Full Year 2023 SLR Investment Corp Earnings Call
Operator: Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good day, everyone, and welcome to today's Q4 2023 SLR Investment Corp. Earnings Call. At this time, all participants are in a listen-only mode.
Please standby your program is about to begin if you need assistance during your conference today. Please press Star zero.
Good day, everyone and welcome to today's Q4 2023 S. All our investment Corp earnings call.
At this time all participants are in a listen only mode.
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Operator: Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Chairman and Co-CEO, Michael Gross. Please go ahead.
Please note this call is being recorded.
I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Chairman and co CEO Michael gross please go ahead.
Michael Stuart Gross: Thank you very much and good morning. Welcome to SLR Investment Corp.'s earnings call for the fiscal year ended December 31st, 2023. I'm joined here today by Bruce Spohler, our Co-Chief Executive Officer, and our Chief Financial Officer, Shiraz K. Shiraz, before we begin, would you please start by covering the webcast and forward-looking statements? Thank you, Michael. I would like to remind everyone that today's call and webcast are being, Note that they are the property of Petzl, R & W, and any unauthorized broadcaster. This conference call is also being webcast for the events calendar in the investor section of our website at www.slarinvestmentgroup.com. All your replays of this call will be made available later today.
Thank you very much and good morning, welcome to SLR investment Corp's earnings call for the fiscal year ended December 31, 2023, I'm joined here today by Bruce <unk>, Our co Chief Executive Officer, and our Chief Financial Officer garage kg.
Before we begin would you please start by covering the webcast and forward looking statements. Thank you Michael good morning, everyone.
I'd like to remind everyone that today's call and webcast are being recorded.
Please note that a property that's a lot of investment Corp.
Any unauthorized broadcast in any form is strictly prohibited.
This conference call is also being webcast live events calendar in the Investor section on our website at Www Dot SLR investments Dot com.
Replays of this call will be made available later today as disclosed in our February 27 earnings press release.
Shiraz K.: All doors close on February 23rd. I would also like to call attention to the customary disclosures in our press release regarding... This conference call or webcast may include forward-looking statements, and these statements are not guarantees for our viewers and involve a double risk. For more information, call 1-800-315-8555.
I would also like to call your attention to the customary disclosures in our press release regarding forward looking statements.
Today's conference call webcast may include forward looking statements and projections.
These statements are not guarantees of future performance or financial results.
The double of risks and uncertainties.
Past performance is not indicative of future results.
Michael Stuart Gross: Actual results may differ materially as a result of these factors, which were described from time to time in our filing, did not undertake to update it, unless required to do so, paid copies of our latest please visit our website at www.solarcapital.com, Call us at 212-997-8888. At this time, I would like to turn the call back over to our Chairman and Co-CEO, Michael. Thank you, Shiraz. We are pleased to report that for the fourth quarter of 2023, SLRC generated net investment income of $0.44 per share, representing growth of 7% year-over-year and a 26% increase over our net investment income immediately following our merger with SLRC in Q1 2022. Our fourth quarter NAI per share equates to a 7% surplus over our distributions paid during the quarter.
Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC.
We do 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 gross.
Thank you Suraj there. Please report that for the fourth quarter of 2023.
<unk> generated net investment income of 44 per share representing growth of 7% year over year, and a 26% increase over our net investment income immediately following our merger with SLR Senior core Q1 2022.
Our fourth quarter NII per share equates to a 7% surplus of our distributions paid during the quarter.
Michael Stuart Gross: The increase in NII over the past two years has been driven by meaningful, comprehensive portfolio growth, as well as increases in reference rates and asset yields. We believe this will be an attractive vintage to have grown our portfolio. Also contributing to our strong quarter, SLRC earned $1.1 million from SLR's Senior Lending Program, or SSLP, as we call it, representing a 10.2% annualized yield compared to earnings of $300,000 in Q3. At year end, investment commitments total $200 million, and we expect commitments to reach approximately $240 to $250 million by the end of Q1. Once fully ramped up, based on current rates, we anticipate that this vehicle will generate an annualized yield in the low double digits.
The increase of NII over the past two years has been driven by meaningful comprehensive portfolio growth as well as increases in reference rates and asset yields. We believe this will be an attractive vintage to have grown our portfolio.
Also contributing to a strong quarter Src earned $1 $1 million from SLR senior lending program or S. S. L. P. As we call. It represented 10, 2% annualized yield compared to earnings of <unk>.
$300000 in Q3 at.
At year end investment commitments totaled $200 million, and we expect commitments to reach approximately $240 million to $250 million by the end of Q1 once fully ramped based on current rates. We anticipate that this vehicle will generate an annualized yield in the low double digits.
Michael Stuart Gross: On December 31st, our net asset value per share was $18.09, up from $18.06 per share on September 30th, reflecting stable credit performance and the over-earning of our distribution. We continue to be pleased with the credit quality of our portfolio, with no new non-accruals during the quarter. Our December 31st non-accrual rate based on off was just 0.6% and 0.4% on fair value, which remains significantly below the BDC industry average. However, finance, the average EBITDA, and revenue growth continue to be positive for our portfolio company. Overall, they have successfully managed the transition to an environment with higher costs of capital and inflation.
At December 31, our net asset value per share was $18.09 up from $18 six per share at September 30th reflecting stable credit box and the over earning of our distribution.
We continue to be pleased with the credit quality of our portfolio with no new no new non accruals during the quarter.
Our December 31st non accrual rate based Pos was just one 6% and one 4% on fair value, which remains significantly below the BDC industry average.
And finance the average EBITDA and revenue growth continues to be positive for our portfolio companies. Overall, they have successfully managed the transition to an environment with higher cost of capital and inflation.
Michael Stuart Gross: The weighted average interest coverage on our sponsor finance loans is 1.0 times. We believe these healthy metrics are the result of our focus on sponsor finance in recession-resistant industries with high recurring free cash flow, such as healthcare and business services. As a reminder, our comprehensive portfolio achieves significant diversification through our specialty finance investments, allowing us to be highly selective in sponsor finance. Our specialty finance allocations provide the portfolio with counter-cyclical and less correlated investment opportunities compared to cash flow credit. Credit Quality for Specialty Finance Investments continues to be solid, with attractive LTVs that have meaningful collateral support. At quarter end, approximately 98% of our comprehensive investment portfolio is comprised of first lien senior secured loans. Our longstanding focus on first lien loans has resulted in a portfolio which we believe is better equipped to withstand persistent inflationary pressures and high interest rates than portfolios with second lien loans.
The weighted average interest coverage under sponsor finance loans as one point in time, we believe these healthy metrics. The result of our focus in sponsor finance on recession resilient industries with high recurring free cash flow such as health care and business services. As a reminder, our comprehensive portfolio achieved significant diversification for our specialty.
Finance investments, allowing us to be highly selective in sponsor finance.
Our specialty finance allocations provides the portfolio with counter cyclical and less correlated investment opportunities to cash flow credit.
Credit quality for specialty finance investments continues to be solid with attractive ltvs that are meaningful collateral support.
At quarter end, approximately 98% of our comprehensive investment portfolio is comprised of first lien senior secured loans.
Our long standing focus on first lien loans has resulted in our portfolio, which we believe is better equipped to withstand persistent inflationary pressures and high interest rates and portfolio of second lien loans.
