Q1 2022 SLR Investment Corp Earnings Call

Please standby the conference will begin shortly.

[music].

Good day and thank you for standing by welcome to the Q1 2022.

<unk> investment Corp earnings Conference call at this time participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require assistance during the conference. Please press Star Zero I would now like to hand, the conference over to your Speaker today, Michael gross chairman and co CEO .

Thank you very much and good morning, welcome to SLR investment Corp's earnings call for the first quarter ended March 31, 2022, I'm joined today by Bruce <unk>, our chief coat, our co Chief Executive Officer, Rich <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 todays call and webcast are being reported.

Please note that they are the property of Epsilon investment Corp.

And that any unauthorized broadcast in any form are strictly prohibited.

This conference call is being webcast from the investors tab on our website at Www Dot SLR investment Forbes Dot com.

Replays of this fall 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 may constitute forward looking statements, which relate to future events or our future performance or financial condition.

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.

<unk> 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.

Sure.

Excellent investment Corp undertakes no duty to update any forward looking statements.

Prior to do so by law.

To obtain copies of our latest SEC filings. Please visit our website or call us at Q1 to 90 931670.

Comments on today's call.

Call include forward looking statements, reflecting our current views with respect to the April 2020 to close some merger with any to Src.

Any expected synergies and savings associated with the merger the ability to realize the anticipated benefits of the merger of future operating results and financial performance and the payment of dividends going forward.

We specifically note that the amount and timing of past dividends or distributions are not a guarantee of any future dividends or distributions for the amount thereof, the payment timing and amount of which will be determined by echelon investment towards the board of directors.

With that said I would like to turn the call back to our chairman and co CEO Michael growth. Thank you very much rich I'd like to widen everyone. Today that today's call will be reporting Q1, 2022, operating and financial results of Src on a pre merger basis only.

Given the April closing of the Src Sun's merger. Our Q2 2022 earnings report for Src will be the first quarterly report of the combined entity. However on this call we will provide some pro forma guidance.

The combined portfolio would have been at the end of the first quarter.

Last night, we reported net investment income of 32 per share for the first quarter of 2022, excluding merger related expenses. The company's net investment income would have been 35 per share consistent with the prior quarter net asset value at March 31, 2022, with $19 56 per share.

The unfolding geopolitical events continued supply chain issues and labor shortages and a far more aggressive tone from the fed in reaction to accelerating inflation in the U S has injected a dose of uncertainty and volatility into global equity and credit markets.

Syndicated spreads wide in Q1, particularly in longer duration fixed income securities at the margin we are seeing some spread widening in middle market floating rate leverage loans, but it is too soon to call. It a trend.

Due to our focus on the upper middle market U S companies operating in defensive sectors, the effect of rising inflation and supply chain disruptions on our portfolio have thus far been immaterial, but of course, we are closely monitoring the situation.

Following a record year of $1 two trillion dollars of U S private equity investments in 2021 sponsor activity slowed in Q1.

Against this backdrop Src platinum originations totaled $174 million against $205 million repayments.

Sponsor activity is picking up thus far in Q2, and our pipeline remains healthy across all of our business verticals.

Most importantly, with the closing of the Sun's acquisition on April one our comprehensive portfolio has grown by over $600 million.

$2 6 billion and we expect solid net origination over the course of 2022.

At March 31 over 99% of our comprehensive portfolio was invested in senior secured loans and 81% of the portfolio at fair value with allocated a specialty finance investments.

Kingsbridge, which we acquired in Q4 2020 continues to perform above our expectations.

We continue to actively evaluate commercial finance investment opportunities that can enhance and further diversify src's portfolio.

In January of 2022, we issued $135 million up 333% senior unsecured notes due January 2027, and a private placement.

Combined with the $50 million of 295% senior unsecured notes issued in Q3 2021, we have lowered the company's long term average unsecured financing rates.

The aggregate $185 million of senior unsecured notes due 2022 have a weighted average annual interest rate of three 2%.

Significant reduction from the four 5% weighted average annual interest rate in the $100 million of senior unsecured notes that mature next week on may eight.

At March 31, our leverage was <unk> 98 times net debt to equity compared to its low point due to the pandemic of five six times net debt to equity at September 32020.

On April one 2022.

<unk> completed its previously previously announced acquisition of SLR investment Corp horse funds.

In accordance with the terms of the merger agreement at the time of the merger SUNS common stock was converted into 700 796 shares of <unk> common stock, resulting in the issuance of approximately $12 5 million shares of Src to former <unk> shareholders.

In conjunction with the merger SLR capital partners, the investment advisors Src permanently reduced the annual base management fee by 25 basis points from 175% to one 5% on gross assets effective upon the successful close the merger.

The contractual step down to the base management fee to 1% on gross assets above one to one leverage remains in place.

We believe the transaction with <unk> makes strategic sense, 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 important benefits as of March 31. The combined company would have had just under $2 7 billion of comprehensive.

Hence the portfolio assets and $1 1 billion of net assets with a larger market capitalization are expected to provide greater trading liquidity garner additional institutional investor interest in research coverage and enhance the company's access to the equity and debt markets.

Additionally, the greater scale will increase portfolio diversification as well as expand the opportunity set for additional commercial finance opportunities, including tuck ins platform acquisitions and asset purchases.

The combined company will have a more broadly diversified portfolio will be it will be enhanced with the addition of SUNS to commercial finance affiliates.

All our healthcare ABL and Thats <unk> business credit, which festival specializes in making senior secured asset based loans in fact arrangements.

Small and medium sized companies.

Based on <unk> balance sheet at March 31, the pro forma net leverage for the acquisitions tons would have been nine times opening up additional capacity to fund portfolio growth over the remainder of 2022.

Overtime, we expect that a combination of expected cost synergies reduced management fees and interest savings, resulting from more efficient debt financing should drive net investment income growth importantly, it is anticipated that the largest scale and capital base should allow the combined company to grow NII faster than either solar or stance.

We have been able to achieve on a standalone basis, and potentially generate higher NII per share.

Finally on March 3rd our board of directors authorized the company's adoption of a $50 million share repurchase program.

Outstanding common stock.

Given the recent market volatility and economic uncertainties. The repurchase plan provides us with an additional tool for enhancing shareholder value.

At this time I will turn over the call to our CFO rich fatigue is take you through the Q1 financial highlights.

Thank you Michael.

That's a lot of investment Corp, 's net asset value at March 31, 2022 was $846 4 million.

Or $19 56 per share.

$842 3 million or $19 93 per share at December 31, 2021.

And 131 to that point too.

<unk> T is on balance sheet investment portfolio had a fair market value of $1 63 billion.

101 portfolio of companies.

Across 33 industries.

Cash flow fair market value of $1 7 billion in 106 portfolio companies across 34 industries at December 31.

'twenty one.

At March 31 2022.

Had two investments on non accrual representing 4% of the portfolio at cost.

And one 7% at fair market value.

And 131, the company had $815 million of debt outstanding with Leverages Zero 98 times net debt to equity.

When considering available capacity from the company's credit facility together with available capital from the non recourse credit facilities Epsilon credit solutions, that's where our equipment Finance group.

Epsilon investment Corp has significant available capital to fund future portfolio growth.

Moving to the P&L.

For the three months ended March 31 2022.

Gross investment income totaled $33 million.

Versus $35 7 million for the three months ended December 31 2021.

Expenses totaled $19 5 million for the three months ended March 31.

'twenty two.

This compares to $20 8 million for the three months ended December 31 2021.

Included in this quarters expenses were one 5 million of one time costs associated with the merger with Epsilon Senior investment Corp.

Across the fourth quarter of 2021, and the first quarter of 2022.

<unk> recognized a total of $2 4 million of merger expenses, which includes additional reserves. We currently expect will cover all remaining merger related expenses.

Importantly, given where the company is with regard to this incentive fee calculation it catch up.

The investment manager ultimately covered $114 million of the $2 4 million of merger costs.

In addition.

The investment manager is committed to not included mix incentive fee calculation any purchase discount accretion created by the company asset acquisition accounting under ASC 805.

Back to the P&L accordingly.

The company's net investment income for the three months ended March 31, two.

Totaled $13 5 million or <unk> 32 per average share.

Compared to $14 9 million or <unk> 35 per average share for the three months ended December 31 2021.

Below the line the company, a net realized and unrealized losses for the first fiscal quarter totaling $12 3 million.

Compared to a realized and unrealized loss of $8 8 million for the fourth quarter of 2021.

Ultimately the company had a net increase in net assets, resulting from operations.

A $1 5 million or <unk> <unk> per average share for the three months ended March 31 2022.

This compares to a net increase of $6 1 million or <unk> 40 per average share for the three months ended December 31 2021.

Finally on May three 2022.

The board of directors declared its new monthly distribution of.

$13 $6 67 per share payable on June 2nd.

2020 to holders of record as of May 19, 2020.

Yes.

And with that I'll turn the call over to our co CEO Bruce.

