Q3 2022 SLR Investment Corp Earnings Call
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Good day, everyone and welcome to the Q3 2022 SLR investment Corp earnings call at.
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I'd now like to turn the conference over to Mr. Michael Gross Chairman and co CEO . Please go ahead.
Thank you very much and good morning, welcome to SLR investment Corp earnings call for the third fiscal quarter ended September 32022.
And today by Bruce bowler are our co chief CEO and.
And rich <unk>, our Chief Financial Officer Rich before we begin would you. Please start by covering the webcast and forward looking statements.
Sure. Thanks, Michael.
I would like to remind everyone that today's call and webcast are being recorded please.
Please note that they are the property of <unk> investment Corp.
Any unauthorized broadcast in any form are strictly prohibited.
This conference call is being webcast from the events calendar in the investors section of our website at Www Dot SLR investment Corp Dot com.
What are your replays of this call will be made available later today as disclosed in our earnings press release.
I would also like to call your attention to the customary disclosures in our press release regarding forward looking information.
Statements made in today's conference call and webcast may constitute forward looking statements, which relate to future events or our future performance or financial condition.
These statements are not guarantees of our future performance financial condition or results and involve a number of risks and uncertainties, including impacts from COVID-19.
Past performance is not indicative of future results actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC.
SLR investment Corp undertakes no duty to update any forward looking statements unless required to do so by law.
Copies of our latest SEC filings, please visit our website or call us at two one to 90 931.
1670.
Comments on today's call include forward looking statements, reflecting our current views with respect to the Sos fees acquisition of songs any expected synergies and savings associated with the merger the ability to realize the anticipated benefits of the merger our future operating results and financial performance.
And the payment of dividends going forward. Please.
Please specifically note that the amount and timing of cash dividends and distributions are not a guarantee of any future dividends or distributions, while the amount thereof the payment.
Timing and the amount of which will be determined by <unk> investment Corp, 's board of directors.
With that I would like to turn the call back to our chairman and co CEO .
Michael growth. Thank you rich good morning, and thank you for joining us.
Last night <unk> reported net investment income of 37 per share for the third quarter of 2022.
Importantly, we are expecting to cover our 41 per share distribution in the fourth quarter of this year.
In our communications outlining the proposed merger of <unk> and SUNS, we projected that we would reach 41.
Per share of NII in the second year following the acquisition close.
Due to the realization of synergies portfolio growth rising interest rates and stable portfolio quality. We are now expect to achieve that target sooner than originally projected.
As expectations for research to continue to build we are pleased to share that our portfolio companies are well positioned to withstand a downturn.
Our margins have been impacted some of our borrowers from a combination of higher labor and input costs as well as continued chain disruptions, we have not seen evidence of financial stress amongst our borrowers.
At September 32022, <unk> net asset value per share was $18 37.
A slight decline from the <unk>.
Second quarter <unk>.
Largely driven by unrealized losses from Mark to market changes in our specialty finance subsidiaries, resulting from lower copper company valuations.
These unrealized losses are due to market technicals and are not indicative of the financial health of our commercial finance businesses, all of which have had a solid third quarter and are trending positively.
Overall, our portfolio is performing well and credit quality is stable.
As a reminder, our cash flow senior secured loans are to companies and non cyclical sectors and our specialty finance loans have significant collateral coverage.
Enhanced by Src's acquisition of SUNS, our portfolio is highly diversified across capsule loans and non cyclical industries and an asset based loans.
At September 30th 97, 6% of our comprehensive investment portfolio was comprised of first lien senior secured floating rate loans, which provide greater downside protection during a recession.
Our second lien exposure remains de Minimis, our investment focus on first lien loans should enable us to perform well and increasing rate environment.
The current market conditions for new investments are the most attractive we've seen in several years against.
Against the volatile market backdrop during the third quarter the company originated $394 million of new investments and had repayments of $159 million.
Terms on sponsor finance loans become more attractive in our specialty businesses, which flourished during turbulent market conditions are also seeing attractive opportunities and importantly have available capital to take advantage of the investing climate.
