Q2 2021 SLR Investment Corp Earnings Call
[music].
Good day and thank you for standing by welcome to the Q2.2021F. L. Our investment Corp earnings call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will need to price.
1 on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now at the hand the conference over to your Speaker today, Michael gross Chairman and CEO. Please go ahead.
Thank you very much of a good morning, welcome to SLR investment Corp earnings call for the second fiscal quarter ended June 32021, I'm joined today by Bruce bowler, Our co Chief Executive Officer, and Richard <unk>, Our Chief Financial Officer Rich before we begin would you. Please start by covering the webcast and forward looking statements.
Of course, thanks, Michael.
I would like to remind everyone that today's call and webcast are being recorded.
Note that they are the property of <unk> investment Corp, and that any unauthorized broadcast in any form of strictly prohibited.
This conference call is being webcast from the investors tab on our website at Www Dot SLR investment Corp Dot com.
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 in our press release regarding forward looking information state.
Statements made in today's conference call and webcast may constitute forward looking statements, which relate to future events or our future performance of financial condition and.
These statements are not guarantees of our future performance financial condition or results and involve a number of risks and uncertainties, including impacts from COVID-19.
Past performance is not indicative of future results actual results may differ materially as a result of the number of factors, including those described from time to time in our filings with the SEC.
All of our 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 202.993.
On 670.
At this time of I'd like to turn the call back to our chairman and co CEO Michael gross.
Thank you rich good morning, and thank you all for joining us for the second quarter of 2021 SLR. The earned net investment income of 37 per share consistent with the first quarter of 2021.
Net asset value per share for the quarter ended June 30 was $20.29, representing a modest increase over the prior quarter.
We attribute the resiliency of our portfolio of tour Conservative underwriting our focus on first lien senior secured loans to large upper middle market businesses, and our cash flow segment, and our specialty finance investment verticals, which offer attractive structural protections and yield.
At June 30 over 99% of our comprehensive investment portfolio was invested in senior secured loans and 82% of the portfolio at fair value with allocated to specialty finance investments.
Against the backdrop of the continued economic rebound the U S middle market of reflected a more favorable economic climate punctuated by a resurgence in sponsor activity and a robust pick up in M&A activity.
We said, we expect supportive financed from.
Financing markets record amounts of private equity dry powder and potential future changes to the U S tax structure to drive record levels of of deal activity in the second half of 2021 were correspondingly seeing a significant increase in the investment commitments post quarter end.
We remain modestly levered at <unk> 73 times net debt to equity as of June 30 looking.
Looking forward, we expect to deploy much of our $740 million of low cost available capital towards new investment across our lending strategies.
And our cash flow lending business, we are seeing an increase in the size of the companies seeking direct financings, which you attributed to financial sponsor of desire for speed and certainty of execution.
The scale of SLR, Steve the investment advisor and its ability to hold up to $200 million I'll be given the investment enables us to participate in these upper middle market financings, which we continue to believe are better positioned to protect capital in the event of future economic disruptions.
Our specialty finance teams are also seeing increased deal flow as more companies look to pledge collateral to obtain working capital to fund growth initiatives the.
Breadth of our investment strategy means that we only need to see modest growth from each vertical to drive meaningful portfolio of the earnings growth.
Given our sizable third quarter pipeline, we expect portfolio growth in the third quarter to bring us the alerts these net leverage within our target range of <unk> 9 times to 1 of the quarter times.
At this time I'll turn the call back over to our CFO rich, particularly to take you through the second quarter highlights.
Thank you Michael.
<unk> investment Corp, 's net asset value at June 32021 was $857.4 million or $20.29 per share.
<unk> to $856.2 million or $20.26 per share at March 31, 2020.
The 1.
At June 32021, as far as fees on balance sheet investment portfolio had a fair market value of $1.5 zero of $1 billion and 101 portfolio of companies across 27 industries.
This compares to a fair market value of 157 billion in 105 portfolio of companies across 27 industries at March 31.2021.
At June 30 of the company at $670 million of debt outstanding with Leverages Euro 7.3 times net debt to equity.
When considering available capacity from the company's credit facilities.
The with available capital from non recourse credit facilities that SLR credit solutions as for equipment finance and Kingsbridge.
<unk> investment Corp has over $740 million to fund future earnings growth.
Moving to the P&L for the 3 months ending June 32021.
Gross investment income totaled $35.6 million versus.
First is $35.9 million from the 3 months ended March 31.
Expenses totaled $21 million per the 3 months ended June 30, compared to $20.4 million for the 3 months ended March 31.2021.
