SLR Investment Corp. Q1 2023 Earnings Call
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Speaker 2: our Investment Corp earnings call. At this time, all participants are in a listen-only mode.
Speaker 2: Later you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your touch tone phone.
Speaker 2: You may withdraw yourself from the queue by pressing star 2. I will stand by if you should need any assistance. It is now my pleasure to turn the conference over to Michael Gross, Chairman and Co-CEO. Please go ahead.
Speaker 3: Welcome to SLR Investment Corp's earnings call for the fiscal quarter ended March 31, 2023. I'm joined today by Bruce Bowler, our Co-Chief Executive Officer, and our new Chief Financial Officer, Shiraz K. Jee. Shiraz, before we begin, would you please start by covering the webcast and forward-looking statements.
Speaker 4: Thanks, Michael. Good morning, everyone. I would like to remind everyone that today's call and webcast have been recorded. Please note that they are the property of SLR Investment Corp. and that any unauthorized broadcast in any form are strictly prohibited.
Speaker 4: This call is also being webcast from the events calendar in the investor section on our website at www.slrinvestmentcorp.com
Speaker 4: Audio replays of this call will be made available later today as disclosed in our May 10 earnings press release.
Speaker 4: I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information.
supporting our loans. At March 31st, 98.6% of our comprehensive investment portfolios comprise of first lien, senior secured floating rate loans. Our long-standing investment focus on first lien loans has resulted in a portfolio better equipped to withstand continued inflationary interest expense pressures than portfolios with second lien loans or equity exposure. Additionally, with 77% of our comprehensive investment portfolio invested in specialty finance assets, which have foreign bases supporting the first lien loans and full covenant structures.
We are defensively positioned for a volatile economic period.
Our portfolio has largely been insulated from the macro challenge this year, and we believe it will benefit longer term from the regional banking issues.
The setbacks in the financial sector have created an acceleration of a two-decade trend of increasing market share from middle-market direct lending by non-bank lenders. As banks have continued to retreat and the syndicated loan market has remained stalled, firms with significant available capital, such as SLR, are able to fill the void.
Borrowers value our speed and certainty of execution, flexibility, and ability to invest $150-$20 million in a given upper middle market.
financing, which gives us greater pricing power and influence over terms. With $12 billion of total investment capital across its platform, inclusive of anticipated leverage, SLR has the scale necessary to provide full financing solutions which SLRC benefits from through co-investment.
We believe the current investment environment remains as favorable as any we've seen in several years. In particular, our specially financed businesses are benefiting from the regional banking turmoil as those banks have historically competed with our commercial finance strategies. Additionally, during uncertain economic times, borrowers increasingly turn to the banks to
during challenging market conditions when asset-rich companies' access to traditional lending sources is constrained. And we have the flexibility to allocate more of our capital to those strategies to take advantage of their attractive risk-reward attributes.
While the sponsored finance market slowed during the first quarter, which traditionally happens following the rush to close transactions before year-end, SLR was able to pick our spots in transactions with attractive terms.
For Q1, the company originated $250 million of new investments across the platform. Our first quarter origination total is slightly higher than we've originated in past years during the seasonally slow first quarter.
Of note, our pipeline has increased and we expect to grow our portfolio in the coming quarters which should result in growth of net investment income.
Importantly, we have ample dry powder to capitalize on the favorable investment environment.
Our funding profile is in a very strong position to weather a rising rate environment with 42% of our $1.1 billion of funded debt comprised of senior unsecured fixed rate notes at a weighted average annual cost of just 3.8%. At March 31, our leverage is 1.12 times net debt to equity.
up from our load during the COVID-19 pandemic of 0.56 times and culturally within our target level range of 0.9 to 1.25 times.
Our next term debt maturity isn't until the end of 2024. We are in the fortunate position of not needing to refinance any of our term debt in the near term at current high rates. At March 31st, including available credit facility capacity at especially finance portfolio companies and subject to borrowing based limits,
we had over $800 million in available capital to take advantage of the current attractive investment environment. During the first quarter, we and our joint venture partner continue to grow the investment portfolio of the recently formed SLR, Senior Lending Program, or SFLP.