The inflation and economic concerns that a play 2022 led to further disruption in the syndicated loan and high yield markets in the third quarter.
We continue to benefit from banks retreat from leveraged lending.
Pricing volatility and deep trade discounts in these markets reflect the increased credit risk from tight pricing of loose structures of broadly syndicated loans that were underwritten prior to the second quarter 2022.
With banks in the sidelines lenders, who can hold investments of $200 or more such as the SLR platform or even in more demand and have greater pricing power and influence over terms.
As a result, private direct lending deals continue to be heavily negotiated with tight structures.
With economic headwinds and continued rising rates middle market private credit as a source of relative stability and potentially higher returns.
Some of our seeds unique positioned to capitalize on this opportunity.
We are seeing investment opportunities with less leverage and higher yields than the loans restructured during the recent period of Covid related government stimulus.
The recession resistant sectors in which SLR special items continue to perform well with financial sponsors focused on deploying their dry powder into existing portfolio companies via add on acquisitions.
During uncertain economic time borrowers increasingly turn to asset based lending strategies for working capital and liquidity management, which provide our investors with greater downside protection across economic cycles.
Our ABL businesses have historically outperformed during challenging market conditions with asset rich companies access to traditional lending sources is constrained.
We have ample dry powder to take advantage of investment opportunities with terms more attractive than were available a year ago.
Our funding profile is in a strong position to weather a rising rate environment with $566 million of our $1 2 billion of funded debt comprised of senior senior.
Senior unsecured fixed rate notes at a weighted average annual interest rate of three 9%.
At September 30, our leverage was one four times net debt to equity comfortably within our target leverage range of <unk> nine times to 125 times.
At September 30th including available credit facility capacity other specialty finance companies and subject to borrowing base limits <unk> ample available capital to take advantage of the current attractive investment environment.
In October we announced the formation of the SLR senior lending program with us with a strategic partner, who knows our business and investment philosophy, well, including throw up through other investment initiatives.
Src and Investor have each made initial equity commitments of $50 million. We're currently in the process of selecting a financing provider.
We expect to contribute to the JV sub SLR lower yielding first lien cash flow loans that were acquired through our merger with <unk>.
Lastly, we plan to reduce our overall cost of capital through share repurchases under our $50 million share repurchase program authorized by our board of directors.
While we have not yet been active with the buyback plan, we are committed to utilizing it and believe that our patients will translate to the ability to invest in our portfolio at attractive discounts.
I will now turn the call back over to our CFO rich with Teco to take you through the third quarter financial highlights.
Thank you Michael.
SLR investment Corp, 's net asset value at September 32022 was 1.01 billion or $18 37 per share compared to $1.2 billion or $18 53 per share at June 32022.
At September 32022 as for fees on balance sheet investment portfolio had a fair market value of approximately $2 2 billion.
135 portfolio companies across 40 industries.
Compared to a fair market value of 2.01 billion in 127 portfolio companies across 40 industries at June 30.
At September 30.
The company had approximately $1 $1 6 billion of debt outstanding with leverage of 114 times net debt to equity.
When considering the available capacity from the company's combined credit facilities together with available capital from the company's significant subsidiaries <unk> investment Corp has significant available capital to fund future comprehensive portfolio growth.
Moving to the P&L for.
For the three months ended September 32022.
Gross investment income totaled $47 6 million.
Versus $42 8 million for the three months ended June 30.
Net expenses totaled $27 5 million for the three months ended September 32022.
This compares to $22 5 million for the three months ended June 32022.
Accordingly.
The company's net investment income for the three months ended September 32022.
Totaled $20 1 million or <unk> 37 per average share compared to $20 3 million or <unk> 37 per average share for the three months ended June 30.
Below the line the company had net realized and unrealized losses for the third fiscal quarter totaling $6 5 million.
Versus realized and unrealized loss of $35 9 million for the second quarter of 2022.
Ultimately.
