Q4 2020 Solar Senior Capital Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q4, 'twenty and 'twenty Solar Senior Capital Ltd Earnings Conference call.
At this time.
All participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.
And I have to ask a question. During this time you will need to press star one on your telephone keypad.
Also please be advised that today's conference is being recorded.
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I would now like to hand, the conference over to your Speaker today, Mr. Michael Gross chairman and co CEO. Thank you. Please go ahead.
Thank you and good morning, welcome to Solar Senior Capital Ltd earnings call for the fiscal year ended December 31, 2020 and.
And as we will discuss on this call last night, we announced the rebranding of the solar platform S. L are.
Effective today with SUNS changed its name to SLR Senior investment Corp, and sons advisor changed its name to SLR capital partners.
Ticker will remain S. U N S and I'm joined here today by Bruce bowler, our co Chief Executive Officer, and Rich, particularly our Chief Financial Officer Rich would you. Please start off by covering the webcast and forward looking statements.
Yeah.
Sure of course, Michael Thank you.
I'd like to remind everyone that today's call and webcast are being reported.
Please note that they are the property of SLR Senior investment Corp, and that any unauthorized broadcast in any form are strictly prohibited.
This conference call is being webcast from the investors tab on our website at Www Dot S. L. R.
Senior investment Corp Dotcom.
Audio 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 and 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 our 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 and base interest rates and significant market volatility on our business our portfolio of companies and the global economy.
Additionally, past performance is not indicative of future results actual results may differ materially as it and as a result of a number of factors, including those described from time to time and our filings with the SEC.
As far as senior investment Corp undertakes no duty to update any forward looking statements unless required to do so by law.
Copies of our latest SEC filings, please visit our new website or call us at two one to 99 three.
One 670.
At this time I'd like to turn the call back to our co Chief Executive Officer, Michael gross.
Thank you rich.
I'm pleased to report that SLR senior investment Corp's portfolio remained 100% performing throughout the entire year.
The strong performance supports our investment thesis that asset based loans and niche markets and firstly and cash flow loans to upper middle market companies provide meaningful downside protection during challenging economic periods.
Our portfolio companies resilient business models strong management teams and financial sponsors have enabled them to successfully weather the crisis.
We attribute our healthy portfolio to our disciplined underwriting the deep experience of our investment teams and SUNS diversified platform across cash flow asset based lending and life science verticals.
We are pleased with SUNS performance during 2020, and extremely grateful to our employees and clients lenders and service providers.
This effort despite the stress and personal hardship. This pandemic has caused.
At year, and our net asset value per share was $15 and 91.
Up from $15.79 at the prior quarter.
Credit market valuations continue to improve and the fourth quarter as our portfolio companies benefited from the government stimulus and the proactive steps taken by our management teams and sponsors to marshal liquidity and reduce expenses throughout the downturn.
At December 31st our net asset value represents and approximately 76% recovery of the unrealized depreciation reported at March 31st.
Importantly, we currently anticipate that our existing investments will ultimately result, and the expected returns at the time of our initial underwriting 100% of our repayments during the quarter were made at or above par.
At December 31st over 99% of our comprehensive and basketball portfolio at fair value was invested and first lien loans and approximately 53 per cent of the total fair value consisted of loans and our specialty finance verticals.
These businesses have historically exhibited low default and loss rates throughout business cycles, and notably the a b L and lifestyle teams of each managed through multiple cycles over a career spanning 20 to 30 plus years.
In the fourth quarter, SLR and basketball Court produced 30 cents per share of net investment income post fee waivers and fully covering our distributions.
At December 31st SUNS remains significantly under Levered at 0.3, or four times net debt to equity relative to our target range of 1.25 to one five times.
Our portfolio contraction in 2020, as a result of robust repayment activity from a cash flow borrowers due to the strong fundamental performance of these companies despite broad economic challenges.
Additionally, the decline and our asset base loan portfolio balances resulted from us.
Strong liquidity positions of those borrowers and.
A significant amount of the borrowers at our ABL businesses receive government stimulus funding and many of those you that liquidity to temporarily pay down the credit lines with them.
And as economic conditions normalize we expect these customers to redraw on our credit lines.
The strong repayment activity throughout the year is a testament to our underwriting discipline as well as the resilience of our portfolio.
We expect portfolio growth and the coming quarters from the increased pipeline of both first lien cash flow as well as asset base loan and investment opportunities.
Given the improving economic climate and stabilization of markets our investment pipeline is growing.
Our diversified investment platform encompassing cast of lending multiple ABL strategies and life science venture land lending positions Sun, a solutions provider to borrowers and importantly.
Importantly, we are and a unique position to allocate capital across our strategy to the most attractive risk adjusted return investments.