Exposure.

Thank you rich.

At quarter end.

<unk> comprehensive portfolio was approximately $2 billion and remained highly diversified encompassing 600 different borrowers across Avi industries with average exposure of $3 3 million or 2% of the total portfolio.

Our largest industry exposures were diversified financials healthcare providers life Sciences and software at quarter end over 99% of the comprehensive portfolio consisted of senior secured loans.

95% of the portfolio was invested in first lien assets and only four 3% was invested in second lien assets of the second lien loans.

One, 4% will cash flow and $2, 9% were underwritten on an asset base.

<unk>.

At $3 31, our weighted average asset level yield was 10%.

By focusing on our niche commercial finance verticals, we've been able to maintain asset level yields around 10%, while actively reducing our exposure to second lien cash flow investments.

At March 31, the weighted average investment risk rating of <unk> portfolio was just under two based on our one to four risk rating scale with one representing the least amount of risk.

At quarter end, the weighted average LTV of our first lien income producing portfolio was approximately 45% loan to value indicative of significant junior capital and equity cushion supporting the investments in our portfolio.

Total originations for the first quarter were just over $170 million and repayments were just over $200 million.

Essentially we were able to run in place during the first quarter. Despite a backdrop of the seasonal slowdown in sponsor activity as well as the more uncertain and volatile environment.

<unk> Src had approximately $180 million of unfunded commitments outstanding at quarter end, which we expect to fund in future quarters.

Now, let me turn to each of our investment verticals.

Sponsor finance.

At 331, our cash flow loan portfolio is just over $370 million or just over 18% of the total portfolio and was invested in 21 different borrowers.

EBITDA or cash flow investments was $82 million consistent with our focus on larger upper mid market borrowers.

<unk> average leverage in this portfolio as.

Has hovered around five five times consistently and the average interest coverage remains above three times.

As Michael mentioned sponsor activity in the first quarter has slowed from last year's torrid pace during.

During the quarter, we originated $2 5 million.

And experienced repayments of over $50 million.

Unfunded commitments totaled over $40 million.

These transactions, which are issued by borrowers to fund future acquisitions offer a prudent opportunity for us to grow our investment and established credits with existing structures.

At quarter end, the weighted average yield on the cash flow portfolio.

Was eight 2%.

Now, let me touch on asset based lending.

At quarter end, the combined asset based portfolio was just under $470 million, representing 23% of our total portfolio and it was invested in 24 borrowers the weighted average yield on this portfolio was just under 11%.

During the first quarter, we originated approximately $38 million of new loans and had repayments of $10 million.

Our ability to assess and monitor collateral.

US an attractive financing partner during periods of economic uncertainty when banks tend to retreat from lending.

Therefore, this business line provides some counter cyclicality to our origination platform.

Now, let me touch on leasing.

Credit quality of Kingsbridge portfolio remains strong and originations were essentially.

Flat during the first quarter.

At quarter end, they're highly diversified portfolio of leases spans across three major equipment sectors, including technology.

Industrial borrowers.

Healthcare and totaled approximately $573 million.

With an average exposure of $1 $3 million per borrower.

This lease portfolio was 100% performing.

Majority of the assets invested in leases with investment grade borrowers.

For the quarter Kingsbridge paid $3 $5 million dividend consistent with the prior quarter, which equates to a 10, 2% annualized yield on cost.

Interest on.

On our $80 million senior secured loan into Kingsbridge.

<unk> total income generated by the investments that kingsbridge through the debt and equity was $5 1 million for the quarter.

While Kingsbridge continues to have a strong pipeline of new investment opportunities supply chain disruptions are likely to limit portfolio growth in the near term, but also will extend attractive residual leasing activity now.

Now, let me turn to equipment finance.

As a reminder included in our equipment finance business, our financings held on our balance sheet as well as in our SLR equipment finance subsidiary.

During the first quarter equipment finance invested $20 million and had repayments of $45 million.

At quarter end the portfolio totaled just over $316 million.

It was invested across 94 borrowers with an average exposure.

<unk> $3 $5 million.

This asset class represents approximately 15% of our total portfolio.

100% of their loans are in first lien assets.

And the weighted average asset level yield is just over 9%.

Q1 comprehensive investment income.

From the entire equipment finance business totaled $3 $3 million.

The rebound in economic activity that started in the fourth quarter of 2020 and continued through last year has been supportive of the performance of our equipment finance portfolio, we're seeing valuations on equipment returned to pre COVID-19 levels and credit quality improving at the borrower level.

Our team expects to grow this portfolio during this year.

At quarter end.

The appointment of a new CEO for equipment finance. He brings over 30 years of experience in the equipment finance industry, including 25 years of vendor finance focused experience, where he brings deep knowledge and relationships with both vendors and end users that will help the company develop and engage with new and existing.

Clients.

It's been early days, but we are thrilled to have Tom on the platform and he is taking us to new opportunities in the marketplace.

Now, let me touch on life Sciences.

At quarter end the portfolio totaled approximately $300 million consisted.

It consisted of 16 different borrowers.

All of our companies in this asset class are meeting or exceeding their expectations at the time of underwriting.

With the weighted average cash runway now standing at over a year.

Life science loans represent just over 14%.

Our comprehensive portfolio for the first quarter and contributed over 23% of our gross investment income.

During the first quarter the team committed to $60 million of new investments, which $36 million were funded.

Repayments totaled $16 million.

At quarter end, Src had $112 million unfunded life science commitments outstanding which are available to our borrowers on reaching certain milestones.

Additionally, the life Science team currently has a robust pipeline of new investment opportunities, which we expect to fuel portfolio growth during the course of 'twenty two.

At quarter end, the weighted average yield on this portfolio was approximately 11%.

<unk> success fees and warrants.

Now, let me talk to.

The combined portfolio with a snapshot of what it would look like at SUNS been acquired at quarter end.

The combined entity on a pro forma basis would have had a portfolio of $2 6 billion.

With over $600 million or 23% of the total allocated to sponsor finance.

$2 billion or 77% of the total portfolio allocated to specialty finance.

Specialty finance verticals would've had an $810 million portfolio and asset based lending and an $890 million portfolio and equipment leasing and equipment finance.

And lastly over $335 million portfolio dedicated to life science investments.

As Michael indicated the combined portfolio will be more broadly diversified with multiple opportunities for growth, including directly underwritten investments tuck in or new platform acquisitions as well as potential portfolio purchases.

Importantly, the combined entity has approximately $215 million of unfunded investment commitments that we expect to fund in future quarters and.

In addition leverage of the combined entity at quarter end would have been nine times leverage creating additional investment capacity going forward to fund portfolio growth.

In conclusion, we see a continuation of the investment themes that have been driving our portfolio over the last few years.

Focusing our new origination activity on first lien cash flow loans to portfolio of companies in defensive sectors and the upper mid market.

Increasing our investments in specialty finance assets, where we generally get tighter structures and more attractive risk adjusted returns.

In growing our investments alongside portfolio companies by committing to unfunded acquisition lines, which will be funded over the future quarters.

The keys to driving.

An increase in net investment income per share.

The remainder of this year will be a combination of capturing anticipated cost certainty.

Merger.

Our balance sheet and specialty finance portfolios.

Continuing to take advantage of our scale and employing a $50 million share repurchase program.

Across our asset classes, we are seeing a number of attractive investment opportunities.

Given the uncertainties and market volatility. It is also important that we remain disciplined opportunistic and highly selective in our investments now.

Now, let me turn the call back to Michael.

Thank you Bruce.

In closing, we are optimistic about earnings growth potential and the opportunity set across each of our investment verticals.

With the overall <unk> portfolio on solid footing, we are focused on the remaining disciplined and highly selective in deploying our capital into attractive investment opportunities.

Financial sponsors continue to have record amounts of dry powder that is expected to support future deployment in 2022 and beyond the.

For larger middle market businesses, we prefer to lens, who continue to choose direct financings over the syndicated debt markets.

These industry tailwind combined with the scale of our investment adviser should benefit <unk> shareholders through greater access to upper middle market cash flow investment opportunities.

With the pandemic, which put the pandemic has proven are better positioned to protect capital than most smaller companies.

Additionally, we are reaping the benefits of our scale advantage and our cash flow life science and ABL verticals.

As I mentioned in my opening remarks, Bruce and I as co Ceos, and our independent directors believe that the merger of Src and sons, which closed April one.

Rates are larger and more diversified portfolio with incremental capacity to fund portfolio growth.

We believe the merger and resulting scale potentially makes us a better acquire strategic buyer of specialty finance businesses, we will continue to be disciplined and selective in our new investments with a focus on capital preservation.

As we deploy our available capital and reached the midpoint of our <unk> nine times to one in a quarter times targeted debt to equity range. We believe that we can drive increased net investment income per share.

Accordingly, we believe Epsilon C to make we expect FERC to make progress moving NII closer to covering its distributions through the remainder of this year as cost synergies are realized and we deploy our available capital.

