Q4 2021 SLR Investment Corp Earnings Call
Pardon me. This is the operator today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Thank you for standing by and welcome to the Q4 2021 S. 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 press Star one 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 like to hand, the conference over to Michael gross Chairman and co CEO . Please go ahead.
Thank you operator, and good morning, welcome to SLR investment Corp's earnings call for the fiscal year ended December 31, 2021, I'm joined here today by Bruce <unk>, Our co Chief Executive Officer, and Richard <unk>, Our Chief Financial Officer.
Rich before we get 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.
Please note that they are the property of <unk> investment Corp.
Any unauthorized broadcast in any form are strictly prohibited.
This conference call is being webcast from the investors tab on our website at Www Dot SLR investment Corp Dot com.
What are your replays of this call will be made available later today as disclosed in our earnings press release.
I would also like to call your attention to the customary disclosures in our press release regarding forward looking information.
Statements made in today's conference call and webcast.
Constitute forward looking statements, which relate to future events or our future performance or financial condition.
These statements are not guarantees of our future performance financial condition or results and involve a number of risks and uncertainties, including impacts from COVID-19.
Past performance is not indicative of future results.
Results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC.
SLR 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 web site.
<unk> said you wanted to.
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167 Europe .
Comments on today's call include forward looking statements reflect our current views with respect to among other things the timing and likelihood of the merger closing the expected synergies and savings associated with the merger the ability to realize the anticipated benefits of the merger our future operating results and financial performance.
And the payment of dividends going forward.
Specifically no.
Amount and timing of past dividends and distributions are not a guarantee of any future dividends or distributions or the amount thereof.
Payment timing and amount of which will be determined by <unk> investment Corp.
The directors.
At this time I would like to turn the call back to our chairman and co CEO .
Michael gross.
Thank you very much rich good morning, and thank you for joining us.
Quarter of 2021 at culminated a record year of originations for SLR see having originated $1 $1 billion of investments, which translated into net portfolio growth for the year.
Against the backdrop of continued economic rebound and record levels of private equity and leveraged finance activity. Our pipeline has been robust during the quarter, we originated $340 million of new investments following strong third quarter originations.
This is one of our most active quarters in recent years, we've been able to remain highly selective while generating portfolio growth.
Net asset value per share for the fiscal year ended December 31 was $19 93.
For the fourth quarter of 2021, Src or net investment income of 35 per share.
Overall portfolio portfolio credit quality remains strong with only one investment on non accrual.
Due to our focus on upper middle market companies in defensive sectors, the effects of rising inflation and supply chain disruptions that our portfolio has been muted.
Thus far we have seen no impact to our portfolio companies of the economic consequences, resulting from the Russian invasion of Ukraine as a company's operations are largely tied to the U S. Economy. We are however closely monitoring the economic impacts of this evolving crisis.
December 31 over 99% of our comprehensive investment portfolio, which takes into account the loan portfolios of Src subsidiaries was invested in senior secured loans.
79% of the portfolio fair value with allocated to specialty finance investments.
Our most recent commercial finance acquisition Kingsbridge is performing above our expectations.
Our other specialty plan subsidiaries continue to re grow the portfolios following the trough utilization levels, resulting from government stimulus and other COVID-19 induced challenges.
At December 31, <unk> leverage was <unk> 97 times net debt to equity compared to $5 six times net debt to equity at September 32020, when our leverage hit its lowest point during the pandemic.
The increase represents progress in rebuilding our portfolio from its pandemic law.
During the fourth quarter, we amended our senior secured credit facility. The amendment includes a reduction in the credit facility pricing grid of 25 basis points to LIBOR, plus 175 to 200 basis points.
The credit facility was expanded from $620 million to $700 million and was extended by two years until December 2026. Additionally, the amendment enhanced our flexibility.
In January of 2022, we issued $135 million of three 3% senior unsecured notes due January 2027, and a private placement.
Through this $135 million issuance together with the $50 million of senior unsecured notes issued in Q3 2021, we have lowered the company's long term average unsecured financing rates.
The $185 million of senior unsecured notes due 2027 have a weighted average interest rate of three 2% a significant reduction from the four 5% weighted average interest rate on the $150 million of senior unsecured notes that are due dismay.
Looking forward, we expect to deploy our low cost available capital towards investments across our lending strategies.
Breath of our investment strategy means that we only need to see modest growth from our verticals to drive meaningful portfolio growth and earnings growth.
In addition, we have an active pipeline of tuck in in new specialty finance platform acquisition opportunities.
