Q1 2024 SLR Investment Corp Earnings Call
Operator: Good day everyone, and welcome to today's SLR Investment Corp. first quarter 2024 earnings call. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. Please note that this call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to Chairman and Co-CEO Michael Gross. Please go ahead.
Good day, everyone and welcome to today's SLR investment Corp, first quarter 2024 earnings call. At this time all participants are in a listen only mode. Later, you will have an opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing star one.
Operator: On your telephone keypad. Please note that this call will be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn today's call 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 quarter ended March 31, 2024. I'm joined today by my long-term partner of 17 plus years, Bruce Spohler, Co-Chief Executive Officer, and our Chief Financial Officer, Shiraz Kajee, and the Solar Investors Relations Team. Shiraz, before we begin, could you please start by discussing the webcast and forward-looking statements?
Michael Stuart Gross: Thank you very much and good morning, welcome to SLR investment Corp's earnings call for the fiscal quarter ended March 31st 2024, I'm joined today by my long term partner for 17 plus years, Bruce bowler co Chief Executive Officer, and our Chief Financial Officer, Shreds, Koji and the solar investors relations team trials before you go.
Michael Stuart Gross: Could you please start by covering the webcast and forward looking statements.
Shiraz Y. Kajee: Thank you, Michael. Good morning, everyone.
Shiraz Y. Kajee: Thank you Michael Good morning, everyone I would like to remind everyone that today's call and webcast are being recorded.
Shiraz Y. Kajee: I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Fesselaar Investment Corp. and that any unauthorized broadcast in any form is strictly prohibited. This conference call is also being webcast from the Events Calendar in the Investors section on our website at www.slreinvestmentcorps.com. Audio replays of this call will be made available later today, as disclosed in our May 8th earnings press release.
Shiraz Y. Kajee: Please note that they're the property of first a lot of investment pool, and then any outsized broadcast in any form is strictly prohibited.
Shiraz Y. Kajee: This conference call is also being webcast live events County in the investors section on our website at Www Dot best one cool dotcom.
Shiraz Y. Kajee: Audio replays of this call will be made available later today as disclosed al may eight.
Shiraz Y. Kajee: Earnings press release.
Shiraz Y. Kajee: I would also like to call your attention to the customary disclosures in our press release regarding forward-looking statements. Today's conference call and webcast may also include forward-looking statements and projections. These statements are not guarantees of our future performance or financial results and involve a 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, including those described from time to time in our filings with the SEC.
Shiraz Y. Kajee: I'd also like to call your attention to the customary disclosures in our press release regarding forward looking statements.
Shiraz Y. Kajee: Today's conference call and webcast may include forward looking statements and projections.
Shiraz Y. Kajee: Shipments are not guaranteed yourself future performance or financial results and involve a number of risks and uncertainties.
Shiraz Y. Kajee: This performance is not indicative of future results.
Shiraz Y. Kajee: 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.
Shiraz Y. Kajee: We do not undertake to update any forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at 212-993-1670. At this time, I'd like to turn the call back over to our Chairman and Co-CEO, Michael Gross. Thank you, Shiraz, and again, thank you for your time.
Shiraz Y. Kajee: We do not undertake to update any forward looking statements unless required to do so by law.
Michael Stuart Gross: To obtain copies of our latest SEC filings. Please visit our website or call us at two one to 90 931670.
Michael Stuart Gross: At this time I'd like to turn the call back over to our chairman and co CEO Michael glass. Thank you Roz and again, thank you to everyone for joining our earnings call. This morning.
Michael Stuart Gross: Thank you, Shiraz, and again, thank you to everyone for joining our earnings call this morning. After the market closed yesterday, SLRC reported net investment income of $0.44 per share in the first quarter of 2024, representing year-over-year growth of 7.7 percent. First quarter results mark the sixth consecutive quarter of NII per share meeting or exceeding the quarterly dividend and contributed to an increase in net asset value per share to $18.19 as of March 31, 2024 from $18.09 per share on December 31, a sequential increase of 0.6%.
Michael Stuart Gross: After the market closed yesterday Src reported net investment income of 44 cents per share in the first quarter of 2024, representing a year over year growth of seven 7%.
Michael Stuart Gross: First quarter results marked the sixth consecutive quarter of NII share per share meeting or exceeding our quarterly dividend and contributed to an increase in net asset value per share to $18.19 as of March 31, 2024 from $18.09 per share at December 31st a sequential increase of 0.6%.
Michael Stuart Gross: Despite a continuation of tepid M&A activity in the first quarter, the further strengthening in bank participation in the BSL market, and recovery in the CLO issuance, we continue to find attractive investment opportunities across our complementary private credit strategies of Sponsored Finance and Specialty Finance. In the first quarter, we originated new investments of approximately $261 million and received repayments of approximately $314 million, which resulted in a slight decline in the comprehensive investment portfolio to $3.1 billion.