Finally, with the board's authorization for Src, the adoption of a $50 million share repurchase program, we have additional flexibility to deliver shareholder value.

Our investment advisors, the alignment of interest with our company's shareholders continues to be one of our guiding principles.

Our team owns approximately 8% of the combined entity.

A significant percentage of the annual incentive compensation invested in <unk> stock.

The team's investment alongside fellow Src shareholders demonstrates our confidence in the company's defensive portfolio stable funding and favorable position to reap the expected benefits of the merger.

We thank you very much for your time today operator at this time will you. Please open the line for questions.

Yes, and as a reminder to ask a question you will need to press star one on your telephone.

To withdraw your question press the pound key.

Please standby, while we compile compile the Q&A roster.

Our first question comes from Ryan Lynch with K B W.

Ryan Your line is now open.

Hey, good morning.

Hey, Brian .

First question I had.

You guys.

<unk> implemented a share repurchase agreement.

Yes.

This is the first one I can remember in quite a bit of time and I know you guys haven't been active with share repurchases in the past I would just love.

To get a little more color on why you implemented the share repurchase now what are you guys use on how active you will be at the current.

At the current stock price.

And was it implemented more ads.

Our capital allocation.

<unk> mechanism.

As you go going forward or is it more putting therefore any dislocations you guys.

Stock price or at the level you envision it being just part of the normal capital allocation process.

Yes. Thank you. Thanks for your question I think.

In fact going way back in history, we implemented.

I bought stock buyback program back in 2014, which we fully.

So you could actually use substantially used we did at that time, because in one particular quarter, we had literally.

Third our portfolio repaid and so we were under Levered and thought that was a great capital allocation opportunity for us.

This instance.

We waited for the merger to close.

Part of it is all of the merger as our leverage went down from 97% 91, so at a $50 million buyback.

It would roughly take us back to the 97 again worth full use so we thought that was good.

Capital allocation policy. It was also in response to the fact that there has been volatility in.

In the BDC space, including ours, and we expect that to continue.

All of the uncertainty regarding rising interest rates inflation and.

And the war that's going on so we do expect to use it.

We think our stock is very attractive at these levels subject to.

Window period, being opened and we intend to ASIC.

Okay.

That's helpful color and then.

Can you just give us any update you guys had a heavy nir.

Non accrual in the quarter that has also been down.

Pretty meaningfully.

Hi, Matt.

I would just love if you can give an update on what's going on with that business, what what drove that that markdown.

Sure.

Sure so.

As you probably know this is one of our last remaining second lien cash flow positions.

We've been actively.

Sitting that portfolio, rather successfully until we hit a speed bump with this one which is one of the last ones we have.

Just for context so this.

This is an outsourced anesthesia.

Business.

And they have faced some headwinds in the market that they operate in potential.

Reimbursement headwinds as well as some operating headwinds as well as some expense issues.

Even.

Increased.

Wage inflation.

Our country, including in health care service companies. So it's been a bit of a perfect storm for them.

Again, as a second lien investor.

Do take some of the brunt of that after the equity does they are in the process of evaluating strategic alternatives. So theres not a lot we can say.

But we will keep you updated as we move through the next quarter.

Okay understood that's helpful background.

Background context on that investment and then just the last one that I had I just want to make sure I'm understanding this correctly.

You talked about your corporate <unk> portfolio supply chain issue being.

Somewhat of a headwind as far as being able to fund new investments, it's not that the pipeline is not there, but the ability to fund those investments.

Slide 10 presents an issue.

Didn't hear you mention that or maybe I missed it regarding the equipment financing portfolio. It didn't sound like there is the supply chain issues were.

The delay in funding in that book.

I correct.

That that assessment and two can you just break down why supply chain would affect one and not be Alberta, if I am understanding that question sure.

It does affect equipment fans, but less so the equipment finance is.

To.

Bifurcate the two businesses Kingsbridge is lending to predominantly investment grade companies large companies large perfect purchases new purchases.

So a lot of assets coming in from overseas our equipment finance vertical as you may recall is lending to small companies mission critical equipment very often used equipment. So it's already landed and being employed somewhere else and then being redeployed. So just.

Different demand drivers on the two segments.

Okay. Thanks for the explanation.

That's all for me I appreciate the time today.

Thanks, Brian .

Our next question comes from Bryce Rowe with price.

Do you have the floor.

Thanks, Thanks, good morning.

Maybe wanted to start on rates and rates and <unk>.

Could you guys speak to the sensitivity of your balance sheet, especially considering.

It's pretty drastic move higher in base rates that we've seen or that we saw and continue to see here.

Herein here next.

Sure sure we do disclose.

100 basis point move in our 10-Q, where we would see a 4% to 5% per annum pop based upon the $3 31 portfolio and the floating rate debt, we have as well as glass as the liabilities.

What would happen with a 100 basis point move up.

Four to five.

In NII for the for the year.

With a 200 basis points pop.

Europe , 16% to 18%, 18% range and this is all on a look through basis. So looking at all five of the think Bose.

We have in the portfolio post merger.

So thats unemployed looking basis.

So very positive okay.

And rich were talking about.

No.

Shocking shocking the base rate being being LIBOR correct at the end of the quarter.

Correct.

Got it okay.

Then maybe one for Bruce or Michael just thinking about.

Potential upward trajectory of balance sheet leverage.

Thank you, possibly fund some of these unfunded commitments.

I think we've talked over the last six months that there is good visibility into that and obviously we returned some.

Uncertainty into the into the mix just kind of curious how you feel about some of the heightened or the heightened uncertainty that were that were.

Seeing and being able to get to that midpoint of the targeted range.

Sure Great question. So as you know we have a couple of levers to get there. So.

Yeah, obviously, the first step was making a significant acquisition in our portfolio, we know well.

At SUNS that did take leverage down a little bit, but not in a meaningful way.

But we think thats.

Quarter step back for two steps forward.

Because it also positions us with additional verticals that <unk> did not have on their own clearly they both participate in cash flow life science loans, but now we have the working capital line of credit businesses.

Both business credit as well as the healthcare ABL business, both of which lend against receivables and are less M&A, driven or more relationship lending, where they act as the local bank for their borrowers.

So they use the driver there is just putting on new relationships and having utilization of the working capital facilities that they extend to their borrowers. So that's a new driver for SLR and.

<unk> business credit in particular, we have been making tuck in acquisitions and growing that business. So that's a new lever for growth I think the other thing that we look to is the to your point the unfunded commitments go predominantly across our life science business and our cash flow business.

Typically in life Science, we do see some of that drawn down as they hit additional operating milestones or capital raise milestones. So we think that will be drawn because the drivers are as you know in life Sciences, it's about new drug and device development FDA approval process, and then getting into commercialization.

We're in late stage companies by and large and so they are moving into that commercialization stage and will need our capital and I think the other driver in DD Tls is acquisition lines for existing borrowers as you know our cash flow business is in defensive sectors, such as healthcare insurance brokerage and software and they continue to.

Tuck in acquisitions. These lines do have a cost to them when they are unused.

And have a life to them a finite life. So we expect to see steady usage of those existing commitments and then last but not least we.

We are putting out new capital and new opportunities and I think the other thing worth noting is given the uncertainty we are seeing less headwinds in terms of repayments clearly there will be companies that will be sold and will be repaid, but the whole refinancing dynamic of trying to drive their cost of capital that I think has been put on hold.

For the foreseeable future at the portfolio company. So that will also mitigate.

And contribute to net portfolio growth.

Excellent. Thank you. Thanks for the time this morning.

Our pleasure.

Our next question comes from Casey Alexander with Compass point Casey. Your line is now open.

Yes, Hi, first just one maintenance question.

The discussion of the combined portfolio, where you said $890 million of equipment finance is that the equipment financing corporate leasing combined there, yes, yes Casey.

We are going to increasingly look to make it a little bit easier to understand the collective businesses because they are similar but slightly different. So it's the same thing as we start to talk about our ABL business is similar but slightly different we'll try to simplify it for you as we move forward.

Okay.

Secondly, regarding the new CEO of the equipment finance business the previous management group was.

Out of I believe out of GE equipment finance, what precipitated the change.

Is that business, just not growing as fast as you'd like or.

Why reach out for a new CEO there.

Sure. So so great question, so just by way of background the.

Consistent with all of our fin co platforms as we call them.

These are entrepreneurial founded and teams have been together for a long period of time to your point. This team came out of.

GE, but basically when we bought this business we knew.

That.

Phil Carlson, who ran the business has started the business was going to be looking to transition out over time.

He had been with us for a number of years, but it was approaching 70 million. So this was a natural time in his life to retire and so we actually brought in somebody.

AC who also has <unk> background. Most recently he spent the last 10 or 15 years at DLL to Lodge Landon.

As a major player in independent leasing, but he also comes by way of <unk>. So the entire team is in place. We just had transitioned from.

Phil who is retiring to a new CEO .