Accordingly.
The company's net investment income for the 3 months ended June 32021 totaled $15.5 million or <unk> 37 per average share.
<unk> to $15.5 million or <unk> 37 per average share for the 3 months ended March 31.2021.
Below the line the company of net realized and unrealized gains from the second fiscal quarter totaling 3.0 million versus net realized and unrealized gains of $6 million for the first quarter of 2021.
Ultimately the company had a net increase.
Net resulting from operations of $18.6 million of 44 per average share for the 3 months ended June 32021.
This compares to a net increase of $21.5 million or <unk> 51 per average share for the 3 months ended March 31.2020.
Finally.
Our board of Directors declared a Q3.2021 distribution of <unk> 41 per share payable on October 5.2021 to shareholders of record on September 23.2021.
And with that I'll turn the call over to our co CEO Bruce polar Thank you rich.
The solar see strong portfolio performance supports our underwriting thesis of investing at the top of the capital structure and first lien cash flow loans to upper mid market borrowers and non cyclical industries.
As well as allocating a significant portion of our exposure to collateralized loans to our specialty finance verticals.
At quarter end, our portfolio was just under $2 billion and remained highly diversified encompassing 600 borrowers across 75 industries.
Our largest industry exposures were healthcare diversified financials life sciences, and retail asset based loans.
The average investment per issuer was approximately $3 million or 2%.
Over 99% of the portfolio consisted of senior secured loans.
Of those 95% were first lien and only 4.3% were second lien of.
Of those second lien loans to 4% were cash flow and 2% or asset based loans.
At quarter end of weighted average asset level yield was 9.8% consistent with the prior quarter.
By focusing on our niche commercial finance verticals, we've been able to maintain asset level yields close to 10%.
Despite the decrease in LIBOR as well as spread compression.
Notably we've been able to maintain these yields while actively reducing our exposure to the second lien cash flow loans.
At June 30 of the weighted average investment risk rating was just under 2 based on our 1 to 4 risk rating scale with 1 representing the least amount of risk.
Total originations for the second quarter were $173 million in repayments with just over $300 million, resulting in a net portfolio of approximately $2 billion.
In addition, we had $82 million of unfunded investment commitments outstanding at quarter end, which we expect to be drawn down in future quarters.
Now let me, let me provide an update on each of our investment verticals.
SLR sponsored cash flow finance.
At quarter end, our cash flow portfolio was approximately $340 million or 18% of our total portfolio is invested across 18 borrowers with an average investment of approximately $20 million the <unk>.
Average EBITDA of our SLR cash flow of portfolio was $80 million.
Consistent with our focus on upper mid market larger borrowers.
During the second quarter.
We made $63 million of new cash flow commitments of which 48 was funded into new and existing investments we.
We experienced repayments of $40 million.
As Michael mentioned, we have been able to take advantage of the broader scale. The SLR platform to underwrite larger hold positions in first lien cash flow loans to upper mid market sponsor owned companies.
Given the sponsor communities preference from partnering with just a few lenders on each transaction each with large hold sizes.
<unk> would not be able to participate in these financings without the broader capacity of the SLR platform.
We are increasingly committed to delayed draw of acquisition lines of credit that are used by borrowers to fund future acquisitions.
These transactions offer of prudent opportunity for <unk> to grow its investment and established credits with existing financial covenants.
At quarter end.
Had $50 million of unfunded cash flow commitments, which we expect to be drawn down in future quarters.
We're also seeing robust new deal activity in our cash flow vertical and expect to meaningfully grow this segment during this third quarter.
Our asset level yield cash flow loans was 8.4% slightly below the prior quarter now.
Now, let me turn to asset based lending SLR credit solutions.
At quarter end the portfolio of asset based lending was $390 million, representing approximately 20% of our total portfolio.
The weighted average asset level yield was 10, 3% compared to 10, 5% of the prior quarter.
During the quarter.
We funded approximately $27 million of new loans and had repayments of $100 million looking forward the pipeline in asset base lending is robust.
For example.
Retailers of core competency of this team.
We are actively exploring alternative financing solutions at an active rate following the challenging 2020.
For the quarter credit solutions pay the SLR sea of cash dividend of $5.5 million.
Now, let me turn to corporate leasing our Kingsbridge platform.
We are now 9 months into our investment in Kingsbridge and are extremely pleased with the results.
Credit quality of the portfolio remains strong and originations during the second quarter were steady.
At quarter end, they're highly diversified portfolio of leases.