Michael Stuart Gross: Despite a continuation of tepid M&A activity in the first quarter to further strengthening and bank participate participation in the BSL market and recovery in the CLO issuance, we continue to find attractive investment opportunities across our complementary private credit strategies, our sponsor finance and specialty finance in.
Michael Stuart Gross: In the first quarter, we originated new investments of approximately $261 million and received repayments of approximately $314 million resulted in a slight decline in our comprehensive investment portfolio to $3 $1 billion.
Michael Stuart Gross: SLR is one of a handful of private credit managers that have been in existence since before the Great Financial Crisis, and we have the experience and strong track record of navigating a variety of market environments across credit cycles over its 20-year history. Cyclicality in the sponsor finance markets, which can be governed by the ebbs and flows of the Moore markets, is a condition that is not new to us as private credit investors.
Michael Stuart Gross: SLR is one of a handful of private credit managers that it's been in existence since before the great financial crisis, and we have the experience and strong track record of.
Michael Stuart Gross: Navigating a variety of market environments across credit cycles over a 20 year history.
Michael Stuart Gross: The cyclicality of the sponsor finance markets, which can be governed by the ebbs and flows of the mall is a condition that is now not new to us as private credit investors. In fact, it's this condition that let us to diversify our investments away from strictly castle lending more than a decade ago their expansion into asset based lending in 2012.
Michael Stuart Gross: In fact, it is this condition that led us to diversify our investments away from strictly cash flow lending more than a decade ago via expansion to asset-based lending in 2012. Since then, SLRC has added several commercial finance teams to expand our investment strategies, resulting in a more diverse private credit investment model. Our multi-strategy approach to private credit investing was on display in the first quarter as the very attractive lending-friendly conditions that existed in 2023 for sponsor finance softened.
Michael Stuart Gross: Since then Src has added several commercial finance teams to expand our breadth of strategies, resulting in a more diverse private credit investment model.
Michael Stuart Gross: Our multi strategy approach of private credit investing was on display in the first quarter, that's a very attractive lending friendly conditions that existed in 2023 and sponsor finance softened.
Michael Stuart Gross: Originations of $220 million from SLRC's Specialty Finance Investment Verticals of asset-based lending, life sciences lending, and equipment finance represented approximately 88 percent of total originations for the quarter. Said another way, only 20 percent of our first quarter originations were in sponsored finance, a sharp reversal of last year's trend where sponsored finance originations comprised close to half of total originations in the first quarter of 2023. While we expect the 2020 vintage for sponsor finance investments to be very strong for both us and the private credit industry more broadly, our flexible investment mandate allows us to shift to areas of less competition than which currently exist in the sponsor finance market.
Michael Stuart Gross: Originations of $220 million from SLR, see, especially finance investment verticals.
Michael Stuart Gross: Asset based lending life Sciences lending and equipment finance represented approximately 88% of total originations in the quarter set another way only 20% of our first quarter originations worth sponsor finance, a sharp reversal of last year's trend, where sponsored finance originations comprise close to half of total originations in the first quarter of 2000.
Michael Stuart Gross: 'twenty three.
Michael Stuart Gross: While we expect the 2020 vintage for sports fans investments he very strong for both us and the private credit industry more broadly our flexible investment mandate allows us to shift to areas with less competition, there, which currently exists in sponsor finance market.
Michael Stuart Gross: Managing teams and sponsors are increasingly exploring ways to raise new capital to support owning assets over a longer time frame to execute their business plan. This has resulted in an increasing opportunity for asset-based loans and liquidity solutions as middle market companies grapple with both lower free cash flow and tighter working capital. ABL originations were more than $50 million in the quarter.
Michael Stuart Gross: Management teams and sponsors are increasingly exploring ways to raise new capital to support owning assets over a longer timeframe to execute their business plan.
Michael Stuart Gross: This has resulted in an increasing opportunity for asset based loans and liquidity solutions as middle market companies grappled with both lower free cash flow and tighter working capital.
Michael Stuart Gross: ABL originations were more than $50 million in the quarter post quarter end, we have closed some attractive new ABL investments and have a strong pipeline of ABL investment opportunities.
Michael Stuart Gross: Post-quarter end, we have closed some attractive new ABL investments and have a strong pipeline of ABL investment opportunities. We've also started to see some green shoots in the life science market following a period of muted transaction activity in 2023. In the first quarter, we originated $24 million via both new deals and DDTL draws based on borrowers hitting certain performance milestones. This origination activity exceeded our originations for the first half of 2023
Michael Stuart Gross: We are also starting to see some green shoots in the life science market. Following a period of muted transaction activity in 2023.
Michael Stuart Gross: In the first quarter, we originated $24 million via both new deals and D. D. T. L draws based on borrowers borrowers hitting certain performance milestones.
Michael Stuart Gross: This is a really nice activity exceeded originations for the first half of 2023.
