
Sure I would say that the simple way to think about it.
Mickey is enough you know with the team that has a lead that business and earlier in their careers, let GE easily seeing business equipment finance business.
For many many years it really isn't underwrite of liquidation of collateral first and credit quality of the bar where second.
But as we've talked about we also very often because those are small entrepreneurial companies have find other credit support behind just the liquidation value of the equipment.
And the term form of personal guarantees.
<unk> and other assets for collateral on a personal basis.
As you think about Kingsbridge. It is more an investment grade underwrite of the borrower the Albert Gore.
With over 70% of the Obligors being investment grade rated.
And then the liquidation value of the equipment is important but its a secondary part of the underwriting.
That's really helpful. Bruce it's sort of answers. My next question I was going to ask if there were any meaningful synergies between you know kingsbridge and the rest of the leasing platform, but it sounds like you're targeting different sorts of customers.
Right I have another question, which is just a math question and it may just reflect Mike you know I'm a bit tired. After a couple of long days, but you've got you've guided for kingsbridge to generate $20 million of income to solar on your $216 million investment, which is a return of 9.3, but you've guided for a return.
Out of 10 to 11, so what am I missing there.
10 to 11, it would be on the equity.
Okay. That's those are are we on the equity that makes sense, yeah, I understand and if we look in the rearview mirror, Michael and Bruce you know sponsor finance investments have been pretty resilient, even during the pandemic you know over the last several years.
And then and I understand you've been cautious on them, obviously for many years.
With that performance in hindsight have you changed your view on on per potentially growing this segment going forward given that you know my understanding and from what we're hearing is that you know.
Although spreads are probably back to pre co bid levels, you know attachment points in terms of leverage and number of covenants you can get are still fairly attractive.
I think it really depends on.
The sector for example, as well as.
The individual transactions. So we're finding as I mentioned increased opportunities you know, we're very focused on defensive sectors, such as health care.
So we are seeing an increase in opportunity their health care, as particularly attractive because of our expertise with both life Sciences healthcare cash flow as well as you know the geminos team over at solar senior so.
So we do feel we have a really good proprietary insight and have the best part of our track record has actually been in health care. When we look at our cash flow strategy. So we are ramping there we continue to stay in defensive sectors. I think the the thing I agree 100% the pricing is not where any.
Of us would like it to be back to pre cobot levels. I think the biggest thing that is keeping us at bay. When we look at the volume of opportunities that we passed on this past quarter was really the underlying credit quality and what I mean by that is <unk>. You know, we we see businesses with 50% of EBITDA adjusted.
Doesn't mean that that won't work out just well for the lender down the road and obviously the equity investor but for US that's a big leap of faith, you say there are covenants, but again it has to be in sectors, where you can demand it as a lender like health care, it's not broad based and that's critical as we talk about our ability to get to that.
Table swipe.
So I think it's a little soon to know how people's portfolios are going to survive.
Nine months into this I think you know most of us would underwrite.
Long recovery here on the economic side, regardless of some short burst that we may see so.
So we are cautious, but we find sectors that we are extremely attracted to but you know having having a covenant in name only concerns us and having larger EBITDA adjustments concerns us so were whittling down that opportunity set and then trying to take meaningful positions across the platform in the assets.
We like so again it is our strategy hasn't changed but I do think that we are starting to see better opportunities in cash flow and we would like nothing more than to grow that segment.
And Bruce just so you know the fourth quarter calendar quarter tends to be sick quickly a stronger quarter for that business in terms of volume simply as people look to close that deal before the year finishes.
You know can you give us any insight into whether you expect that to impact your cash flow sponsor finance business. This year.
The head the reason Im pausing Mickey is as you know when M&A.
Just looking at her own transaction with Kings Bridge, you know it never closes until it's closed.
So it's.
It's hard to pick a Q4 versus a Q1 or Q3 versus a Q4, but the activity is definitely picking up and we are optimistic.
But most of it is add on you're not seeing a lot of new platforms and the difference in that statement implies that the investment might be a little bit smaller because you're doing add ons to existing investments, but we are definitely seeing increased activity I've, it's not going to materialize in Q4, we feel it will over the next couple of quarters.
Fair enough and my last question is on the dividend Yeah for last year in 2019, your distributions had a small return of capital and.