The approximately $590 million with an average funded exposure of the.
$1.3 million per obligor.
Of the portfolio was 100% performing.
With the large majority of Kingsbridge portfolio invested in assets that are leased by investment grade borrowers.
For the quarter Kingsbridge pay the dividend to Src of $3.5 million, which is an increase from $2.75 million in the prior quarter.
This equated to a 10, 2% annualized yield on cost.
When we include the interest on our $80 million loans into Kingsbridge gross income from Kings Bridge for the second quarter was just over $5 million.
Now, let me turn to equipment finance.
As a reminder, <unk>.
<unk>, our equipment finance business, our financings held both directly on our balance sheet as well as in our subsidiary SLR equipment Finance.
For the second quarter, the strategy invested $24 million and had repayments of $31 million.
At quarter end of the portfolio totaled approximately $314 million.
It was invested across 104 borrowers with an average exposure of $3 million.
The equipment finance asset class represents 16% of our total portfolio.
100% of their investments are first lien loans.
For the second quarter the yield on this portfolio was just under 10%.
For the second quarter.
Investment income from this portfolio totaled $4 million the <unk>.
Rebound in economic activity that started last year and has continued this year has been supportive of the performance of our equipment finance portfolio. We are seeing equipment valuations return to their pre COVID-19 levels and credit quality of the borrowers improving.
Our team is currently focused on growing the portfolio.
Now, let me provide an update on our life science business at quarter end of this portfolio totaled just over $270 million consisting of 15 borrowers with an average investment of $18 million.
In total this portfolio represents 14% of our.
Our comprehensive portfolio.
During the second quarter of the team committed to $11 million, new investments of which $6 million has been funded.
Repayments and amortization totaled 65 million, which included the repayment of 1 investment of $50 million, which generated over 13% unlevered asset level IRR.
During the pandemic, our life science portfolio experienced higher <unk>.
<unk> churn than is typical as repayments start occurring items.
The more normal cadence this year realization fees and other income associated with these loans will become more recurring and consistently benefiting our earnings.
At quarter end Src at $22 million of unfunded life science commitments, which are available to borrowers upon reaching certain milestones. These may be drawn to continue to fund Sorc's life science portfolio of growth.
The weighted average yield on this portfolio was just over 10%, which excludes any success fees and warrants.
In conclusion <unk> portfolio activity represents the continuation of the investment themes that have been driving our portfolio over the last few years.
Focusing new origination activity on first lien cash flow loans to portfolio of companies in defensive industries.
Increasing our investments in specialty finance assets, where we are able to get tighter structures and more attractive risk adjusted returns and growing alongside of our portfolio of companies by committing to acquisition lines, which May fund over the next few quarters across all of our asset classes, including cash flow.
We are seeing a larger volume of quality investment opportunities than we have seen in a number of quarters.
This uptick is reflective of the solid economic rebound and increased middle market sponsor activity.
The current environment is attractive and provides a great opportunity for us to grow our portfolio throughout the remainder of this year.
Given our sizable third quarter pipeline, we expect this growth to bring our net leverage within our target range of 90 to 1 in the quarter.
Now, let me turn the call back to Michael.
Thank you Bruce.
In closing we are optimistic about our earnings growth potential on the opportunity set across each of our investment verticals with the economic recovery in full swing and SLR portfolio on solid footing, we're focused on deploying our available capital into attractive investment opportunities.
The breadth of our investment strategy will spend cash flow ABL life science lending in addition to equipment financing and corporate leasing means of modest activity in each vertical can aggregate to meaningful overall portfolio of growth.
We also believe that we're still on the early innings with substantial runway as the financial sponsors deploy record amounts of dry powder and more of the larger businesses, we prefer to lend to choose direct financings over syndicated debt markets.
These industry tailwind combined with the scale of our investment adviser should benefit ester of RC investors through greater access to upper middle market cash flow investment opportunities, which as of last year has proven are better positioned to protect capital in the most smaller companies.
Now that we're through the incentive fee catch up every incremental dollar of income is highly accretive to shareholder returns, we have access to ample low cost capital with which to fund portfolio growth.
As we continue to grow the portfolio of portfolio. We believe net investment income will ultimately return to fully cover the dividend in.
In July our advisor announced that it had completed initial closings of over $480 million in equity commitments.
Private health care lending fund capitalizing on our strength and deep experience in healthcare lending industry across cash flow ABL and life science investment strategies.
With anticipated leverage this fund adds over $1 billion of investable capital to our platform.