Michael Stuart Gross: Additionally, with approximately 76% of our comprehensive investment portfolio invested in specialty finance assets, we have borrowing bases and coveted structures that we believe are defenselessly positioned. In 2023, SLRC had record originations of approximately $1.5 billion. They sponsor finance business in particular, capitalizing on an investment environment with better pricing and lower risk profiles than the historical average. Repayments for the year totaled over $1.3 billion, representing approximately 45% of our beginning 2020 portfolio. Although LBO volume was down in 2023, approximately 61% of sponsor finance investments supported token acquisition for a new and existing portfolio of companies, with remaining activity financing new LBO investment opportunities. Buyers and sellers continue to engage in price discovery with increased pressure on sponsors to transact as LPs seek a return of capital before making new commitments.
Additionally, with approximately 76% of our comprehensive investment portfolio invested in specialty finance assets, we are borrowing basis and covenant structures, which we believe are defensively positioned.
In 2023, Src had record originations of approximately $1 $5 billion.
Sponsor finance business in particular, capitalizing on investment environment, with better pricing and lower risk profiles than the historical average.
Repayments for the year totaled over $1 $3 billion, representing approximately 45% of our beginning 2022 portfolio.
LBO volume was down in 2023, approximately 61% sponsor finance investments supported tuck in acquisitions for new and existing portfolio companies with the remaining activity financing new LBO investment opportunities.
Buyers and sellers continue to engage in price discovery with increased pressure on sponsors to transact is L. P seek a return of capital before making new commitments.
Michael Stuart Gross: As a result of the slow M&A environment, sponsors have held on to their performance for longer via maturity extensions and sales-to-continuation vehicles. While M&A activities remain muted thus far in 2024 and competition has increased for this limited direct lending deal flow, we remain excited about the opportunities set for direct lending in 2024, from an expected acceleration in M&A activity in the second half of the year. Our life science, ABI, and equipment finance strategies continue to benefit from being uncorrelated to the broader cash flow market. The life science market continued to recover from lighter activity in 2023. Equity valuations for both private and public life science companies have been stabilized, with debt opportunities continuing to improve. The ABL market remains robust, with referrals from both money center banks and regional banks accelerating.
As a result of the slow M&A environment sponsors have held onto their performance for longer the maturity extensions and sales to continuation vehicles.
Well M&A activities remained muted thus far in 2024 and competition has increased and has limited direct lending deal flow.
We remain excited about the opportunity separate direct lending in 2024.
From an expected acceleration in M&A activity in the second half of the year.
Our life Science, ABL and equipment finance strategies continue to benefit from being uncorrelated to the broader cash flow market.
<unk> science market continues to recover from lighter activity in 2023.
Equity valuations for both private and public life science companies have been stabilized with debt opportunities continuing to improve.
B L market remains robust with referrals from both money center banks and regional banks accelerating in particular, the continued turbulence of regional banks is providing more opportunities for private credit managers such as ourselves.
Michael Stuart Gross: In particular, the continued turbulence of regional banks... and providing more opportunities for private credit managers such as ourselves. Firms with significant available capital, such as the SLR platform, are able to fill the void left as regional banks retreat. Borrowers value our speed and certainty of execution, flexibility, and our ability to invest $150 to $200 million in a given upper middle market finance transaction, which gives us influence over pricing and documentation and $13 billion of total investable capital across the platform, inclusive of anticipated leverage. SLR has the scale to provide full financing solutions, which benefits SLR's city co-investors. Importantly, we have ample dry powder to capitalize on the favorable investment environment.
Firms are significant available capital such as the SLR platform are able to fill the void left has reached a point banks retreat borrows valuers are speed and certainty of execution flexibility and our ability to invest $150 million to $200 million ended up in a given upper middle market financing, which gives us influence where pricing and dock.
Mutation.
With 13 billion of total investable capital across our platform inclusive of anticipated leverage SLR has a scale to provide full financing solutions, which benefits SLR City Hall investment.
Importantly, we have ample dry powder to capitalize on the favorable investment environment at.
At December 31st including available credit facility capacity at the S. S. L P and especially finance portfolio companies Src had over half a billion dollars of available capital to take advantage of the current attractive investment environment.
Shiraz K.: At December 31st, including available credit facility capacity at the SSLP and especially financed portfolio companies, SLRC had over half a billion dollars of available capital to take advantage of the current attractive investment environment. I'll now turn the call back to Shiraz to take you through the Q4 financial highlights. Thank you.
I'll now turn over the call back to Shiraz to take you through the Q4 financial highlights.
Thank you Michael.
There's a lot of investment close to net asset value at December 31, 2023 was $987 million for $18.09 per share compared to $985 million by $18.06 per share at September 30.
At quarter end and philosophies on balance sheet investment portfolio.
Approximately $2 $2 billion and 151 portfolio companies across 43 industries.
Shiraz K.: That's a lot of investment quotes. The net asset value at December 31st, 2023 was $987 million, $18.09 per share compared to $985 million, were $18.06 per share in September, and Core-Ed, SLRC's Unbalanced Reinvestment Portfolio, for approximately $2.2 billion, and 151 portfolio companies across 43, paid to a fair market value of $2.2 billion. Also, at December 31st, SSLP had a fair value portfolio of $187 million. Firstly, in senior security.
Yeah, It's a fair market value of $2 2 billion to 154 portfolio companies across 43 industries at September 30.
Also at December 31st SSL, He had a fair value portfolio of $187 million or.
Firstly in senior secured loans.
After initial $100 million joint commitment.
S philosophy, and our JV partner has contributed a combined equity easy Mount $85 million.
[laughter].
In Q4, 2000, Twenty's Sloshy earned income.
$1 $1 million from SSL P equating to a 10.2% annualized yield.
In the fourth quarter, we also upsized, the SSL credit facility by $50 million to $150 million.
At December 31st philosophy at approximately $1 $2 billion of debt outstanding.
With leverage of 119 times net debt to equity upfront pandemic little 0.5 dollars seven times.
We expect our leverage ratio to remain in the middle of our target leverage range.
Shiraz K.: Of the initial $100 million joint commitment, SLRC and our JV partner have contributed combined equity in the amount of $35 billion. Oh, and in Q4 2023, SLC earned $1.1 million from SSL, equating to a 10.2% annualized rate. We also upsized the SSLP credit facility by $50,000.
92125 times.
There's a lot of these funding profile isn't a strong position to continue to weather the current interest rate environment.
Just this month, we expanded the list of participants in our primary credit facility.
Furthermore, our existing $470 million of senior unsecured fixed rate notes have a weighted average annual interest rate.
With only three 8%.
We expect to Opportunistically access the investment grade Denmark.
Moving to the P&L for the three months ended December 31, gross investment income totaled $59 8 million versus $59 6 million for the three months ended September 30.
Shiraz K.: , The 731st SLOC had approximately 1.2 billion dollars of debt outstanding, with leverage of 1.19 times net debt, up from the pandemic low of 0.5. We expect our leverage ratio to remain in the middle of our target, www. SolarCapital.com. SLRC's funding profile is in a strong position to continue to weather the current interest rate environment. Just this month, we expanded the list of participants in our primary.
Net expenses totaled $35 9 million for the three months ended December 31. This compares to $36 3 million for the prior quarter.
As a reminder, at the time of the merger of echelon senior investment into the company last year.
Investment advisor agreed to waive incentive fees, resulting from England to CD accretion of purchase discount allocated to investments acquired as part of the market.
During the fourth quarter, the company waived approximately $90000 of incentive fees, which related to the merger, which now totals approximately $2 million in cumulative latest by the manager is related to the merger.