As we announced in December Src and entered into an agreement to merge with SUNS also managed by <unk> capital partners with Src surviving company subject to shareholder approval and customary closing conditions.
The board of directors of both <unk> and <unk> on the recommendation of the special committee's consisting only of the independent directors have unanimously approved the acquisition.
We believe the transaction with funds make strategic sense for the company and will create long term value and growth opportunities for <unk> shareholders for a number of reasons, a few of which I'll highlight now.
The greater scale of the combined company should provide several benefits as of December 31. The combined company would have approximately $2 1 billion of total assets and $1 $1 billion of net assets with a larger macro market capitalization that is expected to provide greater trading liquidity garner additional institutional.
Investor interest and research coverage and enhance the company's access to equity and debt markets.
Additionally, the greater scale increased portfolio diversification as well as to expand the opportunity set for additional commercial finance opportunities to include large investments in asset purchases.
Upon closing SLR capital partners the investment advisor to Src has voluntarily agreed to a permanent 25 basis point reduction of the annual base management fee from 175% to one 5% of gross assets.
The contractual step down the base management fee to 1% and grown assets gross assets above one to one leverage will remain in place.
The business combination is expected to be accretive to net investment income per share based on <unk> and SUNS balance sheet at December 31, 2021, the pro forma leverage for the combined entity would have been approximately <unk> nine times translate until a slight reduction in <unk> leverage.
Overtime, we expect that the combination of expected cost savings reduced base management fees and interest savings, resulting from more efficient debt financing should drive net investment income growth.
Importantly, it is anticipated that the larger scale and capital base should allow the combined company to grow NII faster than either <unk> or SUNS would be able to achieve on a standalone basis and to potentially generate higher net investment income per share at this time I'll turn the call over back to our CFO rich <unk> to take you through the <unk>.
Fourth quarter financial highlights.
Thank you Michael.
Thus far our investment Corp, 's net asset value at December 31, 2021 was $842 3 million or $19 93 per share.
Compared to 850.
<unk> $53 5 million or $20 20 per share at September 32021.
At December 31, 2021, <unk> is on balance sheet investment portfolio had a fair market value of $1 67 billion in 106 portfolio companies across 34 industries.
<unk> to a fair market value of 162 billion in 106 portfolio companies across 33 industries at September 32021.
At December 31, the company had $818 $5 million of debt outstanding with Leverages Zero 97 times net debt to equity when.
When considering available capital capacity excuse me from the company's credit facilities together with available capital from the non recourse credit facilities at for credit solutions.
All our equipment financed and Kingsbridge.
As for investment Corp has significant available capital to fund future portfolio growth.
Moving to the P&L for the three months ended December 31 2021.
Gross investment income totaled $35 7 million.
Versus $32 2 million for the three months ended September 32021.
Expenses totaled $20 8 million for the three months ended December 31 2021.
This compares to $17 2 million for the three months ended September 30.
Included in this quarter's expenses were zero point $9 million of one time costs associated with the merger with asphalt senior investment Corp.
Importantly, due to our <unk> C. As in the incentive fee catch up these expenses were effectively incurred by the manager and not by our shareholders.
Accordingly.
The company's net investment income for the three months ended December 31, 2021 totaled $14 9 million was <unk> 35 per average share.
<unk> to 15.0 million was <unk> 36 per average share for the three months ended September 30.
Below the line the company and net realized and unrealized losses for the fourth fiscal quarter totaling $8 8 million.
Versus net realized and unrealized losses of $1 6 million for the third quarter of 2021.
Ultimately.
The company had a net increase in net assets, resulting from operations of $6 1 million or <unk> 14 per average share for the three months ended December 31 2021.
This compares to a net increase of $13 4 million was <unk> 32 per average share for the three months ended September 30.
Finally, our board of directors declared a Q1 2022 distribution of <unk> 41 per share.
Payable on April one 2022 to.
To shareholders of record on March 18, 2022.
Following the closing of the proposed merger with <unk> Senior investment Corp.
<unk> board of directors intends to begin declaring monthly distributions instead of quarterly.
And with that I will turn the call over to our co CEO .
Bruce polar thank you rich.
Src 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 financial sponsors and non cyclical industries and allocating a significant portion of our exposure to collateralized loans to more specialty finance.
Articles.
At year end, our comprehensive portfolio was just over $2 billion and remained highly diversified encompassing over 600 distinct borrowers across 75 industries.
Our largest industry exposures continue to be healthcare services diversified financials life Sciences and recurring software.
At year end over 99% of the portfolio consisted of senior secured loans.
94% is invested in first lien assets and only 5% was invested in secondly after.
