Q2 2023 SLR Investment Corp Earnings Call
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Good day, everyone and welcome to today's SLR Investment Corporation second quarter earnings call. At this time, all participants are in a listen only mode.
Later, you will have the opportunity to ask questions. During the question and answer period Hebe registered to ask a question at any time by pressing star one on your telephone keypad. Please note. This call will be recorded I will be standing by should you need any assistance.
It is now my pleasure to turn today's call over to Mr. Michael Gross Chairman and co Chief Executive Officer of S. L. Our investment Corp. Mr. Carlos You May begin your conference.
Thank you very much and good morning, welcome to SLR investment Corp, 's earnings call for the second quarter ended June 32023.
I'm joined today by Bruce bowler, our co Chief Executive Officer, and our Chief Financial Officer, Shiraz kg Charade before we begin would you. Please start by covering the webcast and forward looking statements.
Thanks, Michael Good morning, everyone.
I would like to remind everyone that today's call and webcast are being recorded.
Please note that they are the property of Epsilon conversant.
And that any unauthorized broadcast in any form.
Great.
This conference call is also being webcast from the.
In the investors section on our website at Www Dot one.
One cool dot com.
Audio replays of this call will be made available later today as disclosed in August .
The.
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 on today's conference call and webcast may constitute forward looking statements, which relate to the future events.
Our future performance financial condition.
These statements are not guarantees.
These statements are not guarantees of our future performance financial condition or results and simple number of risks and uncertainties.
Past performance is not indicative of future results.
Actual results may differ materially as a result of a number of factors.
And those described from time to time now filings with the SEC.
That's a lot of investment Corp, does not undertake 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 91670.
At this time I would like to turn the call back over to our chairman and co CEO Michael Wes.
Thank you Suraj.
We're pleased to report that for the second quarter of 2023 that Solarcity generated net investment income of 42 per share over earning the quarterly distribution continuing the steady growth and then net investment income over the past several quarters as we rebuild the portfolio post our corporate area deleveraging and importantly.
During a very attractive investment environment.
The improved NII performance resulted from the combination of a larger portfolio and the increase in index rates for our predominantly floating rate portfolio.
At June 30, our net asset value per share was $17.98 compared to $18 four at March 31st.
Before we dig into our performance I will touch on the market conditions and investment climate.
As the Federal Reserve has continued to fight to curb inflation.
Labor statistics and consumer spending have remained relatively stable.
Based on both the recent economic data and a portfolio company success in navigating higher interest rates as well as the input expenses.
We'd be recession as less inevitable.
As the full impact of higher rates reverb race to the economy, we believe our defensively positioned portfolio should whether those conditions.
As conservative credit investors, we have always managed our portfolio that we are heading into a downturn and we will continue to do so despite signs that the U S. Government's fiscal policy May result in a soft landing for this cycle.
The overall health of our portfolio remains solid and we did not place any assets on non accrual during the second quarter.
Our weighted average interest coverage on our sponsor financed loans remains at comfortable levels at approximately two times.
We believe that this is the result of our investment focus in sponsor finance and recession resilient industries with high recurring free cash flow, such as health care and business services as well as our emphasis on specialty finance investments with borrowing basis supporting our lungs.
Additionally, we are monitoring near term maturities that have not identified any load the material risk of non repayment.
At June 30th approximately 98% of our comprehensive investment portfolio was comprised of first lien senior secured loans.
Our long standing investment focus on first lien loans has resulted in a portfolio of better equipped to withstand continued inflationary and interest rate pressures and portfolios of second lien loans or equity exposure.
Additionally, with 76% of our comprehensive investment portfolio invested in specialty finance assets, which a borrowing base of supporting and full covenant structures. We are defensively positioned should've economy prove unable to withstand the continue higher interest rate environment.
Our unique investment approach a couple of cash flow loans, especially finance loans with greater diversification and additional downside protection.
Although direct lending new issue activity picked up in the second quarter total new issuance volume remain lighter than prior years.
Much of the second quarter activity was it relating to add on acquisition financings, we're beginning to see more M&A processes as the bid ask spread for assets narrows. Additionally, access to the broadly syndicated loan market remains extremely limited for all but the largest and highest rated issuers and their market and the retrenchment by regional.
<unk> continues to benefit our specialty finance strategies.
In the second quarter Src originated $394 million of new investments across the platform.
Repayments of $265 million during the second quarter, we had net portfolio growth in each of our forward lending strategies totaling $129 million.
Looking forward the current investment environment remains favorable as we've seen in several years. We currently have a sizable pipeline and which we believe will prove to be a strong vintage for private credit.