Okay that makes perfect sense. Thank you last question in relation to the life science portfolio and I know that that some portion of your NII not dependent but benefits from <unk>.

Prepayments in the life Science area, where there is.

End of term payments accelerated fees as the volatility of the equity markets actually continue to slow that down I know they did prepayments haven't come in at the rate that you might've expected and I'm just wondering if the lack of having an IPO exit for certain companies or lack of not wanting to do down route.

<unk> might continue to slow prepayments in that vertical.

So thats a great question.

It is so key.

<unk> specific in terms of where they are in their development.

Because again, we're dealing with late stage you will see companies get purchased by Big Strategics because basically.

The VC community has become the outsourced R&D for the big strategics that once they get them to commercialization strategic step in and buy them. So that's really the driver of the takeout, it's less of a refinancing market than you think of when the typical cash flow sponsor business, where they're constantly trying to take down their cost of capital.

It is already cheaper than equity to these borrowers and so it's not a big refinancing driver.

Exit tends to be as you know $2000.

<unk> thousand 836 month Hall, because youre just so late in the development of the company's products be they drugs or devices that then youre getting set up for takeout I think the comment that you make which is spot on is the volatility in the equity market means they are less inclined to issue equity to fund their growth.

Before the exit and more looking to supplement with some credit capital debt.

In our minds is expensive, but relative to issuing equity is cheap and so we're actually starting to see the volatility allow us to put new assets out as we look forward. This year because that becomes more attractive to fund that marginal dollar that they need before they sell the business in the next year or two but just to your point also I think.

While we do get these on a continuous but not necessarily consistent basis Q1 was light in that in that category. We will have some decent fees in Q2.

Alright, great. Thank you for taking my questions.

Our pleasure thank you.

Sure.

Our next question comes from Robert Dodd with Raymond James Robert Your line is open.

Hi, guys. Thanks.

Taking my question is on the combined portfolio you guys you talked about $2 6 billion combined 600.

Close at least allocated to sponsor finance so that's about it.

Should we expect that mix, one quarter sponsor finance three quarter, especially finance.

Kind of stay the same going forward as potentially a level up or is that just where it is today and you actually have a difference.

Three year target allocation.

Sure.

So that capital base.

I think as you know we grew that portfolio both.

And last year.

I think right now we would say that it's probably unlikely to outpace the growth of the other segments. So I think 20% to 25% is good.

Fair range.

Okay.

On the delayed duals I mean, the market has gotten.

More choppy.

What we're talking about in the context of the life Sciences.

Yes.

If hypothetically how.

Different or the delayed draw structures that obviously you put in place some time ago for acquisitions.

How different are those structures say.

Say structures that would be put in place today.

Either covenant structures coupon spreads.

How much is kind of the market for what you do today versus when you actually put these things.

Put these searches together great question I think as Michael mentioned in his remarks.

There is always a lag between seeing the volatility in change in terms in the broadly syndicated market.

And the private market and we've been to your point where deals for months before they actually close and so you are not always able to adjust terms. So.

Effectively what's in place today.

His last year's structure in last year's pricing, but I would tell you today, we're really if we were to book the same investment. It would look very similar you haven't seen that change we're hopeful as we get into another quarter or two as this volatility continues as always you see the broadly syndicated market terms reflected in the private market, but I think.

We are a quarter or two away. So it is really going to happen in the next quarter or two those investments be they funded or delay draws you'll see a bit of a change but it really today is no different from a year ago yet.

I appreciate it thank you.

And as a reminder to ask a question. Please press star one on your telephone.

Our next question comes from Melissa Wedel from Jpmorgan Melissa Your line is now open.

Good morning, everyone. Thanks for taking my questions today.

First one is a little bit of a housekeeping item on the combination of the portfolio I just wanted to follow up I know you mentioned a couple of different things and as these portfolios are integrated.

There anything specific that we should be thinking about in the next.

<unk> or two in terms of the incremental cost headwinds or friction.

Yes.

We're financing Eric good things to think about as financing is consolidated.

Now the good news is that this merger with literally seamless the credit facility that existed at <unk>, namely the revolving credit facility as well as the secured notes just moved over we didn't have to make any change to any of our financing agreements that src.

Yes.

We obviously know the portfolio well since we originated at all so literally there will be no friction cost at all.

And all the merger expenses were incurred in Q4 and Q1, we don't really expect it to be anything more from that and so Q2 should be a very clean quarter and will reflect the full results of the merged entity.

And not merger related specifically, but next week, we do.

Repay the four 5% notes that we have outstanding.

Pre refinance those with roughly three 2% notes between the issuance in January and last September . So we will also see not a full quarter kind of a half quarter of that benefit in our interest cost on a combined basis.

Just to be a little more direct regard. Your question, we do expect that NII in Q2 will be higher than Q1.

Okay. That's helpful. Thank you.

And my second question is really bigger picture in nature, I think that you talked about a couple of interesting things in terms of the volatility.

Potentially impactful in pricing.

But there is a lag in the private markets versus.

David.

And also the attractiveness of that.

To find incremental growth right now as opposed to equity that being said. There's also continues to be a lot of capital formation in this space.

Im curious how youre looking at the landscape longer terms, what what the opportunities that can look like for you and what youre expecting in terms of pricing.

And also given the rather diversified platform that you guys have how those things all come together.

Yes.

Let me, let me take a shot I'm sure Bruce interrupt me.

You're spot on there has been a tremendous on our capital formation in private credit.

Good news is that the vast majority of it is being created by.

Those who are $20 $30, $40 500 billion or asset managers.

And there are the ones, we're focused on doing the $1 billion to $3 billion unit tranche. We just saw second liens and so at their scale. It kind of moved to the point, where we don't really see them in our business. We're looking to put any given loan across our platform anywhere from $50 to $250 million in a given loan.

One 1 billion.

So.

The real capital formation that really hasn't kind of impacted our markets and more specifically in the 75% of our portfolio of specialty finance.

You have not seen much capital formation in those sectors. So it doesn't really impact about it either.

Yes, I would just echo Michael's comment I think the.

Diversity to your point Melissa of the platform the ability to do anything from $100000 factoring line too.

$250 million life Science investment.

Is very compelling the aggregation of these niches adds up to a nice overall diversified platform that serves us well throughout economic and credit cycles, and I think that's really what we're going to do more of that mid life Sciences is a great example, even there yes, there has been a little bit of capital formation.

But the market is for a $5 billion market youre not going to see people come in that have <unk>.

Large scale platforms and need to deploy to Michael's point 500 to a $1 billion in a transaction just doesn't exist. So it's important that we maintain discipline.

And go to a collection of defensive niches.

Thank you guys.

Our next call comes from Gerard Heymann from RBC Gerard Your line is open.

Hello, gentlemen, congratulations again on the merger I think it's an amazing thing.

I just have a two part question for both Bruce and Michael.

Can take them in turn or whatever but just was curious based on the merger now and where we are in the markets to the one thing that you guys are most excited.

Cited about going forward and the one thing you guys are.

Most fearful of going forward, if you could possibly answer that that would be most appreciated. Thank you.

Yes, I think the excitement is.

Follow up on that.

The prior question for Melissa the exciting part for US is that we have increased scale increase simplicity and our shareholders are together and combined in all can benefit from the different growth engines. As you know back in the day when we created two different bdcs. They did have distinct investment strategies increasing.

We also thought back then that there was a different risk adjusted return with a benefit of 16 17 years, we feel that the risk has converged and it would be beneficial for everybody to be on one platform as shareholders.

Employees and as borrowers and so we're really excited to have it together and be able to think a little bit more simpler.

And broader.

Take advantage of the scale of the platform not only at the BDC, but we as you know have continued to partner with private capital alongside the BDC that allows the BDC to act as it is an $8 billion.

Fund rather than a $2 6 billion fund pro forma for the <unk> merger. So it really allows us to have the benefit of scale and go to the larger transactions. When we want to go large and go to the small transactions like factoring deal. When we want to go small so I think we have really looked at the flexibility and ink and are taking advantage.

Vantage of that I think.

The biggest challenge is always in credit.

Credit investing is discipline and I think we're most concerned about the fact that as.

As Melissa was talking about the amount of capital that has been raised.

People need to learn a tough lesson before they get back to their disciplined centric. So we will see marginal players come into some of our niches and we need to maintain discipline and know that we're going to let investments go.

And be patient and I think thats the real challenge day in day out is to not follow where some of the new new players go and take a long term approach and so that is the challenge.

But I think we're up to that challenge.

Great.

Thank you very much.

Sure.

And then we'll have no further questions at this time, so I'd now like to turn the conference back to Michael gross Chairman and co CEO .

Thank you very much we have nothing more to add at this point. However, as always if you have any questions or comments. Please feel free to reach out to any of us at any time. We appreciate all your support we look forward to reporting on our first quarter as a merged entity in early August . Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

Thank you.

Thank you.

[music].

Yes.

Yes.

[music].

[music].

[music].