On March 31, the SFLP held $46 million of assets comprised of senior secured first lien loans across 18 different borrowers.
SSLP had already committed to several transactions in Q2. And based upon a strong pipeline, we expect the SSLP to reach $250 million by year-end.
Importantly, SSOP provides additional investment capacity and earnings power by generating an attractive ROE once rammed.
Finally, our Board of Directors has authorized an extension of our previously announced $50 million share reach purchase plan to March 10, 2024. We intend to continue to utilize this program to repurchase shares at levels that are attractive to shareholders. At this time, I'll turn the call over to our CFO , Shiraz, to take you through the Q1 financial highlights. Thank you, Michael. For more information, visit www.fema.gov
SLR Investment Corp's net asset value at March 31, 2023 was approximately $984 million, or $18.04 per share, compared to $1 billion, or $18.33 per share, at December 31, 2021.
A quarter-end SLRC's on balance sheet investment portfolio had a fair market value of approximately $2.1 billion in 145 portfolio companies across 45 industries.
compared to a fair market value of $2.1 billion in 139 portfolio companies across 45 industries at your end.
At March 31st, the company had approximately $1.1 billion of debt outstanding with leverage of 1.12 times net debt to equity.
When considering the available capacity from the company's combined credit facilities...
Together with the available capital from the company's significant subsidiaries, SLRC has significant available capital to fund future portfolio growth while remaining within its target leverage range of 0.9 to 1.25 times net debt to equity.
Moving to the P&L, for the three months ended March 31, 2023, gross investment income totaled $53.5 million versus $54.1 million for the three months ended December 31.
Head expenses totaled $31.4 million for the three months ended March 31st. This compares to $31.6 million for the three months ended December 31, 2022. As a reminder, at the time of the merger of SLR Senior Investment Corp, or SUNS, into the company last year.
The investment advisor agreed to waive incentive fees resulting from income earned due to the accretion of purchase discount allocated to investments acquired as part of the merger. During the quarter ended March 31st, the company waived approximately $110,000 of related incentive fees. When a client Charmquin Bank sophisticated money into a credit card attorney, he billed
Accordingly, the company's net investment income for the three months ended March 31, 2023 totaled $22.1 million, or $0.41 for average share, compared to $22.5 million, or $0.41 for average share, so the three months ended December 31, 2022.
Below the line, the company had a net realized and unrealized loss for the first quarter, totaling $15.3 million, versus a net realized and unrealized loss of $3.5 million for the fourth quarter of 2022.
As a result, the company had a net increase in net assets resulting from operations of $6.8 million, or 13 cents per average share, for the three months ended March 31, 2023. This compares to a net increase of $19 million, or 35 cents per average share, for the three months ended December 31, 2022. In an effort to ensure more than 55 percent of the Venmo market's members by Yangon toorespecs brought data to Carson. The company now has $ deserts worth of magical pick-ups.
Finally, on May 9th, the Board of SLRC declared a monthly distribution of 13.6667 cents per share, able on June 1, 2023 to hold as a bracket as of May 24, 2023.
With that, I'll turn the call over to our co-CEO, Bruce Fuller. Thank you, Shiraz.
Let me begin by providing an overview of our portfolio.
At quarter end, on a fair value basis, the comprehensive portfolio consisted of approximately $2.9 billion of senior secured loans.
to 780 distinct borrowers across 110 industries with an average exposure of 3.7 million.
Measured at fair value, 99.8% of the comprehensive portfolio consisted of senior secured loans with 98.6% invested in first lane loans including the investment in the SSLP attributed to SLR.
and only 0.2% was invested in second lien cash flow loans with the remaining 1% invested in second lien passive based loans.
Our specialty finance investments account for approximately 77% of the comprehensive portfolio, with the remaining 23% invested in senior secured loans to upper mid-market sponsor backed companies.
