Q4 2022 SLR Investment Corp Earnings Call

Speaker 3: net debt to equity, up from our load during the COVID-19 pandemic of 0.56 times, and comfortably within our target leverage range of 0.9 to 1.25 times. Along the repayment of our $75 million of senior unsecured notes in January , our next term debt maturity is until the end of 2024. We are in the fourth position of a not needing to refinance any of our term debt in the near-term at current higher rates. December 31, including available credit facility capital at our specialty-fans portfolio companies, and subject to bar and base limits, SORC had over $650 million in available capital to take advantage of the current attractive investment environment. As a reminder, during the pandemic, our credit quality remains strong. However, we did lose earnings power through outside loan repayments as many of the borrowers paid down their debt with capital from government stimulus programs. This year, we expect to continue to grow up for folio, when we expect to be a very attractive advantage for both cash flow and specialty-financed loans, which should drive further increases in our earnings. In December , we began contributing portions of lower yielding firstly in cash flow loans.

Speaker 4: $18.33 per share.

Speaker 4: compared to 1.01 billion or $18.37 for share at September 30, 2022.

Speaker 4: At December 31st, 2022, S. Laura C. is on-bound cheat investment portfolio had a fair market value of approximately 2.1 billion.

Speaker 4: Skin 139 portfolio companies across 45 industries.

Speaker 4: compared to a fair market value of 2.2 billion in 135 portfolio companies across 44 industries at September 30, 2022.

Speaker 4: At December 31st, the company had approximately 1.1 billion of debt outstanding.

Speaker 4: with leverage of 1.08 times net debt to equity.

Speaker 4: By considering the available capacity from the company's combined credit facilities.

Speaker 4: Together with the available capital company and significant subsidiaries, S.L.R. investment corps has significant available capital to fund huge comprehensive portfolio growth while remaining within its target leverage of 0.9 times to one time, two five times net debt equity.

Speaker 4: Moving to the panel. The three months ended December 31st, 2002.

Speaker 4: The gross investment income told 54.1 million versus 47.6 million for the three months ended to 10th of 30th of 2022.

Speaker 4: Net expense is total 31.6 million for the three-month ended December 31st, 2002.

Speaker 4: This compares to 27.5 million for the three months that did September 30th, 2012.

Speaker 4: Accordingly, the company's net investment income for the 3 months ended December 31, 2022, totaled 22.5 million or 41 cents per average share compared to 20.1 million, what 37 cents per average share for the 3 months ended September 30, 2022.

Speaker 4: hello the lining

Speaker 4: The company and net realized and unrealized lost for the block fiscal quarter, it's holding 3.5 million.

Speaker 4: But she realized and unrealized losses of 6.5 million for the third quarter of 2022.

Speaker 4: Ultimately, the company had a net increase in that assets resulting from operations of 19 million.

Speaker 4: or 30 cents per average share for the three months I did December 31st, 2022.

Speaker 4: This compares to a net increase of 13.5 million or 25% for average error for the three months at the 10 of the 30 is about 25%

Speaker 4: increase of 13.5 million or 25 cents per average year for the three months into September 30th, this is at 25. Finally.

Speaker 4: The Board of S.S. Lawyer has declared a monthly distribution of 0.136667 per share, table on April 4, 2023, the hold of the record as a March 23, 2023.

Speaker 4: And with that, I'll turn the pole over to our co-cheap executive officer Bruce Poler. Thank you, Rich.

Speaker 4: Let me begin by providing an overview of folio. At year end on a fair value basis, the combined comprehensive portfolio consisted of approximately 2.9 billion of senior secured loans to approximately 800 distinct borrowers across over 120 industries with an average investment exposure of 3.7 million. At quarter end measure two fair value, 99.8% of the entire bitcoin wallet is lost trepidly, 99.8% of our taxes as a fair value.

Speaker 4: with full borrowing based governors.

Speaker 4: Our specialty finance investments account for approximately 78% of the comprehensive portfolio, with the remaining 22% invested in senior secured cash flow loans to upper mid-market sponsor owned companies.

Speaker 4: We believe that this defensive portfolio construction and investment strategy diversification positions us extremely well for pending turbulence and provides a differentiated return profile for our shareholders.