Good day and thank you for standing by welcome to the Q1 2022 SLR investment Corp earnings Conference call.

At this time participants are only in a listen only mode. After the speaker presentation, there will be a question and answer session.

I 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 assistance during the conference. Please press Star Zero I would now like to hand, the conference over to your Speaker today, Michael gross chairman and co CEO .

Thank you very much and good morning, welcome to SLR investment Corp, 's earnings call for the first quarter ended March 31, 2022, I'm joined today by Bruce <unk>, our chief coat, our co Chief Executive Officer, Rich <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.

Sure.

I would like to remind everyone that todays call and webcast are being recorded.

Please note that they are the property of <unk> investment Corp.

And that any unauthorized broadcast in any form are strictly prohibited.

This conference call is being webcast from the investors tab on our web site at Www Dot SLR invest a forbes dot com.

Replays of this fall 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 may constitute forward looking statements, which relate to future events or our future performance or financial condition.

Statements are not guarantees of our future performance.

Condition or results and involve a number of risks and uncertainties, including impacts from COVID-19.

Past performance does not indicative of future results.

<unk> 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.

Sure.

Excellent 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 Q1 to 90 931670.

Comments on today's call include forward looking statements, reflecting our current views with respect to the April 2022 close of summit merger with any into Src.

Any expected synergies and savings associated with the merger the ability to realize the anticipated benefits of the merger of future operating results and financial performance and the payment of dividends going forward.

Please specifically note that the amount and timing of pad dividends or distributions are not a guarantee of any future dividends or distributions, while the amount thereof, the payment timing and amount of which will be determined by echelon investment group's board of directors.

With that said I would like to turn the call back to our chairman and co CEO Michael growth. Thank you very much rich I'd like to remind everyone. Today on today's call. We have reporting Q1, 2022 operating and financial results of FRC on a pre merger basis only.

Given the April closing of the Src Sun's merger. Our Q2 2022 earnings report for Src will be the first quarterly report of the combined entity.

However on this call we will provide some pro forma guidance what the combined portfolio would have been at the end of the first quarter.

Last night, we reported net investment income of 32 per share for the first quarter of 2022, excluding merger related expenses. The Companys net investment income would have been 35 per share consistent with the prior quarter net asset value at March 31, 2022, with $19 56 per share.

The unfolding geopolitical events continued supply chain issues and labor shortages and a far more aggressive tone from the fed and react to accelerating inflation in the U S has been injected a dose of uncertainty and volatility in the global equity and credit markets.

Syndicated spreads wide in Q1, particularly in longer duration fixed income securities at the margin we are seeing some spread widening in middle market floating rate leverage loans, but it's too soon to call. It a trend.

Due to our focus on the upper middle market U S companies operating in defensive sectors, the effect of rising inflation and supply chain disruptions on our portfolio have thus far been immaterial, but of course, we're closely monitoring the situation.

Following a record year of $1 two trillion dollars of U S private equity investments in 2021 sponsor activity slowed in Q1.

Against this backdrop <unk> platform originations totaled $174 million.

$205 million repayments.

Sponsor activity is picking up thus far in Q2, and our pipeline remains healthy across all of our business verticals.

Most importantly, with the closing of the Sun's acquisition on April one our comprehensive portfolio has grown by over $600 million over $2 6 billion and.

And we expect solid net origination over the course of 2022.

At March 31 over 99% of our comprehensive portfolio was invested in senior secured loans and 81% of the portfolio at fair value with allocated and specialty finance investments.

<unk> Bridge, which we acquired in Q4 2020 continues to perform above our expectations.

We continue to actively evaluate commercial finance investment opportunities that can enhance and further diversify src's portfolio.

In January of 2022, we issued $135 million up 333% senior unsecured notes due January 2027, and a private placement.

Combined with the $50 million of 295% senior unsecured notes issued in Q3 of 2021, we have lowered the company's long term average unsecured financing rates.

The aggregate $185 million of senior unsecured notes due 2022 have a weighted average annual interest rate of three 2% a significant reduction from the four 5% weighted average annual interest rate and a $100 million of senior unsecured notes that mature next week on may eight.

At March 31, our leverage was <unk> 98 times net debt to equity compared to its low point due to the pandemic of five six times net debt to equity at September 32020.

Yes.

On April one 2022, SRT completed its previously announced acquisition of SLR investment Corp horse funds.

In accordance with the terms of the merger agreement at the time of the merger SUNS common stock was converted into 700 796 shares of <unk>.

The common stock, resulting in the issuance of approximately $12 5 million shares of Src to former Sun shareholders.

In conjunction with the merger SLR capital partners, the investment advisors Src permanently reduced the annual base management fee by 25 basis points from 175% to one 5% on gross assets effective upon the successful close the merger.

The contractual step down to the base management fee to 1% on gross assets above one to one.

Leverage remains in place.

We believe the transaction will make strategic sense. The company 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 important benefits as of March 31. The combined company would have had just under $2 7 billion.

Of comprehensive portfolio assets and $1 $1 billion of net assets, where the larger market capitalization and expect that to provide greater trading liquidity garner additional institutional investor interest in research coverage and enhance the company's access to the equity and debt markets.

Additionally, the greater scale will increased portfolio diversification as well as expand the opportunity set for additional commercial finance opportunities, including tuck ins platform acquisitions in App purchases.

The combined company will have a more broadly diversified portfolio will be it will be enhanced by the addition of SUNS to commercial finance affiliates.

While our healthcare ABL and Thats still our business credit, which festival specializes in making senior secured asset based loans in fact arrangements to small and medium sized companies.

Based on <unk> balance sheet at March 31, the pro forma net leverage for the acquisitions tons would have been nine times opening up additional capacity to fund portfolio growth over the remainder of 2022.

Overtime, we expect that a combination of expected cost synergies reduced management fees and interest savings, resulting from the more efficient debt financing should drive net investment income growth importantly, it is anticipated that the largest scale and capital base should allow the combined company to grow NII faster than either solar or SUNS.

Would have been able to achieve on a standalone basis, and potentially generate higher NII per share.

Finally on March 3rd our board of directors authorized the company's adoption of a $50 million share repurchase program of our of our outstanding common stock.

Given the recent market volatility and economic uncertainties. The repurchase plan provides us with an additional tool for enhancing shareholder value.

At this time I'll turn over the call to our CFO Rich <unk> take you through the Q1 financial highlights.

Thank you Michael.

Exelon investment Corp's net asset value at March 31, 2022 was $846 4 million.

Or $19 56 per share.

$842 3 million or $19 93 per share at December 31, 2021.

Our March 31, two that point too.

<unk> is on balance sheet investment portfolio had a fair market value of $1 six 3 billion.

101 portfolio of companies.

Across 33 industries.

Add to a fair market value of one 7 billion in 106 portfolio companies across 34 industries at December 31 2000.

'twenty one.

At March 31 2022.

Had two investments on non accrual representing 4% of the portfolio at cost.

And one 7% at fair market value.

At March 31, the company had $815 million of debt outstanding with leveraging zero 98 times net debt to equity.

When considering available capacity from the company's credit facility together with available capital from the non recourse credit facilities SLR credit solutions as for Oracle and refinance NK grid.

SLR investment Corp has significant available capital to fund future portfolio growth.

Moving to the P&L.

For the three months ended March 31 2022.

Gross investment income totaled $33 million.

Versus $35 7 million for the three months ended December 31 2021.

Expenses totaled $19 5 million for the three months ended March 31.

'twenty two.

This compares to $20 8 million for the three months ended December 31 2021.

Included in this quarters expenses were $1 5 million of one time costs associated with the merger with Epsilon Senior investment Corp.

Across the fourth quarter of 2021, and the first quarter of 2000 point too.

<unk> recognized a total of $2 4 million of merger expenses, which includes additional reserves that we currently expect will cover all remaining merger related expenses.

Importantly, given where the company is with regard with the incentive fee calculation and catch up.

The investment manager ultimately covered $114 million of the $2 4 million of merger costs.

In addition, the investment manager is committed to not included mix incentive fee calculation any purchase discount accretion created by the company asset acquisition accounting under ASC 805.

Back to the P&L accordingly.

The company's net investment income for the three months ended March 31 and debt to.

Totaled $13 5 million or <unk> 32 per average share.

Compared to $14 9 million or <unk> 35 per average share for the three months ended December 31 2021.

Below the line the company, a net realized and unrealized losses for the first fiscal quarter totaling $12 $3 million.

Compared to a realized and unrealized loss of $8 8 million for the fourth quarter of 2021.

Ultimately the company had a net increase in net assets, resulting from operations.

A $1 5 million or <unk> <unk> per average share for the three months ended March 31 2022.

This compares to a net increase of $6 1 million or <unk> 40 per average share for the three months ended December 31, 21%.

Finally on May three 2022.

The board of directors declared a new monthly distribution of.

$13 $6 57 per share payable on June 2nd.

2020 to holders of record as of May 19, 2022.

And with that I'll turn the call over to our co CEO Bruce <unk>.