The company had a net increase in net assets, resulting from operations of $13 5 million was <unk> 25 per average share for the three months ended September 30.
This compared to a net decrease of $15 6 million or 29 per average share for the three months ended June 32022.
Finally.
On November <unk> 2022.
The board of directors declared a monthly distribution of $13 six $600 seven per average share payable on December one 2022 to.
The holders of record on November 17th 2022.
And with that I'll turn the call over to our co CEO Bruce.
Bruce folder, Thank you rich let.
Let me begin by providing an overview of the combined portfolio.
At quarter end on a fair value basis. The comprehensive portfolio consisted of approximately $2 9 billion of senior secured loans to approximately 780 distinct borrowers across over 100 industries with an average exposure of $3 7 million.
At quarter end 99, 8% of our portfolio consisted of senior secured loans with 97, 6% in first lien loans and only 2% in second lien cash flow loans and 2% in second lien asset based loans.
Our specialty finance investments account for approximately 76% of the fair value of the portfolio with the remaining 24% in senior secured cash flow loans to upper mid market sponsor backed companies at.
At quarter end, our waiver weighted average asset level yield was 11, 3% up from nine 6% at the end of the second quarter.
The weighted average investment risk rating was under two based on our one to four risk rating scale with one representing the least amount of risk.
Turning to our investment strategies as a reminder, we have segmented the portfolio into four distinct asset classes. The first cash flow loans to upper mid market companies, which we referred to as sponsor finance. The second is asset based loans to third as life science loans, which are made to <unk>.
<unk> capital back late stage drug and medical device development companies.
In the fourth strategy is equipment finance.
Now, let me turn to each of these strategies.
Sponsor finance in our sponsor business, we originate first lien secured loans to upper mid market companies and non cyclical industries with our largest industry exposures being healthcare and diversified financials.
Our sponsor finance vertical is currently benefiting from banks retrenchment from private financings and sponsors and management teams increasing preference to partner with direct lenders during a time when financial sponsors have record dry powder and a desire to put it to work and buyouts and add on acquisitions.
The recent market turmoil caused by the fed tightening and indicators of a recession have resulted in a widening of yields in the syndicated bank loan market and a sharp reduction in banks' willingness to assume syndication risk.
As a result of the diminished supply of capital available to borrowers and the selloff in the liquid credit markets. We're seeing a 200 to 300 basis point increase in the yields on our private debt portfolio compared to a year ago.
With over 99% of our cash flow portfolio in first lien loans and a weighted average interest coverage ratio that exceeds two five times, our investments are well positioned to withstand any liquidity pressures that our borrowers are facing from rising interest rates.
At quarter end, our sponsor cash flow portfolio was just over $700 million.
Equaling, 24% of our combined portfolio and was invested across 45 companies.
The average EBITDA of our cash flow portfolio was $113 million.
Increased from $82 million at the beginning of this year.
Private equity transaction volume, while down from last year's record setting levels remains healthy and we believe that this 'twenty two 'twenty three vintage will be extremely attractive period to deploy capital.
During the quarter, we originated just over $100 million of cash flow loans and experienced repayments of $34 million.
At quarter end, the weighted average yield on the cash flow portfolio was nine 6% up from just over 8% at the second quarter.
Now, let me turn to our ABL segment.
SLR credit solutions.
The first of our three ABL segments provides collateral backed loans to asset rich companies. The asset class requires expertise in valuing and monitoring our underlying collateral that supports our loans. Historically this business has outperformed during periods of market volatility and economic.
<unk>.
Borrowers who are asset rich, but have cash flows that are pressured by rising rates and slowing demand are forced to raise capital backed by their liquid.
Assets.
Our teams.
Deep over 20, plus years of average experience and value and collateral gives us an advantage in underwriting investments that are backed by strict borrowing basis against the collateral.
Underlying borrowers piping.
Pipeline today is very attractive and we are optimistic about the business over the coming quarters.
Now, let me turn to SLR business credit.