Based on gap and I know, there's differences between tax and gap and you know, but she can I could talk about that for hours I'm sure but.
It it still looks like there will be a return of capital this year.
The son, and I don't have kingsbridge, covering getting you to cover the dividend you know we can discuss.
Discuss that offline if you like but you know besides.
Besides kingsbridge, what is the path to eventually cover the dividend or you know the board considering you know realigning the dividend just.
Two.
To reality with the world's offering it today.
The path is to utilize the stuff on the middle seven in the liquidity that we have available to us at.
As you know LIBOR, plus two which is to present today basically.
Tend to grow the portfolio and take advantage of opportunities that we're seeing so I think we don't tend to to realign or did it because we think we have the ability in the near term to grow into our dividend.
And important while Michael you're OK returning capital if that's needed.
Yes, I mean, it's not a lot. So yes, we are and and again I think when we do the math and we're happy to talk offline it doesn't take much to get there and.
And we're blessed by yes, we're seeing increased opportunities in cash flow, but we are seeing increased opportunities in a P.L. in life science and now kings for it. So we think we have multiple paths to get there and importantly, the repayment headwinds other than in second lien assets, which you know were happy to get repaid on our cash flow segment we.
We see multiple ways to get there.
You imply that repayment head wins are pretty low.
Low right now given yes state of the economy, Yeah understood Alright, that's it for me Congrats on the acquisition you know we've been looking forward to that sort of news and hopefully more to come. Thank you for your time. Thank you maybe a little.
Okay.
Thank you.
And as a reminder to ask a question you will need to press star one on your telephone.
Your next question comes from lined up they need O'shea with Wells Fargo.
Hi, guys. Good morning, Thanks for having me on just a couple.
Couple of questions or Kingsbridge, what did you pay on a price to book basis.
So this this is not really a business that you are looking to multiple book value basis is more of a you know are are we return basis and so we you know we bought it at about a 10, 11% or are we.
If you think about it the huge portion of their debt is non recourse not just nonrecourse SLR c., but non recourse the kingsbridge itself because as we talked about earlier.
The business that you know taking your leases passenger together and then getting <unk>.
Off balance sheet financing at the investment grade rate of your counterparty. So it's not really a business that one looks at multiple book.
Okay makes sense and then Bruce I think you gave a bit of color on any up did you touch on the dividend I believe that any up dividend was turned off any in any input.
Input or color on that.
Yeah, Yeah, Yeah. It was de Minimis last quarter. So it wasn't a material adjustment. It just a couple of hundred thousand dollars and we've been as you know running that low eight because fitting in a lot of the NAF assets are on solar <unk> balance sheet. So the income from the Neff business is actually coming directly through the investments on balance sheet.
Whereas the subsidiary also contains the cost and the team of running the business has is loaded by that expense factor.
We are as I mentioned continue to feel that this is the one business that obviously its got some cyclicality to it having said that it is outperforming our expectations quarter over quarter in terms of the underlying performance of its borrowers. So we're being conservative in keeping that down and turn.
So the distribution up but we expect as we get into next year, we will start to see income not only from the assets on balance sheet, but on a combined basis together with a dividend.
Okay. That's helpful. And then just the last a high level question.
On the fee structure for solar.
Nominally you're one of the highest of the major Bdcs and looking at what you manage there's seems about half and half proprietary credit and then financial companies. So.
The question is is is managing these financial companies like say any.
Is that more expensive for the advisor.
To administer or is there something else that that leads to you know the higher price shareholders pay.
Any color would be appreciated.
Well first of all as you know with all these finance company, but now.
A critical and now Kingsbridge, we don't get paid on the asset.
But we are getting paid on the equity so we're actually managing much greater pools of assets and charging fees only on the equity component of that investment as opposed to.
Typical based.
Taking all their fees on assets. So it either these are complex businesses to manage we are actually managing these companies as opposed to just.
Buying loans and put them on our books. So we think it's fair it's fair.
Okay makes sense. Thanks for taking my question. Thank.
Thank you Roger.
And as a reminder to ask a question. Please press star one on your telephone.
And I'm showing no further questions. So with that I will turn the call back over to chairman and co CEO, Michael gross for any further remarks.
We have no further comments of the live thank everybody for their extensive participation this morning, especially given.
Everything is going on and our sector and more importantly.
With our country take everybody and be healthy.
Okay.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect.
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