Thank you rich.

At quarter end.

<unk> comprehensive portfolio was approximately $2 billion and remained highly diversified encompassing 600 different borrowers across 80 industries with average exposure of $3 3 million or 2% of the total portfolio or.

Our largest industry exposures with diversified financials healthcare providers life Sciences and software at quarter end over 99% of the comprehensive portfolio consisted of senior secured loans now.

<unk>, 95% of the portfolio was invested in first lien assets and only four 3% was invested in second lien assets of the second lien loans.

One 4% were cash flow and two 9% were underwritten on an asset base.

<unk>.

At $3 31, our weighted average asset level yield was 10%.

By focusing on our niche commercial finance verticals, we've been able to maintain asset level yields around 10%, while actively reducing our exposure to second lien cash flow investments.

At March 31, the weighted average investment risk rating of <unk> portfolio was just under two based on our one to four risk rating scale with one representing the least amount of risk.

At quarter end, the weighted average LTV of our first lien income producing portfolio was approximately 45% loan to value indicative of significant junior capital and equity cushion supporting the investments in our portfolio.

Total originations for the first quarter were just over 170 million and repayments were just over $200 million.

Essentially we were able to run in place during the first quarter. Despite a backdrop of the seasonal slowdown in sponsor activity as well as a more uncertain and volatile environment importantly.

Importantly, Src had approximately $180 million of unfunded commitments outstanding at quarter end, which we expect to fund in future quarters now.

Now, let me turn to each of our investment verticals.

Sponsor finance.

At $3 31, our cash flow loan portfolio is just over $370 million or just over 18% of the total portfolio and was invested in 21 different borrowers.

The average EBITDA of our cash flow investments was $82 million consistent with our focus on larger upper mid market borrowers the weighted average leverage in this portfolio has hovered around five five times consistently and the average interest coverage remains above three times.

As Michael mentioned sponsor activity in the first quarter has slowed from last year's torrid pace.

During the quarter, we originated $2 5 million.

And experienced repayments over $50 million.

Unfunded commitments total over $40 million.

These transactions, which are issued by borrowers to fund future acquisitions offer a prudent opportunity for us to grow our investment and established credits with existing structures.

At quarter end, the weighted average yield on the cash flow portfolio.

It was eight 2%.

Now, let me touch on asset based lending.

At quarter end, the combined asset based portfolio was just under $470 million, representing 23% of our total portfolio and it was invested in 24 borrowers the weighted average yield on this portfolio was just under 11%.

During the first quarter, we originated approximately $38 million of new loans and had repayments of $10 million.

Our ability to assess and monitor collateral makes us an attractive financing partners during periods of economic uncertainty when banks tend to retreat from lending.

Therefore, this business line provides some counter cyclicality to our origination platform.

Now, let me touch on leasing.

The credit quality of Kingsbridge portfolio remains strong and originations were essentially.

Flat during the first quarter.

At quarter end, our highly diversified portfolio of leases spans across three majors equipment sectors, including technology.

Industrial borrowers and healthcare and totaled approximately $573 million.

With an average exposure of $1 3 million per borrower.

This lease portfolio was 100% performing with the majority of the assets invested in leases with investment grade borrowers.

For the quarter Kingsbridge paid $3 5 million dollar dividend consistent with the prior quarter, which equates to a 10, 2% annualized yield on cost.

<unk> interest.

On our $80 million senior secured loan into Kingsbridge.

<unk> total income generated by the investments in Kings bridge through the debt and equity was $5 1 million for the quarter.

While Kingsbridge continues to have a strong pipeline of new investment opportunities supply chain disruptions are likely to limit portfolio growth in the near term, but also will extend attractive residual leasing activity now.

Now, let me turn to equipment finance.

As a reminder included in our equipment finance business, our financings held on our balance sheet as well as in our SLR equipment finance subsidiary.

During the first quarter equipment finance invested $20 million and had repayments of $45 million.

At quarter end the portfolio totaled just over $316 million.

It was invested across 94 borrowers with an average exposure.

Ultimately $3 $5 million.

This asset class represents approximately 15% of our total portfolio.

100% of their loans are in first lien assets.

And the weighted average asset level yield is just over 9%.

In Q1 comprehensive investment income.

From the entire equipment finance business totaled $3 $3 million.

The rebound in economic activity that started in the fourth quarter of 2020 and continued through last year has been supportive of the performance of our equipment finance portfolio. We are seeing valuations on equipment returned to pre COVID-19 levels and credit quality improving at the borrower level.

Our team expects to grow this portfolio during this year.

At quarter end, we had.

The appointment of a new CEO for equipment finance. He brings over 30 years of experience in the equipment finance industry, including 25 years of vendor finance focused experience, where he brings deep knowledge and relationships with both vendors and end users that will help the company develop and engage with new and existing <unk>.

Lions.

It's been early days, but we are thrilled to have Tom on the platform and he is taking us to new opportunities in the marketplace.

Now, let me touch on life Sciences.

At quarter end, the portfolio totaled approximately $300 million and.

It consisted of 16 different borrowers.

All of our companies in this asset class are meeting or exceeding their expectations at the time of underwriting.

With the weighted average cash runway now standing at over a year.

Life science loans represent just over 14%.

Our comprehensive portfolio for the first quarter and contributed over 23% of our gross investment income.

During the first quarter the team committed to $60 million of new investments, which $36 million were funded.

Repayments totaled $16 million.

At quarter end, Src had $112 million unfunded life science commitments outstanding which are available to our borrowers on reaching certain milestones.

Additionally, the life Science team currently has a robust pipeline of new investment opportunities, which we expect to fuel portfolio growth during the course of 'twenty two.

At quarter end, the weighted average yield on this portfolio was approximately 11%.

Excluding success fees and warrants.

Now, let me talk to.

The combined portfolio with a snapshot of what it would look like at SUNS been acquired at quarter end.

The combined entity on a pro forma basis would have had a portfolio of $2 $66 billion.

With over $600 million or 23% of the total allocated to sponsor finance and $2 billion or 77% of the total portfolio allocated to specialty finance.

Specialty finance verticals would have had an $810 million portfolio and asset base lending and an $890 million portfolio and equipment leasing and equipment finance.

And lastly over $335 million portfolio dedicated to life science investments.

As Michael indicated the combined portfolio will be more broadly diversified with multiple opportunities for growth, including directly underwritten investments tuck in or new platform acquisitions as well as potential portfolio purchases.

Importantly, the combined entity has approximately $215 million of unfunded investment commitments that we expect to fund in future quarters.

In addition leverage of the combined entity at quarter end would have been <unk> nine times leverage, creating additional investment capacity going forward to fund.

<unk> growth.

In conclusion, we see a continuation of the investment themes that have been driving our portfolio over the last few years.

Focusing our new origination activity on first lien cash flow loans to portfolio companies in defensive sectors and the upper mid market.

Increasing our investments in specialty finance assets, where we generally get tighter structures and more attractive risk adjusted returns.

And growing our investments alongside portfolio companies by committing to unfunded acquisition lines, which will be funded over the future quarters.

The keys to driving.

An increase in net investment income per share the.

The remainder of this year will be a combination of capturing anticipated cost certainty.

On the merger.

Our balance sheet and specialty finance portfolios continuing to take advantage of our scale and employing a $50 million share repurchase program.

Across our asset classes, we are seeing a number of attractive investment opportunities.

Given the uncertainties and market volatility. It is also important that we remain disciplined opportunistic and highly selective in our investments now let me turn the call back to Michael.

Yeah.

Thank you Bruce.

In closing we are optimistic about our earnings growth potential and the opportunity set across each of our investment verticals.

With the overall <unk> portfolio on solid footing, we are focused on remaining disciplined and highly selective in deploying our capital into attractive investment opportunities.

Financial sponsors continue to have record amounts of dry powder that is expected to support future deployment in 2022 and beyond the.

For larger middle market businesses, we prefer to lens, who continue to choose direct financings over the syndicated debt markets.

These industry tailwind combined with the scale of our investment adviser should benefit <unk> shareholders through greater access to upper middle market cash flow investment opportunities.

With the pandemic, which put them pandemic has proven are better positioned to protect capital than most smaller companies.

Additionally, we are reaping the benefits of our scale advantage and our cash flow life science and ABL verticals.

As I mentioned in my opening remarks, Bruce and I as co Ceos, and our independent directors believe that the merger of Src and sons, which closed April one.

Rates are larger and more diversified portfolio with incremental capacity to fund portfolio growth.

We believe the merger and resulting scale potentially makes us a better acquire a strategic buyer of specialty finance businesses, we will continue to be disciplined and selective in our new investments with a focus on capital preservation.

As we deploy our available capital and reached the midpoint of our <unk> nine times to one in a quarter times target debt to equity range. We believe that we can drive increased net investment income per share.

Accordingly, we believe Epsilon C to make we expect FERC to make progress moving NII closer to cover its distributions through the remainder of this year as cost synergies are realized and we deploy our available capital.