Shiraz K.: Furthermore, our existing $470 million of senior unsecured fixed-rate notes have a weighted average annual income of $1.2 billion, of only 3.8, and we expect to opportunistically access the investment grade. Moving to the P&L, for the three months ending December 31st, gross investment income totaled $59.8 million. $59.6 million for the three months ended September. Net expenses totaled $35.9 million for the three months ended December 31st.
Accordingly, the Companys net investment income for the three months ended December 31, 2020 fleet totaled $23 $9 million for 44 cents per average share.
Compared to $23 $4 million before since the average share for the three months ended September 30.
Below the line the company had a net realized and unrealized loss for the fourth quarter totaled $2 3 million ounce versus a net realized and unrealized gain of $3 6 million for the third quarter of 2023.
As a result, the company had a net increase in net assets, resulting from operations of $23 $6 million.
For the three months ended December 31, 2023, compared increase of $26 9 million for three months ended September 30.
Shiraz K.: This compares to $36.3 million for the prior... As a reminder, at the time of the merger of SLR Senior Investment Corp or SUNS into the company... Investment Advisors Agree to Waive Incentive Fees, to the inclusion of Purchase Discount Allocations, www.larryweaver.com During the fourth quarter, the company waived approximately $90,000 of incentive fees related to, which now totals approximately $2 million in $0.44 per average, compared to $23.4 million of earnings per average share for the three months ended September Below the line, the company had a net realized non realized loss of $0.3 million versus a net related and unrelated gain. As a result, the company had a net increase in net assets resulting from operations of $23.6 million. The three months ended December 31, 2014. 9 million.
Yeah.
I mentioned on previous calls the company has returned to making quarterly rather than monthly distributions.
February 27, what if that philosophy declared a Q1 2024 quarterly distribution of 41 cents per share payable on March 28, 2024 to holders of record as of March 14, 2020 with.
With that I'll turn the call over to our co CEO.
Thank you Suraj.
Before I provide an overview of our portfolio I'd like to touch on our approach to portfolio construction.
Our commercial finance business model provides us with the flexibility and capabilities to capitalize on the most attractive lending opportunities across our four private credit investment strategies.
If you take a fundamental bottom up approach to portfolio construction based on the relative attractiveness for risk adjusted returns across our investment verticals.
While we were more active answer finance throughout 2023, we did see a pickup in activity in our other verticals during the fourth quarter, which we expect to continue in 2024.
With our flexible mandate and broad capabilities, we are positioned to take advantage of either continued durable economic conditions or softening of the economy.
Shiraz K.: As mentioned on previous calls, the company has returned to making quarterly rather than monthly payments. On February 27th, the Board of Trustees declared a Q1 2024 quarterly payment of 41 cents per share, payable on March 28th, 2025, to holders of Racket as of March 14, 2021. With that, I'll turn the call over to our co-CEO. Thank you, Shiraz.
We believe having the flexibility to play either offense or defense at the right moments across the cycle is critical to long term consistent performance.
Now, let me turn to the portfolio.
At year end on a fair value basis. The comprehensive portfolio consisted of approximately $3 1 billion of senior secured loans.
Bruce J. Spohler: Before I provide an overview of our portfolio, I'd like to touch on our approach to portfolio construction. Our commercial finance business model provides us with the flexibility and capability to capitalize on the most attractive lending opportunities across our four private credit investment strategies. We take a fundamental bottom-up approach to portfolio construction based on the relative attractiveness or risk-adjusted returns across our investment verticals. While we were more active in sponsor finance throughout 2023, we did see a pickup in activity in our other verticals during the fourth quarter, which we expect to continue in 2025 with our flexible mandate. Broad Capabilities. We are positioned to take advantage of either continued, durable economic conditions or the softening of the economy. We believe having the flexibility to play either offense or defense at the right moments across the cycle is critical to long-term, consistent performance.
Two 790 borrowers across over 110 industries.
With a $3 9 million or <unk>, 1% bridge position exposure.
Measured at fair value 99, 2% of our portfolio consisted of senior secured loans with 97, 7% invested in first lien loans, including investments to our S. S. L. P attributable to the company and only <unk>, 3% was invested in second lien cash flow loans.
With the remaining one 2% of the portfolio invested in second lien asset based loans with full borrowing basis.
Our specialty finance investments account for approximately 76% of the comprehensive portfolio with the remaining 24% invested in senior secured cash flow loans to upper mid market private equity owned 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 compared to sponsor only portfolios.
Bruce J. Spohler: Now let me turn to the portfolio. At year end, on a fair value basis, the comprehensive portfolio had approximately $3.1 billion of senior secured loans to 790 borrowers across over 110 with $3.9 million. Thank you all.
Quarter end, our weighted average asset level yield was 11 six times.
Our credit quality remained strong at year end, the weighted average investment risk rating of our portfolio was under two based on our one to four risk rating scale with one representing the least amount of risk.
Bruce J. Spohler: Thank you, measured at fair value 99.2% of our portfolio. Senior Secured Loan. 97.7% invested in first lien loans. Including investments through our SSLP attributable to the company, only 0.3% was invested in second, cash flow; the remaining 1.2% of the portfolio invested in second lien asset-based loans, full bar. Our specialty finance investments account for approximately 76% of the comprehensive portfolio, remaining 24% invested. Richard Peteka, Bruce Spohler, Ryan Lynch, Christopher York, Solar Capital Ltd. We believe that this Defensive Portfolio Composition www.solarcapital.com provides a differentiated risk-return profile for our shareholders. Sponsor Only, portfolio. 14 End, our weighted average asset level yield was 11%. Our credit quality remains strong.
97% of the portfolio is rated two or higher and 99, 4% of the portfolio on a cost basis was performing with only one nonaccrual.
Now, let me turn to our four investment verticals.
And our sponsor finance business, we originate first lien senior secured loans to upper mid market companies and non cyclical industries, such as healthcare services business services and financial services, which we believe has helped to mitigate the impact on our portfolio from cyclical economic factors.
At year end this portfolio was approximately $730 million, including the senior secured loans in the S. S. L. P attributable to our company.
We were invested across 50 distinct borrowers with approximately 99% of the cash flow portfolio in first lien loans. We believe that these investments are well positioned to withstand liquidity pressures that borrowers may be facing in light of higher interest rates.
Bruce J. Spohler: At year-end, the weighted average investment risk rating of our portfolio was under 2 based on our 1 to 4 risk rating scale, over 97% of the portfolio was at or higher. 99.4% of the portfolio on a cost basis. There's only one anonymous.
Additionally, we believe we have a defensively positioned portfolio.
Our borrowers have a weighted average EBITDA of 120 million.
Low ltvs of approximately 40% and.
Bruce J. Spohler: Now let me turn to our fourth investment verdict. In our sponsor finance business, we originate first lien, senior secured loans to upper mid-market companies and Non-Cyclical Industries, namely Health Care Services.
And interest coverage ratios, averaging one seven times.
Our portfolio is comprised of businesses that perform essential services with either recurring or reoccurring revenues and generally have low capital intensity.