Michael Stuart Gross: Equity valuations for both private and public life science companies have begun to stabilize, with credit investment opportunities continuing to improve. In equipment finance, the transition from banks to non-banks continues to rapidly evolve, and our team's deep industry expertise across a wide range of equipment solutions allows us to be a solution provider for both big and small companies.
Michael Stuart Gross: Equity valuations for both private and public life science companies have begun to stabilize with credit investment opportunities continuing to improve.
Michael Stuart Gross: In equipment finance the transition from banks to Nonbanks continues to rapidly evolve and our teams deep industry expertise across a wide ride wide range of equipment solutions allows us to be a solution provider for big and small companies.
Michael Stuart Gross: We continue to be pleased with the construction, quality, and performance of our portfolio. At quarter end, approximately 98% of our comprehensive investment portfolio was comprised of first lien senior secured loans. SLR's longstanding focus on first lien loans has resulted in a portfolio which we believe is more conservatively positioned and better equipped to withstand persistent inflationary pressures and high interest rates than portfolios with second lien and broader cyclical exposure. As of March 31st, our investments in non-accrual represented... 0.8% and 0.6% of the investment portfolio on a cost and fair value basis, respectively.
Michael Stuart Gross: We continue to be pleased the construction quality and performance of our portfolio at quarter end approximately 98% of our comprehensive investment portfolio was comprised of first lien senior secured loans.
Michael Stuart Gross: <unk> long standing focus on first lien loans has resulted in our portfolio, which we believe is more conservatively positioned and better equipped to withstand persistent inflationary pressures and high interest rates their portfolios with second lien and broader cyclical exposure.
Michael Stuart Gross: As of March 31st our investments in non accrual represented 0.8% <unk>, 6% of the investment portfolio on a cost and fair value basis, respectively.
Michael Stuart Gross: We believe our low rate of non-accruals relative to the BDC sector is a result of our multi-strategy approach, in which our specialty finance strategies, which account for 75% of our comprehensive portfolio at Market to First, enable us to be more selective in our sponsor finance investments. In sponsor 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 costs of capital and inflation.
Michael Stuart Gross: We believe our low rate of non accruals relative to the BDC sector as a result of our multi strategy approach.
Michael Stuart Gross: Our specialty finance strategies, which accounted for 75% of our comprehensive portfolio at March 31st enable us to be more selective in our sponsor finance investments.
Michael Stuart Gross: In sponsor finance the average EBITDA and revenue growth continues to be positive for our portfolio companies. Overall, they have successfully managed the transition to environment with higher cost of capital and inflation.
Michael Stuart Gross: The weighted average interest coverage under sponsor-financed loans has held steady at approximately 1.7 times. Additionally, and importantly, only 1.8% of our first quarter gross income is in the form of capitalized PIC income from cash flow borrowers resulting from amendments.
Michael Stuart Gross: The weighted average interest coverage under sponsor financed loans that held steady at approximately one seven times.
Michael Stuart Gross: Additionally, and importantly, only one 8%.
Michael Stuart Gross: Of our first quarter gross income is in the form of capitalized Pik income from cash flow borrowers, resulting from amendments.
Michael Stuart Gross: We believe these healthy metrics are the result of our focus and sponsored finance on recession-resistant industries with high recurring free cash flow, such as health care, business, and financial services. The credit quality of our specialty finance investments continues to be solid, with attractive LTVs that have meaningful collateral support and borrowing-based structures. With the refinancing market open only to the best credits, sponsors are now focused on the remainder of their portfolios in this higher-for-longer rate environment.
Michael Stuart Gross: We believe these healthy metrics are the result of our focus on sponsor finance on recession resilient industries with high recurring free cash flow such as health care business in financial services.
Michael Stuart Gross: The credit quality of our specialty finance investments continue to be solid attractive ltvs that are meaningful collateral support and borrowing based structures.
Michael Stuart Gross: With the refinancing market opened all went to the best credits sponsor now focus on the remainder of their portfolios it is higher for longer rate environment.
Michael Stuart Gross: While we are optimistic that M&A will increase in the back half of the year, current activity remains centered on DTL draws and amended extends, which we are addressing very prudently. As of March 31st, including available credit capacity at SSLP and our specially financed portfolio companies, we have approximately $800 million of available capital to deploy. From our receipt today, we think SLRC is in a favorable position to take advantage of either continued durable economic conditions or a softened economy. I'll turn the call now back over to Shiraz to take you through the first quarter financial highlights.
Michael Stuart Gross: We are optimistic that M&A will increase in the back half of the year current activity remains centered on D. T. L draws and amended extends which we're addressing very prudently.
Shiraz: At March 31st including available credit capacity at S. S. L P and.
Shiraz: And our specialty finance portfolio companies, we have approximately $800 million of available capital to deploy from our seat today, we think SLR see isn't a favorite position to take advantage of our E. Either continued durable economic conditions or softening economy.
Michael Stuart Gross: I'll turn the call now back over to Shiraz to take you through the first quarter financial highlights.
Shiraz: Thank you Michael.