Finally, with the board's authorization for SLR seed adoption of a $50 million share repurchase program, we have additional flexibility to deliver shareholder value.

Our investment of ours, the alignment of interest with our company's shareholders continues to be one of our guiding principles.

Our team of approximately 8% of the combined entity.

A significant percentage of the annual incentive compensation invested in <unk> stock.

The team's investment alongside fellow Src shareholders demonstrates our confidence in the company's defensive portfolio stable funding and favorable position to reap the expected benefits of the merger.

We thank you very much for your time today operator at this time will you. Please open the line for questions.

Yes, and as a reminder to ask a question you will need to press star one on your telephone.

To withdraw your question press the pound key please standby, while we compile compile the Q&A roster.

Our first question comes from Ryan Lynch with K B W.

Ryan Your line is now open.

Hey, good morning.

Hey, Brian .

First question I had.

You guys.

Implemented a share repurchase agreement.

Yes.

This is the first one I can remember in quite a bit of time and I know you guys haven't been active with share repurchases in the past I would just love.

To get a little more color on why you implemented the share repurchase now what are you guys use on how active you will be at the.

The current.

At the current stock price.

And was it implemented more ads.

Our capital allocation.

<unk> mechanism.

As you go going forward or is it more putting therefore any dislocations you guys.

Stock price or at these levels.

Do you envision it being just part of the normal capital allocation process.

Yes. Thank you. Thanks for your question I think.

Take back is going way back in history, we implemented.

<unk> stock buyback program back in 2014, which we fully.

So we've actually substantially used we did at that time, because in one particular quarter, we had literally a.

A third of our portfolio repaid and so we were under Levered and thought that was a great capital allocation of opportunity for us.

This instance.

We waited for the merger to close.

Part of it is all of the merger as our leverage went down from 97% 91, so at a $50 million buyback.

It would roughly take us back to the point 97 again works work fully use so we thought that was good.

Capital allocation policy. It was also in response to the fact that there has been volatility in.

The BDC space, including ours, and we expect that to continue on with all the activity regarding rising interest rates inflation and the war that's going on so we do expect to use it.

<unk>.

Our stock is very attractive at these levels subject to our window period being opened and we intend to asics.

Okay.

That's helpful color and then.

Can you just give us any update you guys had a adding new nonaccrual in the quarter that has also been down.

Pretty meaningfully.

That.

I would just love if you can give an update on what's going on with that business, what what drove that that markdown and acting faster.

Sure so.

As you probably know this is one of our last remaining second lien cash flow positions.

We've been actively exiting that portfolio, rather successfully until we hit a speed bump with this one which is one of the last ones we have.

Just for context, so the business.

This is an outsourced anesthesia.

Business.

And they have faced some headwinds in the market that they operate in potential.

The reimbursement headwinds as well as some operating headwinds as well as some expense issues.

Even.

Increased.

Wage inflation.

Our country, including in health care service companies. So it's been a bit of a perfect storm for them.

Again, as a second lien investor.

Do take some of the brunt of that after the equity does they are in the process of evaluating strategic alternatives. So theres not a lot we can say.

But we will keep you updated as we move through the next quarter.

Okay understood that's helpful background.

Background context on that investment and then just the last one that I had I just want to make sure I'm understanding this correctly.

You talked about your corporate <unk> portfolio supply chain issue.

Somewhat of a headwind as far as being able to fund new investments, it's not that the pipeline is not there, but the ability to fund those investments.

Slide 10 presents an issue.

Didn't hear you mention that or maybe I missed it regarding the equipment financing portfolio. It didn't sound like there is the supply chain issues were.

The delay in funding in that book.

One am I correct in.

That that assessment and two can you just break down why supply chain would affect one and not the other if I am understanding that cluster. So it does affect equipment fans, but less so the equipment finance is.

Okay.

Bifurcate the two businesses Kingsbridge is lending to predominantly investment grade companies large companies large perfect purchases new purchases.

So a lot of assets coming in from overseas our equipment finance vertical as you may recall is lending to small companies mission critical equipment very often used equipment. So it's already landed and being employed somewhere else and then being redeployed. So just different demand drivers on the two segments.

Okay. Thanks for the explanation.

For me I appreciate the time today.

Thanks, Brian .

Our next question comes from Bryce Rowe with hope.

Do you have the floor.

Hi.

Thanks, Thanks, good morning.

Maybe wanted to start on rates and rates in <unk>.

Could you guys speak to the sensitivity of your balance sheet, especially considering.

It's pretty drastic move higher in base rates that we've seen or that we saw and continue to see here.

And here in May.

Sure sure we do disclose.

100 basis point move in our 10-Q.

We would see.

4% to 5% per annum pop based upon the $3 31 portfolio into floating rate debt, we have as well as the assets and liabilities.

What would happen with a 100 basis point move up.

Sure.

Pre qualified.

In NII.

For the year.

The 200 basis points.

Europe , 16% to 18%, 18% range and this is all on a look through basis. So looking at all five of the same codes.

Having the portfolio post merger.

So thats unemployed looking basis.

So very positive okay.

And rich were talking about.

Shocking shocking the base rate being being LIBOR correct at the end of the quarter.

Correct.

Got it okay.

And then maybe one for Bruce or Michael just thinking about.

Yes.

Potential upward trajectory of balance sheet leverage.

And can you, possibly fund some of these unfunded commitments.

I think we've talked over the last six months.

There is good visibility into that and obviously we've thrown some.

Uncertainty into the into the mix just kind of curious how you feel about some of the heightened or the heightened uncertainty that were that were.

Seeing and being able to get to that midpoint of the of the targeted range.

Sure Great question. So as you know we have a couple of levers to get there. So.

Yeah, obviously, the first step was making a significant acquisition in our portfolio, we know well.

At SUNS that did take leverage down a little bit, but not in a meaningful way.

But we think thats.

Quarter step back for two steps forward.

Because it also positions us with additional verticals that SLR <unk> did not have on their own clearly they both participate in cash flow life science loans, but now we have the working capital line of credit businesses.

Both business credit as well as the healthcare ABL business, both of which lend against receivables and are less M&A, driven or more relationship lending, where they act as the local bank for their borrowers.

So they use the driver there is just putting on new relationships and having utilization of the working capital facilities that they extend to their borrowers. So that's a new driver for SLR seats and add business credit in particular, we have been making tuck in acquisitions and growing that business. So that's a new.

<unk> for growth I think the other thing that we look to is the to your point the unfunded commitments go predominantly across our life science business and our cash flow business typically in life science, we do see some of that drawn down as they get additional operating milestones or capital raise.

Milestones. So we think that will be drawn because the drivers are.

In life Sciences, it's about new drug and device development FDA approval process, and then getting into commercialization. So we are in late stage companies by and large and so they are moving into the commercialization stage and will need our capital and I think the other driver in DVT LLS is acquisition lines for existing borrowers.

As you know our cash flow business is in defensive sectors, such as healthcare and insurance brokerage and software and they continue to make tuck in acquisitions. These lines do have a cost to them. When they are unused and have a life to them have finite lives. So we expect to see steady usage of those existing commitments.

And then last but not least we are.

Putting out new capital and new opportunities and I think the other thing worth noting is given the uncertainty we are seeing less headwinds in terms of repayments clearly there will be companies that will be sold and will be repaid, but the whole refinancing dynamic of trying to drive their cost of capital that I think has been put on hold.

For the foreseeable future at the portfolio company. So that will also mitigate.

And contribute to net portfolio growth.

Excellent. Thank you. Thanks for the time this morning.

Our pleasure.

Our next question comes from Casey Alexander with Compass point Casey. Your line is now open.

Yes, Hi, first just one maintenance question.

Discussion of the combined portfolio, where you said $890 million of equipment finance is that the equipment financing corporate leasing combined there, yes, yes Casey.

We arent going to increasingly look to make it a little bit easier to understand the collective businesses because they are similar but slightly different. So it's the same thing as we start to talk about our ABL business is similar but slightly different we'll try to simplify it for you as we move forward.

Okay.

Secondly, regarding the new CEO of the equipment finance business.

Previous management group was.

How does I believe out of GE equipment finance, what precipitated the change.

Is that business, just not growing as fast as you'd like or.

Why reach out for a new CEO there.

Sure. So so great question, so just by way of background.

The.

Consistent with all of our fin co platforms as we call them.

These are entrepreneurial founded and teams have been together for a long period of time to your point. This team came out of.

Okay.

Basically when we brought this business we knew.

That.

Phil Carlson, who ran the business has started the business was going to be looking to transition out over time.

Had been with us for a number of years, but he was approaching 70 million. So this was a natural time in his life to retire and so we actually brought in somebody Casey who also has <unk> background. Most recently he spent the last 10 or 15 years at DLL to Lodge, Landen, which is a major player in independent.

Leasing, but he also comes by way of GE. So the entire team is in place. We just had a transition from.

Phil who is retiring to a new CEO .

