Q4 2020 Solar Capital Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q4, 'twenty and 'twenty solar capital earnings call.
At this time all participants are in a listen only mode.
After the Speakers' presentation and will be a question and answer session to ask a question. During this time, you and need to press star one on your telephone keypad.
Please note that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Mr. Michael Gross Chairman and co CEO. Please go ahead Sir.
Thank you very much and good morning, welcome to the Solar Capital Ltd earnings call for the fiscal year ended December 31 2020.
And we'll discuss on this call last night, we announced the rebranding of the solar capital partners platform to S. L. R.
Effective today with S. L. R. C change its name the SLR investment Corp, that's sort of our seed advisor changes seem to SLR capital partners. The.
Company ticker will remain S. L. R C.
I'm joined here today by Bruce bowler, our co Chief Executive Officer, and Richard <unk>, Our Chief Financial Officer Rich before we begin could you. Please start off by covering the webcast and forward looking statements.
Of course.
Thank you Michael.
I would like to remind everyone that today's call and webcast are being recorded.
Please note that they are the property of <unk> investment Corp, and that any unauthorized broadcasts 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 investment Corp Dotcom.
Audio 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 and our press release regarding forward looking information.
Statements made on today's conference call and webcast may constitute forward looking statements, which relate to future performance or future performance of the financial condition.
These statements are not guarantees of our future performance financial condition or results and involve a number of risks and uncertainties.
Additionally, as the performance is not indicative of future results and.
Actual results may differ materially as a result of a number of factors, including those described from time to time and our filings with the SEC.
And so a lot of investment Corp 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 visit our website or call us at two one to 99 three.
One 670.
At this time I'd like to return the call back to our chairman and co Chief Executive Officer, Michael gross.
Thank you very much rich good morning, everyone and thank you for joining us today the.
A year ago, when we reported our fourth quarter and full year results 2019, none of us could have imagined that we were on the eve of of a global pandemic and will result, and the tragic loss of so many lives of severe economic contraction and the complete disruption to our daily lives and route routine business and social interactions.
In spite of and extraordinarily challenging year and negatively impacted the functioning of literally every government business and community organization across our country solar solar see performed well, reflecting our long standing and disciplined approach to manage and the company's assets and liabilities.
We are grateful to our employees clients lenders and service providers for their tireless efforts, despite the stress and personal hardship. This pandemic has caused.
At December 31, 2000, 2100% of our portfolio is performing.
The credit quality supports our investment thesis that asset based loans and niche markets and first lien cash flow loans to upper middle market companies operating primarily in non cyclical segments provide meaningful downside protection during challenging economic periods.
Our portfolio of companies resilient business models and assets of liquidity have enabled them to successfully weather the economic crisis at the <unk>.
Remember 31, 2020, our net asset value per share was $20.16 up from $20, 14th and at the end of the third quarter.
Importantly, we anticipate that our existing investments will ultimately deliver their underwritten returns.
As our longtime investors know we embarked on an initiative of eight years ago with the acquisition of Crystal financial to broaden and diversify our investing capabilities b of niche ABL strategies that are complementary to our cash flow lending business.
In Q4, we further the strategy to the acquisition of Kingsbridge Holdings, a leading independent lessor of essential use equipment to a diverse set of primarily investment grade customers.
During our two year loan investment and Kingsbridge, we gained a deeper understanding of the business and developed the strong relationship with the <unk>.
Accessible management team.
Kingsbridge expands our director of the origination capabilities and provide differentiated source of growth for the company.
With the acquisition of Cambridge, we are truly diversified commercial finance business.
During the fourth quarter 2020, SLR sees comprehensive portfolio of grew to just over $2 billion up 37% from September 30th driven primarily by the acquisition of Kingsbridge.
At December 31st over 99% of our comprehensive of investment portfolio at fair value was invested in senior secured secured loans and approximately 80 per 686% of the total fair value consisted of loans and our specialty finance verticals.
These businesses have historically, the low default and loss rates throughout business cycles, notably the specialty finance teams of each managed through multiple cycles over a career spanning 20 to 30 years.
During 2020, 76% of the company's gross investment income was generated from our commercial finance businesses.
Investment income and Q4 2020 was up approximately 9% compared to the third quarter.
And the income from our investment Kingsbridge, which closed in early November.
In the fourth quarter SLR C produced 35 per share of net investment income up a penny per share from the third quarter.
We have a clearly defined path for <unk> to generate pre COVID-19 levels of NII over the next few quarters as we approach our target leverage.