Speaker 4: At year end, our weighted average asset level yield was 12.2% up from 11.3% at the under the third quarter. At year end, the weighted average investment risk rating of our portfolio was under two based on our one to four risk rating scale.

Speaker 4: with one representing the least amount of risk. Now let me turn to our investment strategies.

Speaker 4: As a reminder, segmented the portfolio into four distinct asset classes. The first is cash flow loans to upper mid-market private equity owned companies, which we refer to as sponsor finance. The second is asset-based loans. The third is life science loans, which are made to venture capital-backed late-stage drug and devised companies.

Speaker 4: just in the streets, bozier being health care providers versus and diversified financials.

Speaker 4: Our sponsor finance segment is benefiting from banks for trenchment from private financing, a slowdown in the COLO issuance market, and sponsors and management teams increasing preference to partner with direct lenders during a time when sponsors have record drive outter and a desire to put it to work in new platforms and add on acquisitions.

Speaker 4: which are available at increasingly attractive valuations in this environment. The ongoing market turmoil caused by aggressive fed tightening has resulted in a widening of yields in the syndicated bank loan market and a sharp reduction in banks' willingness to assume syndication risks.

Speaker 4: This has led to an increased opportunity set for direct lenders like us.

Speaker 4: As a result of the diminished supply of capital available to borrowers and the selloff in the liquid credit markets, we have seen 100 to 300 basis point increase in yields on private loans issued relative to a year ago.

Speaker 4: Additionally, total leverage levels on new issuance has decreased, which translates into a lower risk profile for our investments.

Speaker 4: We expect 2023 to be a great vintage for sponsor finance and for our pipeline to continue to build throughout this year. At your end, our sponsor finance portfolio was 643 million, including senior secured loans in the SSLP attributable to us. We're just under 22% of our total portfolio and this was invented.

Speaker 4: The weighted average yield on our counterflow portfolio was 11.2% up from 9.6% in the prior quarter.

Speaker 4: with approximately 99% of our cash flow.

Speaker 4: loan portfolio invested in first-learn loans and a weighted interest coverage ratio above 2.3 times. We believe that our investments are well positioned to withstand any pressures borrowers may be facing from rising interest payments.

Speaker 4: Now let me turn to our ABL segment. Historically, our ABL business is outperformed during periods of market volatility and economic

Speaker 4: Borrowers which are asset rich but have cash flows pressured by rising rates and slowing demand are forced to raise capital backed by their liquid collateral.

Speaker 4: Our team's deep 20-plus average years of expertise in valuing this collateral gives us an advantage in underwriting deals that are backed by strict borrowing bases against the collateral of the borrowers.

Speaker 4: This business segment is currently seeing heightened demand towards capital, translating into increased deal volume that we believe will continue throughout this year.

Speaker 4: In particular, slow and consumer spending is a positive for ABL business, which has extensive experience providing working capital loans to asset-rich retail companies. At UN, the senior secured asset-based low-emportfolio total of $1 billion, representing 35% of our total portfolio.

Speaker 4: It was invested in over 170 borrowers.

Speaker 4: average asset level yield of the ABL portfolio was 14.1% up from 12.3% in the third quarter.

Speaker 4: During the fourth quarter, we originated approximately 141 million of new ABL loans and had repayments of 71 million.

Speaker 4: Now let me turn to equipment finance. Our equipment finance segment provides customized equipment leasing solutions to businesses in North America with significant capital equipment needs. Our borrowers range from privately held family-owned middle-market businesses to large investment-grade companies.

Speaker 4: Our leasing capabilities span a broad spectrum of industries including warehousing, manufacturing, transportation, information technology, and healthcare. The team has extensive experience in valuing fixed assets and structuring loans, allowing us to provide our customers with quick creative and effective solutions.

Speaker 4: solutions to their financing needs, which is especially valued during periods of market volatility.

Speaker 4: This segment's portfolio grew during the fourth quarter and we are expecting that trend to continue this year.

Speaker 4: At year end, the Equipment Finance portfolio totaled $900 million representing approximately 32% of our total portfolio, and it was invested across 500 borrowers. The weighted average asset level yield to the portfolio was 10.7%. chance you could fund zero frame with your kids.

Speaker 4: During the fourth quarter, we originated 167 million of equipment finance loans and had repayments of 130 million.