This division provides asset based loans collateralized predominantly by receivables as well as factoring of receivables facilities in order to finance, our borrowers working capital needs.
Similar to the credit solutions team business credit has expertise in valuing and monitoring the underlying receivable collateral.
Business credit subsidiary previously called fast pay.
And now SLR digital finance has continued to outperform our acquisitions at the time of our acquisition in 2021 and has contributed to the growth of this division's portfolio, which once again is at an all time high at the end of the third quarter.
The last division and the ABL segment.
<unk> healthcare ABL is very similar to business credit.
And that it lends against accounts receivable, but here, we only lend to health care companies.
Portfolio size has recovered from its COVID-19 lows when the government's massive capital infusion cause many of our borrowers to pay down our credit lines.
And finally, our lender finance business makes asset based loans to other commercial lenders with the issuers underlying loans as our collateral.
We're seeing a slowdown in the securitization and private placement markets, which is driving increased demand for our capital.
With our increased deal flow, resulting from this market disruption we are continuing to take a conservative approach as always we evaluate the runoff value of our portfolio to ensure that it will fully cover the value of our investment.
At quarter end, the combined senior secured asset based loan portfolio totaled over $965 million, representing 33% of our total portfolio was invested in over 170 borrowers the weighted average asset level yield of this portfolio was just over 12.25%.
During the third quarter, we originated $132 million of new asset based loans and had repayments of just under $20 million.
Now, let me touch on equipment finance.
This division consists of both Kingsbridge holdings and SLR equipment finance.
Kingsbridge provides leases for essential use equipment to a diversified diverse set.
Investment grade customers.
Customers have been continuing to extend their existing leases to lengthen the useful life of their existing equipment, which has had a positive impact on our portfolio due to the attractiveness and size of the opportunity set kingsbridge has been continuing to add originators originators to its team.
SLR equipment finance provides.
Senior secured financings that are collateralized by mission control equipment across a variety of industries.
As a result of our focus on reducing the risk in the portfolio.
Extremely well positioned to weather a potential recession.
Additionally, the portfolio is benefiting from rising asset valuations due to inflation.
We are already seeing the benefits of our new CEO in this division.
He brings new energy and has brought in additional resources to enhance both originations and risk management.
Businesses had strong originations towards the end of the third quarter, which is continuing into the fourth quarter. We feel that they are very well positioned for growth next year.
At quarter end, the combined equipment finance portfolio totaled just over $900 million, representing 31% of our total portfolio and was invested across 500 borrowers.
Weighted average asset level yield of this portfolio was 11, 4%.
During the third quarter, we originated approximately $111 million of new equipment finance loans and had repayments of just under $101 million.
Finally, let me provide an update on our life Science segment.
The life Sciences, the current economic conditions have not impacted the need for new drugs and medical devices, which in recent years has bolstered venture capital activity and ultimately reinforces the need for leverage provided by our life science team.
The asset class has traditionally been uncorrelated economic disruptions.
These borrowers have significant equity cushions with strong venture capital equity backing.
Our low loan to values, which are typically less than 25% provides significant downside protection for our investments.
Record amounts of venture capital equity is continuing to drive the opportunity set here.
At quarter end, our portfolio totaled over $350 million across 15 borrowers over.
Over 90% of our life science portfolio is in loans, and which borrowers have over 12 months of cash runway.
Life science loans represent approximately 12% of our total portfolio and contributed approximately 20% of our gross investment income for the third quarter.
During the quarter the team committed $47 million of new investments and had repayments totaling $4 7 billion.
At quarter end.
Had $88 million of unfunded future commitments for life science loans.
Additionally, the team currently has a robust pipeline for new investment opportunities, which we expect to fund over the next couple of quarters.
At quarter end, the weighted average yield of life science portfolio was approximately 11, 3% excluding success fees and warrants.
In conclusion across our asset classes, we are seeing an improved investment opportunity set and expect the current negative market sentiment to continue to translate into better terms across each of our asset classes.