Bruce J. Spohler: Solar Economy Services and Financial Services, believe it has helped to mitigate the impact on our portfolio from cyclical economic factors. At year-end, this portfolio was approximately $730 million, including the senior secured loans in the SSLP attributable to our company, were invested across 50 distinct borrowers, with approximately 99% of the cash flow portfolio in first lien loans. We believe that these investments are well positioned to withstand liquidity pressures that borrowers may be facing in light of higher interest rates. Additionally, we believe we have a defensively positioned portfolio. Our borrowers have a weighted average EBITDA of approximately $120 million, low LTVs of approximately 40%, and interest coverage ratios averaging 1.7 times. All portfolios comprised of businesses that perform essential services with either recurring or recurring revenues generally have a low capital intent. Overall, our portfolio has exhibited solid credit metrics that have remained steady in 2020. During the quarter, we originated $107 million of cash flow loans and experienced repayments of $185,000.
Overall, our portfolio has exhibited solid credit metrics that have remained steady 2023.
During the quarter, we originated $107 million of cash flow loans and experienced repayments of $185 million.
Our fourth quarter investments all of which were first lien have an average yield to expected maturity of 12, 6%.
And average leverage to our investment of four eight times with interest coverage of one seven times.
We believe these metrics support our thesis that 2023 should be a great vintage for sponsor finance investments.
Importantly, this portfolio carries less leveraged than the historical average for new issues.
Michael mentioned sponsor finance deal flow continues to be muted due to lower M&A volume. However, there are pockets, particularly in our defensive sectors, where we do see opportunities to make loans at attractive risk adjusted returns.
At quarter end, the weighted average yield across the portfolio was 12%.
Now, let me turn to our ABL segment.
In the wake of the U S regional banking crisis last year, the opportunity set for all of our ABL businesses improved.
Lending standards tightened to commercial banks, we saw an increase in deal flow as a result, we were able to originate several new attractive investments.
Bruce J. Spohler: Our fourth quarter investments, all of which were first, have an average yield to expected maturity of 12.6%, average leverage to our investment of 4.8 times, and coverage of 1.7. We believe these metrics support our thesis that 2023 should be a great vintage for sponsor finance investment. Importantly, this portfolio carries less leverage than the historical average for new issues. Michael mentioned sponsor finance deal flow continues to be muted due to lower M&A volume, but there are, basically, in our defensive sectors where we do see opportunities to make loans at attractive risk-adjusted returns. At quarter end, the weighted average yield across the portfolio was 12%. Now, let me turn to our ABLC. The Wake of the U.S.
As new entrants with less experience have entered the space, we remain committed to our high underwriting standards in which we focus on the quality of the underlying collateral base when determining acceptable advance rates and loan to value ratios.
We believe that not adhering to this discipline may result in losses in the ABL asset class.
Increase in deal volume is enabling us to remain active while being extremely selective.
At year end, the senior secured ABL portfolio totaled just under $1 billion, representing 31, 5% of our comprehensive portfolio and it was invested across 160 borrowers.
Weighted average asset level yield was 14, 5%.
And the rate the average LTV was approximately 60%.
For the fourth quarter, we had $150 million of new ABL investments and repayments of $166 million.
Bruce J. Spohler: The regional banking crisis, the opportunity set for all of our ABL... Lending standards tightened at commercial banks. We saw an increase in deal- And as a result, we were able to originate several new attractive investors; new entrants with less experience have entered the..., remain committed to our high underwriting standards, which we focus on the quality of the underlying collateral, determining acceptable advance rates and loan-to-value rates. We believe that not adhering..., may result in loss.
Now, let me touch on equipment finance.
At year end this portfolio totaled.
$1 billion, representing 32% of our comprehensive portfolio was highly diversified across 550 borrowers.
Credit profile continues to be strong the weighted average asset level yield was just over 8%.
During the fourth quarter, we originated approximately $154 million of new equipment loans and had repayments of $106 million.
Our investment pipeline has expanded.
In conjunction with the disruption caused by the regional bank failures.
Finally, let me touch on life Sciences.
At year end, our portfolio was $350 million at fair value.
Bruce J. Spohler: The increasing deal volume is enabling us to remain active while being extremely selective. At UREN, the senior secured ABL portfolio totaled just under a billion dollars, representing 31.5% of our comprehensive portfolio, invested across 160 borrowers. The Weighted Average Asset Level Yield was 14.5%. The rate, the average LTV was approximately 6.5.
Approximately 80% of the portfolio at par is invested in loans to borrowers that have over 12 months of cash runway.
Additionally, all of our portfolio of companies are generating revenues with at least one product in the commercialization stage, which significantly de risks our investment exposure.
Life Science loans represented 11, 6% of our portfolio at year end and contributed just under 22% of our gross income for the quarter.
During the fourth quarter, the team committed to $16 million of new investments and funded $38 million of new investments, while having repayments $6 million.
Bruce J. Spohler: In the fourth quarter, we had $150 million of new ABL investment and payments of $160,000. Now, let me touch on Equipment Finance. At year-end, this portfolio totaled... billion dollars, representing 32% of our comprehensive portfolio, highly diversified across 500 Credit Profiles to be strong. The weighted average asset level yield was just over 8%. During the fourth quarter, we originated approximately... 4 million Equipment Loans and had repayments of $160,000.
We have just under $20 million of unfunded life science commitments, which may be drawn by borrowers based upon reaching.
Important milestones such as revenue levels or liquidity levels at.
At year end, the weighted average yield on this portfolio was 13%.
This excludes any success fees or warrants.
While we expect valuations in the life Sciences segment to stabilize this year, we continued to see several new lending opportunities that we will meet that will meet our underwriting criteria.
Given our ability to allocate our capital to the best risk reward opportunities, we have the luxury of being highly selective in our deployment and life sciences, while yet still generating power origination and portfolio growth for the company overall.
Bruce J. Spohler: Our investment pipeline has expanded. Thank you. Finally, let me touch on Lifesign, at your end, our portfolio. ACS 300, fair value, approximately 80% of the portfolio at par. Invested in loans to borrowers that have over 12 months of cash running out. Additionally, all of our portfolio companies are generating revenue; one product in the commercials significantly de-risks our investment. Life Science Loans represented 11.6% of our portfolio, and contributed just under 22% of our gross... During the fourth quarter, the team committed to $16 million of new investment, funded $38 million of new investment, for having repayments of $600,000. We have just under $20 million of unfunded life science loans that may be drawn by borrowers based upon reaching certain levels. At year-end, the weighted average yield on this portfolio was 13%. This document excludes any success fees or warrants.
Now, let me turn the call back to Michael.
Thank you Bruce in conclusion, our portfolio reflects stable fundamentals and benefits and benefits from the flexibility to allocate capital to investments across our different lending verticals that we believe offer the most attractive risk adjusted returns for our shareholders.
Based on last nights closing price Src trades about 11% yield, which we believe presents an attractive investment opportunity.
We are available capital and an opportunity for continued earnings growth.
While the current market expectations are for rates to stay higher for longer.
And remember that specialty finance spreads and returns are not as volatile as cash flow entrepreneur investments as a result, we would not expect yield contraction for specialty finance assets to the same extent as sponsored finance when interest rates begin to move lower.
Bruce J. Spohler: We expect valuations in the life science segment to stabilize this year. We continue to see several new lending operations that we will, that will meet our underwriting criteria, given our ability to allocate our capital to the best. www.SolarCapital.com. We have the luxury of being highly selective in our capital deployment in life science while yet still generating power. I'm Richard Spektor. Thank you. Now, let me turn the call back to Mike.
Looking forward, we expect origination opportunities driven by a combination of increased activity loan maturities and regulatory credit contraction forces impacting regional banks to the benefit of direct lenders such as ourselves.