Shiraz Y. Kajee: SLR Investment Corp.'s net asset value at March 31, 2024 was $992 million, or $18.19 per share, compared to $987 million, or $18.09 per share, at December 31, 2021. The quarter-end SLRC's on-balance sheet investment portfolio had a fair market value of approximately $2.1 billion in 145 portfolio companies across 41 industries, compared to a fair market value of $0.2 billion in 151 portfolio companies At March 31st, the company had approximately $1.2 billion in debt outstanding with leverage of 1.16 times net debt to equity. We expect our leverage ratio to remain in the middle of our target leverage range of 0.9 to 1.25 times. SLRC's funding profile is in a strong position to continue to weather the current interest rate environment.
Shiraz: That's a lot of investment clubs net asset value at March 31, 2020, full it was $992 million or $18 19 per share compared to $987 million or <unk> $18.09 per share at December 31st.
Shiraz Y. Kajee: At quarter end as losses on balance sheet investment portfolio at fair market value of approximately $2 1 billion.
Shiraz Y. Kajee: 45 portfolio companies across 41 industries.
Shiraz Y. Kajee: Pet to a fair market value of $2 2 billion knowledge and 151 portfolio companies across 43 industries at December 31st.
Shiraz Y. Kajee: At March 31st the company had approximately $1 $2 billion of debt outstanding with leverage of 116 times net debt.
Shiraz Y. Kajee: Debt to equity, we expect our leverage ratio to remain in the middle of our target leverage range of <unk> nine to $1 two five times.
Shiraz Y. Kajee: So obviously as funding profile is in a strong position to continue to weather the current interest rate environment.
Bruce John Spohler: Our existing $470 million of senior unsecured fixed notes have a weighted average annual interest rate of only 3.8%, and we expect to opportunistically access the investment grade debt market and are always in dialogue with investors in the fixed income community. Moving to the P&L, for the three months ended March 31st, Gross Investment Income totaled $58.1 million versus $59.8 million for the three months ended December 31st. Net expenses totaled $34.2 million for the three months ended March 31st.
Shiraz Y. Kajee: Existing $417 million of senior unsecured fixed notes have a weighted average annual interest rate of only three 8%.
Bruce John Spohler: And we expect to Opportunistically access the investment grade debt market and I always have dialogue with investors in the fixed income community.
Bruce John Spohler: This compares to $35.9 million for the prior quarter. Accordingly, the company's net investment income for the three months ended March 31st, 2024 totaled $23.9 million, or 44 cents per average share, the same as the prior quarter. In total, the company had net realized and unrealized gains for the first quarter totaling $4 million versus a net realized and unrealized loss of $0.3 million for the fourth quarter of 2023. As a result, the company had a net increase in net assets resulting from operations of $27.9 million for the three months ended March 31st compared to a net increase of $23.6 million for the three months ended December 31st, 20
Bruce John Spohler: Moving to the P&L for the three months ended March 31, gross investment income totaled $58 $1 million versus $59 $8 million for the three months ended December 31st.
Bruce John Spohler: Expenses totaled $34 2 million for the three months ended March 31.
Bruce John Spohler: $35 9 million for the prior quarter.
Bruce John Spohler: Accordingly, the company's net investment income for the three months ended March 31, 2020 totaled $23 9 million or.
Bruce John Spohler: 44 cents per average share the same as the prior quarter.
Bruce John Spohler: Below the line the company had net realized and unrealized gains for the first quarter totaling $4 million versus a net realized and unrealized loss of <unk> 3 million for the fourth quarter of 2023.
Bruce John Spohler: As a result, the company had a net increase in net assets, resulting from operations of $27 $9 million for the three months ended March 31st compared to a net increase of 23 6 million for the three months ended December 31 2023.
Bruce John Spohler: Okay.
Bruce John Spohler: On May 8th, the Board of Trustees declared a Q2 2024 quarterly distribution of $0.41 per share payable on June 27, 2024 to holders of record as of June 13, 2024. With that, I'll turn the call over to our co-CEO, Bruce Spohler.
Bruce John Spohler: On May eight the board declared a Q2 2020 full 40 distribution with 41 cents per share payable on June 27, 2024 to holders of record as of June 16th 2024.
Bruce John Spohler: With that I'll turn the call over to our co CEO Bruce Butler.
Bruce John Spohler: Thank you Suraj.
Bruce John Spohler: We believe that SLRC's commercial finance investment model provides us with the flexibility and capabilities to capitalize on the most attractive lending opportunities across our four private credit investment strategies. This diversity provides us with the flexibility to determine where we want to invest today and, importantly, the ability to say no.
Bruce John Spohler: We believe that SLR CS commercial finance investment model provides us with the flexibility and capabilities to capitalize on the most attractive lending opportunities across our four private credit investment strategies. This diversity provides us with the flexibility to determine where we want to invest today and <unk>.
Bruce John Spohler: Fortunately the ability to say no.