Importantly, we are confident the Companys earnings power continues to reflect the benefits of S. Alerts the multi strategy commercial finance platform that combines cash flow and our specialty finance businesses.
We expect portfolio growth in 'twenty and 'twenty, one from a growing pipeline of both senior secured cash flow as well, especially finance investment opportunities.
With the improving economic climate and stabilization of markets M&A activity has picked up and our investment pipeline is growing.
Our diversified investment platforms span and cash flow lending ABL equipment for.
Dance corporate leasing and lender finance and life science venture lending positions SLR C at the solutions provider to borrowers with scale.
We are fortunate to be and a unique position to allocate capital across our investment strategy to the most attractive risk adjusted opportunities.
We have significant available capital to support the growth of our portfolio at December 31st ethanol RC remained low levered at approximately <unk> eight times debt to equity relative to our target range of 0.9 to 1.25 times.
When including available liquidity of Crystal financial NEF Holdings, and Kingsbridge, The company had over $730 million of available capital subject to borrowing base limits.
Finally, let me touch on the rationale and benefits of our platform rebranding, which was announced last night.
Since our acquisition of Crystal financial and 2012, we are focused on building a diversified commercial finance platform with multiple investment verticals that can provide our investors the with exposure to private debt asset classes, the care of attractive pricing and terms the strong protections of the form of covenants and collateral coverage.
This initiative is included and the development of our lender and life science businesses and the acquisitions of nations equipment Finance and Kingsbridge, We will continue to expand our suite of lending strategies.
As a result of our success across the SLR platform, we have become a house of brands rather than a branded house to fully reflect our unified platform and holistic approach to providing our borrower clients with the financing solutions across the capital structure and our shareholders with attractive investments, we've rebranded solar and S. L. R.
And with each of our entities change its name Twitch and extension of the SLR brand.
At this time and I'll turn the call over to rich <unk>, our CFO to take you through the Q4 financial highlights.
Yeah.
Thank you Michael.
Yeah.
That's the law of investment Corp's net asset value at December 31, 2020 was $852.0 million or $20.16 per share.
Compared to $851 1 million or $20 and <unk> 14 per share at September 30th 2020.
At December 31, 2020.
Src's on balance sheet investment portfolio had a fair market value of 1.53 billion in 105 portfolio of companies across 25 industries.
Compared to a fair market value of 1.35 billion in 105 portfolio of companies across 26 industries at September 30th 2020.
At December 31, as far as he had $677 million of debt outstanding and.
And the leverage ratio of 0.78 times net debt to equity.
And when considering cash on hand and available capacity from the company's credit facilities.
Combined with available capital from our non recourse credit facilities at Crystal and Es.
And Kingsbridge.
And so all of our investment Corp had more than 700 million to fund portfolio of growth.
Subject to borrowing base limits.
Moving to the P&L for the three months ended December 31 2020.
Gross investment income totaled $31 4 million.
Versus $28 9 million for the three months ended September 32020.
Expenses totaled $16 5 million for the three months ended December 31 2020.
This compares to $14 6 million for the three months ended September 31st I'm, Sorry September 30th 2020.
Accordingly, the Companys net investment income for the three months ended December 31, 2020 totaled $14 9 million or <unk> 35 per average share.
Compared to $14 3 million or <unk> 34 per average share for the three months ended September 30.
Below the line.
The company of net realized and unrealized gains for the fourth quarter of 2000 and 'twenty.
Totaling $3 4 million.
Versus net realized and unrealized gains of $4 4 million for the third quarter of 2020.
Ultimately the company had a net increase and net assets, resulting from operations of $18 3 million or <unk> 43 per average share for the three months ended December 31 2020.
This compares to a net increase of $18 6 million of 44 per average share for the three months ended September 30.
In addition.
Sure and.
Of course, he has investment grade corporate rating was affirmed by Fitch ratings, which is further testimony to S. P. S. O S. He is conservative and investment and management philosophy and strong underwriting track record.
The investment grade ratings from both Moody's and Fitch provide important flexibility and efficiency.
And the companies growing balance sheet.
Finally.
And our board of Directors recently declared a Q1 2021 distribution of 41 per share payable on April 2nd 2021.
The shareholders of record on March 18, 2021.
And with that I'll turn the call over to our co.
Chief Executive Officer, Bruce bowler.
Thank you rich good morning, everybody.
The first and foremost.
As solar <unk> portfolio is the 100% performing and has shown remarkable durability throughout the economic slowdown and the current stages of recovery.
Our performance is of tremendous complement to the financial sponsors and portfolio companies that we've invested in.