In addition, we continue to seek opportunities to expand our specialty finance capabilities through tuck in acquisitions for existing commercial finance portfolio companies portfolio team acquisitions or acquisitions of specialty finance portfolios.
Michael Stuart Gross: Thank you, Bruce. In conclusion, our portfolio reflects stable fundamentals and benefits from the flexibility to allocate capital to investments across our different lending verticals that we believe offer the most attractive risk-adjusted returns for our shareholders. Based on last night's closing price, SLRC trades at an 11% yield, which we believe presents an attractive investment opportunity. We have available capital and an opportunity for continued earnings growth. While the current market expectations are for rates to stay higher for longer, it is important to remember that specialty finance spreads and returns are not as volatile as cash flow sponsored finance investments. As a result, we would not expect yield contraction for specialty finance assets to the same extent as for sponsored finance when interest rates begin to move lower.
There are six broad foundation of diversified commercial finance businesses has the resources and experience to acquire portfolios and to service the loans on an opportunistic basis.
We continue to believe that a diversified portfolio approach across sponsor in commercial finance assets is the most effective strategy to generate income and manage risk across economic cycles.
In closing our investment advisors alignment of interest with the company's shareholders can you just be one of our guiding principles.
The SLR team owns over 8% of the company's stock, including have a significant percentage of their annual incentive compensation invested in and Src stock.
Michael Stuart Gross: Looking forward, we expect origination opportunities to be driven by a combination of increased activity, loan maturities, and regulatory credit contraction forces impacting regional banks to the benefit of direct lenders such as ourselves. In addition, we continue to seek opportunities to expand our specialty finance capabilities through token acquisitions for existing commercial finance portfolio companies, portfolio team acquisitions, or acquisitions of specialty finance portfolios. PLRC's broad foundation of diversified commercial finance businesses has the resources and experience to acquire portfolios and to service the loans on an opportunistic basis. We continue to believe that a diversified portfolio approach across sponsor and commercial finance assets is the most effective strategy to generate income and manage risk across economic cycles. In closing, our Investment Advisors' alignment of interest with the company's shareholders continues to be one of our guiding principles.
But the team's investment alongside fellow shareholders demonstrates our confidence in the company's defensive portfolio stable funding and favorable position. We appreciate 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 one on your telephone keypad.
You may remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question.
We will pause for a moment to allow questions to queue.
Our first question comes from Mickey <unk> with Ladenburg.
Yes, good morning, Bruce and Michael I wanted to start off by asking you about the other income reported for the quarter could you give us a sense of what underlies that amount which was relatively high.
Michael Stuart Gross: The SLR team owns over 8% of the company's stock, including a significant percentage of their annual incentive compensation invested in SLRC shares. The team's investment, alongside fellow shareholders, demonstrates our confidence in the company's defensive portfolio, stable funding, and favorable position. We appreciate your time today. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2.
In comparison to your previous quarters.
Okay.
Yes, I think it would make you buy the day, we had to we had a chunky exit fee in our life science business this quarter.
Those fees.
Sporadic throughout the year.
So that was the major driver in Q4.
As the pie quota.
And as you know make you some sometimes we will get the exit fee.
As a success fee or warrant that comes in a detachable form subsequent to repayments. So this was actually a life science loan that paid off earlier in the year, but then hit a milestone that triggered a success fee for us in the fourth quarter.
Operator: Once again, that is Star One to ask a question. We will pause for a moment to allow questions to queue. Our first question comes from Mickey Schlien with Ladenburg. Yes, good morning, Bruce and Michael.
Very nice congratulations on that.
Wanted to also ask about the sponsored finance cash flow segment.
Bruce J. Spohler: I want to start off by asking you about other income reported for the quarter. Could you give us a sense of what underlies that amount, which was relatively high in comparison to your previous quarters? www.larryweaver.com. I think the major driver there was a chunky exit fee in our life science business this quarter. Those fees, you know, are sporadic throughout the year.
That portfolio.
<unk> during the quarter can you give me a sense of.
To what extent the normalization of the broadly syndicated loan market.
And you know potential prepayment activity and sponsored finance drove that contraction.
Bruce J. Spohler: And as you know, Mickey, sometimes we will get the exit fee as a success fee or warrant that comes in a detachable form subsequent to repayment. So this was actually a life science loan that paid off earlier in the year but then hit a milestone that triggered a success fee. Very nice.
Yes, so so.
Great question more broadly as you see across the year there was growth.
So I don't want to focus too much on one quarter, but.
But I do think it brings up a bigger issue, which is we are beginning to see some pressure where a lot of capital as you know has been raised in the cash flow market.
Bruce J. Spohler: Congratulations on that. I wanted to also ask about the sponsored finance cash flow segment. I see that that portfolio shrank during the quarter. Can you give me a sense of to what extent the normalization of the broadly syndicated loan market and potential prepayment activity in sponsored finance drove that contraction? Yes, so, so, great question.
It starts at the upper upper market.
Kind of above where we play I'll call. It the four or $500 million EBITDA business competing with a broadly syndicated loan business, where you start to see.
Fair amount of capital come in and start to put pressure in terms of borrowers asking for re pricings to take their cost of capital down it's creeping a little bit into where we are playing in the call it $100 million to $200 million EBITDA businesses, and we are opportunistically using that as a chance to exit.
Bruce J. Spohler: You know, more broadly, as you can see across the year, there was growth. So, you know, I don't want to focus too much on one quarter, but I do think it brings up a bigger issue, which is that we are beginning to see some pressure where a lot of capital, as you know, has been raised in the cash flow market. It starts at the upper market, kind of above where we play. I'll call it $400 million-500 million EBITDA. Broadly sincere."
Again, we have seen very attractive opportunities to deploy you see the originations are still strong, but we also have opportunities as you know in our other verticals, where we will recycle capital at higher returns so.
Bruce J. Spohler: loan business where you start to see a fair amount of capital come in and start to put pressure on terms of borrowers asking for repricings to take their cost of capital down, creeping a little bit into where we are playing in the, you know, call it, 100 to 200 million EBITDA business. And we are opportunistically using that as a chance to exit because, again, we have... very attractive opportunities to deploy. You see, originations are still strong, but we also have opportunities, as you know, in our other verticals where we will recycle capital at higher returns. So it's not so much a lot of sales across portfolio companies, but it's more pricing, where certain lenders are opting to stay, and we're opting to exit. And I think that trend will continue, as we've seen in the early part of 2024.
It's not so much.
A lot of sales across portfolio companies, but it's more.
Pricings, where certain lenders are opting to stay and we're opting to exit and I think that trend will continue as we've seen in the early part of 2024, but I think importantly, because less than a quarter of our portfolio was in kind of that sector.
Are the other 75% of our business in the specialty finance are not really driven by the technical factors of the financing markets to your point Mickey.
As capital returns into the liquid market.
In general finance portfolios are at risk of being repriced or letting them go whereas that's just not the case in specialty finance you don't have the ebbs and flows of capital into the space to drive pricing and returns.
I understand that's helpful. My last question relates to your internal investment ratings I see there.
Bruce J. Spohler: But I think importantly, because less than a quarter of our portfolio is in some way in that sector, the other 75% of our business, and especially finance, is not really driven by the technical factors of the financing markets. To your point, Mickey, as capital returns into the liquid market. I think in general finance, portfolios are at risk of being repriced or let go, whereas that's just not the case in specialty finance. You don't have the ebbs and flows of capital into the space that drives prices.
There was both migration up too.
Ones, but there was also a migration down to level three and four.