We also have over $440 million and available capital to support the expansion of our comprehensive portfolio and no.
<unk> seven $5 billion of investable capital across the SLR platform.
So and because the opportunity to take part in larger transactions alongside SLR and other investment vehicles, providing us with a significant advantage versus lenders that do not have the capital base to underwrite entire middle market financings.
Finally, I'll touch on the rationale and benefits of our platform rebranding, which we announced last night.
Since our first acquisition for our sister BDC Solar city in 2012, we have remained focused on building a diversified commercial finance platform with multiple sourcing verticals that can provide our investors exposure to niche private debt sub asset classes.
Carey attractive pricing and terms with strong protections and the form of covenants and collateral coverage.
This initiative has included Sun's acquisition of Gemini and North mill and from a financial by North Mill.
We continue to seek opportunities to expand our suite of lending strategies.
As a result of our success, we have become a house of brands rather than a branded house.
And to reflect our unified platform and holistic approach to providing our borrower clients with financing solutions and our investors with attractive investment returns and we have rebranded solar as S. L. R.
Each of our entities changed its name to and extension of the SLR brands.
While origination team as always and focus on cross selling our financing capabilities. We look forward to leveraging our common branch as originators go to market under one day.
And our clients the entrepreneurial style of high touch service will always remain the same supported by the resources up and asset manager with over seven $5 billion of Investable capital.
At this time I'll turn over the call over to our CFO rich Petechiae to take you through the Q4 financial highlights.
Thank you Michael.
SUNS net asset value at December 31 was $255 4 million.
For $15.91 per share.
This compares to a net asset value was $253 4 million.
Or $15 and 79 per share at September 32020.
And so on balance sheet investment portfolio at December 31, 2020 had a fair market value of $340 8 million and 44 portfolio companies operating and 19 industries.
<unk> to a fair market value of $389 5 million and 44 portfolio companies operating and 19 industries at September 32020.
Turning to our funding profile and leverage.
SUNS continues to have a very strong balance sheet, which we believe is serving us well and the current downturn.
At December 31, 2020, SUNS had $94 million of debt outstanding.
And net leverage of only 0.3 or four times debt to equity down from 0.52 times and the prior quarter.
So and also I had no near term debt maturities, having already termed out both its primary 225 million credit facility and the secondary $75 million credit facility to 2023 and 2024, respectively.
In addition, SUNS has $85 million of unsecured notes with a maturity of March 31 2025.
And SUNS has over $440 million available to fund comprehensive portfolio growth.
Direct to borrowing base limits.
As a reminder, SUNS target leverage is 1.25 times to one five times debt.
Debt to equity under the reduced asset coverage requirement.
As of December 31, 2020 the.
The company only had unfunded the company had unfunded revolver commitments of only $5 $2 million that could be fully drawn by its borrowers.
And from a P&L perspective gross investment income for the three months ended December 31, 2020 totaled $7 3 million.
Compared to $7 9 million for the three months ended September 30th.
Net expenses for the three months ended December 31, with $2 5 million compared to $3 1 million for the three months ended September 32020.
Therefore.
Net investment income for the quarter ended December 31, 2020 was $4 8 million or <unk> 30 per average share as compared to $4 8 million or <unk> 30 per average share for the three months ended September 30th.
For the quarter ended December 31, 2020, and the investment adviser voluntarily waived management fees of just over $1 million compared to 722000 and fees waived for the quarter ended September 30th.
Going below the line SUNS had net realized and unrealized gains for the fourth fiscal quarter.
Totaling 2.0 million.
Compared to net realized and unrealized gains of $3 8 million for the third fiscal quarter ended September 30th.
Accordingly.
SUNS had a net increase and net assets, resulting from operations of $6 9 million.
For <unk> 43 per average share for the three months ended December 31 2020.
This compares to a net increase and net assets, resulting from operations of $8 6 million.
Or <unk> 54 per average share for the three months ended September 32020.
Lastly.
And our board of directors declared a monthly distribution for March 2021 of <unk> 10 per share payable on April <unk> 2021 to stockholders of record on March 18th 2021.
And at this time I would like to turn the call over to our co Chief Executive Officer Bruce bowler.
Thank you rich.
First and foremost SUNS portfolio has remained 100% performing.
The current economic slowdown and the early stages of the recovery.
Our performance is a testament to the financial sponsors management teams and portfolio companies that we've invested in.
In addition.
SUNS performance supports our underwriting thesis of minimizing the risk of loss by investing at the top of the capital structure and first lien cash flow loans to non cyclical industries and allocating a significant portion of our portfolio to collateralized loans through our special special.
<unk> finance lending verticals at.
At year end the weighted average.