In addition, and solar she's.
Performance supports our 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 proportion of our exposure to collateralized loans through our specialty finance lending verticals.
At year, and the weighted average investment risk rating of our portfolio was under two based on our one to four risk rating scale with one representing the least amount of risk.
As a further indication of the resiliency of our investments 100% of the portfolio was performing at year end.
And on watch list was less than 3% of the entire portfolio, which had peaked at seven 5% back and the second quarter of 2020.
As Michael mentioned, our comprehensive portfolio grew 37% and the fourth quarter driven largely by the acquisition of Kingsbridge.
At year, and our portfolio was just over $2 billion and was highly diversified encompassing 600 distinct issuers across the industries.
Our largest industry exposures, where health care providers and services diversified financials pharmaceuticals and retail.
<unk> loans.
The average investment per issuer was just over $3 million or 2%.
At year and over 99% of the portfolio consisted of senior secured loans. The senior secured loan portfolio was comprised of approximately 94% first lien.
And 5% second lien loans of the second lien loans, only 2% were cash flow with the remaining being asset based second lien loans.
At year end, our weighted average asset level yield was 10% compared to 10, 1% the prior quarter.
By focusing on our niche commercial finance verticals as well as cash flow lending, we have been able to maintain asset level yields close to 10%. Despite the decrease in LIBOR and the continued spread compression and the marketplace.
Notably we've been able to maintain this yield of 10% while actively reducing our exposure to second lien cash flow investments.
Originations for 2020 totaled just under $1 billion and repayments were $680 million, resulting in net portfolio growth of approximately $300 million.
Portfolio growth was heavily weighted towards the fourth quarter, coinciding with when the markets reopened as well as the acquisition of Kingsbridge.
Now, let me provide and update on each of our investment verticals.
At year, and our sponsor cash flow portfolio was just over $280 million or approximately 14% of the total portfolio was invested across 16 issuers with an average investment of just under $20 million. These.
And these companies had a weighted average EBITDA of over $50 million, which highlights our commitment to finance upper mid market businesses, which we believe are better positioned.
Positioned to withstand the downturn.
Yeah.
During last year, we originated commitments of over $65 million of first lien cash flow loans and experienced repayments of $225 million.
Our cash flow investments came from a mixture of delayed draws and incremental investments and existing credits.
Additionally, during the fourth quarter, we committed to unfunded acquisition lines that we expect will provide a boost of fundings and our portfolio during this year.
Of note our second lien cash flow loan exposure was further reduced with the repayment of our loan to bishop lifting.
We earned over a 10% IRR on this investment.
Across the rest of our portfolio, we're continuing to see healthy operating performance substantially all of our cash flow companies are outperforming their post COVID-19 revise 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 as providing essential services and non cyclical sectors.
During the fourth quarter, none of the borrowers and this portfolio experienced defaults.
The weighted average yield of the cash flow portfolio was eight 7% up from eight 5% and the prior quarter.
Now, let me turn to our ABL business as a reminder, this vertical is a combination of senior secured loans at crystal financial as well as senior secured loans originated directly on to our balance sheet.
At year, and the portfolio totaled approximately $530 million, representing 26% of our total portfolio.
It was invested and 33 borrowers with an average loan size of 17 million the.
Weighted average asset level yield was 10, 7% compared to 11% the prior quarter.
During last year, we funded approximately $225 million of new ABL investments and had repayments of just over $300 million.
During the fourth quarter, we had one of our strongest.
Periods with the ABL team with originations of over 125 million and repayments of just under $100 million.
This division paid SLR see the.
The cash dividend for 2020 of $24 million equating to an eight 5% yield on cost.
Now, let me turn to Kingsbridge as.
As a reminder, in November we invested $136 million of equity and $80 million of debt to acquire 87, 5% of Kingsbridge and partnership with the management team.
Kingsbridge is an Illinois based leading independent lessor of essential use equipment to primarily investment grade customers.
We had the benefit of being a lender the kingsbridge over the prior two years, giving us unique insight into their business.
Underwriting and credit disciplines and strength of the management team.
The acquisition highlights the benefits of our lender finance business, which gives our portfolio team and opportunity to get to know management and their niche businesses through being a lender.
And then potentially becoming an equity investor.
Kingsbridge was founded in 2006 by the current management team and is underwritten over $1 billion of leases since inception.
At year end Kingsbridge highly diversified portfolio.
Totaled approximately $570 million with an average funded exposure of approximately $1 2 million per obligor and was 100% performing.