Bruce John Spohler: We take a fundamental, bottom-up approach to our portfolio construction based on the relative attractiveness or risk-adjusted returns across our investment verticals. At quarter end, on a fair value basis, the comprehensive portfolio consisted of $3.1 billion of senior secured loans to approximately 800 distinct borrowers across 110 industries, with $3.8 million as our average position.
Bruce John Spohler: We take a fundamental bottom up approach to our portfolio construction based on the relative attractiveness or risk adjusted returns across our investment verticals.
Bruce John Spohler: At quarter end on a fair value basis. The comprehensive portfolio consisted of $3 1 billion of senior secured loans to approximately 800 distinct borrowers. This was across 110 industries with 3.8.
Bruce John Spohler: $8 million as our average position.
Bruce John Spohler: Measured at fair value, 99.3% of the portfolio consisted of senior secured loans, with 97.8% invested in first lien loans, including investments in the SSLP attributable to the company, and only 0.3% was invested in second lien cash flow loans, with the remaining portfolio invested in second lien asset-based loans aggregating 1.2%. Our specialty finance investments account for approximately 75% of our comprehensive portfolio, with the remaining 25% invested in senior secured cash flow loans to upper mid-market sponsor-backed companies.
Bruce John Spohler: At fair value 99, 3% of the portfolio consisted of senior secured loans with 97, 8% invested in first lien loans, including investments in the S. S. L. P attributable to the company and only 0.3% was invested in second lien cash flow loans.
Bruce John Spohler: The remaining portfolio invested in second lien asset based loans aggregating one 2%.
Bruce John Spohler: Our specialty finance investments account for approximately 75% of our comprehensive portfolio with the remaining 25% invested in senior secured cash flow loans to upper mid market sponsor backed companies. We believe that this defensive portfolio construction positions us well for potential economic weakness.
Bruce John Spohler: We believe that this defensive portfolio construction positions us well for potential economic weakness and provides a differentiated risk-return profile for our shareholders compared to cash flow-only portfolios. At quarter end, our weighted average asset level yield was 11.8%, up from 11.6% in the prior quarter. Our portfolio credit quality remains strong. As of March 31st, the weighted average investment risk rating of our portfolio was just under 2 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk.
Bruce John Spohler: And provides a differentiated risk return profile for our shareholders compared to cash flow only portfolios.
Bruce John Spohler: At quarter end, our weighted average asset level yield was 11, 8%.
Bruce John Spohler: Up from 11, 6% in the prior quarter.
Bruce John Spohler: Our portfolio credit quality remains strong.
Bruce John Spohler: At March 31, the weighted average investment risk rating of our portfolio was just under two based on our one to four risk rating scale with one representing the least amount of risk.
Bruce John Spohler: Consistent with last quarter, over 97% of the portfolio is rated a 2 or higher, and 99.2% of the portfolio on a cost basis and 99.4% on fair value were performing, with only 2 investments on non-accrual. Now, let me turn to our four investment strategies. Sponsor Finance or Cash Flow Lending. In our sponsor finance business, we originally first originated senior secured loans to upper mid-market companies in non-cyclical industries such as healthcare, business services, and financial services, which has helped us mitigate the impact of cyclical economic factors.
Bruce John Spohler: Consistent with last quarter over 97% of the portfolio is rated a two or higher.
Bruce John Spohler: And 99, 2% of the portfolio on a cost basis and 99, 4% on fair value were performing with only two investments on non accrual.
Bruce John Spohler: Now, let me turn to our fourth investment strategies.
Bruce John Spohler: Sponsor finance for cash flow lending.
Bruce John Spohler: And our sponsor finance business, we originate first lien senior secured loans to upper mid market companies and non cyclical industries, such as healthcare business services and financial services, which has helped us mitigate the impact from cyclical economic factors.
Bruce John Spohler: At quarter end, our sponsor finance cash flow portfolio was approximately $750 million, which included loans in the SSLP attributable to the company. It was invested across 48 distinct borrowers. With approximately 99% of this cash flow portfolio invested in first lien loans, we believe our investments are well positioned to withstand liquidity pressures that borrowers may face in today's environment. Additionally, we believe we have a defensively positioned portfolio. Our cash flow borrowers have a weighted average EBITDA of approximately $125 million, carry low LTVs of approximately 40%, and interest coverage of approximately 1.7 times, consistent with last quarter. Our portfolio is comprised of businesses that perform essential services with either recurring or reoccurring revenues and have low capital intents. Overall, our portfolio has exhibited solid credit metrics that have remained steady throughout this year.
Bruce John Spohler: At quarter end, our sponsor finance cash flow portfolio was approximately $750 million, which includes loans in the S. S. L. P attributable to the company.
Bruce John Spohler: It's invested across 48 distinct borrowers.
Bruce John Spohler: With approximately 99% of this cash flow portfolio invested in first lien loans, we believe our investments are well positioned to withstand liquidity pressures that borrowers may face in today's environment.