Speaker 4: Finally, let me provide an overview of our life science segment.

Speaker 4: The life sciences, the current market volatility and economic uncertainty has not impacted the interest in an ultimate need for new drugs and medical devices.

Speaker 4: This has been bolstered by additional venture capital activity in recent years and ultimately reinforces the need for the type of first-lean senior secure loans that we offer. Record amounts of venture capital coupled with improved valuations are continued to drive this opportunity set.

Speaker 4: We expect the recent trend of higher yields to continue. Additionally, the extremely low-loan to values, which are typically less than 20%, provide significant downside protection for our investments.

Speaker 4: We continue to remain disciplined in our underwriting standards. At URIM, this portfolio totaled $322 million across 14 borrowers. Over 85% of our life science portfolio is invested in loans to borrowers that have over 12 months of cash runway.

Speaker 4: and important metric in this segment. Lifetime loans represented approximately 11% of our portfolio and contributed 20% of our gross investment income for the fourth quarter.

Speaker 4: During the quarter, the team originated $110 million of new loans and had repayments of

Speaker 4: 90 million.

Speaker 4: At your end, 121 million of life science unfunded commitments exist, which may be drawn based on borrowers hitting certain milestones.

Speaker 4: Additionally, the life science team currently has a robust pipeline of new opportunities.

Speaker 4: which we expect a few portfolio growth over the next several quarters.

Speaker 4: At year end, the weighted average yield on this portfolio was 12.5%, however that excludes success fees and warrants which typically take our returns higher.

Speaker 4: In conclusion, we are optimistic about the performance of the loans within each of our four investment strategies, as well as the prospects for additional portfolio growth this year, and what we anticipate will be an attractive vintage for each of our segments.

Speaker 3: At this time, 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 in non-cyclical industries and asset-based loans with significant collateral coverage positioned us well...

Speaker 3: for recession and any continued market volatility. All four of our ISA classes are exhibiting overall strong quality and with track and breadth of pipelines.

Speaker 3: We are anticipating further portfolio growth across the board in 2023, which should drive further increases in our net investment income per share. As I mentioned in my opening remarks, our fourth quarter net investment income fully covered our first quarter of 2023 distributions.

Speaker 3: and based on current availability pipelines, we expect to continue to build our earnings power this year as we deploy our available capital into higher yielding assets. However, please note that the amount in timing of past dividends and distributions are not a guarantee of any future dividends or distributions or the amount thereof.

Speaker 3: the payment timing and amount of which we determined by the company's board of directors. Our investment bar is alignment of interest with the company's shareholders, continuously one of our guiding principles. The SLR team knows approximately 8% of the company's stock, including having a significant percentage of their annual incentive compensation invested in SLRC stock.

Speaker 3: The team's investment alongside fellow SLC shareholders demonstrates their confidence in the company's defense portfolio, stable funding and favorable position.

Speaker 3: We thank you for your time today. Operator, will you please open the line for questions?

Speaker 2: Yes, sir. At this time, if you would like to ask a question, please press the star and one keys on your touchtone phone.

Speaker 2: If at any time you find your question has been addressed, you may remove yourself from the queue by pressing star queue.

Speaker 2: Once again, that is star 1 to ask a question.

Speaker 2: And our first question will come from KC Alexander with Compass Point. Your line is open.

Speaker 3: Hi, thank you. My questions are centered around equipment finance, which used to be one of the most attractive yields in the portfolio.

Speaker 3: because as I recall, it's shorter term loans that are fixed rate, kind of the yields on some of your other verticals have moved on past it. And so I'm kind of wondering, how long does it take for that portfolio to churn over? And what kind of onboarding yields are you getting now relative to the weighted average yield of 10.7%?

Speaker 4: Good morning Casey, thanks. Great question. So yes, as you know it is a high churn portfolio. As you look at the year equipment finance had 476 of originations and refays of 449. As you look at the year equipment finance had 469 of originations and refays of 449. As you look at the year equipment finance had 479 of originations and refays of 449.

Speaker 4: So it is a high-chirn, but to your point, we are burdened by fixed rate loans. So I can't put a precise time, but yes, we are putting new assets on above that 10.7 or else we wouldn't be deploying capital to that segment by definition given what we're seeing in other segments. So we expected to catch up over the next 12 to 18 months.