Over 70% of their portfolio is invested in assets leased by investment grade borrowers and.
Portly Kingsbridge strong track record has continued through the current health and economic crisis.
This acquisition expands our direct origination capabilities provides differentiated sources of growth for SLR C and is our first foray into lending to investment grade borrowers.
We view this transaction as an investment and a permanent asset that is not subject to a three year average life of a typical cash flow of investment and it will have the benefit of enhancing the duration of the overall solar portfolio I'm, sorry SLR C.
During the fourth quarter Kingsbridge pay the dividend of just under $2 million for the partial ownership period.
Including interest on our $80 million loan gross income generated by Kingsbridge during the fourth quarter was $5 4 million.
We continue to expect that our debt and equity investments and Kingsbridge will generate approximately $20 million of gross income and 2021 and produce a blended cash yield of approximately 10%.
Consistent with our other specialty finance assets.
Still early the integration of Kingsbridge is proceeding exceptionally well.
Now, let me turn to equipment finance as a reminder.
Included in the equipment finance business, our transactions held directly on our balance sheet as well as those held and our subsidiary NEF Holdings.
And 2020.
Our equipment finance strategy invested over $50 million and had repayments of approximately $120 million.
And at year end portfolio totaled $318 million.
Is invested across 100, and 505 borrowers with an average issuer exposure of approximately $3 million.
This asset class represents just over 15% of our total portfolio.
100% of the equipment finance investments are first lien loans and at year and carried this portfolio carried and weighted average asset level yield of just over 10%.
In two.
2020.
Investment income from the equipment finance portfolio totaled just over $18 million.
Last year was an unprecedented year with the pandemic, creating the most challenging investment environment.
And this team's history. However, they have had 40 years of experience and this business while the majority of their borrowers received government assistance.
Prolonged shutdown and took a toll, particularly on transportation related leases to the leisure educational and entertainment sectors.
Over the last several quarters, we have reduced this portfolio.
As we enter 2021, we believe that the equipment finance team has made the most of the challenging situation and are poised to grow this year.
Now, let me turn to the life Science segment.
At year end the portfolio of totaled just over $325 million.
And consisted of 16 borrowers with an average investment of approximately $20 million.
The life science portfolio represented 16% of the total portfolio and close to 30% of the gross investment income.
During last year the team originated approximately $60 million of new investments and had repayments of just under $30 million.
The uncertainties and market impact of the pandemic led many life science borrowers to work closely with existing lenders, while focusing on reducing cost and surviving on lower cash budgets.
This led to fewer repayments last year than we typically have seen resulting in greater duration for our life science portfolio.
You had one exit and the fourth quarter, which had a weighted average realized IRR of 13%.
The weighted average yield on the existing portfolio is nine 5%, however that excludes any success fees and warrants that typically accompany these investments.
In conclusion <unk> portfolio of activity last year represents a continuation of the investment themes that have been driving our investments over the last few years.
Reducing our second lien cash flow loan exposure.
Focusing on new origination activity and first lien loans.
And defensive sectors.
And increasing our investments and specialty finance assets were able to get tight structures and attractive risk adjusted returns.
Across all of our verticals, including our sponsor cash flow lending business. We are seeing a larger volume of higher quality investment opportunities than we've seen and a number of quarters. The.
The uptick is certainly reflective of the economic rebound and increase middle market sponsor activity.
In addition, we're seeing of larger pipeline of opportunities from the business development efforts of our origination professionals across the platform.
The current market environment is attractive and provides a great opportunity for us to grow our portfolio and 2021 now.
Now, let me turn the call back to Michael.
Thank you Bruce and.
In closing, we're pleased with how our portfolio of whether 2020, and we're confident and our ability to continue to grow our portfolio and net investment income over the coming quarters.
We're starting the new year with the strong portfolio of foundation and is 100% performing and it's.
Allocated over 86% of specialty finance assets, the carry attractive pricing and terms with strong protections and the form of covenants and collateral coverage.
The additional kingsbridge, the Src further expands our origination engines.
With over $700 million of available capital and low leverage we believe <unk> is positioned to originate attractive new investments.
Our patience and willingness to remain Underinvested during last year provides us with the foundation to grow.
With over seven $5 billion of investable capital across the platform as the large scale has enabled the src to participate and the higher volume of larger transactions, which we believe will accelerate the growth of our portfolio and 2021.
We believe that the improved investment opportunity set will persist for a while and companies require financing solutions for liquidity M&A and growth initiatives.
Sponsor activities on the upswing and the P. P industry its armed with significant dry powder that's the.