Our pipeline of healthcare investment is strong.
Due to industry diversification targets, our platform has originated more healthcare opportunities than Src can handle on the balance sheet.
The addition of the private health care fund enabled the SLR platform to continue to provide a full capital solutions of 200 plus million dollars, which benefits epilepsy through increased diversification within its health care portfolio and a steady stream of new investments into which we can invest.
At 11 o'clock. This morning, we'll be hosting an earnings call for the second quarter result of SLR Senior investment Corp, or SUNS.
Our ability to provide traditional middle market senior secured financing because of 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 our deal flow. We thank you for your time operator could you. Please open the line for questions.
As a reminder, if you would like to ask a question. Please press star 1 on your telephone.
So on your question press the pound key please standby, while we compile the Q&A roster.
The first question comes from the line of price ROE would hold it.
Thanks. Good morning appreciate you taking the question here.
The recent Michael just wanted.
Wanted to try to frame up the debt.
The projected third quarter activity on it sounds it sounds like.
A good portion of it will come from the sponsor finance.
Business, but.
Just curious how we should think about the mix the mix of third quarter activity.
In terms of the sponsored finance.
Al.
And possibly the life sciences vertical.
Yes, I think we expect it to be more heavily weighted.
This quarter towards both cash flow as well as ABL lifestyle.
Life Sciences active but as you know it's the smaller strategies. So I just think magnitude wise it will be driven more by cash flow and ABL in terms of the current pipeline.
But activity level is there across actually all of the strategies.
Okay. That's helpful.
And then wanted to maybe follow up to some of the prepared remarks around the around the ABL strategy you talked about obviously a robust pipeline.
The portfolio from the comprehensive perspective was down here here in the quarter and you noted a dividend of $5.5 million on.
On the on the equity investment in net in that vertical so as we think about debt that pipeline.
The robust the navy converting to the fundings.
How should we think about debt.
Dividend coming into the coming into the BDC.
$5 million versus what had been I guess $6.6 million previously.
That's a great question as you know this vertical tends to be.
On a little bit variable quarter to quarter over the course of the year, it's been pretty consistent quarter to quarter can vary based upon the short duration of the assets, what youre booking when youre generating prepayments.
So we try to smooth this out I think this is a good level to assume for the moment.
Upon what we're seeing.
Okay.
And then maybe 1 more from me.
On the cash flow side of things.
As noted.
Larger companies that youre that youre lending to average.
Average investment of $20 million do you expect hold sizes to kind of go up within the within that vertical kind of given the increased scale within within the platform and maybe.
On the.
The private equity sponsors.
Being more active in looking at.
Looking at more M&A opportunities.
Yes, I mean, the whole size, historically, where small because as you know we had been deemphasizing cash.
Cash flow is not really liking what we saw given the frothiness in the market.
Pre COVID-19.
Out of Covid.
Maybe it's helpful to step back for a moment of what we do in cash flow like our other strategies. It's a niche for us we're not a broad based sponsor backed cash flow lender. We tend to focus on industries that have been very stable high free cash flow generative staying away from capital intensive sectors.
<unk> healthcare financial services software business services Thats, 90% of our portfolio. So we're not in every sector within cash flow.
And those sectors have been performing incredibly well and prove themselves to be resilient.
During COVID-19 and so we're seeing a lot more investment activity there both on the <unk> side as well as therefore on the credit side.
So that's really what's driving our investment activity and yes holds are increasing because we want to take our exposure up and we have the increased scalable platform.
To be able to do so not only within the SLR, but to make the platform.
Relevant to the borrowers taking down a $150.200 million hold so we expect holds will go up.
To your point and an increase in our exposure to the sector within those core industry groups that have proven themselves to be resilient from where we've been investing for years.
Great.
For me I appreciate your time.
Thank you.
Again, if you would like to ask a question price Star 1 that is star 1 from questions. The next question comes from the line of Ryan Lynch with K B W.
Hey, good morning.
I just have 1 question today.
Over the last several years you guys have really done a great job of building out your lending business to include different lending verticals, which have provided a lot of diversification on the asset side in that portfolio of self serve really well. During COVID-19 you guys have also raised additional funds outside of the BDC.
Which is largely day increase your commitment size of the relevance while keeping diversification.
At <unk>.
But all of that really hasnt translated all of that building out of the platform really hasnt translated into much of portfolio growth at <unk> theres been about 3% total growth.
Net portfolio growth of the portfolio and the 2 years prior to Covid and Theres been no organic quarterly growth.