Any color you can provide on the downward migration.
Yeah, I don't think there was much movement on four there was a movement into three.
One investment.
And.
What I would say Mickey is.
Bruce J. Spohler: I understand that that's helpful. My last question relates to your internal investment ratings. I see there was both migration up to ones, but there was also migration down to levels three and four. Any color you can provide on the downward migration? Yeah, I don't think there was much movement on four.
We are fortunate that our watch list is made up of names that are fundamentally performing at.
Strong operations in terms of revenue and EBITDA growth, but maybe are facing some capital structure constraints and so we will move it into a watch list until we resolve the capital structure.
Bruce J. Spohler: There was a movement into three. Yeah, that was one investor. And what I would say, Mickey, is we are fortunate that our watch list is made up of names that are fundamentally performing and have strong operations in terms of revenue and EBITDA growth but maybe are facing some capital structure constraints. And so we'll move it into a watch list until we resolve the capital structure. But that was literally just one specific name.
But that was literally just one specific name.
If we were to.
Right. It today, rather than at 12 31, it probably would not be on watch list, which I hope will be the case going forward.
But we're comforted that our fundamentals are strong and we're just addressing some balance sheet issues here and there.
Bruce J. Spohler: I think, you know, if we were to rate it today rather than at 1231, it probably would not be on the watch list, which I hope will be the case going forward. But we're comforted that our fundamentals are strong and we're just addressing some balance sheet issues here and there. Okay, that's helpful. That's it for me this morning.
Okay. That's helpful. That's it for me this morning. Thank you.
Thank you thank you Mickey.
The next question comes from Erik Zwick with Husky group.
Eric Good morning, everyone.
I wanted to start first we've got $125 million of notes maturing later this year in December I'm, just curious about your thoughts for the source of funding to redeem those and Charles maybe you kind of alluded to that in some of your comments.
Bruce J. Spohler: Thank you. Thank you. The next question comes from Eric Zwick with the Hovde Group. Good morning, everyone.
Indicating that you might opportunistically tap the investment grade market, but just kind of curious your thoughts on funding the redemption of those notes.
Bruce J. Spohler: I wanted to start first, we've got 125 million notes maturing later this year in December. I'm just curious about your thoughts for the source of funding to redeem those, and Shiraz. Maybe you kind of alluded to that in some of your comments, you know, indicating that you might opportunistically, you know, kind of tap the investment grade market. But yeah, just kind of curious about your thoughts on funding the redemption of those notes. Yes, so as you know, that's our first redemption in quite some time.
Yes, so as you know that's our first redemption in quite some time.
Yeah.
Fortunate.
To have some good luck that we haven't had to go to the market. During this rising rate environment of the last couple of years.
We have as Shiraz mentioned increased our.
Lender universe. So we have capital such that we don't need to refinance this in the unsecured market in December when the maturity comes up but we are going to be opportunistic throughout this year to look to term that out.
Bruce J. Spohler: We're fortunate to have some good luck that we haven't had to go to the market during this rising rate environment of the last couple of years. We have, as Shiraz mentioned, increased our lender universe, so we have capital such that we don't need to refinance this in the unsecured market in December when the maturity comes up, but we are going to be opportunistic throughout this year to look to turn that out. And I think importantly, given the size of that maturity, it allows us to really pursue multiple options and be nimble and see what the best opportunity is. We've had a very strong following in the insurance company private marketplace, and we've had a lot of success, and kind of bespoke financing at the right time, www. SolarCapital.com, I mean, we've had a lot of inbound inquiries, and there's been a fair amount of activity in the IG market year to date, so for us, it's a matter of when, not if. That's helpful.
Eddie importantly, given given the size of that maturity.
Allows us to really pursue multiple options to be nimble.
The best opportunities and we've had a very strong following.
In the insurance company private marketplace, and we've had a lot of success doing kind of bespoke financings at the right time. So we feel very comfortable about the situation I mean, we've had a lot of inbound inquiry as you know there's been a fair amount of activity in the state and the AG market year to date, so for us it's a matter of when not if.
That's helpful. Thank you and then you previously mentioned that leverage would decline is that S. L. P ramps and that has been the case over the past few quarters and leverage has come down and I think you've still got room to go.
Increased SLP, even more so it.
Should we continue to expect leverage to come down and get closer to that to the middle of the range over the next few quarters.
I think it will.
As mentioned it will move between the $1 one other one too.
What we are doing as you know as <unk>.
Moving.
Bruce J. Spohler: And then you previously, you know, mentioned that leverage would decline as the SLP ramps up. And that has been the case over the past two quarters; the leverage has come down. And I think that you've still got room to, you know, increase SLP even more. So should we continue to expect leverage to come down, you know, closer to the middle of the range over the next few quarters? I think it will, as Shiraz mentioned, move between 1.1 and 1.2.
Are substantially complete with moving.
Lower yielding assets that we acquired with the merger with sons back in 'twenty two into the SSL P, which frees up balance sheet.
Parent company to invest in some of these very attractive vintages across our four strategies, but we're comfortable given the vintage and the quality of the assets to operate between the one and one in the one two.
At this stage of the cycle.
And then last one for me you spent a fair amount of time in the prepared remarks talking about the opportunities that have been created in multiple of your kind of lending platforms.
Bruce J. Spohler: We are doing, as you know, moving, which we are substantially complete with moving lower yielding assets that we acquired with the merger with Suns back in 22 into the SSLP, which frees up the balance sheet at the parent company to invest in some of these very attractive vintages across our four strategies. But you know, we're comfortable given the vintage and the quality of the assets to operate. A measuring the one, one and the two, two.
From the turbulence in the regional bank market I know this is a little bit hard to kind of maybe.
So we have a strong opinion about but just curious to know what type of pipeline you have it how long does that opportunity last at this point.
I guess it's.
We do.
Put it this way at the moment, we don't we think it's going to continue to operate existed throughout this year.
Bruce J. Spohler: At this stage of the cycle, and then last one for me, you spent a fair amount of time in your prepared remarks talking about the opportunities that have been created for multiple of your kind of lending platforms by the turbulence in the regional bank market. I know this is a little bit hard to kind of maybe answer or have a strong opinion about, but I was just curious, you know, what type of sightline you have and how long that opportunity will last at this point. Um, I guess it is. We do, put it this way, at the moment we don't, but we think it's going to continue to operate and exist throughout this year. I don't really, based on our conversations, we're not hearing a lot of dialogue from banks looking to come back in.
I don't really based on our conversations were not hearing a lot of dialogue from banks looking to come back in it's more about shedding.
Portfolios and teams and so it will really we think be a great opportunity for direct lenders private credit providers, such as SLR to step in there. If you have these capabilities.
And very often it's a portfolio. So you really need to have the team.
Be able to.
Acquired that portfolio underwrite the portfolio and manage that portfolio.
So these are not always stand alone businesses. There are assets for sale and we think those are very attractive opportunities, but I will say in the past when we have lost individual investments across some of our specialty finance businesses, including life Sciences with SBB was a dominant player.
Bruce J. Spohler: It's more about shedding portfolios and teams, and so it will really, you know, we think be a great opportunity for direct lenders, private credit providers such as SLR to step in there if they have these capabilities. And very often it's a portfolio, so you really need to have the team to, you know, be able to... Acquire that portfolio, underwrite that portfolio, and manage that portfolio.
Typically by several hundred basis points to a regional bank and so we're just feeling that the lack of that competition is also helping us in our day to day business.