Our specialty finance businesses are benefiting from the regional banking turmoil as these banks have historically competed with our commercial finance strategies.
Additionally, during uncertain economic times borrowers increasingly turn to asset based lending strategies for working capital and liquidity management we.
We believe the structure and collateral supporting our loans provides our investors with greater downside protection across economic cycles.
Our ABL businesses have historically outperformed 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 these strategies to take advantage of the attractive risk reward attributes.
For all of the significant available capital such as the SLR platform are able to fill the void left by regional banks retreat and installing in the syndicated loan markets.
Borrowers all your speed and certainty of execution flexibility and ability to invest $150 million to $200 million any given upper middle market financing, which gives us greater pricing power and influence over terms.
With $13 billion of total investable capital across the platform inclusive of anticipated leverage SLR has the scale necessary to provide full financing solutions, which benefits SLR see through co investment.
Importantly, we have ample dry powder to capitalize on this favorable investment environment.
Our funding profile is in a strong position to weather a rising rate environment, but our next fixed rate maturity not until the end of 2024.
Additionally, our senior unsecured fixed rate notes have a weighting weighted average annual interest rate of three 8%.
With $1 $2 billion with funded debt at June 30, our leverage was 1.2 to three times net debt to equity at this point in time level of leverage doesn't fully reflect the ramp of the S. S. L. P through loan asset contributions from our balance sheet.
Since the end of the second quarter, we continued to make progress on ramping the S. S. L. P based.
Based on transfers from Src balance sheet during the third quarter to date as well as new deal activity, we expect a substantially increased investment commitment and that's <unk> by the end of the third quarter.
Believe we are on track to reach $250 million commitment by the end of this year.
As a result of our continued efforts to ramp the <unk>, we expect our leverage ratio to once again be in the middle of our target leverage range of <unk> nine to $1 two five times.
At June 30th including available credit facility capacity at the <unk> and our specialty finance portfolio companies subject to borrowing base limits Src had approximately $600 million in available capital to take advantage of the current attractive investment environment.
Now I'll turn the call back over to Shiraz, our CFO to take you through the second quarter financial highlights.
Thank you Mike.
That's a lot of investment Corp's net asset value at June 32023 was $981 million or <unk>.
$17 98 per share compared to $984 million or $18 <unk> per share at March 31, 2023.
At quarter end <unk> on balance sheet investment portfolio had a fair market value of approximately $2 2 billion.
156 portfolio companies across 45 minutes.
Compared to a fair market value of $2 1 billion.
And 145 portfolio companies across 45 industries at March 31.
At June 30, the company had approximately $1 $2 billion of debt outstanding with leverage of 123 times net debt to equity.
The increase in leverage is temporarily higher as the company continues to ramp its SSL teeth.
When considering the company's plan to utilize the SSL piece facility as well as the available capacity from the company's credit facilities together with available capital from the company's specialty finance subsidiaries that philosophy is ample available capital to fund future portfolio growth, while remaining within its target leverage range of <unk> 90 to $1 two five.
Net debt to equity.
Moving to the P&L.
[noise] ended June 32023.
Investment income totaled $56 3 million ounce.
Versus $53 5 million for the three months ended March 31st 2020.
Net expenses totaled $33 7 million for the three months ended June 30.
This compares to $31 4 million for the three months ended March 31.
As a reminder, at the time of the merger of Epsilon Senior investment Corp, with 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 that Mike.
During the quarter ended June 30th company weighs approximately 125000 analysis looked at related incentive fees.
Accordingly, the Companys net investment income for the three months ended June 30 totaled $22 $7 million or <unk> 42 per average share compared to $22 1 million or <unk> 41 pad, we share it with the three months ended March 31.
Below the line the company had net realized and unrealized loss for the second quarter totaling $3 7 million.
Versus a net realized and unrealized loss of <unk> <unk>.
$15 3 million for the first quarter of 2020.
Yes.
As a result, the company had a net increase in net assets, resulting from operations of $19 million 35 per average share for the three months ended June 32023.
This compares to a net increase of $6 8 million 13 cents per average share for the three months ended March 31 2023.
Finally on August eight the boarder first philosophy declared monthly distributions of $13 seven per share.
Payable on August 32020 suite holders of record as of August 18, 2020 fleet.
Moving forward the company intends to make distributions on a quarterly rather than monthly basis. We expect this change to begin in Q4 2023.
With that I'll turn the call over to our co CEO Bruce <unk>.
Thank you Suraj, let me begin by providing an overview of our portfolio.
At June 30 on a fair value.
<unk> basis. The comprehensive portfolio consisted of approximately $3 1 billion of senior secured loans to approximately 780 distinct borrowers.