The second lien loans roughly.
Roughly half or cash flow or two 4% of the portfolio and roughly two 8% were asset based second lien models with full borrowing basis.
At year end, our weighted average asset level yield was 10%.
By focusing on our commercial finance verticals, we've been able to maintain.
Blended asset level yields around 10%, despite a decrease in LIBOR and recent spread compression.
Ultimately, we've been able to maintain these yields while actively reducing our exposure to second lien cash flow investments.
At year end the weighted average.
Investment risk rating was under two based on our one to four risk rating scale with one representing the least amount of risk.
Total originations for the fourth quarter with 340 million and repayments with just over $260 million.
In addition, we had approximately $150 million on unfunded commitments outstanding at year end, which we expect to fund in future quarters now, let me provide an update on each of our investment verticals.
SLR sponsor finance.
Our sponsor cash flow portfolio was $440 million or approximately 21% of the comprehensive portfolio and is invested across 23 borrowers. The average EBITDA of our cash flow investments was approximately $85 million, which is consistent with our focus on larger upper mid market borrowers.
Yeah.
During the fourth quarter, a compelling set of cash flow opportunities across health care software financial service industries drove our originations.
Originated $56 million in the fourth quarter of new exists and existing investments.
As Michael mentioned, we've been able to take advantage of the broader scale. The SLR platform to underwrite larger investment positions in first lien cash flow loans to upper mid market sponsor owned companies.
Given the sponsored communities preference for partnering with just a couple of lenders each with large investment sizes solar would not be I am sorry, <unk> would not be able to participate in these financings without the capacity of the broader SLR platforms to co invest alongside SLR.
Recent commitments have grown to over $200 million on a given investment which demonstrates the benefit of our platform's ability to speak for larger transactions.
We've also increased our commitments to <unk>.
Draw term loans, which are issued by borrowers to fund future acquisitions.
These transactions offer a prudent opportunity for <unk> to grow its investments and established credits with existing financial covenant packages.
At year end, the weighted average yield of our cash flow portfolio was just over 8%.
Now, let me turn to our asset base lending vertical credit solutions.
Year end this portfolio was $440 million.
For approximately 21% of our total portfolio across 23 distinct borrowers.
The weighted average asset level yield of this portfolio was 11, 5%.
In the fourth quarter, we originated.
<unk> 5 million of new asset based investments and had repayments.
Just under $70 million.
Credit solutions ability to assess and monitor collateral makes it an attractive financing partner during periods of economic distress when banks tend to pull back.
Therefore, this business provides a counter cyclicality to our broader platform.
We're also seeing greater demand from commercial finance businesses for working capital as well as growth capital and lending strategy that our team has significant expertise.
For the quarter, our credit solutions, a cash dividend of $5 5 million consistent with the prior quarter.
Now, let me turn to our leasing business Kingsbridge.
We're now over a year into the investment in Cambridge and are thrilled with our results.
Credit quality and portfolio remained strong and originations during 2021, the first day.
At year end Theyre highly diversified portfolio of leases across three equipment sectors, which include technology industrial sectors in healthcare.
Just over $575 million with an average funded exposure of just over $1 million in a quarter per obligor.
Lease portfolio was 100% performing at year end.
The majority of the Kingsbridge assets.
Used by investment grade borrowers.
For the fourth quarter Kingsbridge paid a dividend of $3 5 million to Src consistent with the prior quarter and equating to 10, 2% annualized yield on costs.
Including the interest on our loan investment in Kingsbridge of $80 million.
<unk> income generated for the fourth quarter was $5 2 million.
We expect to see Kingsbridge portfolio expand during 2021 as a result of their sizable pipeline.
Now, let me turn to equipment finance.
As a reminder included in our equipment Finance segment, our financings held directly on our balance sheet as well as those held in our subsidiary <unk> equipment finance for tax efficiency purposes.
In the fourth quarter equipment finance.
Just under $60 million and had repayments of just over $40 million.
At year end portfolio totaled $336 million.
And was invested across 83 different borrowers with an average exposure of $4 million.
This asset class represented 16% of our total comprehensive portfolio.
As a reminder, 100% of these investments are first lien.
The weighted average asset level yield was nine 5%.
During the fourth quarter, our comprehensive investment income across equipment.
Equipment finance with <unk>.
Just under $4 million.
The rebound in economic activity that started in the second half of last year.
And continued throughout.
Into this year has been supportive of the performance of our equipment finance portfolio.
We are seeing equipment valuations return to pre COVID-19 levels and improvement in the underlying credit quality of the borrowers.