Post Covid, obviously outside of the Kingsbury acquisition. So there just hasnt been any net growth post COVID-19.
Across the portfolio. So I know you said there is a strong pace.
Line.
For the third quarter and you expect to get within your targeted leverage range, but my question is this.
As a platform can you generate significant consistent organic net portfolio growth going forward and I assume the answer to that is going to be yes, and instead of the case why and what would have to change versus what we've seen in the data in the past.
So I think I think you hit the nail on the head and to some extent answered your own question, we have grown by adding verticals day in and of themselves bring capital.
To the table that we have invested in these verticals and importantly, as you appreciate Ryan having followed us for many years.
Many of these verticals are very stable.
Less transactional and so we don't face that headwind of.
Some of the asset classes, such as cash flow that are very transactional short duration assets driven by M&A ex.
<unk>.
Once the business tends to perform you get repaid on your loan. So Kingsbridge is of Great example.
As you know we had been a lender for a number of years brought that platform on late last year deployed over $200 million of capital we view that as permanent deployment that we will then grow as that business growth now, it's not a high grower, but it is the steady Eddie consistent grower as it's already proven and importantly, those of long duration.
<unk> assets that are the less transactional the average duration. There is 5 years and so that's kind of of permanent piece of deployment here that is less facing those headwinds of constant churn as we try to grow the portfolio to your question. So I think as we look at it we have a number of verticals through.
Which to grow as Michael mentioned, we are seeing growth in all of them coming out of Covid right now given the economic climate and that's obviously in Iran, and we don't count on all of them growing at the same time, we view ourselves as allocators of capital to the segments that offer the best risk adjusted returns, but I think on 1 hand.
We feel like we have incredibly strong stable foundation and yet we're telling you. We're also seeing growth right now across the portfolios again, there is the time to grow in there at the time to get repaid in lending as you know based on where you are on the credit cycle, but we feel that we're incredibly well positioned for prudent growth the other.
<unk> growth is which.
We don't factor in.
And you can't model in is we are active acquirer thats the line of business for us and we have a team that is dedicated.
We're finding new opportunities and that's kind of a step function.
We have an active pipeline today can't predict if and when some of them happen, but in all likelihood given given our experience and on our desire, we'll be adding other platforms, which to Bruce the point add additional layers of kind of permanent funded capital that will generate attractive returns.
Okay, I mean, where would you add on.
On that I mean, where would you guys like to see given.
Given that you guys are viewing early in the sort of an economic recovery today on the exit opportunity to grow.
Which is what you guys said I mean, where would you guys like to see those cash flow origination ethanol RC holes did too because they take then.
They are fairly small over the last several quarters in the prior to Covid I understand you guys were.
Trying to get out of.
Certain area and get out of some sort of more sub debt and now that you guys are seeing that as the as an area that you guys want to be growing what can those quarterly origination numbers in the cash flow lending that debt <unk>, specifically calls what do you think that can get to on a quarterly basis or sort of.
Like in the annual basis, because I know of quarter to quarter it can be lumpy.
Look again, it's to your point it can be lumpy, it's hard to predict repays.
Our average hold will go up because of the facility side. We're doing are going up if we do 100 mill on our facility the hold size for <unk>, it's probably around $20 million. If we do a twin of Mt facilities closer to $50 million.
We don't we don't put any constraints or budgets in place on the cash flow origination team.
With the 730 of dry powder of it will take whatever opportunities, we see that makes sense. So.
It's really a hard question to answer because we have all the different verticals, we don't sit here and provide budgets and guidelines of each vertical thats more of like show us the show us share with you what the opportunity is and we will invest in the best first quarter, we can say.
And I think 1 other point that's worth noting.
Ryan as you know our team is agnostic, they're outsourcing from the sponsored community.
Loans they.
They may go to a particular issuers that's owned by the sponsor where we think the best solution is an asset based solution.
Increasingly we're finding p/e firms.
That are in health care migrating into earlier stage life science businesses that historically were dominated by venture capital firms so for us.
We don't look at it as Michael mentioned in terms of how do we grow the cash flow book versus the ABL book towards the life Science book, They're all doing 1 thing we lend to middle market U S. Corporates and then what we do is our origination team is well versed across the strategies of the underwriting expertise is definitely specialized within those verticals.
But the sourcing network is broad based and our head of originations is out there.
With his team offering all of our products and it may be owned by a sponsor may be on by venture capital as it may be on by an entrepreneur, but we don't segment our business that way. We are just looking at the best risk adjusted return for the given borrower. So it's a different strategy at the obviously has helped us on.