Thanks for taking my questions today.
Okay.
The next question comes from Bryce Rowe with B Riley.
Thanks, Good morning.
Good morning.
Wanted to maybe follow up on some of Eric's questioning there around.
Bruce J. Spohler: So these are not always stand-alone businesses; they're assets for sale, and we think those are very attractive opportunities. But I will say in the past when we have lost individual investment across some of our specially financed businesses, including Life Sciences, where SVB was a dominant player. It was typically, you know, by several hundred basis points to a regional bank, and so we're just feeling that the lack of that competition is also helping us in our day-to-day business. Thanks for taking my questions today. The next question comes from Bryce Rowe with B. Reilly. Thanks. Good morning.
The environment.
That is providing some opportunities from within the within the banking space.
Maybe maybe Bruce can you talk a little bit about.
How widespread the.
Maybe the pullback is within that space and then.
From a geographic perspective, how well suited.
Our platform is to take it to take advantage I mean is it is it pockets of the country or pockets of the regional bank space or is it more widespread than that.
Bruce J. Spohler: Morning. Wanted to maybe follow up on some of Eric's questioning there about the environment that is providing some opportunities from within the banking space. Maybe, Bruce, can you talk a little bit about, you know, how widespread the, you know, maybe the pullback is within that space, and then, you know, from a geographic perspective, how well suited, you know, the SLR platform is to take advantage of it? I mean, is it pockets of the country or pockets of the regional bank space, or, you know, is it more widespread than that?
That's a great question.
Because to your point it is a very regional business. We think that provides the opportunity and to some extent a barrier for other entrants.
It is a difficult some of these lines of business are very difficult to grow organically other than on the margin and having the opportunity to step into new regions.
Because you do need feet on the street as you know we have 19 offices around the country. Most of them are dedicated to our specialty finance businesses, both sourcing teams as well as underwriting teams as well as management teams I think what many people don't appreciate is that these are asset management heavy.
Bruce J. Spohler: That is a great question because, to your point, it is a very regional business. We think that provides the opportunity and, to some extent, a barrier for other entrants. Some of these lines of business are very difficult to grow organically, other than on the margin, and having the opportunity to step into Nugent's, because you do need feet on the street. We have 19 offices around the country.
Of the loans once you make the loan you are monitoring the collateral. So that you are comfortable advancing against that collateral throughout your loan investment and so you need a big investment in people and to your point does need to be regional.
And so we are not seeing the dislocation in any specific region, but thankfully for US we are finding opportunities in regions. We don't cover where industries. We don't cover there are industry dedicated platforms that may just do factoring for the trucking sector.
Bruce J. Spohler: Most of them are dedicated to our specialty finance businesses, both sourcing teams, as well as underwriting teams, as well as management teams. I think what many people don't appreciate is that these are asset management-heavy loans. Once you make the loan, you're monitoring the collateral so that you're comfortable advancing against that collateral throughout your loan investment. You need a big investment in people, and, to your point, it does need to be regional. We are not seeing the dislocation in any specific region, but, luckily for us, we are finding opportunities in regions we don't cover or industries we don't cover. There are industry-dedicated platforms that may just do factoring for the trucking sector. There are Canada-based companies, Midwest-based companies. We have a nice presence in Minneapolis, in Salt Lake City, on the East Coast, in the Southeast, but there are definitely pockets where we would like to have more penetration.
There are Canada based company's Midwest based companies, we we have a nice presence in Minneapolis, and Salt Lake City.
And on the East coast and the southeast, but there are definitely pockets, where we would like to have more penetration.
And so it dislocation feels to be widespread and I think that we're in the early days of.
Participants.
Making decisions about whether they want to exit where they wanted to JV. We've had approaches to JV with people, who want it still have attachment and touch points with those customers, but those corporate borrowers, but they don't want to tie up their balance sheets. So I'd like to partner with somebody like an SLR, where we take on the assets and they maintain the relationship the cash.
Bruce J. Spohler: And so this location feels to be widespread, and I think that we're in the early days of participants making decisions about whether they want to exit, whether they want to JV. We've had approaches to JV with people who want to still have attachment and touchpoints with those customers, with those corporate borrowers, but they don't want to tie up their balance sheets. So I'd like to partner with somebody like an SLR where we take on the assets and they maintain the relationship, the cash management, and many of the treasury and fee-based businesses that are so lucrative for the bank. So the banks are taking a very strategic approach, and it varies across institutions rather than regions, but we're open to all regions in the state. That's great, Collar.
Management and many of the Treasury and fee based businesses that are still lucrative for the banks. So the banks are taking a very strategic approach and it varies across.
Individual institutions, rather than regions, but where we are open to options in the states.
That's great color I appreciate it.
And let's say, maybe maybe just shifting gears a little bit.
Yes, Theres a lot of talk about which way rates are going to move and when.
Wanted to get a sense for your portfolio or your balance sheets asset sensitivity to lower rates.
How should we how should we be thinking about different different rate scenarios over the next quarter or two.
I'll kick it off for a second.
Bruce J. Spohler: Appreciate it. And let's see, maybe just shifting gears a little bit. Yeah, there's a lot of talk about which way rates are going to move and when. Wanted to get a sense for your portfolio or your balance sheet's asset sensitivity to lower rates. How should we be thinking about different rate scenarios over the next quarter or two? Thanks. I'll kick it off for a second, to some extent.
To some extent.
We benefit.
With rates staying elevated because we do have very defensive portfolio and as Michael mentioned.
Only 24% of it exposed to cash flow lending rather than more asset oriented strategies, where you do have more cushion during higher rate environments and more control over the investment because you have not only covenants, but borrowing basis. So selfishly speaking we do benefit.
Bruce J. Spohler: Thank you. We benefit from rates staying elevated because we do have a very defensive portfolio and, as Michael mentioned, only 24% of it is exposed to cash flow lending rather than more asset-oriented strategies where you do have more cushion during higher rate environments and more control over the investment because you have not only covenants but borrowing bases. So selfishly speaking, we do benefit by having elevated rates longer. But I think it also keeps more competitors on the sidelines as they deal with some stress in their portfolios that people are starting to see just in terms of covering this debt service, you know, on top of having inflationary pressures across their operating performance. So to some extent, we benefit, but as Michael touched on, we also benefit in a declining rate environment just because many of these asset classes are more absolute return products that are less sensitive to both increase and decrease, and beit. We're putting on assets at higher yields today, and those won't go down. That's great. Thank you. As a reminder, if you would like to ask a question, please press star 1.
Having elevated rates longer I think it also keeps more competitors on the sidelines as they deal with some stress in portfolios that people are starting to see just.
Just in terms of covering this debt service on <unk>.
Inflationary pressures across their operating.
Performance, so to some extent, we benefit but as Michael touched on we also benefit we think in a declining rate environment just because many of these asset classes are more absolute return products that are less sensitive to both increase and decrease in interest rates. So we feel like the stability of our earnings.
Is better than it would be had we just been a 100% cash flow portfolio. We also have a chunk of our portfolio in the equipment leasing sector that is fixed rate so were putting on assets at higher yields today and those won't go down.
When rates go down.
That's great. Thank you. Thank you.
As a reminder, if you would like to ask a question. Please press star one.
Okay.