Given the current uncertainties and market volatility. It is important that we remain disciplined opportunistic and highly selective in our capital deployment now let me turn the call back to Michael.
Thank you Bruce.
In closing, we believe that our time tested conservative underwriting approach, resulting in a defensively constructed portfolio comprised of both first lien cash flow loans to borrowers and non cyclical industries and asset based loans with significant collateral coverage positions us well for recession in any continued market disruption as I.
Mentioned in my opening remarks, we are expecting to cover distribution. This current fourth quarter and beyond this revised forecast is an acceleration of our net investment income projections at the time of our merger announcement last December .
Separately, if interest rates were to move another 100 basis points higher we would expect the portfolio at September 32000, 2022 to generate incremental net investment income of <unk> 12 per share on an annualized basis.
Our investment Adviser's alignment of interest of the company's shareholders continues to be one of our guiding principles. The SLR team owns approximately 8% of the companys stock, including have a significant percentage of annual incentive comp invested in Src stock.
The team's investment alongside fellow Src shareholders demonstrates our confidence in the company's defensive portfolio stable funding and favorable position.
Thank you for your time today, operator would you. Please open up the line for questions.
Certainly at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing star Q.
We will take our first question from Sean Paul Adams with Raymond James Your line is open. Please go ahead.
Hey, guys.
We understand how.
Interest rate sensitivity affects your debt book, but can you provide some color on how about chip flow through the dividend line, given your specialty finance businesses, having underlying floating rate portfolios.
Okay.
So I think what we highlighted in terms of 100 basis points move that impacts from the finance company as well because it effectively with the exception of equipment leasing.
All of our specialty finance businesses are floating rate as well. So we would expect the dividends for the finance companies will increase as rates increase.
Yes in that 12 includes that that increase from the finance companies.
Thank you.
Thank you.
Once again, if you would like to ask a question. Please press star one on your Touchtone phone.
We will go next to Melissa Wedel with Jpmorgan. Your line is open. Please go ahead.
Good morning.
Wanted to first touch on the share repurchase program you mentioned it during your prepared comments, but didn't have not yet use that authorization.
Even the attractiveness.
Vintage as you guys just elaborated on.
Should we interpret that to mean that.
You would need to see the current opportunity set become less attractive.
Before you guys would be inclined to repurchase shares.
No I think the answer is we're going to do both I think we think the shares are very attractive today.
As attractive as new investments. So I think you should expect to see us.
Continue to invest in new investments as well as to you to stock buyback during this quarter.
Okay got it thanks for that clarification and then on the JV can you elaborate on how you're expecting that to.
Scale over time, what should that timeframe look like and what kind of yield profile what level of leverage are you expecting to take that too.
Yes, great question, so just to summarize.
The SLR and the JV partner, each put up $50 million of equity commitment to the JV.
Target leverage will be somewhere in the one five to two times so in the aggregate at most 300 of assets.
The nice thing is that we can scale it over time, but we do have through the acquisition of SUNS a portfolio of call it $240 million or so of cash flow assets that while very attractive were put in place an underwritten at a time where rates were lower and spreads were.
Tighter.
And so it's a very efficient vehicle to overtime.
Contribute some of those sons assets.
Starting to do that this quarter, but.
But also at the same time, we will be replacing that.
Investment capacity on balance sheet to deploy to your earlier comment into this very attractive market environment. So it's a bit of a rotation and it'll happen over a few quarters.
Okay. Thanks.
I will hop back in the queue. Thank you.
Thank you.
Our next question comes from Paul Johnson with <unk>. Your line is open. Please go ahead.
Yes. Good morning, Thanks for taking my questions.
Over the last few quarters.
Curious I was looking at the Mark on the SLR equipment Finance business I think this last quarter here is around 83% of cost or so and I think that's just trended slightly lower over the last few quarters. I was just hoping you can just explain I guess what drives the mark on that investment I was wondering if that had anything to do with it.
The fixed rate assets.
Investments, but I guess any color on how that how that investments mark can be helpful.