On the risk mitigation side by having multiple ways to underwrite risk for U S corporate borrowers.
Yeah, and I totally understand that that kind of 1.1 approach. The reason I was focusing on the cash flow that seems like an area that was the emphasized in the past and now you guys are starting to emphasize that more given where we are on the economics of cycle. So.
Yes, I appreciate the discussion today, that's all from me.
Thank you. Thank you.
The next question comes from the line of Robert Dodd with Raymond James.
Hi, guys, just kind of focusing on on that pipeline outlook again, I mean, obviously, if the cash flow and asset backed you. Both of you characterize both of his vote box for.
So the cash flow along with obviously of health care on the it sounds like <unk> maybe.
A good chunk of that robust activity going forward, obviously on the asset base side health care of the crystal used to be I think larger it's been been shrinking.
You're pointing it may be retail.
As were the asset that could grow in the near future I mean has there been any.
There been any shift in the market of wave.
The margin away from asset backed health care towards cash flow health care and is that is that kind of the dynamic going on I mean, it would go to <unk>.
Based upon the health care, but.
Instead of a dynamic shifts from them in the market right now.
No actually this just to clarify we do we are active in health care asset backed lending both.
Receivables back.
<unk> financing, which is over at SUNS, our sister BDC through.
Through our health care ABL segment, as well as equipment finance and the health care sector through Kingsbridge, but the asset base group I know we of a number of them, but the asset base group here at Src really is health care is 1 sector. They don't do much in.
Kind of source those for the rest of the platform.
They have always been very focused on retail.
Because you have <unk>.
Inventory finished goods very liquid collateral, which is their key underwriting thesis is what does the liquidation value and then how liquid is that if we need to see.
Sell the assets in order to get repaid that's really the case, but that is the underwriting thesis. So retail has been going back to their roots 20, plus years ago, how they got started and it's been not the only but always a core segment of their business and it's been increasingly active coming through Covid as you can imagine coupled with.
Between Lockdowns as well as online headwinds as businesses retailers figure out how to survive and in this kind of less brick and mortar environment. So they've been very active there.
And thats been pretty consistent.
Got it got it. Thank you and then looking at the other 2 obviously of equipment and Kingsbridge, which you said on.
The 1 side of origination steady or looking to grow but didn't use robust net.
Would you use day off on anyway.
But can.
Can you give us any color on that I mean, obviously, we know the rest of supply chain issues out there when it comes to equipment good.
Good luck ton of Bicarb right now.
Et cetera.
Is the what sounds to be relatively more volume expectations for those 2 segments in the niche of <unk>.
Is that the supply chain related at all.
So I got it.
Yes no.
It's a good question so.
So just to clarify equipment finance segment is really mission critical equipment for small borrowers.
And corporate leasing Kingsbridge is equipment for larger investment grade borrower.
The both segments have to your point been affected by supply chain disruption, so theyre getting orders.
But again, our fundings don't occur until the equipment is delivered and those have been pushed off in some cases till next year. So good pipeline.
On winning business, but not funding it because the supply chain has delayed those deliveries step.
Stepping back from that what hopefully is a.
Timing issue and will correct itself over time here stepping back both of those segments are not sponsored driven M&A driven acquisitions. This is.
Clearly.
Internal borrowers sitting down and thinking out what is their capex need and do they want to buy or lease.
And those are smaller transactions at our lead itself to kind of a steady drip of growth rather than huge volumes quarter to quarter.
So that's why our comments are tempered in terms of their growth not that theyre not growing but the nature of the asset class is different from the M&A driven asset classes, such as cash flow and ABL.
Understood understood so on.
On those 2 areas, maybe taking the robust wood out of it.
What.
What kind of contracts would you duel between.
Orders right now to your point, the orders and delivery of different things.
But deliveries may be motivated near terms of supply chain, but how would you.
Qualitatively describe kind of the pipeline outlook slightly on the interest level coming in that even if the equipment isn't available yet.
On a strong I would say strong people are looking to deploy capital coming out of Covid and are obviously need equipment to.
On their growth at the business level. So it's strong.
Okay got it thank you.
The only other thing I would just say real quick.
On that those 2 segments is these are monthly amortization payments asset classes. So you always have a steady slow but steady headwind of amortization of those loans. So unlike cash flow, where theres very little amortization until the deal is repaid here you always have the steady drip of growth and a steady drip of.
Of repayments, that's the nature of corporate leasing.
Understood.
Thank you.
Thank you.