<unk> risk rating remained constant at one nine.
Based on our one to four risk rating scale with one representing the least amount of risk.
As further indication of the resiliency of our portfolio, 100% of the portfolio was performing.
Our watch list was down to two 4% at year and down from the peak of seven 6% back in the second quarter.
<unk> total portfolio.
Was $460 million at year end and was highly diversified.
Encompassing 205 borrowers across over 120 different industries.
Approximately 53% of the portfolio was invested in asset based and life science lending strategies with the remaining 47% and.
And first lien cash flow loans.
Our largest industry exposures were insurance health care providers and services.
And software.
The average investment per borrower was just over $2 million or less and <unk>, 5% of the portfolio.
At year, and approximately 100% of the portfolio was invested in senior secured loans with 99, 9% of that being and first lien loans and a de minimis amount of equity.
Approximately 85% of our loans have LIBOR floors and at year and all of our borrowers made their interest payments as expected.
We believe that our efforts to position the portfolio to first lien loans, which carry less risk and second lien and subordinated loans will result in greater capital preservation during the ongoing economic recovery.
At year end, our weighted average asset level yield was nine 6%.
By focusing on our commercial finance verticals, we've been able to maintain asset level yields that approach, 10%. Despite the sharp drop in LIBOR, resulting from the federal reserve's efforts.
Including activity across our four business lines originations and the fourth quarter totaled 35 million and repayments were just under $100 million.
For the full year originations totaled just over 165 million and repayments were $370 million.
Now, let me provide and update on our investment verticals.
I'll start with cash flow.
We believe our cash flow portfolio is well positioned to perform during either a continued economic recovery or a mild downturn given our lack of direct exposure to cyclical industries, such as energy commodities travel leisure heavy manufacturing or consumer discretionary sectors.
Substantially all of our cash flow investments outperformed their COVID-19 budgets as a rebound in revenues as well as cost cuts have had a positive impact on their financial performance.
We view the majority of our portfolio companies is providing essential services and non cyclical sectors.
And in particular.
Health care loans have been performing extremely well we attribute this both to the recession resilient and essential service nature of this industry as well as our underwriting edge stemming from our experienced healthcare cash flow team.
And access to proprietary and industry insights through both our life science teams and our gym and O healthcare ABL team.
At year, and our cash flow portfolio.
And was.
Just about $220 million or roughly 47% of the total portfolio and was invested across 30 borrowers with an average investment of $7 million.
Of note our one remaining second lien investment was repaid at par and the fourth quarter.
Resulting now and a 100% first lien cash flow loan portfolio.
The weighted average EBITDA for this portfolio was over $100 million.
And the weighted average yield on this portfolio was six 7% at year end.
During the fourth quarter, we originated approximately $20 million of new cash flow loans and experienced repayments of approximately $70 million.
In addition, during the fourth quarter, we committed to unfunded acquisition lines that we expect will provide a boost to fundings during 2021.
The weighted average IRR on realized cash flow deals during the fourth quarter was seven 3%.
For the full year, we originated just over $60 million of cash flow loans and experienced repayments of over $180 million.
Our cash flow portfolios contraction during last year.
And was driven by repayment activity at or above par where.
Where performance from the borrower remains strong despite the challenging market and COVID-19 conditions.
While this dynamic creates a short term need to re grow our portfolio, we viewed as a testament to the strong underwriting skills of our team and success and preserving our investors capital.
We are seeing a pickup and sponsor activity during the fourth first quarter with higher volumes of M&A and add on acquisitions compared to the prior quarters. We expect this sponsor led momentum to carry forward through 2021.
Now, let me touch on our asset based businesses.
The collaboration across our health care business and business credit.
Together with the acquisition of summit financial factoring business, a year ago has broadened and deepened coverage across all regions and enhance the pipeline of investment opportunities. We view this new unified rebranding as a means of enhancing their marketing efforts as well as an.
Symbolism their collaborative approach to the market.
Let me now provide and update on each of them.
I'll start with SLR business credit.
Our business credit portfolio was approximately $150 million at year end, representing 32% of the total portfolio.
It consisted of over 120 borrowers with an average investment of $1 2 million.
99% of its borrowers were deemed essential businesses.
And the government stimulus has been highly beneficial to the portfolio companies.
And this portfolio is defensively positioned with its largest exposures being and food distribution it staffing and manufacturing.
And businesses business credit has not had a single payment default during the pandemic and is 100% performing at year and we.
We are very pleased with the credit quality of the portfolio as well as the yield carrying over 12, 5%.
During the fourth quarter, we funded $8 million of new loans and had repayments of 15 million from.
For the full year business credit funded over $70 million of new loans, and net repayments of $94 million.