We believe that this defensive portfolio composition and strategy diversification positions us well for potential economic weakness and provides a differentiated risk return profile for our shareholders.
At 331, the weighted average asset level yield was 11.9%. At quarter end, the weighted average investment risk rating on our portfolio was just under two based on our 1 to 4 risk rating scale with 1 representing the least amount of risk.
During the quarter, we placed one investment, a mirror mark, on non-accrual. Due to the current ongoing reorganization process, we unfortunately cannot provide any detail on the situation at this time.
Importantly, we consider the write down of a mirror mark to be idiosyncratic to this investment and not indicative of stress elsewhere in our portfolio.
Now let me turn to our investment strategies.
Sponsor finance, cash flow investing.
In this segment, we originate firstly in senior secured loans to upper mid-market companies in non-cyclical industries with our largest exposure being in healthcare.
segment we originate firstly in senior secured loans to upper mid-market companies in non-cyclical industries with our largest exposure being in healthcare and diversified financials.
As Michael mentioned, the broad middle market cash flow segment saw a seasonally low level of activity in the first quarter. However, the market turbulence and regional banking issues have reinforced the macro trend that provides a tailwind for non-bank lenders such as ourselves. We were able to make selective attractive investments during the first quarter.
and believe that the opportunity set will expand as the M&A market continues to pick up.
In addition to the banks' retrenchment, the disruption in the BSL and CLO markets continues to benefit private debt providers, with financial sponsors increasingly turning to direct lenders who have the scale and certainty to provide financings to upper mid-market companies.
As a result, we are continuing to see yields of 12 to 13 percent in comparison to 7 to 9 percent just a year ago.
with less leverage than the historical average for new issues.
Importantly, yields continue to be priced at a premium for leveraged loans with the addition of also having more structural protections.
Our pipeline has an average yield of over 12.5% and an LTV of 35%, which supports our thesis that this year should be a great vintage for sponsor finance.
Given our current pipeline and lack of expected repayments,
We are expecting net portfolio growth throughout the year.
At quarter end our portfolio was approximately $680 million.
and represented 23% of the total portfolio invested across 47 companies.
We have defensively positioned this portfolio where we have an average EBITDA of 134 million, LTVs of on average 40%, and importantly, strong interest coverage of just over two times.
The performance of our cash flow portfolio companies remains solid, with quarter over quarter revenue and EBITDA growth. Our portfolios comprise the businesses that perform essential services with either recurring or reoccurring revenues, and importantly, low capital intensity. Our industry exposure is heavily weighted towards defensive sectors.
and experienced repayments of $82 million.
Our new investments had a weighted average leverage of just under five times and a yield of 12.6%.
The weighted average yield on the entire cash flow portfolio was 11.8% up from 11.2% in the prior quarter.
With 99% of this portfolio invested in first lien loans, we believe that the investments are well positioned to withstand any pressures from rising interest payments.
Now let me touch on our ABL segment. Historically our ABL business outperformed during periods of market volatility and economic contraction resulting in a counter cyclical component to our multi...
let me touch on our ABL segment. Historically our ABL business outperformed during periods of market volatility and economic contraction, resulting in a counter cyclical component to our multi private credit strategy.
Borrowers which are asset rich but have cash flows pressured by rising interest rates and slowing demand are forced to raise capital backed by their liquid collateral.
The rising rate environment and general slowing of the economy has put pressure on asset rich borrowers in more cyclical sectors, which has increased the opportunity set for our team.
In particular, slower consumer spending is a positive for this business, which has extensive experience providing collateralized working capital lines of credit.
We are seeing increased steel volume that we believe will continue throughout this year.
With access to capital being limited for borrowers, we expect the rate of repayment to slow, translating into net portfolio growth.
Our strong positioning in this segment has led us to expand the team with several new fires across our EBL niches.
Also of note, as a result of the merger of solar and suns, our team has now been able to work closer together to provide full solutions such as providing ABL revolving lines alongside our life science term loans.
At quarter end, our asset-based loan portfolio totaled one billion, representing a third of our comprehensive portfolio, and was invested across 160 borrowers.