Speaker 3: Okay, thank you. And one other question, just simply because it becomes sort of relevant to the equipment financing universe. Does your equipment financing portfolio include any loans to that are backed by crypto mining machines?

Speaker 3: One other question, just simply because it becomes relevant to the equipment financing universe. Does your equipment financing portfolio include any loans that are backed by crypto mining

Speaker 3: Great question. Okay. No.

Speaker 3: All right, thank you. That's all my questions. I appreciate it.

Speaker 5: Any questions? I appreciate it. Thanks.

Speaker 6: Thank you.

Speaker 2: Our next question will come from Eric Slick with Hoofed Group. Your line is open.

Speaker 7: Thanks good morning all one just wanted to say I appreciate all the commentary that Bruce gave kind of breaking down some of the

Speaker 7: current characteristics and look in the forward distinct asset classes. I guess I'm curious as you look at the pipeline today and I'm sure that the next one to two quarters that the visibility is probably good beyond that maybe not quite as clear. But just curious as you look at that and think about the relative track and this is the four sectors, it sounds like you're positive on growing all four of those. But is there one that?

Speaker 4: year was 400 million of the billion, too, that we originated last year. And I think we would expect that to continue to sort of out-originate the other segments. You know, as we just touched on with K.D. equipment finance is kind of a steady drip of original steady drip of repayments.

Speaker 4: But I think ABL in general, in addition to equipment finance, but ABL more broadly is going to be more active in this environment. We're still seeing steady originations in our sponsor finance and life science segments, but I think ABL will be a little bit heavier because as we mentioned in our comments.

Speaker 4: In this environment, cash flow market is only open to certain borrowers in certain industries such as healthcare, which is extremely defensive and recession resilient. And so, you know, if you are in capital intensive businesses or cyclical businesses,

Speaker 4: your only access to capital is really using your assets since the cash flow market is in dislocation. So ABO will be heavier. We see that out driving everything else this year. But a steady activity in the other segments which is what we find very attractive. And to Casey's comments earlier, what you see is...

Speaker 7: to comment about expecting further growth in an eye pressure throughout 2023. And you mentioned there's opportunity for portfolio growth. And certainly you have got some room there. I will leverage to take that higher. I assume a part of that expectation is also just the outlook for higher rates. So kind of curious if you could maybe kind of weigh out that the benefits of the two of those and then just what you're expecting in terms of.

Speaker 4: We benefit from the fact, as Michael mentioned, that we've termed out our liabilities, have a nice 50-50 structure and don't need to go back to the funding markets until the end of 24, beginning at 25. So we're gonna be putting an opportunistic on that side. And I think on the asset side, given the strength of our portfolio and the first lean dominance, we are very comfortable.

Speaker 7: Thanks for taking my questions today.

Speaker 2: Thank you. As a reminder, that is star one to get into the questioning queue.

Speaker 2: Our next question will come from Mickey Schleen with Lattenberg. Your line is open.

Speaker 4: Good morning everyone. First question is about the 2.3 times interest coverage ratio you mentioned. I just wanted to clarify that on the last 12 month basis or is that the fourth quarter rate annualized?

Speaker 4: That is the fourth quarter analyzed.

Speaker 4: Okay, good to hear. And are you seeing signs of stress on average among borrowers in cash flow and their ability to service their debt given how much rates have increased?

Speaker 4: That's a great question and obviously why we did the recent stress test on not just interest coverage but fixed charge coverage. And for us, as you know, our cash flow book, while it's only 22% of the portfolio, it is bigger in our other portfolios that we manage than it is in the BD.

Speaker 4: and large companies, we mentioned the average EBITDA, you know, being up above $110 million, we just find bigger is safer in environments like this and obviously first lane. There is not much in the way of junior capital beyond equity, we don't have big second lane structures that we've invested in, but if we look at it, you know, our companies just need to...

Speaker 4: run in place from an earnings perspective in spite of the increased interest burden that they're facing because they don't have many other fixed charge.

Speaker 4: because we don't go into capital intensive businesses that have catbacks and big work and capital investments. And so what we find is steady earnings, we can still generate substantial free cash flow, which is what we care about and de-risk our credits. We are hearing from others peers who are in more ...