Operator: Our next question comes from Robert Dodd with Raymond James. Hi guys, congratulations on the quarter. A couple of questions on the kind of cash flow lending book. I mean, as you said, repricing is starting to creep in. A lot of your cash flow book as it stands today was a 2023 vintage, which means slightly higher spreads, lower leverage, a really attractive vintage, but what? What risk do you consider that those assets are going to be sticky? Or are those at better leverage, better spreads, are those the ones that are going to get refinanced relatively quickly if market activity more broadly accelerates this?
Our next question comes from Robert Dodd with Raymond James.
Hi, guys congratulations on the quarter a couple of questions on the kind of the cash flow.
Lending book.
As you said.
Re pricing starting to creep in a lot of your cash flow book as it stands today versus 2023 vintage which.
Slightly higher spreads lower leverage royalty attractive vintage but whats.
What do you.
Risks considered those offsets are they going to be sticky.
All of those.
That will have to which benefits all of those the ones that are going to get refinanced.
Relatively quickly if the market activity.
Broadly accelerate.
Bruce J. Spohler: So, I would say that there is a component of our cash flow book, Robert, that is extremely acquisitive in financial services and healthcare. And those sponsors are... very focused in this environment on making additional tuck-in acquisitions. I think if they were done with their acquisition program, they might turn to optimizing the pricing of the financing, but right now, they're more focused on the availability of financing. They may have a billion-dollar credit facility and need another $200 million to make an add-on acquisition, so they're coming to people like us who can take down that $200 million add-on and are less focused on saving the 25 basis points. But I think as that portfolio matures, and the sponsors are getting ready to exit the portfolio company, then you might see them turn more towards repricing.
So I would say that there is a component of our cash flow book Robert that is extremely acquisitive.
In financial services, and healthcare and those sponsors are.
Focused in this environment on making additional tuck in acquisitions I think if they were done with their acquisition program they might turn to optimizing the pricing of the financing, but right now they are more focused on availability of financing. They may have a $1 billion credit facility and need another 200 million to make an add on acquisition.
And so they're coming to people like us who can take down that $200 million add on and less focused on saving the 25 basis points, but I think as that portfolio matures and the sponsors.
Getting ready to.
<unk> at the portfolio Company, then you might see them turn more towards repricing. So I don't think its going to be a major.
Bruce J. Spohler: So I don't think it's going to be a major headwind for us just because businesses are still in growth mode. But once you get into more of a.. www.larryweaver.com The other factor that's relevant also is that the biggest source of repricing today is investing banks being back in the syndicated loan market and being able to. www.larryweaver.com The average unit of our portfolio is 122, those aren't on average, the bigger ones are, but those are not candidates for refinancing The people who are truly at risk for immediate repricing are, you know, average of $300 million, where you know a billion, two billion, five, four to five times financing. That's not gonna be part of the data projections, and I think that's not gonna be very doable in today's public markets. The public markets really never did well for the 120 million dollar Ubung Dha company.
Headwind for us just because the businesses are still in growth mode.
But once you get into more of a.
A harvesting mode. They will be back around looking to reprice no doubt about it.
Other factors relevant also is that the biggest source repricing today.
As investment banks being back in the syndicated loan market.
Distributed those loans.
The average EBITDA of our portfolio was 102022 those are on average the bigger ones are but those are not candidates for refinancings in the BSL market.
The people who are truly a risk for immediate repricing.
Average EBITDA of $300 million.
We're one.
$1 2 billion five 4% to five <unk> financing is extremely doable at today's public market. The public markets never really did the $120 million EBITDA company. So I think I think the risk of the repricing of our portfolio is far less than those in the bigger bigger credits.
Bruce J. Spohler: And so I think... I think the risk of the repricing of our portfolio is far less than those in the bigger credits. Got it. Got it. Thank you. Very clear.
To Michael's point to one or two names that have come in and asked in the last week or so are our larger $300 million EBITDA type names.
Got it got it thank you very clear.
Bruce J. Spohler: On the other question, I mean, on the comprehensive portfolio, ABL is about a third, and equipment financing is about a third. To your point, right, there's opportunities for maybe acquisitions, JVs on the asset-based side, maybe acquisitions on the fragmented equipment financing side. I mean, where are you comfortable in the mix?
The other question I mean on the comprehensive portfolio.
About a third equipment finance is about.
To your point, there's opportunities for the EP acquisitions, JV asset base side maybe.
Acquisitions.
Fragmented equipment financing side.
Where are you comfortable.
Bruce J. Spohler: I mean, would you be comfortable with having equipment financing at 50% of the comprehensive portfolio? I mean, you like diversification through the specially financed vertical. So where would you be comfortable?
In the mix I mean would you be comfortable with having equipment financing at 50% of the comprehensive portfolio.
Diversification.
Especially by next Thursday, So where would you be comfortable.
Bruce J. Spohler: Yeah, and look, the equipment finance portfolio is one of the most diverse portfolios across the platform. So to your point, that is comforting. But I think that, We've always said, we've been blessed that we haven't had to work with a finite capital pool. We've always seemed to get returns at the time that we see a nice investment opportunity across different verticals, but we've always felt that at 15, 16% life sciences with zero losses in the team's history, it's a pretty compelling asset class, but it's not unlimited in terms of its So we try to take advantage of life science as much as possible. I think asset-based lending, where you're lending against working capital assets, receivables, and inventory, is another segment that is incredibly scalable, to your point, similar to equipment finance.
Yes, and look the equipment finance portfolio is one of the most diverse portfolios.
Across the platform so to your point that is comforting, but I think that.
We've always said when we've been blessed that we haven't had to.
Work with a finite capital pool base, we've always seem to get repays at the time that we see a nice investment opportunities across different verticals, but we've always felt that at 15%, 16% life Sciences with zero losses in the team's history.
Compelling asset class, but it's.
It's not unlimited in terms of its need for capital. So we try to take advantage of life science as much as possible I think asset based lending.
Where you are lending against working capital assets receivables and inventory is another segment that is incredibly scalable to your point similar to equipment finance and obviously, we have the investment across three different ABL teams here. So we think we're well positioned there.
Bruce J. Spohler: And obviously, we have the investment across three different ABL teams here, so we think we're well-positioned there. I think the short answer is, as you know with us, sponsor finance will ebb and flow. ... I think we will see in the near term a little bit more growth. We need rates to come down a little bit more, and we've gone through the business plan there, there are some strategies where we're going to take that up, but I think it might be even more accelerated growth on the ABLC.
So.
The short answer is as you know with our sponsor finance will ebb and flow between.
15% and 30% based on where we see the market opportunity, but I think asset based lending and life sciences, we'd like to scale up as well as equipment, but I think we see in the near term a little bit more growth in ABL and hopefully life Sciences equipment finance to Michael's point, because it is a fixed rate asset.
We need rates to come down a little bit more but we are positioned for growth as.
As we look out at 24, having just sat down with the team and gone through the business plan. There. There are some strategies, where we're going to take that up but.
But I think it might be even more accelerated growth on the ABL side.
Bruce J. Spohler: Got it, thank you. It appears we have no further questions at this time. I will now turn the program back over to Michael Gross for any additional or closing remarks. Thank you all for your time this morning. No additional closing remarks, but as always, we are here and available if anybody has any follow-up questions. www.larryweaver.com. This does conclude today's program. Thank you for your participation. You may disconnect at any time. Thanks for watching!
Got it thank you.
It appears we have no further questions at this time.
I'll now turn the program back over to Michael gross for any additional or closing remarks.
Thank you all for your time this morning, no no additional closing remarks, but as always we are here and available if anybody has any follow up questions. Thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Okay.
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