Sure. So similar to all of the <unk> third party marks and Theyre really as equity finance companies, which SLR has an equity investment in each of them.
Third party is looking to the comparable company analysis and as you can imagine as we're heading into a recession and rising rates.
Most lenders are being marked down regardless of the form of lending capital that they provide and so most of this is market technicals I would say that the other <unk> have been growing as we mentioned in our prepared remarks, whereas over the last couple of years, starting in 2020 with Covid, we have been shrinking that.
Portfolio, so they're mark to market is down a bit more than the others because it's not just the market Comparables. It's also shrinking that portfolio, but we do believe that that is now starting to re grow and so we would expect all of the values at the <unk>, including equipment finance to grow over time, but they do.
Do face.
Face whatever the market comparable values will be and that's reflected on an unrealized basis.
Got it appreciate that.
Very helpful.
And then I guess just in terms of all of your your Sin COSE.
Yeah.
Be helpful to kind of hear where you think youre at I guess, what the comprehensive portfolio and within your individual finance companies in terms of I guess optimal leverage I know that's been a work in progress at the BDC level, but where are you I guess in a comprehensive level basis are you still.
Kind of on your way getting there I mean more leverage to be taken down within the Santos or are we closer I guess to that point.
Yes, great question I think that it varies by <unk> as we mentioned in our comments. If you look at business credit for example, which together with the acquisition of fast paced last year has been.
Re growing their portfolio also utilization of their facilities is increase as government stimulus has receded.
So they are heading towards the optimal.
Leverage the other.
Other areas I would say Kingsbridge has also.
Towards optimal leverage but there is.
Some rebuilding that we've been doing at credit solutions.
I think additionally, add equipment finance.
As well as to some extent at our healthcare division, which is the smallest of the five so there is some additional borrowing capacity across the <unk> codes that were looking to take advantage of as well as on balance sheet.
Got it I appreciate that.
Last question just in the quarter I was wondering if you guys. If you had it.
Do you guys have any estimated amount of potential purchase discount accretion in the quarter.
Probably around in minor bulks.
Have you got a $1 million.
Got it okay.
Okay I appreciate it. Thanks, Thanks for taking my question that's all for me.
Thank you.
And a final reminder, star one if you had a question or comments well move next.
Melissa Wedel with Jpmorgan. Your line is open. Please go ahead.
Thanks for taking my follow ups.
Okay.
Wanted to touch on <unk> activity, we've heard varying comments.
Current teams about what sort of activity levels and repayment activity base.
With sort of the traditional environment.
Perhaps being a little less active but maybe there is an opportunity for more specialized creative type financing solution. So.
Curious how youre looking at for Q, and what you expect.
Yes, I think that similar to what youre hearing from others.
Had a very strong Q3, but we are seeing a slowdown in Q4.
It's active and we benefit from having multiple verticals.
But we also were not seeing much in the way of repayments.
I think that Directionally, we've taken our leverage to one one for.
We are looking at to your earlier questions to recycle some assets move them into the JV and the cash flow segment and put some more on balance sheet. We do have some delayed draw facilities that are getting drawn for add on acquisitions, but I think net net we're not expecting.
Meaningful movement in terms of the portfolio on a net basis this quarter.
Okay. That's helpful. And then my last follow up question I'm not sure. If I missed it did you guys give an update on the non accrual rates specifically in <unk>.
The non accrual rate outstanding.
Yes.
2%.
At cost and <unk>.
4% on fair market value.
Got it okay and is that across two or three company.
Two companies American teleconferencing and looked at them.
And finally, I'd like a magnet.
Yes.
Got it thank you.
Okay. Thank you.
If you would like to ask a question. Please press star one on your Touchtone phone.
With no further questions holding I'll now turn the conference back to Michael gross for any additional or closing remarks.
No additional comments other than thank you for your support and time and if you have any follow up questions. As always please feel follow up with any of us take care everybody Bye bye.
Ladies and gentlemen that concludes today's conference you may disconnect at this time and have a wonderful day.
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