The next question comes from the line of Mickey <unk> with Ladenburg.
Good morning, Michael and Bruce Hope you're well.
1 of 2 yes. Good morning, I just wanted to follow up I don't want to beat a dead horse, but on the cash flow lending segment.
I appreciate that you are excited about the pipeline, but everything I am hearing is that true.
Terms in general or if not at least at pre COVID-19 levels, probably even tighter than pre COVID-19 levels. So is there something about the solar platform, that's providing you sir.
Certain opportunities in cash flow lending that are more attractive today as opposed to what was available in a very dislocated market.
Sort of 9 months ago.
I'll, let Bruce comment on the the turns within the current market, but just to step back Mickey.
Okay.
So.
We of the team sat down last year around this time and said yeah.
We seek.
Spreads widening out in terms of a little better, but the big thing that we're still missing in cash flow loans back then was there was no call protection.
And so we were faced with really asymmetrical risk reward.
If we were right.
And the market did pick up of did well then those loans that were put on at attractive spreads would be called out the minute the markets tightened which is what happened loans that were done last summer at quote unquote widening spreads.
Were taken out in the first and second quarter of this past year because spreads tightened.
So we were faced with the choice of yes, we can put some money to work make money for 6 months, if we were right, but if we were wrong.
The market did not recover in Covid continue to be as bad as it was then we would've really regretted making those loans and we'd be underwater.
We chose not to be aggressive.
In the face of the of being able to make money for 6 months versus potentially losing money. That's change we can see the live at the end of the ton of we see it we've seen of for a few months now and so that's why from our perspective, our activity has picked up dramatically yet terms are still not ideal, but we are getting covenants.
The things we're doing.
We're still incredibly picky, we're not looking to put out of $1 billion per quarter.
We are focused on industries and sponsors.
That are willing to accept having some structure of the transaction. So they tend to be more complicated situations more complicated industries companies that are kind of evolutionary of meaning that the acquisitive and are growing and where the owners.
What part lender partners, who will grow with them and be flexible.
Yes, I think just to.
Add to that for a moment Mickey I guess, maybe the best analogy is you look at.
Our life Science business as you know we are only really funding the late stage life science companies that are either through phase III and commercialization or close to it there's a whole other book of business and life science lending earlier stage.
Preclinical phase 1.
Drug royalties there is a lot of ways to play.
Life science investing but our niche is the late stage, where we feel it is less risky and.
And we still can get an attractive return for our capital I think as we approach cash flow, it's very similar to Michael's point, we play within our niche within cash flow. We are not broad based cash flow lenders, we're not going to play of the economic recovery, we're not going to go into building.
The sectors.
Anything cyclical.
We have 4 industries business services healthcare financial services recurring software that is 90% of Src's cash flow portfolio. So we're very niche within cash flow and not surprisingly given our conservative underwriting posture. These are sectors that are high free cash flowing.
And of our very resilient through cycles, and we're resilient last year. So if you think about it.
Given the.
The resiliency of those sectors, it's part of why our portfolio performed so well last year is that as they are now attracting equity because people see these as great businesses that now we're poised for growth a lot of tuck in acquisitions, both in health care as well as we're seeing in insurance brokerage for example.
And so they are attracting new equity capital, which once credit capital alongside debt to fund it.
And so that's really what's driving it to Michael's point that the terms and your point Mickey the terms are no better.
But we do get covenants. These are complicated structures is a little bit of of complexity premium because of a little less competition, because you actually need the industry expertise. The sponsor is less focused on the last turn of leverage over the last 50 bps of price reduction and more focus on having people that understand the industry the borrower.
And can grow with them.
These businesses at a $100 million of EBITDA can go to the BSL market as you know, but yet they choose to go to the private market why because they want certainty of execution and knowledge of the company and the industry from their borrowers.
And so that's really what is driving our ability to grow cash flow right now.
It's a combination of the industries have proven themselves to be very resilient. They are attracting a lot of private equity and they are looking for lenders with expertise.
I appreciate that Bruce so if im understanding correctly just to make sure. We're on the same page.
The terms in terms of leverage and spreads may be tied to pre COVID-19 levels, but it's the documents on the covenants that are better today than they were let's say a year or 2 ago and debt is what's attracting you within the niches that you operate in I would say the fundamentals of the businesses.
Our more proven and attracting more capital which drives activity the.
To your point, we've always had some covenants in the sectors. These are just some very active sector is coming out of Covid and on the margin you get a little bit better price never enough, but you know our strategy is to underwrite the risk and the fundamentals and then charge what we can as.