All of our CS and a great position to capitalize on this opportunity and we fully expect growth and our spend sponsored finance cash flow of business as well the across our specialty finance verticals.
We look forward to continuing to execute our commercial finance strategy now under one unified brand, which will enable us to further enhance our collaborative origination efforts. We go to market with a comprehensive solution set across the capital structure that can be customized to the needs of each borrower and offer certainty and scale of capital and each.
And vertical.
2020, with the challenging year for all of US we hope that all of your and good health, we would like to thank you for your time today and your support of our company.
At 11 o'clock. This morning, we'll be hosting on the earnings call for the fourth quarter and 2020 results of SLR Senior investment Corp, or sons, which was previously named solar senior capital.
Our ability to provide traditional middle market senior secured financing through the vehicle continues to enhance our origination team's ability to meet our clients capital needs and we continue to see benefits of the value proposition and the SLR sees deal flow.
We appreciate your time. This morning, operator would you. Please open the line for questions at this time.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Well pause for just a moment to come out of the Q&A roster.
Your first question comes from the line of Paul Johnson with K B W.
Good morning, guys. Thanks for taking my questions.
Congratulations on the rebranding and I guess this marks the exit of your.
Your exit from the solar business.
The head to.
Had to say that but.
[laughter] anyway.
I was hoping you could maybe help me understand or help us understand.
The just the fundamentals behind the driver of whats the demand for.
The type of financing that comes from your Kingsbridge business.
And I, just imagine that it's obviously, a very different type of borrower.
From some of your other verticals. So is there any type of maybe common economic driver.
For the demand of leasing those assets versus owning.
Yeah. This is Bruce thanks for the question.
It's really just the the.
The.
And purchasing agents sitting at these large investment grade companies.
As you know we cover everyone from a of Cardinal health two of Bank of America, and Theyre, making buy versus lease decisions. Just as you made with your car and the economic climate might drive that we as Michael mentioned these are longer duration leases at the opening contract and then very often what.
And we find particularly and environment like this with uncertainty as they may say, we're going to put off purchasing new equipment, let's just extend the existing lease that we have with kingsbridge.
And it's.
Really driven by the economic environment and what's going on at the company in terms of how they want to optimize their capex dollars between purchases and leases.
Okay.
Sense.
And then you mentioned the.
It's a and attractive.
The environment today.
Could you maybe just talk about what verticals you might see the most favorable risk adjusted opportunities and the market for your portfolio of today.
Yes, I think that from a high level perspective.
No the life science business has consistently generated.
On the best risk adjusted returns Thats not just for US that's just as an asset class.
And in particular, our team as you know has never had a loss. So they still tend to get outsized returns and having said that all of our strategies.
Across the platform and consistent with the marketplace broadly has felt spread compression and also the reduction of LIBOR. So we have felt pressure on pricing across all of the strategies relative to their historic.
Returns, but I think that we're actually as we look at the portfolio of investment strategies that we have.
We're finding that they all are seeing good opportunities for similar reasons coming out of.
And what we hope is coming out of the.
The pandemic here and the economic recovery that we're experiencing and is in front of us and so companies, whether it's kingsbridge to your prior question where companies are looking to extend leases or enter into new leases and as they are looking to figure out how best to deploy their capital into this economic.
Recovery, we're seeing the same thing in life science lending activity is picking up.
As you are coming out of.
And so many businesses in this segment being tied up with Covid related <unk>.
Products. They are now shifting the focus.
Back to other.
On drugs and devices that were in process and need to be developed in addition to the Covid crisis and you're then going to the same way as you go across the platform. Our ABL strategy had the best quarter in the fourth quarter in terms of originations, we still see a lot of.
Need for capital against assets for companies that are in transition. During this economic period as companies are trying to transition and figure out what projected cash flows look like they are borrowing more and more against the assets, particularly in the retail sector, where the team has had strong long standing expertise.
And then and the cash flow market, we're seeing activity pick up there as we mentioned.
The sponsors in sectors that had been resilient during the crisis that have proven themselves last year and have rebounded quickly.
Are attracting additional private equity dollars, which needs lending dollars alongside that to leverage the equity investments and so we're.
As we mentioned doing deals.
The delay draw on drawn acquisition facilities to fund add on acquisitions and they don't get drawn always day, one but tend to get drawn over six 912 months to fund acquisition pipeline. So there's no one segment and summary, I would just say that we see opportunity and all of them and are.
Obviously, the blessed and.
I'm thrilled to have multiple strategies to take advantage of the changing economic climate.