Across over 115 industries with an average exposure of just under $4 million.
Measured at fair value 99, 4% of our portfolio consisted of senior secured loans with approximately 98% invested in first lien loans, including investments in the SSL <unk> attributable to the company.
And only 2% was invested in second lien cash flow loans with the remaining one 2% invested in second lien asset based loans.
Our specialty finance investments account for approximately 76% of the portfolio with the remaining 24% invested in senior secured cash flow loans to upper mid market sponsor backed companies.
We believe that this defensive portfolio composition.
Positions us well for potential economic weakness and provides a differentiated risk return profile for our shareholders.
At quarter end, our weighted average asset level yield was 12, 1% up from 11, 9% at Q1.
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.
During the second quarter, we restructured our investment in my remark, which we'd replace we placed on non accrual last quarter.
While it is still early days, we are pleased with the results of our efforts thus far.
To date we.
We foreclosed on the business contributed transition capital.
Which has since been fully repaid at par.
Hold certain assets for cash.
Entered into a partnership with both operating and financial investors with respect to the company's core operations and expect to exit bankruptcy later this month.
As a result, we increased our second quarter marked by 10% from the prior quarter.
We view the successful restructuring of this investment is evidence of our team's long standing private equity style approach to investing in.
In our teams DNA to approach a restructuring with an operational mindset, using our expertise and experience to maximize our recovery.
Now, let me turn to our four investment verticals spot.
Sponsor finance or a cash flow business.
Here, we're originating first lien senior secured loans to upper mid market companies and non cyclical industries, such as health care providers and diversified financials.
Our historical focus on these sectors has helped to reduce the impact on the portfolio from rising input costs.
As a result of the positive market dynamics, Michael highlighted we are continuing to see new issue yields of 12% to 13% in comparison to the recent historical range of 8% to 10%.
Fortunately these investments are carrying less leverage than we had seen historically.
Middle market loans continue to be priced at a premium to leverage loans with the added benefit of having these better structural protections and lower leverage levels.
Our Q3 pipeline.
Has an average yield of just under 13% and a loan to value of just under 40%, which supports our thesis that this year it should be a great vintage for investing in sponsor finance cash flow upper mid market loans.
Given our current pipeline and reduced level of expected repayments.
We expect continued portfolio growth during the remainder of this year.
At quarter end, our cash flow portfolio was approximately $740 million or 24% of the total portfolio invested across 48 borrowers.
We have defensively positioned this portfolio.
With borrowers that have an average EBITDA of over $140 million and low loan to values of approximately 40%.
Interest coverage ratios have come down from the high three times, a few years ago, but it has leveled off at two times.
Our portfolio is comprised of businesses that perform essential services.
With either recurring or reoccurring revenues and have low capital intensity overall.
Overall, the portfolio has exhibited solid credit metrics that have remained steady.
This year.
During the quarter, we originated $115 million of new loans and experienced repayments of $55 million.
These investments were made on compelling terms, our second quarter investments were focused on existing borrowers with over 85% of this capital committed to companies that we have exposure to and have exhibited strong operating performance.
At quarter end, the weighted average cash flow yield was 11, 6%.
With approximately 98% of this portfolio invested in first lien loans, we believe our investments are well positioned to withstand liquidity pressures that borrowers may face.
Now, let me turn to our ABL segment.
<unk>. The ABL segment has performed well during periods of market volatility and economic contraction such as today's environment.
Borrowers, which are asset rich, but have cash flows that are pressured by rising interest rates and slowing demand are forced to raise capital in the ABL market rather than the cash flow market.
The rising rate environment and economic <unk>.
<unk> have put pressure on these borrowers, particularly those in more cyclical sectors, which has resulted in an increased opportunity set for our ABL teams.
We're seeing increased deal volume that we will believe will continue throughout this year.
With limited access to capital.
As regional banks largely continue to sit on the sidelines, we expect the rate of repayments to slow translating into additional portfolio growth.
Our ABL team has been working to provide.
Full solutions to potential borrowers.
Including working closely with our life science team.
At quarter end, the senior secured ABL portfolio totaled just under $1 billion or 32% of our total portfolio.
Invested across 165 issuers.
The weighted average asset level yield was 14, 6% compared to 13, 6% in the first quarter.
Our average loan to value was approximately 74%.
For the second quarter, we originated $113 million of new investments and had repayments of just under $100 million.
Now, let me move to equipment finance.
At quarter end the portfolio totaled just under $1 billion, representing 32% of our total portfolio and was highly diversified invested across 550 issuers.
The credit profile of the portfolio is as strong as it's ever been.