Our team expects to grow this portfolio this year.
Biosciences.
At year end, our portfolio totaled just over $270 million.
Consistent 15 borrowers.
All of our borrowers in this asset class are currently exceeding expectations relative.
Relative to at the time of underwriting.
Life science loans represent 13% of the comprehensive portfolio.
Yet contributes 21% our gross investment income during that quarter.
Life Science team committed over $120 million during the fourth quarter of which $66 million.
With new originations.
Repayments and amortization totaled $31 million.
During the pandemic, our life science portfolio experienced lighter churn that is typical for this asset class.
As we see repayments start to re occur.
A more normal cadence these realization fees and other income associated with the loans will become more recurring more consistently benefit quarterly earnings.
At year end.
Src.
$104 million unfunded life science commitments, which are available for the borrowers upon reaching certain milestones.
We expect these to be drawn in future quarters to fund continued growth of our life science portfolio.
In addition, <unk>.
Science team has a robust pipeline of new opportunities, which we also expect to fuel growth this year.
The weighted average yield of this portfolio is just under 11% at cost.
This excludes any success fees and warrants.
In conclusion.
<unk> portfolio activity in the fourth quarter represents a continuation of our investment teams.
<unk>, new origination activity on first lien cash flow loans that are operating in defensive sectors, increasing our investments in specialty finance assets.
We're able to get tighter structures and more attractive risk adjusted returns.
And also growing our investments alongside existing portfolio companies by committing to delayed draw facilities, which fund acquisitions over future quarters.
Across our strategies, we're seeing a number of attractive investment opportunities. This is reflective of the solid economic rebound.
Increased middle market sponsor activity.
The current market environment provides a great opportunity for us to continue to grow our portfolio. This year.
At this time I'll turn the call back to Michael.
Thank you Bruce.
In closing the fourth quarter culminated a strong year of originations for SLR C. In particular, our sponsor finance team capitalize on a strong opportunity set and our core industries.
We are optimistic about our earnings growth potential and the opportunity set across each of our investment verticals.
With the economic recovery in full swing and our portfolio on solid footing, we are focused on deploying our capital into attractive investment opportunities.
Across our investment strategies, which spanned cash flow ABL or life sciences, and additional equipment financing and corporate leasing were seeing steady origination activity, which should translate into continued portfolio growth in the coming quarters.
We believe that we are still in the early innings with substantial runway as financial sponsors deploy record amounts of dry powder and more of the larger business, we prefer to lead to choose direct financings over syndicated debt markets.
These industry <unk> combined with the scale a best seller sees an investment adviser should benefit Src investors through greater access to upper middle market cash flow investment opportunities, which adds last year of the program are better positioned to protect capital and most smaller companies. Additionally, we're reaping the benefits of our scale.
And our cash flow life science and ABL verticals.
As I mentioned in my opening comments, Bruce and I as co Ceos and our independent directors believe that the proposed merger of Src and funds will increase our ability to deliver shareholder value through capital preservation and increased net investment income per share.
We believe that now is the opportune time to merge the two companies given the benefits of greater scale.
<unk> synergies and ease of integration, resulting from the overlap in their investment focus and the advisors knowledge of both portfolios.
Companies have healthy balance sheets today in their portfolios are in excellent shape with strong credit quality, which we believe bodes well for this merger.
Additional details about the merger can be found by going to www dot proxy vote dot com and typing in the control number that was provided in the proxy materials mailed to our shareholders. Once on the site you can also submit your vote.
We encourage you to support the merger of our voting for the issuance of common stock. We appreciate your support.
At 11 o'clock. This morning, we'll be hosting an earnings call for the fourth quarter 2021 results of SLR Senior restaurant Corp horse funds.
Our ability to provide traditional middle market senior secured financing through this vehicle continues to enhance our origination team's ability to meet our borrowers capital needs and we continue to see benefits of this value proposition and our deal flow.
We appreciate your time operator would you. Please open the line for questions.
Thank you and as a reminder to ask a question simply press star one on your telephone to withdraw your question press. The hash key please standby, while we compile the Q&A roster.
First question is from Bryce Rowe with Husky.
Yeah.
Great. Thanks, good morning.
Michael and Bruce.
Nice to see the balance sheet leverage continuing to build here.
And it sounds like pipelines are strong for potential continued balance sheet leverage increases any any any thoughts on how to think about the build in balance sheet leverage certainly not looking for specifics from a quarterly basis, but.
Yes.
As you think about as you think about the build over let's say the next year or two how do you. How do you how do you see it kind of playing out.