Okay. Thanks for that sounds very positive for the BDC and then just one last small question I realize it's a very small investment in your portfolio, but it's it's been there for a long time and I just have to ask why.
Why do you guys hold a it's small and I guess, the equity position and common equity position in the B Riley financial.
Yeah.
Yes.
That's a fair question I think it's just sitting there its had a little upside and eventually well exited this year.
Okay.
Okay. Thanks. Those are are those are all my questions.
Thank you.
And your next question comes from Mickey Schlein with Aladdin Ladenburg.
Good morning, Bruce and Michael.
I wanted to follow up with the question on the competitive landscape, we're sort of and this strange world, where there was a lot of capital and the market share.
<unk> and yield and at the same time, we ended the federal government.
Already having provided a lot of support last year and looking to provide a lot more support this year both to individuals and two businesses can you help us understand how that may impact the demand for loans.
And loans and investments and all of your segments.
Sure I'll take the first shot at that Mickey.
I think that.
It's a great question.
It's a bit of a high class problem.
To have your borrowers have to your point, so much liquidity available to them.
So in terms of the existing portfolio of companies that obviously is a benefit.
It's obviously part of why our portfolios have performed so well I think as we look at the opportunity set. It does you do have to look at it sector by sector of strategy by strategy in general the investment grade companies that Kingsbridge.
Financing really are not benefiting from that they are of high quality borrowers and they are just going through the ordinary capex plans. So it doesn't really have an impact that kingsbridge. It does have an impact at our equipment finance vertical. These are smaller businesses, you know where we're lending against.
The critical use equipment for those businesses many of them are not private equity owned the vast majority and so they are eligible and.
And so that has helped our portfolio, but it's definitely.
A bit of a headwind for growth having said that.
And we consciously tried to downsize of that portfolio and take it down from its peak of 400 million down to just under $320 million last year, because that is the portfolio that can see some of.
And susceptibility to cyclicality, so we purposely shrunk it the.
The team is actively looking to grow with slightly higher quality borrowers that may benefit a little bit less from the government stimulus. So we see and opportunity there to grow the.
On the budget that the team has put forth for this year is not quite back to the 400, but it's meaningfully above the 318. They ended the year with so.
We do see and opportunity to grow, albeit will takes a little bit of spread compression and because we will go to higher quality borrowers there to stay away from the issue that you're raising.
And I think in the ABL businesses.
On the margin it will it will help and create a headwind for that team.
But again that team has always been looking for companies in transition and not all of which have access to government stimulus money. It has helped some of our portfolio there.
But we do see good opportunities, particularly given some of the structural headwinds that are the retail sector faces and again thats a strong suite for that team of.
The portfolio churns quickly, but at the moment and roughly a third of it is across retail ABL, we have very liquid working capital assets. So.
We still see good opportunity, there and clearly and both lender for the life science and cash flow lending.
And where these are venture capital or private equity owned businesses. They generally do not qualify for government stimulus. The date and we have seen increased activity in both segments.
Thank you for that Bruce.
I appreciate the detail and that's really really helpful.
Bruce It sounds like Youre.
Youre not very concerned about liquidity on your book.
Borrowers balance sheets, given all the programs that have been in place and the ability of private equity to write checks book.
And that started about a year ago looking out into this year do you have any concerns about borrower liquidity.
We don't because.
Particularly in our.
And our cash flow business.
These businesses have in many cases because of the sectors, we're lending to health care of financial services recurring software.
We've seen real operating performance rebound as we got into really the summer, particularly in health care as people were able to get back into.
The elective surgeries and other deferred health care visits.
And definitely into Q4, where we actually saw businesses, where we're getting repaid on our loans at par or better that we had.
<unk> zero revenues earlier in the year as we were all locked down.
So for our segments.
Think about it of your the owner Youre not going to put good money after bad, but youre sure as heck going to support your quality investments.
We have seen very little need for liquidity and our portfolio of companies, but sponsors are quick to put it up and the same is true on our life science business. The VC community has been very supportive of those investments if anything paying down our loans to make sure that they have substantial liquidity because those are still burning.
The cash as they get to <unk>.
Commercial adoption.
Stan and thank you for that.
And Bruce My last question is the.
About the right hand side of your balance sheet.
And do you have a variety of unsecured notes some of them are due next year and there has been you know and.
Tremendous demand for.
So that kind of paper are you looking to refinance some of your unsecured debt and potentially also reduce the credit facility balance and you have outstanding.
Yes.