The weighted average asset level yield is nine 6%.
During the second quarter, we originated $150 million of new assets and had repayments of just under $110 million.
Our current investment pipeline in equipment finance has increased significantly over the past quarter.
Finally, let me turn to our life Science segment.
Activity has moderated in the wake of the SBB failure.
Our life Science team continues to be extremely selective as borrowers seek to increase leverage as an alternative to issuing more equity at this time, where valuations have come down in the markets.
However, due to our strong presence, we are still seeing attractive investment opportunities and attractive pricing.
We anticipate that the opportunity set will continue to improve as we move through the second half of this year.
At quarter end, our portfolio totaled $340 million across 15 borrowers.
The substantial majority of the portfolio is invested in loans to borrowers that have over 12 months of cash runway.
Life science loans represent 11% of our portfolio and contributed just under 23% of our gross investment income for the quarter.
During the second quarter, the team committed to $20 million of new investments and had repayments of $2 7 million.
We have just under $120 million of unfunded commitments, which may be drawn by borrowers based upon hitting important milestones such as FDA approvals revenue metrics liquidity and other milestones at.
At quarter end, the weighted average yield on this portfolio was 13, 2% compared to 12, 8% in Q1.
These yields exclude any success fees and warrants.
In conclusion, all of our lending verticals inked a strong on the origination front, while maintaining consistent credit quality.
Given our available capital and ability to provide a wide spectrum of debt financing solutions. We believe we are well positioned to take advantage of the attractive investment environment.
Now, let me turn the call back to Michael.
Thank you Bruce.
In closing we are pleased with our progress in re ramping our portfolio since our cobot era Lowe's into investments that are more attractive terms, we have seen in many years.
Our specialty finance businesses, which were particularly impacted by borrowers having access to government stimulus. During the pandemic have either reached or are near nearing pre COVID-19 portfolio balances importantly, the available capital across our platform provides us the capacity for additional earnings growth.
With our investment strategy is benefiting from the reduced competition from regional banks in the BSL market. We currently have a sizeable investment pipeline.
Importantly, we believe Thats one of the most attractive we've ever had.
In closing our investment advisors alignment of interest with the company shareholders continues to be one of our guiding principles. The SLR team owns over 8% of the company stock, including have a significant percentage of the annual incentive compensation invested in 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 will you. Please open up the line for questions.
At this time, if you would like to ask a question. Please press star one on your Touchtone phone you may recall yourself from the queue by pressing star to once again that is star one for your question well pause a moment to allow questions to queue.
So we will take our first question from Sean Paul Adams with Raymond James. Please go ahead.
Alright, Sean Paul Your line is open please check your mute function.
Hey, guys. Good morning, I was hoping you guys were able to share some commentary on whether you plan to amend your credit facility to extend their maturities since both mature in 2026 and provide some insight whether the revolving period for the secured credit facilities are the same as maturity.
No we.
Have some time on our primary corporate revolver.
I think that maturity if I'm not mistaken is in 'twenty five in terms of the investing period.
And then we have the smaller SUNS facility that came with the merger with SUNS, which matures next spring and we're already in conversations to both upsize it and extend it.
Okay perfect. Thank you and as a follow on can you provide.
And just any details on the impact of the bank banking Barton market tightening.
Yeah.
I'm sorry can you just great in terms of specifically, what you would like us to address an upfront.
Yeah of course.
In regards to the like just generally.
Banking market tightening and issuance.
I guess general.
Flows can you can you provide some just general targets for the next couple of quarters.
Sure I would just say high level.
The cash flow market has been impacted by the tightening on the <unk>.
Money Center banks, who are the biggest players there.
Some markets is really only opened for the largest of issuers and so on the cash flow side as you can see in our origination numbers year to date, we've seen great opportunity in the upper mid market. There I think on the specialty finance businesses Theyre, most impacted and benefit from the tightening in the regional banks.
Yes.
Whether it's equipment finance, all the way through ABL strategies into.
Life Sciences, where obviously silicon valley into some extent signature bank.
Were put on the sidelines those teams have we surface, but we'll see whether.
The banks that they landed at will actually put up the capital to support that sector. So we have seen that dislocation.
Create better opportunities for us not so much in terms of the fundamentals, but as you know.
The regional banks.
Relatively aggressive when they liked investment opportunities.
Relative to direct lenders, such as ourselves and so having more rationality in those sectors I think has led to.
Higher quality opportunities as well as better pricing.
Too soon to know how long that will last but it has definitely given us a better opportunity set.
Perfect. Thank you for that insight.
Thank you.
And once again as a reminder are one.
<unk> for your question.