Yes, I think there's a couple of moving parts as always as you can imagine here.
First of all as we've talked about with the merger given solar being potentially larger than sons.
It really doesn't impact the leverage materially.
Pro forma at year end of <unk> 97 for solar would go down closer to <unk> nine, but nothing meaningful in terms of impact on the leverage there. So I think our goal would be to target. The upper end of our range, which as a reminder, SLR range Leverages <unk> nine to one and a quarter we'd be targeting.
The middle to upper end of that by the end of the year.
And obviously, we don't have visibility on repayment activity, but just on unfunded commitments that we've made we can firmly see if those end up getting drawn this year the path to getting towards that upper end.
Okay. That's helpful and then maybe one more for me.
Thinking about the income statement and the dividends that are coming from the specialty finance verticals.
A couple of them.
As you noted sell some lower volumes.
During COVID-19 starting to see the portfolio is build build back up.
Curious, how you think about maybe kind of a rebuild in this in a few of those dividend.
Dividends coming from the specialty finance verticals, what do you what do you need to see.
For those for those dividend streams to kind of build a little bit here.
Yes, I think it's really.
Looking at particularly as we think about the equipment financing.
Businesses, both the leasing as well as equipment finance, we do we do expect by the end of the year to see some growth there in those portfolios and hopefully therefore in the underlying dividend stream, we do try to smooth them out as you know because the earnings are not a straight line on a quarterly basis, but we do look at that over the course of the 12 month period.
There's a good backlog in those businesses.
Our <unk> solutions business is a little bit more challenging just because to forecast because it is a short duration asset class as opposed to equipment financing and leasing and tends to have a short duration.
Consistent repayment there.
So there I think it's less likely in the near term, but I do think that there is opportunities as we continue to grow those portfolios just as in a side note.
The equipment finance and more so the corporate leasing business that has had a very strong pipeline.
But unfortunately, it's been committed and not yet funded given some of the delays in the.
Supply chain and getting equipment to borrowers such that they need our capital to fund the actual purchase or lease.
So some of that starts to work through the system Youre going to see additional growth. There. If they were on this call. They tell you. It's the strongest pipeline we've ever had.
And as we mentioned at the outset Michael mentioned.
Very pleased there over delivering.
Our original expectations at the time of purchase.
There's upside, but I think it's something that we're going to revisit as we get closer to the end of the year.
Okay, Great I'll step back I appreciate the answers.
Thank you for your time.
Your next question comes from Mickey Schlein with and Ladenburg.
Yes, good morning, Bruce and Michael to ask how you feel about your borrowers revenue and margin trends.
Given the tight.
Labor markets.
<unk> input costs and how do you feel about their ability to service their debt with the potential rate increases that the fed is talking about.
Yes, that's a great question I think look.
The pressure is definitely there we're not seeing it.
Yeah.
Coming into the P&L of our borrowers in a big way, yet, but we are expecting to this year I think.
You can appreciate.
As you will across our segments, we're blessed in our ABL businesses, yes, they look to the P&L for liquidity and cash flow to service the debt, but our underwriting thesis is based on the underlying liquidation value of its assets. Our life science business is used to have a no no free cash flow and.
Funds themselves off of additional equity constantly coming in from the Vcs and owners the cash flow businesses, where we feel that pressure and expect to this year and I think the.
Best thing one can do is try to mitigate it.
Being in defensive high free cash flowing sectors, where you were.
Seeing three to one interest coverage, maybe that will come back to more traditional norms of two to one interest coverage, but still substantial cushion, particularly when you think about the fact that hey, we're in defensive sectors. B. We are dollar one first lien.
So we're going to be the last guy hurt.
From that margin pressure that we do expect and then importantly, we have floating rate investments that gives us a bit of a hedge in there too.
So we are starting to see it come in Mickey, particularly in some of the service businesses in terms of staffing charges.
And the ability to attract personnel and pay up for that personnel I think thats where were seeing some margin pressure.
Early days, but again.
We really don't see that most of our segments. We're not in manufacturing, where you have other raw material input inflation that would impact your margins and importantly, as you know today, all we only 20% of our cash of our portfolio is in cash flow and it is concentrated in those industries that really arent effective I think thats Thats a question that I think a lot of.
The private equity owners, who own levered equity or high yield bond buyers, who own unsecured debt.
I think that's a much greater worried for them than someone who is a senior secured lender like yourselves.
Yes, I appreciate that and Michael just one follow up question from me.
Noticed evaluation of Ppt management.
Was down quarter to quarter I do know that it is.
Moved up and down in the past, but that borrowers in the physical therapy segment, which generally has strong secular.