I think look we are constantly looking at our balance sheet and we obviously recognize that the market will still be favorable so its something we keep looking at them and I think you should expect at some point during this year and we put in place refinancing for that and potentially adding to our unsecured debt stack, we're big fans of having unsecured debt.
On the balance sheet.
I appreciate that thank you Michael those are all my questions. This morning.
Thank you Mickey and Dickey. Thanks.
And your next question comes from Casey Alexander with Compass point.
Hi, This is really just.
Our maintenance question based upon your comments of Crystal.
And Kingsbridge.
And you kind of control of the toggle on the dividend that they paid.
And my right in thinking that the go forward run rate of dividends should be somewhere between nine and $10 million of quarter.
Taken together.
So let me just take those and its components I think that the great. Great question Kingsbridge, obviously early days, but we have been of lender for a few years now Kingsbridge is a very steady Eddy business.
Dividend there should be a relatively consistent.
Targeted kind of the $20 million number.
For this year it is pretty evenly distributed throughout although I would tell you the fourth quarter is closer to 30%, 33% of the year's income with quarters, one through three being <unk>.
Equally distributed so I think that'll be a rather predictable dividend.
As you know historically crystal has had a little bit more volatility quarter to quarter because of the nature of their assets being short duration high churn and generating either origination fees or prepayment fees for example, and the fourth quarter.
We distributed 6 million, although they had earned 8 million. So we try to smoothed their dividend out at roughly that $6 million of quarter until we see significant growth or significant contraction.
And Bruce just by the one point of just just one point of clarification that the $20 million of year that we expect out of Kingsbridge is a combination of the dividends and the interest income on the loan. We have spent so it's not just that's what I was just that's what I was just kind of say $6 4 million of that is interest income that comes from the lights.
Correct.
Right. So so youre kind of expecting there.
13, and a half million dollar dividend at the cadence of that Bruce just suggested.
Yes, plus the quarterly interest yes.
Yeah, Okay, great that was my question. Thank you.
And Keith you.
Your next question comes from Robert Dodd with Raymond James.
And finally and up I had the same kind of questions. One when I look at Crystal obviously, I mean, the portfolio looks good at the least reserves. This year grew a lot of and the fourth quarter, but on the book was down.
On the on balance sheet book of Crystal with that one of 23%.
Year over year, which Steve and Jeff.
Quite honestly kind of trimmed.
And that dividend back from seven and the half to kind of six.
One of your expectation I guess for growth.
The loan book.
Because obviously if that if that can get back to work on.
As of year ago.
We could always do you see the dividend increase but if it stays here.
Yeah, when we might start at six I mean, so it really goes to.
The expectations of how much that on balance sheet book.
Yeah.
And grow and drive net income with cash flow from Bulks of what I do want to look at crystal, but whats your optimism that.
So so what I would say is and this goes across all of the strategy or most of the strategies. We've talked a lot over the last couple of years, Robert how we've increased the scale of the platform.
And that allows each of these strategies to co invest with private pools of capital and basically scale up their ability to go to market and take larger hold sizes across the platform and then take their pro rata share on the diversified basis and so Crystal for example has been doing.
Loans, and the 70 $500 million size bidding.
Bidding on things up to a $150 million that they werent.
Going after a couple of years ago. Most of their book had an average loan size of $20 million to $30 million.
And 40 at the high and so what we're seeing is that that is the driver for growth for them at the same with life science, you've seen net book ROE and the leave and Covid aside.
We were all on hold for a little bit.
But the same thing average loan size of the life Science business has also gone up and importantly at the cash flow business, where we're routinely taken down 100 $150 million and an investment across the platform with solar taking the lion's share of that but again the the scale has allowed them to speak for that size to the.
The prospective borrowers so I think that that's the dynamic that.
Creates an opportunity for crystal to grow its book in addition, the they put some exercise and.
Sorry, some extra on our balance sheet as well of at solar. So we do have some deals where the youll see both on their balance sheet as well as on the parent company's balance sheet. So I think that's going to be the opportunity for crystal.
The re grow as to not only stick to their knitting on the the Twenty's and 20 fives, but to do some of these larger deals that <unk> been active and in the last couple of months.
I think I think you didn't ask it but on another opportunity Robert My.
Robert.
Got my eye snack and my headphones.
And so I don't forget Robert Robert just one other point I would make is.
You didn't ask it but I think there is also as we get deeper into 'twenty, one and opportunity for net to increase its dividend as well and so that's another potential driver on that NII growth.
Got it I appreciate that and and just and.
And now the kind of angle I mean, one of your comments arguments and the Q&A. Obviously is as you know there has been pressure on all LIBOR and spreads which does to a degree make make.