We'll take our next question from Paul Johnson with <unk>. Please go ahead.
Yes, good morning, guys. Thanks for taking my questions.
R&D.
The equipment financing vertical specifically.
SLR equipment, formerly a nation's credit financing.
Sure.
Yes this year.
<unk> been no return out of that investment.
No dividend return of investment last year as well either can you just remind us I guess how I.
I guess, what you intend to deal with the return from that investment.
If theres anything I guess.
You say the portfolio seems to be performing quite well so was there I guess.
Anything that's lumpy in there on timing or is there anything pressuring the return at this moment.
Any kind of.
Foster on that investment would be kind of helpful.
Sure So just as a.
Reminder, that we have to equipment finance verticals, one is the kingsford critical that.
Provides equipment fans for investment grade borrowers and then there is the <unk>.
Shipment finance vertical formally NEF that is more focused on non investment grade borrowers and that vertical, particularly has been repositioning itself, particularly in this stage of the economic cycle to take less.
More focus on the fundamental credits.
The borrower and a little bit less reliance surely on the liquidation value of the equipment. So it's a short way of saying we have been taking down the risk in that portfolio. Having said it has been growing and just as a reminder, that portfolio is housed on balance sheet as well as in that subsidiary so the expense of the team.
As in the subsidiary, but the majority of the assets on balance sheet. So when we report we report on a consolidated basis, rather than just look at that legal.
Subsidiary, So it has been.
Generating nice income, we expect that to grow.
But you need to look at it consolidated between the subsidiary as well as the assets on balance sheet.
Got it thanks, that's pretty helpful.
And then just kind of broadly you guys had a lot of growth this quarter. It sounds like you are.
You like what you see in terms of coming up with the pipeline and expect growth this year.
Leverage is up to about one two times on a gross basis this quarter.
ROE is.
Obviously.
Clearly lagged the space quite a bit to date I'm just wondering what are kind of in your mind the catalysts.
To get that ROE.
Up.
Maybe increase returns from some of your verticals is there any sort of repricing catalyst.
Portfolio somewhere.
Your ideas there would also be sure there are.
There are several levers we can pull in our point to accomplish that across our strategies and the first is we as we mentioned.
Our leverage we quoted was at a point in time.
With the actions we have in place to put more assets into the <unk> that will bring our leverage back down to kind of the midpoint of the range. It will also have the effect of increasing our ROE because we're putting assets into that.
<unk> two times it just as a refresher we've been selling assets into that with our JV partner at par and these are assets, yielding L. Plus $5 50, So we're able to take that capital we get back from those sales and redeploy it into acetate, they're yielding anywhere from 12% to 15% depend.
On the strategy.
Got it thanks for that.
That's all the questions for me.
Thank you.
Thank you we'll take our next question from Casey Alexander with Compass point. Please go ahead.
Hi, good morning.
Thank you for taking my questions can you quantify the capacity that the JV has in terms of how much can you sell down to the JV that then you can replace on balance sheet.
Sure. So so Casey at June 30, we had about $79 million down in the slip and it's been set up to take three sort of asset so roughly another $220 million of assets.
Okay.
That's helpful. Thank you.
My second question is and this may be an entirely ignorant question, but it seems to me that.
One of the assets of the JV, which was designed to take with some of the lower yielding assets from solar senior but it seems to me that the assets from solar senior are now yielding more than the average yield on the equipment finance portfolio is there anything that prevents you from downstream being some of the equipment finance loans.
Can replace those with with significantly higher yielding assets on balance sheet.
Great question.
The JV is set up both from equity partnership perspective, as well as the credit facility to only take cash flow loans. So to your point. It was set up to take the lower yielding Sun's cash flow loans, which as Michael just shared our in the L. Five handle spread at par versus the new cash flow loans, which are coming.
So for 650 at 97, so there is a nice yield delta there, but no I think on the equipment finance business as you know those are fixed rate assets. They do.
I have a longer life, but they do amortize down monthly and so.
So we are looking to continue to cycle out of those assets.
And bring on higher yielding equipment finance assets.
Not if we are seeing better opportunities elsewhere, we will deploy the capital into higher yielding strategies.
Okay. Thanks, we'll see what happens when you give an analyst a calculator he'll start trying to get you to do things youre not last year.
Well good luck one idea, we're going to take the calculator away from you.
Thanks for taking my questions of course complicated.
And once again as a reminder that is star one for your question.
We'll pause a moment to allow further questions to queue.
And it does appear we have no further questions at this time I'll turn the call back to Mr. Gries for closing remarks.
Just thank you for your time and have a great summer and again as always if you have any questions. Please feel free to reach out to any of us directly take care.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
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