Bruce John Spohler: Additionally, we believe we have a defensively positioned portfolio are.
Bruce John Spohler: Our cash flow borrowers have a weighted average EBITDA of approximately $125 million.
Bruce John Spohler: Carry low ltvs of approximately 40%.
Bruce John Spohler: And interest coverage of approximately one seven times consistent with last quarter.
Bruce John Spohler: Our portfolio is comprised of businesses that perform essential services with either recurring or reoccurring revenues that have low capital intensity.
Bruce John Spohler: Overall, our portfolio has exhibited solid credit metrics that have remained steady throughout this year.
Bruce John Spohler: During the quarter, we originated $33 million of cash flow loans and experienced payments of $16 million. Our first quarter investments, all of which were first laying, had an average yield to expected maturity of 12.2% and leverage through our investment of 3.8 times. This leverage level is less than the historical average for new issues. As Michael mentioned, sponsor finance deal flow continues to be muted due to lower M&A volume.
Bruce John Spohler: During the quarter, we originated $33 million of cash flow loans and experience payments of $16 million.
Bruce John Spohler: Our first quarter investments all of which were first lien have an average yield to expected maturity of 12, 2%.
Bruce John Spohler: Leverage through our investment of three eight times.
Bruce John Spohler: Importantly.
Bruce John Spohler: This leverage level is less than historical average for new issues.
Bruce John Spohler: As Michael mentioned sponsor finance deal flow continues to be muted.
Bruce John Spohler: Due to lower M&A volume.
Bruce John Spohler: However, there are pockets in our defensive industries to invest on an attractive risk-adjusted basis. At quarter end, the weighted average cash flow yield was just under 12%. Now, let me turn to our ABL section.
Bruce John Spohler: However, there are pockets in our defensive industries to invest on an attractive risk adjusted basis at quarter end the weighted average cash flow yield was just under 12%.
Speaker Change: Now, let me turn to our ABL segment.
Bruce John Spohler: In the wake of the U.S. regional banking crisis last spring, the opportunity set for all of our ABL businesses increased. As lending standards tightened at commercial banks, we saw an increase in ABL business flow. As a result, we were able to originate several attractive new investments. As new entrants with less experience have entered the space, we've remained committed to our high underwriting standards, in which we focus on the quality of the underlying collateral when determining acceptable loan-to-value lending ratios. The increase in our deal volume is enabling us to remain an attractive active investor while being extremely selective.
Bruce John Spohler: In the wake of the U S regional banking crisis last spring the opportunity set for all of our ABL businesses has increased.
Bruce John Spohler: As lending standards tightened at commercial banks, we saw an increase in ABL to fluff.
Bruce John Spohler: As a result, we were able to originate several attractive new investments as.
Bruce John Spohler: As new entrants with less experience have entered the space. We've remained committed to our high underwriting standards in which we focus on the quality of the underlying collateral when determining acceptable loan to value lending ratios.
Bruce John Spohler: The increase in our deal volume is enabling us to remain attractive and active while being extremely selective.
Bruce John Spohler: At quarter end, our ABL portfolio totaled $930 million, representing 30% of our total portfolio, and was invested in 166 different borrowers. The weighted average asset level yield was 15.7% compared to 14.5% in the prior quarter. For the first quarter, we had $53 million of new investment and repayments of $103 million across our ABL strategy. Now, let me touch on Equipment Finance.
Bruce John Spohler: At quarter end, our ABL portfolio totaled $930 million, representing 30% of our total portfolio.
Bruce John Spohler: And was invested in 166 different borrowers.
Bruce John Spohler: The weighted average asset level yield was 15, 7% compared to 14, 5% from the prior quarter.
Bruce John Spohler: For the first quarter, we had $53 million of new investments and repayments of $103 million across our ABL strategies.
Bruce John Spohler: Now, let me touch on equipment finance.
Bruce John Spohler: At Quarter End, this portfolio totaled $1 billion, representing a third of our total portfolio. It was highly diversified across 550 borrowers. The credit portfolio profile of this portfolio continues to be solid. The weighted average asset level yield was approximately 8%. During this quarter, we originated approximately $150 million of new investments and had repayments for approximately $143 million. Our investment pipeline has expanded in conjunction with the disruption caused by last year's regional bank failure. Finally, let me touch on life sciences.
Bruce John Spohler: At quarter end this portfolio totaled 1 billion, representing a third of our total portfolio was highly diversified across 550 borrowers.
Bruce John Spohler: Our credit portfolio profile of this portfolio continues to be solid the weighted average asset level yield was approximately 8%.
Bruce John Spohler: During this quarter, we originated approximately $150 million of new investments and had repayments of approximately $143 million.
Bruce John Spohler: Our investment pipeline has expanded in conjunction with the disruption caused by last year's regional bank failures.
Bruce John Spohler: Finally, let me touch on life Sciences at quarter end this portfolio totaled $338 million.