Speaker 4: That's good to hear and helpful, Bruce. On the $75 million repayment of the 4.5% unsecured notes in January , could you clarify what was the source of the funds to make that repayment?

Speaker 4: Sure. As you know, capital is fundable, but last year we had, before rates went up, we had pre-refinanced in January and December 21, the securities that we had last spring, and we also did a little bit extra. So we had 30 million more that we took.

Speaker 4: curious whether you shrunk the balance sheet to make that payment. And lastly,

Speaker 4: The other thing I would highlight is, as you recall, when we merged with SONS, we got their 85 million of senior unsecured notes that were at 3.9%, and we also picked up their undrawn revolver. So we expanded our credit capacity and the rich and the team have been very successful in actually adding.

Speaker 4: to our credit facility. So we can easily get to the 1.25 with our existing balance sheet. Yeah, I agree. I understand. Just my last question, regardless of the stock repurchase program, I was glad to see some repurchases during the quarter if I'm not mistaken.

Speaker 4: That was the first quarter during the existing program which would appear to be expiring this May. Given the stock price and how creative it would be, how does the board feel about extending that program beyond this May?

Speaker 3: We will likely extend it and with our window period open at the appropriate price we will be back in the market but we are going to definitely extend it so we have the flexibility to take advantage of it during volatility.

Speaker 4: Yeah, good to hear. And Michael, it's a 10B51 plan, if I'm not mistaken. I know there's a lot of constraints in terms of your ability to make those repurchases, but is there scope to increase the quarterly amount that you're repurchasing?

Speaker 4: here and Michael it's a 10B51 plan if I'm not mistaken is I know there's a lot of constraints in terms of your ability to make those repurchases but is there scope to increase the quarterly amount that you're repurchasing? It depends on the price.

Speaker 3: the answer. So, you know, we'll see and it depends kind of on the investment opportunities in front of us in terms of measuring the crediveness of new investments versus fine I would say, we would ask quarter, we would have bought the whole 50 million at that price, it just wasn't available to us.

Speaker 8: Yeah, yeah, okay. That's it for me this morning. Thank you for taking my questions. Thank you, Megan. Thank you. Our next questions will come from Paul Johnson with KBW. Your line is open.

Speaker 9: Yeah, good morning, thanks for taking my questions. Most of my advice was asked, but kind of adding to Mickey's questions a little bit. Obviously, credit quality for you guys is pretty good and sounds like portfolios. Performing pretty well. Just curious, you know, you've...

Speaker 9: You do, um, observe any sort of pickup and amendment activity either in, you know, your portfolio or a men request activity, I should say, and your portfolio or even just more broadly, you know, across, you know, anywhere else in the platform. And, you know, it also be curious just, you know, of your cash flow portfolio, what, um, what percent of loans, I guess, would you say you're in a controlling position?

Speaker 4: already gotten back to the steady level of call it two to three. That's where we sit today. So no change in trends over the last two years since lockdown. And I would say issue

Speaker 4: level of call it two to three. That's where we sit today. So no change in trends over the last two years since lockdown. And I would say as you...

Speaker 3: The second question, given that the average he put down our castle book is North for $100 million. We are not in a controlling position. We are part of Genuine Clubs, but we do have and make sure it's not having to be a cell. There are sacred rights that cannot be amended without our consent. And generally speaking, in the clubs we are with lenders who are among mindset's ours.

Speaker 9: You know, you talked about this in the past, but just reminding me what's sort of like the average life of the assets in that portfolio? And what is sort of the typical credit rating of the underlying, or I guess the risk of the underlying borrow, or in that portfolio as well?

Speaker 4: So the borrowers are no different from what we see in our cash business, which is typically we're talking about single B, we double B.

Speaker 4: is what I would say. And remember, we're first lane and secured. So we tend to be strong, single B-week double B. Again, similar to where we are in the cash flow book. And the other lane collateral is long-lived, because again, we're going.

Speaker 4: to lend against and underwrite the liquidation value of that collateral, and we're not going to invest in commodities or short-misses.

Speaker 3: But the average duration of our loans, the same maturity is typically five years, the average duration is closer to two.

Speaker 9: I appreciate it. Again, very helpful.

Speaker 9: I appreciate it.

Speaker 2: Thank you. As a reminder, that is star 1 to get into the queue, our next question will come from Robert Dodd with Raymond James. Your line is open.