Verticals like life Sciences, where you can get exit fees or other verticals, where there's the potential of fee income, which can obviously offsets right. If you can get a 13% of all.
On a 9% yield that's because of fees and other sources of income so what.
All of the avenues all of the with.
With your various verticals to get that kind of yield enhancement in the spreads compressed and vibrant.
So let me let me answer that a couple of ways. One is if you if you look out of different businesses.
As you as you hit the nail on the head of life Science really has not impacted by spread compression where LIBOR is neither is.
What used to be called nations equipment leasing because of those are all fixed rate leases neither of us Kingsbridge, which is there's really no relation of LIBOR. So a big chunk of our business today.
Truly is not impacted by the concern you raised crystal.
Does have that issue the LIBOR based loans, but b there, we do make it up on.
And on fee as well and.
And because of the duration tends to be you know 18 to 24 months and the fees get amortized over the period, that's why the returns and consistently above 10% 10%.
So it's really it's really the cash flow of business that is the most impacted by what youre talking about and there. It is difficult because of the fees are limited to one to two points.
And there is very rarely prepayment penalties on on the floating rate loans.
Got it thank you.
And your next question comes from the line of Melissa Wedel with JP Morgan.
Good morning, guys. Thanks for taking my questions.
And couple of follow ups I think of lot of my questions have already been addressed but I guess just to put a finer point on the walk from on the cash pile on and off of.
The unity might result.
And then of <unk>.
The activity.
How are you thinking about yields on new deals and peering in the sort of.
Hi, a line of.
Yield on the investments you currently have and the portfolio.
I think that it's a great question most of where we're underwriting today and.
Again, these are generally going to be upper mid market larger EBITDA businesses, where our loan will be drawn to fund an acquisition, which takes the EBITDA even larger so we're looking at $75 million to $150 million EBITDA of companies that are adding on to fund additional acquisitions.
So so the first equation for US as you know is always about the risk we feel like we're seeing better risk in terms of the businesses.
That are looking for our capital right now I think from of spread perspective and the yield.
Targeting a minimum of 8% as you know these things get repaid early if the execute.
Well and so the early repay ends up accelerating some fee income so closer to the mid eights, so a little bit of compression.
But not material.
Okay got it I appreciate that.
And you actually touched on and then I'll ask which was around prepayment activity and sort of.
And what you guys are in terms of repayment and environment.
And I guess and the near term, but also throughout the course of the 'twenty one.
So we're not expecting much in the near term.
Yeah.
But I think thematic Lee we would expect some as you get deeper into the economic recovery and not sure. If thats the late 'twenty, one or into 'twenty, two but clearly as more and more companies right size their cash flow streams and.
And the life science businesses get to <unk>.
Market, you will start to see repays, I think accelerate but we don't see that and the near term.
Great. Thank you so much.
Thank you Melissa.
And your next question comes from the line of Finian O'shea with Wells Fargo.
Hi, Good morning, this is actually sort of often calling in from fin O'shea.
Most of my questions have been asked and answered but.
I just wanted to look at maybe the portfolio.
Your balance sheet of at least this quarter IC ASIC on what's on balance sheet.
And also alone the maybe cristal participated and I was.
Was wondering if you could give us some color on solar.
And you gave there and.
Basically how you're deciding between putting.
The password.
Part of that loan.
On solar as balance sheet versus carrying of the crystal.
Yeah as I touched on the the crystal balance sheet all of our balance sheet stepping back obviously, we're very focused on maintaining our diversification typically we're in a 2% type of hold the position and so crystal.
May take alone on their balance sheet and have excess either to some of our private funds, but first and up to solar the parent company and so we'll take some of the excess and still on a consolidated basis with what crystals, holding keep our hold level and that sort of 2% to 5% hold position.
For the consolidated solar.
It's generally balance sheet management, just from a diversification perspective, they have their own credit facility, which is again has diversification requirements.
Separate and apart from what we have at our parent company.
Okay cool so long as it's interesting to us because it looks like it has on it.
Commitment there so I didn't know sort of put into it.
That's part of it from me today. So thank you.
Thank you.
Yeah.
I would now like to turn the conference back over to Mr. Michael gross.
Oh for closing remarks.
We thank you for your time this morning, and all of the your insightful questions and as always we are more than one the follow up one on one of if there are more questions and for those of you are participating in.
And.
And what is now called the SLR Senior investment Corp call, we will talk to a couple of minutes. Thank you.
Yes.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect your lines.
Okay.
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