Bruce John Spohler: At quarter end, this portfolio totaled $338 million. Additionally, over 80% of our portfolio, at par, is invested in loans to borrowers that have over 12 months of cash runway. Additionally, all of our life science companies are generating revenue with at least one product in the commercialization stage; this significantly de-risks our underlying investment.
Bruce John Spohler: Over 80% of our portfolio at par has invested in loans to borrowers that have over 12 months of cash runway.
Bruce John Spohler: <unk> all of our life science companies are generating revenue with at least one product in the commercialization stage this significantly de risks our underlying investment.
Bruce John Spohler: Life Science loans represented 11% of the portfolio and contributed over 22% of our gross investment income for the quarter. During the first quarter, the team funded $24 million of new investments and had repayments of $52 million. At quarter end, the weighted average yield was approximately 13% on our life science loans, and this excludes the addition of potential success fees and warrants. While we expect valuations in the life sciences market to stabilize this year, we continue to see several new opportunities that we believe will meet our underwriting criteria.
Bruce John Spohler: Life Science loans represented 11% of the portfolio and contributed over 22% of our gross investment income for the quarter.
Bruce John Spohler: During the first quarter the team funded $24 million of new investments and had repayments of $52 million.
Bruce John Spohler: At quarter end, the weighted average yield was approximately 13% on our life science loans and this excludes the addition of potential success fees and warrants.
Bruce John Spohler: While we expect valuations in the life sciences market to stabilize this year, we continue to see several new opportunities that we believe will meet our underwriting criteria.
Bruce John Spohler: Given SLRC's ability to allocate capital to the best risk-reward opportunities, we have the luxury of being highly selective in our capital deployment towards life sciences while still generating positive originations for the company overall. Lastly, I want to touch on the company's investment in SSLP. SSLP was a strategic initiative put in place at the end of 2022 following the merger with SLR Senior Investment Corp. This was done to rotate some lower yielding cash flow loans from Sun's portfolio.
Bruce John Spohler: Given that <unk> ability to allocate capital to the best risk reward opportunities, we have the luxury of being highly selective in our capital deployment towards life Sciences, while still generating positive originations for the company overall.
Bruce John Spohler: Lastly, I want to touch on the company's investment in S. S. L. P.
Bruce John Spohler: Yes S. L. P was a strategic initiative, which we put in place the end of 2022 following the merger with SLR Senior investment Corp. This was done to rotate some lower yielding cash flow loans from SUNS portfolio.
Bruce John Spohler: Six quarters after launching the initiative, we are pleased with the ramp-up of the portfolio and the income that it has delivered thus far. In the first quarter, SLRC earned $1.6 million from the SSLP program, representing a 13.6% annualized yield. This compares to earnings of $1.1 million last quarter for an annualized yield of 10.3%. As of quarter end, investment commitments at the SSLP total $238 million, and after quarter end, we have invested an additional $6 million in the SSLP, bringing our total commitments to $244 million.
Bruce John Spohler: Six quarters after launching the initiative, we are pleased with the ramp of the portfolio and the income that has delivered thus far in.
Bruce John Spohler: In the first quarter <unk> earned $1 6 million from the S. S. L. P program, representing a 13, 6% annualized yield.
Bruce John Spohler: This compares to earnings of $1 1 million last quarter or an annualized yield of 10, 3%.
Bruce John Spohler: As of quarter end investment committed commitments at the S. S. L. P totaled $238 million and post quarter end, we have invested an additional $6 million in the S. S. L P, bringing our total commitments to 244 million.
Michael Stuart Gross: Now, let me turn the call back to Mike.
Bruce John Spohler: Now, let me turn the call back to Mike.
Michael Stuart Gross: Thank you, Bruce. In conclusion, we are pleased with the results achieved at SLRC in the first quarter of 2024, the continued momentum we are seeing across the lending verticals, and the credit quality and diversity of our investment portfolio. Asset quality remains top of mind for investors today, with a tight risk premium priced across risk assets. From our seat, we have started to see the dispersion in credit quality metrics within the private credit marketplace and believe our history of conservatism and predominantly first-line investment portfolio with significant diversification has begun to differentiate our performance.
Mike: Thank you Bruce in conclusion, we are pleased with the results achieved at Src in the first quarter 2024. The continued momentum we are seeing across the lending verticals and our credit quality and diversity of our investment portfolio.
Michael Stuart Gross: Asset quality remains top of mind for investors today with tight risk premium priced across risk assets from our seat. We have started to see the dispersion in credit quality metrics within the private credit marketplace and believe our history of conservatism and predominantly first lien investment portfolio with significant diversification has begun to differentiate our performance.
Michael Stuart Gross: As of March 31st, non-accrual investments represented 0.8% and 0.6% of the invested portfolio on a cost and fair value basis, respectively. We believe our low rate of non-accruals is a result of a multi-strategy approach in which our specialty finance strategies, which accounted for 75% of our comprehensive portfolio at March 31st, enable us to be more selective in our sponsored finance business. Furthermore, only 1.8% of our gross investment income is in the form of capitalized PIC on restructured cash flow loans, which we believe is also significantly below the peer group. Looking forward,
Michael Stuart Gross: As of March 31st non accrual investments represented 0.8%, 0.6% the best portfolio on a cost and fair value basis, respectively.