Okay that makes perfect sense. Thank you last question in relation to the life science portfolio.

And I know that that some portion of your NII.

Not dependent but benefits from.

Prepayments in the life Science area, where there is.

End of term payments accelerated fees as the volatility of the equity markets actually continue to slow that down I know that the prepayments haven't come in at the rate that you might've expected and I'm just wondering if the lack of having an IPO exit for certain companies or lack of not wanting to do down rounds.

Mike continued to slow prepayments in that vertical.

So thats a great question.

It is so key.

Company specific in terms of where they are in their development.

Because again, we're dealing with late stage you will see companies get purchased by Big Strategics because basically.

The VC community has become the outsourced R&D for the big strategics that once they get them to commercialization strategic step in and buy them. So that's really the driver of the takeout, it's less of a refinancing market than you think of when the typical cash flow sponsor business, where they're constantly trying to take down their cost of capital.

As already cheaper than equity to these borrowers and so it's not a big refinancing driver.

Exit tends to be as you know $2000.

$28 36 months Hall, because youre just so late in the development of the company's products be they drugs or devices.

Devices that then youre getting set up for a takeout I think the comment that you make which is spot on is the volatility in the equity market means.

Are less inclined to issue equity to fund their growth before the exit and more looking to supplement with some credit capital that.

In our minds is expensive, but relative to issuing equity is cheap and so we're actually starting to see the volatility allow us to put new assets out as we look forward. This year because that becomes more attractive to fund that marginal dollar that they need before they sell business in the next year or two but just to your point also I think.

While we do get these on a continuous.

Nestle consistent basis Q1 was light in that in that category, we will have some decent fees in Q2.

Alright, great. Thank you for taking my questions our.

Our pleasure thank you.

Our next question comes from Robert Dodd with Raymond James Robert Your line is open.

Hi, guys. Thanks.

Taking my question is on the combined portfolio you guys you talked about $2 6 billion combined 600.

Close at least allocated to sponsor finance and that's about it.

Should we expect that mix, one quarter sponsor finance three quarter, especially finance.

Kind of stay the same going forward as potentially a level up or is that just where it is today and you actually have.

Difference.

Three year target allocation.

For that capital base.

I think as you know we grew that portfolio of both.

And last year.

I think right now we would say that it's probably unlikely to outpace the growth of the other segments. So I think 20% to 25% is good.

Fair range.

Okay.

Got it.

The delayed draws I mean, the market has gotten.

More choppy.

What we're talking about in the context of the life Sciences.

Thank you.

If hybrids.

<unk>.

Different or the delayed draw structures that obviously you put in place some time ago for acquisitions that come.

Those structures say.

Say structures that would be put in place today.

Either covenant structures coupon spreads.

How much is kind of the market for what you do today versus when you actually put these things.

Put the structure together great question I think as Michael mentioned in his remarks.

There is always a lag between seeing the volatility in change in terms in the broadly syndicated market.

And the private market and we've been to your point where deals for months before they actually close and so you are not always able to adjust terms. So.

Effectively what's in place today.

His last year's structure in last year's pricing, but I would tell you today, we're really if we were to book the same investment. It would look very similar you haven't seen that change we're hopeful as we get into another quarter or two as this volatility continues as always you see the broadly syndicated market terms reflected in the private market, but I think.

We are a quarter or two away. So it's really going to happen in the next quarter or two those investments be they funded or delay draws you'll see a bit of a change but it really today is no different from a year ago yet.

I appreciate it thank you.

And as a reminder to ask a question. Please press star one on your telephone.

Our next question comes from Melissa Wedel from Jpmorgan Melissa Your line is now open.

Good morning, everyone. Thanks for taking my questions today.

First one is a little bit of a housekeeping item on the combination of the portfolio I just wanted to follow up I know you mentioned a couple of different things and as these portfolios are integrated.

There anything specific that we should be thinking about in the next.

Quarter or two in terms of incremental cost headwinds or friction.

Yes.

We're financing Eric good things to think about as financing is consolidated.

Now the good news is that this merger with literally seamless the credit facility that existed at <unk>, namely the revolving credit facility as well as the secured notes just moved over we didn't have to make any change to any of our financing agreements with Src.

But we Havent you know the portfolio well since we originated at all so literally there will be no friction cost at all.

And all the merger expenses were incurred in Q4 and Q1, we don't really expect it to be anything more from that and so Q2 should be a fairly clean quarter and will reflect the full results of the merged entity.

And not merger related specifically, but next week, we do.

Repay the four 5% notes that we have outstanding.

Pre refinance those with roughly three 2% notes between the issuance in January and last September . So we will also see not a full quarter kind of a half quarter of that benefit in our interest cost on a combined basis.

Just to be a little more direct regard. Your question, we do expect that NII in Q2 will be higher than Q1.

Okay. That's helpful. Thank you.

And my second question is really bigger picture in nature, I think that you talked about a couple of interesting things and in terms of the volatility.

Potentially impactful and pricing.

But there is a lag in the private market versus.

David.

And also the attractiveness of that just.

To find incremental growth right now as opposed to equity.

That being said, there's also continues to be a lot of capital formation in this space.

Im curious how youre looking at the landscape longer term, what what the opportunities that can look like for you and what youre expecting in terms of pricing.

And also given the rather the diversified platform that you guys have how those things all come together.

Yes.

So let me let me take a shot I'm sure Bruce interrupt me.

You're spot on there has been a tremendous out of capital formation in private credit.

Good news is that the vast majority of it is being created by.

Those who are $20 $30, $40 500 billion or asset managers.

And there are the ones, we're focused on doing that.

$1 billion to $3 billion a unit tranche, we just saw second liens and so at their scale. It kind of moved to the point, where we don't really see them in our business. We're looking to put in a given loan across our platform anywhere from $50 to $250 million in a given loan not $1 billion.

So.

The real capital formation that really hasn't kind of impacted our markets and more specifically in the 75% of our portfolio of specialty finance.

You have not seen much capital formation in those sectors. So it doesn't really impact about it either.

Yes, I would just echo Michael's comment I think the.

Diversity to your point of the platform the ability to do anything from a $100000 factoring line too.

$250 million life Science investment.

Is very compelling the aggregation of these niches adds up to a nice overall diversified platform that serves us well.

Economic and credit cycles, and I think that's really what we're going to do more of that mid <unk>.

Science is a great example, even there yes, there's been a little bit of capital formation, but the market is for a $5 billion market youre not going to see people come in that half.

Large scale platforms and need to deploy to Michael's point 500 to a $1 billion in a transaction just doesn't exist. So it's important that we maintain discipline.

And go to <unk>.

Collection of defensive niches.

Thank you guys.

Our next call comes from Gerard Heymann from RBC Gerard your.

Your line is open.

Hello, gentlemen, congratulations again on the merger I think it's an amazing thing and I just have a two part question for both Bruce and Michael.

You guys can take them in turn or whatever but just was curious based on the merger now and where we are in the markets to the one thing that you guys are most excited about going forward and the one thing you guys are.

Most fearful of going forward.

You could possibly answer that that would be most appreciated. Thank you.

Yes, I think the excitement is.

Follow up on that.

The prior questions from Melissa the exciting part for US is that we have increased scale increase simplicity and our shareholders are together and combined in all can benefit from the different growth engines as you know back in the day.

We created two different bdcs. They did have distinct investment strategies increasingly we also thought back then that there was a different risk adjusted return with a benefit of 16 17 years, we feel that the risk has converged and it would be beneficial for everybody to be on one platform as shareholders.

<unk>.

Employees and as borrowers and so we're really excited to have it together and be able to think a little bit more simpler.

And broader.

Take advantage of the scale of the platform not only at the BDC, but we as you know have continued to partner with private capital alongside the BDC that allows the BDC to act as it is an $8 billion.

Fund rather than a $2 6 billion fund pro forma for the <unk> merger. So it really allows us to have the benefit of scale and go to the larger transactions. When we want to go large and go to the small transactions like factoring deal will move one of those small so I think we have really looked at the flexibility and are taking advantage.

Vantage of that I think.

The biggest challenge is always in credit investing is discipline and I think we're most concerned about the fact that.

As Melissa was talking about the amount of capital that has been raised.

People need to learn a tough lesson before they get back to their disciplined centric. So we will see marginal players come into some of our niches and we need to maintain discipline and know that we're going to let investments go.

And be patient and I think thats the real challenge day in day out is to not follow where some of the new players go and take a long term approach and so that is the challenge.

But I think we're up to that challenge.

Great.

Thank you very much.

Sure.

And then just willing to go further questions at this time, so I'd now like to turn the conference back to Michael gross Chairman and co CEO .

Thank you very much we have nothing more to add at this point. However, as always if you have any questions or comments. Please feel free to reach out to any of us at a time. We appreciate all your support we look forward to reporting on our first quarter at the merged entity in early August . Thank you.

Okay.

This concludes today's conference call. Thank you for participating you may now disconnect.