Secular trends so could you just give us some background on what's going on there.
Move down its valuation.
Yes, I think Thats a great follow on question to your prior question that is a business that.
As to your point physical therapy, it has a unique and dominant footprint in the Tri State New York Metropolitan area, some very attractive.
Strategic perspective, which was part of our initial underwriting thesis we have been invested as you know being a longtime supporter of ours and ATI and other physical therapy businesses around the country and this is definitely a business that we see being impacted by increased.
Cost on the staffing side.
<unk> some pressure on margins. So we tried to reflect that in our mark here and our revenues have held up nicely.
It ebbs and flow during Covid obviously.
Physical therapy as a business that.
One needs after certain elective surgeries and active activity injuries et cetera that you need to rehab from.
During COVID-19 Lockdowns a lot of that was.
Deferred.
It picked back up in 'twenty, one which is why to your point you saw the mark.
The market recover as the business recovered.
Homochrome hit again, we saw some pullback late last year that seems to be.
Coming back so revenues held up nicely, but we're definitely watching that in terms of margin pressure from staffing costs, but again I think the fallback is.
First lien floating rate investor rather than a junior capital or equity Investor is that there is real strategic value for these assets as you know.
Across the market, particularly given their presence in the New York Metropolitan area, where there are not only <unk>.
Several.
Hospitals.
<unk> electric surgeries that would lead themselves to physical therapy post surgery for recovery, but also <unk>.
Dense population trips and falls and other.
Need so we're very focused.
<unk> on that.
The demand drivers here, but I do think we're going to see some margin pressures we have recently.
Bruce on Ppt just to follow up.
As the sponsor there I'm, assuming it's sponsored.
Do you think they would be more interested in making acquisitions and.
Doing a roll up or would they be more interested in selling to someone else.
I think it's too soon to know but.
They've done both.
Our perspective is we like where we sit in the capital structure, we like the strategic value and we're comfortable whether they sell.
Sell it make more acquisitions.
Either way we like.
<unk> so.
But too soon to know I think there will be some developments over the next.
A couple of years here because they have been invested for a few years.
I appreciate it that's it for me. This morning. Thank you for your time. Thank you.
Vicki.
Thanks. Your next question comes from Melissa Wedel with JP Morgan.
Hi, Good morning, Hi, I appreciate you taking my questions today.
First I was hoping to touch on sort of the yield trends that youre seeing quarter over quarter in cash flow and equipment finance in particular.
Wanted to make sure im understanding what's happening there.
Given a decline.
More notable decline quarter over quarter in the yields is that driven.
Driven by spread compression or is there something else happening.
Yes.
Cash flow I don't think theres been a significant.
Change.
Although we have.
Put out a number of new investments and cash flow in 'twenty, one and as you know the.
But the reality is that the good cash flow loans get repaid rather quickly, which accelerates our returns. So we haven't we underwrite a yield to expected that is higher than the yield to maturity, but were reporting yields on a yield to maturity basis, not a yield to expected basis, so to step back for a moment.
Leaving the reporting and accounting aside we haven't seen much compression obviously, we have over the last few years, but in 'twenty, one we really haven't seen much compression because.
The cash flow deals that came to market by and large and where we invested are focused on as you know our core industry groups healthcare business services recurring software and financial services and tends to.
B with sponsors who have.
Rather than just looking for financial engineering to help drive the returns.
Really organic and acquisition growth stories.
Spreads have held up very nicely there. So we really haven't seen much recent pressure.
Aside from the compression that we saw over the last few years, but that seems to have abated in 'twenty one.
And on the equipment finance side we.
Definitely just as our strategy are looking to expand our footprint. We're finding that there are some lower yielding assets that.
Britain.
Pretty attractive risk adjusted returns.
So we're expanding the.
Footprint of our equipment finance business to include some lower yielding lower risk assets to help us scale that portfolio.
Which on a net basis, because as you know equipment finance is a cyclical sector is apart from our corporate leasing which is to investment grade borrowers, but the equipment finance is the small bar.
Borrowers against mission critical equipment. There is the one part of our platform that has a little bit of cyclicality and we've been mitigating that by doing a little bit lower risk lower yield larger borrower investments.
Okay. So thats really helpful Felicia.
Sounds like you're.
Outlook, if you will given the strategy, especially.
And equipment finance as maybe first time yield stability.
Based off of historical recent levels.
Yes.
Okay. Okay. There's also hoping to get an update on American teleconferencing services. It looks like there might've been a bit of a markdown on on that one.