Speaker 8: Hi guys, a couple of themes for, I'll say the inflation one second. On the JV, you tell the rate, you've made a 15 million equity commitment, clear as a part of the max target or target size 300 which is 2 to 1 leverage. Is that 300 the max?

Speaker 8: Obviously, it's the max based on the 50 that you've initially committed, but would you consider expanding that even further given how attractive the environment is? And what kind of time frame?

Speaker 8: Would you be expecting to get to that side, given again, you took back the cash flow pipeline and their 2023 vintage being extremely effective?

Speaker 4: Sure, great question. So, first question. Yes, that is the initial commitment. I would say that the JV partner has other capital committed to us across our platform in the form of SMAs, so we know that they have a desire to grow with us should the market opportunity continue.

Speaker 4: And then as it relates to the timing, we actually, because of the merger with Sun, really what was the catalyst for thinking about setting up an SSLP again, because as you know, we had them a few years ago. So we have those assets on balance sheet. We are cycling them down as we redeploy on balance sheet.

Speaker 4: so that we can make sure that we're continuing to generate the appropriate earnings and grow the portfolio prudently. So I think what you'll see is a rotation of the on-balance cashflow loans that were required with the suns.

Speaker 4: together with you, Originations Direct into the SSLP. We're already doing that. And I can't pick the quarter, but our best guest, Robert, is that by the end of this year, you'll see that have been fully ramped to that 300 million target portfolio.

Speaker 8: Got it, got it. Thank you. And then the other way, when you look at ABL or equipment, I mean, in both cases, I mean price is arising, right? That's a price. How we start?

Speaker 8: impacting aid demand, right? Because somebody might be inclined to buy new pieces of equipment for the manufacturer, you know, takes the price up and be, or when you underwrite it.

Speaker 8: Are you taking into account the inflation when you're assessing collateral value or are you just assuming flatline collateral value and not get a pricing equipment prices?

Speaker 4: in terms of how you want to light carly. So on the AVL, which will segment at AVL from France, on the AVL business, as we discussed.

Speaker 4: Those are short, their long-lived assets short duration loans and we are constantly monitoring and updating our borrowing base to the extent that the underlying collateral changes in value. We control that pen in terms of determining our advance rate.

Speaker 4: But, you know, if you're lending to a retailer and they sell jeans and t-shirts, there's not going to be a lot of volatility in the cost of those goods. If we lend against cost, liquidation value against cost, not against market or retail. So we have a tremendous amount of cushion built in there and not much in the way of volatility from an inflation perspective affecting...

Speaker 4: the underlying cost of the goods that we're lending against. And it's finished goods or raw. We're not lending against work in process. So, and then on the equipment finance side, what we're seeing is a dynamic where, as you may recall from prior conversations, there was a pent up pipeline of orders that had been placed.

Speaker 4: But because of supply chain disruption, good enough to arrive. Oh, they weren't drawing down on our facilities. So we're benefiting from a funding of the past pipeline, almost in as to a DDTL over in cashflow land. So we're funding that pipeline and supply chain has loosened up. So we're funding past.

Speaker 4: investments. We are seeing, which is typical in periods of inflation, where the purchase versus lease decision is leaning towards leasing and extending existing leases, which provides good income for us because it extends the maturity of those fixed rate leases that we had offered.

Speaker 4: And that's very often how they get the excess income into our portfolios. So as you can see from the results, it's a steady drip of originations and it's steady drip of repayment, but all be at net portfolio growth and we think that trend will continue. We'd yet to see a dramatic sound in new orders, but again we do have a strong backlog that we're still funding.

Speaker 8: Thank you. Thank you for the call. Thank you.

Speaker 2: At this time, there are no further questions in the queue, so I'd like to turn it back over to Michael Gross for any additional or closing remarks.

Speaker 3: Just thank you very much and thank you all for your great questions. If you have anything else, please feel free to reach out to us and otherwise we'll speak to you in...

Speaker 3: Just thank you very much and thank you all for your great questions. If you have anything else, please feel free to reach out to us and otherwise I'll speak to you in two months on our Q1 call. Thank you.

Speaker 2: Thank you ladies and gentlemen. This does conclude today's teleconference and we appreciate your participation. You may disconnect at any time.