As much as we can but we get the barbell that with our specialty finance verticals of Src that are higher yielding and blend out debt to that 10% so weather.
Cash flow loan is at 7% or 7 end of quarter percent of $7.5 sure of $7.5 is better but.
But it's not going to drive our portfolio yield on balance because of the weightings of our portfolio to specialty finance alongside the cash flow, but yes. The terms are better but the fundamentals are strong and the activity is high.
Total <unk> keep in mind that because we are liability of so much funded today by our fixed rate.
The investment grade paper or increment of borrowing for new loans are coming from our bank facility, given where LIBOR is today and what our unused fees our net cost on additional fundings of 175%.
And so when we're putting on these loans at.
Decent spreads.
Significantly accretive to earnings for us.
I understand the that's it from me. This morning. Thank you for your time I appreciate it thanks, Mickey Thanks, Nick.
The next question comes from the line of Finian O'shea with Wells Fargo Securities.
Hi, everyone. Good morning.
Follow on with the dialogue just on with Mickey.
Michael I think you just outlined that the issuers are.
Looking for lending lending partners that are willing to grow with them and be flexible.
Isn't that really sort of the opposite of you guys.
I don't see that of negative way.
Obviously, we want you to be.
Credit discipline principal of disciplined.
But tying this all together with the with the hopeful sustainability.
Of the growth of your lending book.
It feels like you're only willing to engage in the market.
The pretty short.
<unk> of the credit cycle.
Which is right now we are on the rebound post COVID-19.
Presumably.
If things continue in.
6 months here.
Not going on like the market.
So.
How do you sort of content or do you view yourself as someone sponsors view is of lending partner that's always there.
Given that for example, you're not.
Over the past year win when perhaps they needed the most.
Yes, so that is of great question, but just to.
To get a little bit more granular we are always there for.
Where sponsors in our sectors that we lend into.
So.
If we're in healthcare finian, we're dealing with the top tier of healthcare PE firms, we are there through thick and thin with them and we get our diversification by investing across their portfolio of companies rather than by being with 50 different sponsors will be with 10 phenomenal healthcare sponsors.
That never lose money for the equity, which is probably a good place to be as a lender. So we are incredibly consistent but we're consistent within our core competencies where non.
To your point going to try to be the 1 off lender on AR.
Business that is again, perhaps it's playing in the recovery.
We stay away from that we stay away from capital intensive businesses, we don't do retail other than on an ABL basis. So.
We spend time with sponsors who are active in the sectors that we're comfortable with and they tend to be very resilient through the cycle. So we're not in and out to your question. It's more about what is the level of activity in that in those core sectors and then obviously, we have the benefit of having other segments.
Beyond cash flow to drive the portfolio growth.
Okay.
Michael just to us.
The small follow up on the pipeline you seemed.
The pretty optimistic about the pipeline.
Which would tell us that.
It's probably very real and right in front of you, presumably can you give us any color on what the <unk>.
Spread or a yield looks like on on your <unk>.
Pipeline right in front of you.
Yes.
It's consistent with the existing portfolio, we haven't really I mean compression feels like it's kind of a floor for the moment every time I say that we see more over the last few years, but at the moment, it's pretty consistent with what we're seeing across our existing portfolio.
Okay, great. Thanks, so much.
Thanks Vince.
Again, if you would like to ask a question press star followed by the number 1 that is star..1 from question. The next question comes from the line of price ROE would help me.
Thanks, just 1 quick follow up here a lot of discussion about the the left side of the balance sheet just wanted to ask about the the right side.
You guys have a day.
Pretty good chunk of your liability structure tied up in fixed rate unsecured notes as you as you noted Michael you've got some kind of into next year, just curious kind of what the appetite is to maintain net debt level or percentage of unsecured notes.
Would you be willing to maybe.
Take the revolver higher.
And reduced the level of unsecured from where it is now.
I think we'd like to take the level of revolver higher given that we're growing we would also like to do.
Refinance fixed rate notes at more attractive terms and bring down our cash cost of capital that waste as well. So you should expect that our cost of capital hopefully comes down between usage of the revolver and terming out some of the notes the come through next year.
Great. Thanks, Greg I appreciate it.
Thank you.
I will now turn the call back over to Michael gross Chairman and co CEO for closing remarks.
No closing remarks of the time, but thank you for your time and we look forward to speaking to those of you who are also engaged in SUNS in 6 minutes. Thanks Bye bye.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
[music].
[music].
[music].
[music].