During the quarter I was just hoping to get an update sure.
Yeah, Great question. So yes, as you know that is the one investment on non accrual.
I guess, if there's good news the good news is.
Fortunately, it's the one non accrual at SUNS as well so both portfolios on a little bit of this asset.
On a <unk> basis.
The silver lining I would say on this one.
Is that we and the lender group took control of the business.
Middle of last year, as we were heading into the third quarter.
As you know and difficult.
Investments the first step is really understanding what you own as a lender.
You know what you know and you know what you are told.
You are not on the board and Youre, not talking to management everyday and under the Hood at.
That granule lever level. So we did take control and so that's a great position for US we're control freaks and information obsessed.
So we know what we own there we think we haven't marked for recovery, we've got a great management team and their focus on.
Turning it around stabilizing yet they've been in there for a few months and have had a dramatic impact already.
We thought there was a time, where the lender group may have to put in some.
Liquidity working capital that's not the need.
<unk> been able to really shore up the liquidity of the business and now we will spend 2022 really mapping out the path to recovery. It's a collection of divisions. Some may best be monetize by selling something that's b model.
Ties by growing.
So.
As I mentioned, we think its mark for recovery, we like where we stand obviously, it's never good to have an investment on non accrual and to market down.
But as we have done in the past.
One or two times when need be given our private equity backgrounds in orientation.
Michael in particular in the rest of the team we have taken control of asset put in management teams had been patient to optimize our recovery and that's the game plan for this one.
Ladies and gentlemen, if you have a question simply press star one on your telephone.
Next question is from Paul Johnson with K B W.
Yes, good morning, guys. Thanks for taking all my questions.
Good morning.
So my first question is just on your guys' Roe.
It's been running around 7% or thereabouts for for the last year or two.
Understanding we obviously have the base fee reduction coming up.
After their merger as well as some other potential cost savings there.
But also maybe potentially low lower overall yield just put the combination of the two books. So I'm just wondering trying to get your thoughts where do you think your ROE could could eventually get to following the merger.
Yes, I would just just one.
One clarification great question.
The the <unk>.
Book at Solar senior to your point does have some lower yielding cash flow assets, but it also has some high yielding.
ABL specialty finance businesses so.
Coincidentally, the yield is pretty close to the solar yield of 10% on a blended basis.
So SLR I'm, sorry, similar to SLR SUNS balances that are barbells, if by having lower yielding cash flow. It's just their cash flow assets or sub 7%, whereas <unk> or 8%. So on a blended basis, we think that.
There is no dilution in terms of the yield across the combined portfolio post.
Merger and I think the target.
It should be thought of as something over 8%.
Okay great.
Great that's good to hear thanks for that.
And <unk>.
Lastly, Im just curious maybe to get your thoughts on how you kind of see inflation or just the just the prospect of rising rates and a higher forward LIBOR curve flowing through your sort of various verticals, maybe more specifically the equipment finance.
Are we seeing that back.
Vertical do you expect.
Any pressure on asset values within those verticals.
Or even just how you expect that to impact demand for those types of funding.
Yes.
Look great question as you know across the majority of our verticals were floating rate.
Our first lien across all verticals so.
So thats a great hedge there.
Equipment finance does have fixed rate.
Assets, but also as you know we have a fair amount of fixed rate borrowings, including the asset liabilities. We just put on in Q1 and Q3 of last year.
So we've always been very heavy I want to say, we're probably over 60%.
Fixed rate in terms of reliability structure.
But I also think from an inflation perspective, we are seeing values recover from the depths of Covid.
We're seeing borrowers both in equipment financing and corporate leasing extending.
Their leases with us, which is giving us a nice pop on the earnings.
As we extend those.
Leases because they are struggling to get new equipment to replace the equipment there already leasing from us.
So we feel like we're pretty well hedged there.
Okay I appreciate it that's very helpful. That's all for me today.
Thank you.
Alright. Your next question is from Robert Dodd with Raymond James.
Hi, guys.
<unk>.
Michael I think you made a comment about an active.
Portfolio of acquisition opportunities.
Is that would you say that that pipeline that potential is.
Is more elevated than normal or is that just kind of you.
Normal level of looking to add ons I mean, looking at Kings, which obviously very successful acquisition, great return on invested capital et cetera.
<unk>.
Is that the kind of return that potentially in the hopper.
Additional acquisition, so any more color that.
So I would say in general our pipeline is definitely more active now than it was in the fourth quarter.
It's definitely picked up I would say generally we target kind of ROE on the specialty finance acquisitions.
10% to 13% depending on the situation.