Weighted average asset level yield for the ABL portfolio is 13.6%.
The average LTV is approximately 70% and is governed by strict barring bases and maintenance covenants.
Repayments during quarter, the first quarter in our ABL segment were elevated due to seasonal repayments at our digital finance business, as that business typically benefits in the fourth quarter from increased advertising around the holiday season.
In addition, we had a lot couple of large repayments in the first quarter and some originations that slipped into the second quarter. We expect growth in the ABL segment to accelerate during this year.
Now turning to equipment finance. Our equipment finance team has extensive experience in valuing fixed assets and structuring loans which allows us to provide our customers with quick creative solutions for their financing needs.
This team has seen an increase in the opportunity set resulting from the regional bank turmoil.
At quarter end, the equipment finance portfolio totaled 938 million, representing 32% of our total portfolio across 500 borrowers.
The weighted average asset level yield was just under 10%.
During the quarter, we originated $100 million of new equipment finance loans and had repayments of $109 million.
Finally, let me provide an update on our life science segment.
Market activity has moderated as equity valuations continue to come down as the VC industry digests the recent banking failures.
Our life science team is being even more selective as borrowers seek to increase the leverage as an alternative to issuing more equity in this.
My science team is being even more selective as borrowers seek to increase the leverage as an alternative to issuing more equity in this expensive environment.
However, due to our strong presence in this market, we continue to see attractive opportunities.
we're seeing a further improvement in what has already been attracted pricing and we anticipate that volume
as well as the quality of the investments, will continue to improve during the course of 23.
We also expect to benefit from fewer repayments as the risk of other lenders refinancing our loans has dramatically been reduced.
While first quarter activity was slowed in the wake of the SVB collapse, record amounts of venture capital coupled with improved valuations are continuing to drive our opportunity set. We expect this trend to continue throughout the year. Extremely low loan to values, which are typically 15 to 20 percent of cash in...
The science loans represent 11% of our comprehensive portfolio. We contributed just under 24% of our gross investment income for the quarter.
As a reminder, this segment has never had a payment default.
again consistently has LTVs of approximately 15 to 20 percent.
During the quarter, the team committed to $2.5 million of new investments and had repayments of approximately the same amount.
We also have $120 million of unfunded commitments which may be drawn based upon our borrowers hitting important milestones. And that concludes our webinar. Thank you.
At quarter end, the weighted average yield was approximately 12.8% on this portfolio, which excludes any success fees and warrants.
In conclusion, while the private debt market had a slow start to the year, we are seeing a pickup in activity and our specialty finance businesses specifically are benefiting from the regional banking sector's retrenchment.
Given our available capital and ability to provide a full debt financing solution, we are well positioned to take advantage of this attractive investment environment. Finally, we believe that our existing portfolio should perform well through a downturn, enabling us to capitalize on any market decision.
location that should arise. Now let me turn the call back to Michael. Thank you, Bruce. In closing, we believe that our conservative underwriting approach and defensively constructed portfolio comprise of first-laying cash flow loans to borrowers in non-spit oil industries and asset-based loans with significant collateral coverage.
positions us well for the continued market volatility.
All of our asset classes are benefiting from the disruptions in the BSL and CLO markets, as well as the recent regional banking issues. We currently have attractive investment pipelines in all of our businesses.
In fact, we believe that our current pipeline is one of the most attractive we've ever had.
Based on current visibility, we are not expecting heavy repayment activity in 2023, which would translate into portfolio growth via attractive new investments.
Our investment advisor, SLR Capital Partners, has been investing in the SLR platform in addition of several key hires to our investment operations team.
In total, the SLR platform, including the commercial finance companies owned by SLRC, has recently hired over 30 people.
Our collective expertise with a senior team that has on average 27 years of investing gives us the necessary expertise to navigate the current economic climate. Our people, our balance sheet, and our portfolio position us well to take advantage of the attractive investment climate, as well as any challenges ahead.