The reduction in their portfolio resulted from our borrowers receive and government stimulus payments, which they used to pay down temporarily our lines of credit and.
We expect many of these customers to redraw on these lines during 2021.
And solar business credit also continues to monitor the opportunity for additional add on acquisitions to expand their business.
During the fourth quarter, they paid a cash dividend of $1 3 million consistent with the prior quarter and in line with North Mill's earnings power.
Now, let me turn to SLR healthcare ABL.
Health care ABL portfolio was $65 million year, and representing 14% of our total portfolio total number of borrowers has remained consistent over time and is comprised of loans to 37 borrowers with an average funded loan size of just under $2 million.
The portfolio remains 100% performing with not a single payment default since the start of Covid.
The impairment risk remains very low given healthcare ABL and disciplined underwriting and focus on financing.
Health care service providers, who have government and high quality insurance company accounts receivable collateral, which support our working capital facilities.
Cash collections typically go directly into lock boxes and interest payments are debited automatically by our team.
The weighted average yield on this portfolio was approximately 12, 4% at year end.
During the fourth quarter, they funded $8 million of new loans and had repayments of $14 million.
For the full year, they had originations of $25 million and had repayments of just over $90 million.
Similar to business credit health care ABL portfolio contracted in 2020, largely as a result of the borrowers choosing to pay down their credit facilities with proceeds from various government stimulus programs, we have begun to see an increase and our borrowers use of their credit lines as their capital needs.
Extend beyond the government government stimulus received and.
In addition, healthcare ABL and pipeline of new borrowers remains robust heading into this year.
During the fourth quarter, they paid a cash dividend of 900000 consistent with the prior quarter and in line with their current earnings power.
As we look into 2021, we are confident and the portfolio quality of health care ABL and believe the company is well positioned to capture additional portfolio growth as the market settles and funded balances returned to more normal levels.
And finally, let me provide and update on our life Science segment.
Overall, the life science portfolio is largely insulated from short term market and economic dislocations and 100% of life science loans are performing and we continue to expect to incur no losses and this segment.
Currently 100% of the portfolio has a cash runway.
Greater than 12 months.
At year end this portfolio totaled $28 million.
Across eight borrowers with an average investment of $3 5 million.
There were negligible originations and repayments during the quarter the weighted average yield was approximately nine 3%, but this.
<unk> any success fees or warrants that typically accompany these loans.
Overall, we believe SUNS portfolio is well positioned to weather and improving but still challenging period as the economy recovers.
We remain in close contact with our management teams. They are sponsors and work closely with our extensive network of relationships to source new investment opportunities.
Our commercial finance platform and significant dry powder enables us to provide structured solutions, including cash flow and asset based loans.
And so our investment Corp, Senior investment Corp will be able to participate and these financings while maintaining significant diversification.
Now, let me turn the call back over to Michael.
Thank you Bruce at this time, let me offer a few concluding remarks from.
From inception, we've 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 per shareholders and protect our capital.
Throughout 2020, we remain disciplined in the face of significant spread compression higher leverage and loose structures all of which are elevated the risk of principal loss and middle market leveraged loans.
We believe by building a defensive portfolio across cash flow and specialty finance first lien senior secured loans as well as operating well under our target for leverage and preserve liquidity, we took the appropriate steps to navigate successfully through a difficult 2020.
Throughout we have maintain alignment through our ownership of some stock alongside our fellow shareholders.
With over $440 million of available capital and.
And a strong foundation, given our defensive comprehensive portfolio and relatively low leverage we believe the company's positioned positioned to originate attractive new investments.
Our patience and willingness to be Underinvested and provides us with a foundation to be opportunistic.
With over $7 $5 billion of investable capital across the platform and <unk>.
SLR scale, well enabled SUNS to participate and high volume of larger transactions throughout 2021, and accelerating the growth of its portfolio.
And the magnitude of the economic disruption and expected uneven recovery, we believe that the improved investment opportunity set will persist for number of quarters as companies require financing solutions for liquidity.
And capital and growth initiatives.
Sponsor activity is definitely on the upswing and the industry is armed with significant dry powder, we believe SUNS and a great position to capitalize and this opportunity.
Additionally, we look forward to continuing to execute our commercial finance strategy now under one unified brand SLR.
We hope and wish that all of your and good health and we'd like to thank you for your time today and your support of your company operator, if theres any questions. Please open up the line.
At this time I would like to remind everyone in order to ask your question you May Press Star then the number one on your telephone keypad.
Again, Thats star one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
So operator, it looks like we have no questions. So in conclusion and I'd just like to thank everybody for their attention this morning and of course.
If people do up questions. Please feel free to reach out to us directly take care everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
And.
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Yes.
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