That could be in the form of something like King, which is a brand new platform acquisition or an add on acquisition like we've done for the business credit Division of Sun's one of the things that we're excited about is that by merging the two entities.
It makes us a better acquirer and what I mean by that is when we've had two separate companies to buy for its imposed constraints primarily on size. So for example, with funds Mark capital $223 million.
Has been constrained in doing add on acquisitions by virtue of that sort of things have been too large for it and as far as the combined Andy with over 2 billion of assets and over $1 billion of NAV.
We have a much greater balance sheet from which to acquire from them. So that is part of the strategic rationale.
We're having this merger takes place.
Got it.
I'd say Robert the broad.
Commercial finance M&A pipeline, leaving aside our specific interest. Although we are very interested given that we have a number of different platforms that we can add too as well as looking at new platforms, but I would just say it's been a very active.
Marketplace out there right now there's a lot of guys coming to market.
As you know also one of our lending verticals as our lender finance business, where historically, we blend to specialty finance companies, which potentially have led to acquisition. So that'll Kingsbridge came about we have 80 million loan outstanding to it to the private equity sponsor for over two years, we've actually added to our team fairly significantly.
This past year, we added two senior individuals who are on the origination side.
Sourcing not just potential acquisitions, but also loans as well so I would say are our pipeline on our lending business is fairly strong.
Got it got it thank you.
Put a close on this.
Are there any holes in your cap I mean, as you've expanded these verticals.
This potential, especially when you bring everything under one Jonathan.
Jonathan larger umbrella.
It tends to be to be sourcing synergies and things like that.
All of the.
All of the obvious holes that you found in terms of sourcing.
<unk> opportunities.
Your existing portfolio companies see but you don't have.
And offering.
So.
It's a great question I would say we keep.
Learning more and more about these niche.
Commercial finance.
Businesses and marketplaces.
As we go so.
There are.
As we talked about over at solar senior we have a business that is focused on working capital financing. Both in terms of ABL revolving lines of credit, but also in terms of factoring.
Last year, they did an add on acquisition of a factoring business in digital media, which is an industry extension from our core competencies they already had so.
What I mean by this example.
Robert is that there are a number of these are very fragmented businesses. There are regional expansions there are industry focused expansions.
That gives us a lot of white space for the existing platforms that is it a new business or is it an extension it's something we're not doing today, but we're building on our core competency to leverage off of.
And then I think.
But to Michael's point, we often will use as we have to get into life sciences to get into kingsbridge to get into so many things and specialty finance. We use are our lender finance R&D laboratory to lend into these asset classes prior to finding something that we might want to own control off and I think one of the areas.
We continue to sniff around and make some investments we've made one in the fourth quarter as ways to look at.
Lower risk get differentiated niche.
Niche real estate opportunities from a lending perspective.
Where we can try to.
To mitigate a lot of the inherent cyclicality in the asset class, maybe look at shorter duration assets that gives us comfort.
So that is an area that we continue to focus on ways that might be.
Consistent with our DNA in beer, our risk adjusted return profile.
Got it thank you one one.
Last one for me on the dividend.
I think that should after the.
The merger of the plan is to go to a monthly instead of.
Instead of quarterly.
Any color you can give on on why that decision was made I mean, obviously it was a board decision, but we have a couple of board members today on the call.
And obviously you have the simple math 41 doesn't divided by three.
No actually it doesn't have to be about number bumps.
Any comment you can give around about that.
Say I guess, we'll just have to increase it.
Okay.
All kidding aside I think it was something that just for simplicity purposes, although rich would not call. It simplifying is like getting a dividend out every month.
As you know a number of our investors just like the consistency.
A payment schedule on a monthly basis, so we thought it might be a.
A good time to adopt it.
And then the current thought is to take the current intent is to take the 41 antibody <unk>.
Okay fair enough. Thank you.
Thank you.
Thank you. Your next question comes from Casey Alexander with Compass point.
Well, that's the risk of coming in a minute 56 is if I was going to ask you I was going to ask about lender finance is the pipeline for acquisitions and I was going to ask about the dividend. So my questions have been answered. Thanks, perfect. We knew even asked that so we read your mind.
Thank you thank.
Thanks Casey.
And im not showing any further questions in the queue Sir.
Yeah.
While we appreciate all your support and <unk>.
Again.
For those of you own shares. We appreciate you voting. So we can we can close.
Close our merger and we will talk to whoever is going to be on our son's column three minutes. Thank you bye bye.
And this concludes today's conference call. Thank you for participating and you may now disconnect.
Yes.
Sure.
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Good luck.
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