In closing, our investment advisor alignment of interest to company shareholders continues to be one of our guiding principles. The SLR team owns over 8% of the company's common stock, including a significant percent of the annual incentive compensation invested in SLRC stock.
The team's investment alongside fellow SLRC shareholders demonstrates our confidence in the company's defensive portfolios, stable financing, and favorable position. We thank you for your time today. Operator, would you please open up the line for questions?
At this time, if you would like to ask a question, please press star 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We will pause for a moment to allow questions to queue.
Once again, if you would like to ask a question, press star 1.
Our first question comes from Melissa Waddell from JP Morgan. Please go ahead. Good morning. Thanks for taking my questions. And, Sharaz, congrats on the new role. Thank you. Of course. So you mentioned we can haveool like to say thank you in different ways to those speakers.
I was hoping you guys could elaborate a little bit on the scaling of the SSLP. We heard you say that you expect that to grow, I believe, to $250 million of assets by year end. I just want to make sure we are hearing that right. And also if you could help frame.
the size of impact to NII from that scaling. Thank you.
Sure, great question, Melissa. So, as Michael mentioned...
we are targeting to build that to about 250 by year end. Based upon assets
both already dropped in as well as the pipeline that is in the process of closing, we're already at about 150 million, which as you may recall the entire portfolio is targeting towards 300 between roughly a hundred of equity.
half from SLRC and half from our equity partner, and then approximately 200 million of borrowings. So, and we are, you know, drawing down leverage with our equity as we drop assets into the SSLP. So part of it, the timing is really dictated both by replenishing assets on the balance sheet as we move assets down into SSLP, as well as a...
size of impact on NII.
from further ramp? So I can't give you a specific number it's a little bit of multivariate equation because on one hand you have the you know 12 to 14 percent ROE on that 50 million equity investment by SLRC.
And then on the other hand, you have yield pickup by taking lower yielding suns assets and moving them down and replacing them on balance sheet with higher yielding assets that were originating in this environment. So it's a bit of a double pickup.
on the other hand you have yield pickup by taking lower yielding suns assets and moving them down and replacing them on balance sheet with higher yielding assets that were originating in this environment. So it's a bit of a double pickup.
yields pick up by taking lower yielding suns assets and moving them down and replacing them on balance sheet with higher yielding assets that were originating in this environment. So it's a bit of a double pickup. Okay Sonu Kayaka, BETI saSam members and Amy napkin and Susan
Thank you. One follow-up, if I could. It seemed like perhaps the yields in ABL and equipment finance declined a bit, quarter over quarter. I was hoping you could touch on that and whether that was just a function of timing of transactions or something else.
Yeah, no, it is, just timing. ABL is really just because of the churn in the portfolio. We expect that yield.
to continue to hover up.
you know, in the 13 to 14 percent range. And then I think on equipment finance, there, as you know, these are fixed rate assets. By and large, we are funding it with fixed rate liabilities, but we do need to turn off those old assets. The nice thing is, as you know, there's monthly amortization on those assets.
So we're constantly paying down the existing portfolio and replacing with higher yields. So you should see that start to tick up. I would say just as an expansion of your question,
the specialty finance businesses are not seeing the same pickup in yields that you see in cash flow with the spreads widening out You know life science is a great example. That's always been kind of a mid-teens return asset. Maybe they're getting 50 75 basis point more but unlike cash flow
The next question is from Paul Johnson with KBW. Please go ahead. Good morning. Thanks for taking my questions. The next question is from
So, your guys operating ROE is well below, I guess, the group sort of average. There's a decent range in there, but it's definitely below the average. I guess we just ask you, is it your intention to increase?
the ROE over time and if that is the case, you know, how, I guess, how do you expect to do that? The answer is we definitely expect to increase our ROE. As we mentioned, we have, we have about 800 million dollars of dry powder across the platform, including within the finance company, so we have significant capital to be able to put to work.
at attractive net yield. So we fully expect that our NII will grow over the course of the year and as a result our ROE will as well. And as Melissa asked, the SSLP, is that ramped? You'll pick up a couple of pennies to share just from ramping that alone. Okay.
Thanks, that's helpful. And then I just kind of say broadly, I mean you guys obviously have built a fairly diverse engine for deal flow with all the various finance and specialty finance companies. Where I guess do you think you're finding the best relative value or the best opportunities in today's market.
Yeah I would say that in the specialty finance businesses as I mentioned a moment ago you're not seeing the same increase in yields but you are seeing a reduction in risk and so that is making those segments Life Science and ABL and equipment plans very attractive.
which you know you don't see on the returns. And then as you look at cash flow we have benefited not only from a reduction in risk with lower leverage and still attractive fixed charge coverage ratios but obviously premium returns that are starting to approach what we're seeing in our specialty finance business. But in cash flow as you know in this environment it's really bad.
more similar than they've been in the past across the segments.
Thanks for that. Last question, you mentioned you guys hired a number of people across the platform more recently. I was curious, how long do you expect that to start generating production from the date of hire? What are the things that typically take?
I guess do you think that they have a meaningful sort of driving impact on portfolio growth?
Yeah, I think, look, typically I would say it takes a year to see that impact. I think in a.
environment that we're in where you have severe disruption, it's easier to hit the ground running. And these are experienced senior professionals. So we're expecting contribution as we get into the second half of this year. They're across our ABL and cash flow, equipment finance segment.
So, and you know, we already, as you may recall, about a year and a half ago, brought on our digital finance team that hit the ground running, and has actually shown nice growth. So I think it will be sooner than normal in this environment, given the dislocation.
Okay, that's good to know. Thanks for that. That's all for me. Thanks for your questions. As a reminder, if you would like to ask a question today, please press star 1.
Our next question comes from Sean Paul Adams with Raymond James. Please go ahead. Hey, guys. Good morning. Your liability side looks really good, and that's likely not to be the case for all the other alternative lenders in some of your end markets..
Does this represent more of a shared gain opportunity or acquisition opportunity over like the next 12 months? We just had a verified identification notice that read fou Rican according to electronic interpretation.
finance business. And yes, I think, you know, lenders that are smaller than us.
will be challenged and kind of raising the appropriate debt capital to fund their businesses and the working capital. So our lender finance.
lending platform is extremely active. And to your point, that also tends to lead to potential acquisitions for us. You know, several of our platforms today are businesses that we lent money to first and then subsequently acquired. So I would say our pipeline both on the lending side as well as the acquisition side is quite robust. And I think if this environment persists, we will see more and more opportunities.
I also think that we're starting to see some tuck-in acquisition opportunities where there are some peers of ours that might expand our strategic footprint. So we're evaluating those as well as add-ons to existing platforms.
Okay, that's very helpful. Thank you. As a reminder, if you would like to ask a question, please press star 1.
The next question comes from Robert Swish. Please go ahead.
Could you tell us whether you have other situations that you think will result in bad debt experience in the second and third quarters like the first quarter?
Sure, the first quarter, just to clarify, is something that we are working on. So I'm not, you know, the jury has yet to be written, we just can't discuss it because we're working through the potential resolution. I think as we mentioned across the whole portfolio, our watchlist is at an all-time low.
We feel very strong about the portfolio quality. The issue that came up in the one investment for this quarter was very specific to that investment between the sponsor and the execution. They really underperformed, unfortunately. But we don't feel like there's any systemic issues across the portfolio.
Do you think you might get repaid on that write-off in the first quarter? Well, we haven't written it off, so we do expect some level of repayment, but the outcome is still to be determined in terms of the exact level.
repaid on that write-off in the first quarter? We haven't written it off, so we do expect some level of repayment, but the outcome is still to be determined in terms of the exact level. Thank you.
Thank you. It appears we have no further questions at this time. I will now turn the program back over to our presenters for any additional remarks. No additional remarks. I want to thank you all for your support and your time today. And as always, if you have any questions or comments, please feel free to call any of us.
Have a great day. This does conclude today's program. Thank you for your participation. You may disconnect at any time.