Michael Stuart Gross: We believe our low rate of non accruals as a result of a multi strategy approach, which are specialty pan strategies, which accounted for 75% of our comprehensive portfolio at March 31st enable us to be more selective in our sponsored finance business. Furthermore, only one 8% of our gross investment income in the form of cash.
Michael Stuart Gross: <unk> pick on restructured cash flow loans, which we believe is also significantly below the peer group.
Michael Stuart Gross: Looking forward.
Michael Stuart Gross: We expect our origination opportunities to be driven by a combination of an increase in M&A activity, refinancings, and regulatory forces impacting regional banks to the benefit of direct lenders such as SLRC. In addition, our specialty finance teams continue to seek token acquisition opportunities and have the resources and experience to acquire portfolios. We continue to believe that a diversified portfolio approach across sponsor and commercial finance assets is the most effective way to generate income and manage risk across economic cycles.
Michael Stuart Gross: We expect origination opportunities to be driven by a combination of an increase in M&A activity refinancings and regulatory forces impacting regional banks to the benefit of direct lenders such as Src.
Michael Stuart Gross: In addition, our specialty finance teams continue to seek tuck in acquisition opportunities and have the resources expertise experience to acquire portfolios.
Michael Stuart Gross: Continue to believe that a diversified portfolio approach across sponsor and commercial assets.
Michael Stuart Gross: Effective way to generate income and manage risk across economic cycles.
Michael Stuart Gross: 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 base rates move lower.
Michael Stuart Gross: The current market expectations are for rates to stay higher for longer is important to remember that especially finance spreads and returns are not as volatile as cash flow sponsor finance investments as a result, we would not expect yield contraction for specialty finance assets at the same extent as sponsor finance when base rates move lower.
Michael Stuart Gross: In closing, SLRC trades at a 10.5% dividend yield as of yesterday's market close, which we believe presents an attractive investment opportunity for both income-seeking and value investors and offers shareholders diversification benefits compared to sponsor finance-only strategies. Our investment buyers' alignment of interest with SLRC shareholders continues to be one of our hallmark principles. The SLR team owns over 8% of the company's stock and includes having a significant percentage of their annual incentive compensation reinvested in SLRC stock.
Speaker Change: In closing.
Michael Stuart Gross: See trades at a 10, 5% dividend yield as of yesterday's market close, which we believe presents an attractive investment for both income seeking and value investors and offers shareholders diversification benefits compared to sponsor finance only strategies.
Michael Stuart Gross: Our investment of ours, the alignment of interests Src shareholders continues to be one of our hallmark principles.
Michael Stuart Gross: Our team owns over 8% of the company's stock and includes having a significant percentage of their annual incentive compensation reinvest in Src stock.
Michael Stuart Gross: The team's investment alongside fellow institutional and private wealth investors demonstrates our confidence in the company's portfolio, stable funding, and earnings outlook. We thank you all again for your time today. As we know, it's an especially busy day for those that follow the list on BDC Marketplace closely. Operator, will you please open up the line for questions?
Michael Stuart Gross: The team's investment alongside fellow institutional and private wealth investors demonstrates our confidence in the company's portfolio stable funding and earnings outlook.
Michael Stuart Gross: We thank you all again for your time today as we know, it's an especially busy day for those that follow the listed BDC marketplace closely.
Michael Stuart Gross: Operator would you please open up the line for questions.
Operator: At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may withdraw your questions at any time by pressing star 2. Once again, that is star and 1 for your questions. And we will take our first question from Erik Zwick of Hovde Group. Please go ahead.
Michael Stuart Gross: At this time, if you would like to ask a question. Please press star one on your telephone keypad you may recall your questions at any time by pressing star to once again that is stellar and one for your questions.
Operator: And we will take our first question from Erik Zwick with Husky Group. Please go ahead.
Erik Edward Zwick: Thanks. Good morning, everyone.
Erik Edward Zwick: Thanks, Good morning, everyone.
Erik Edward Zwick: I wanted to start a little bit in terms of maybe just getting your view.
Erik Edward Zwick: I wanted to start a little bit in terms of maybe just getting your view of competition in both the ABL and equipment finance markets. And I know you kind of mentioned in your prepared comments there that there were a couple of new entrants that you've seen in the ABL market. So wondering if you could additionally, you know, kind of mention what type of companies those are that are entering the market and how you see that that may impact either pricing or underwriting terms.
Erik Edward Zwick: Competition in both the a.
Erik Edward Zwick: ABL and equipment finance markets and I know you kind of mentioned in your prepared comments that there were a couple of new entrants that you've seen in the ABL market. So wondering if you could additionally, kind of mentioned and what what type of.
Erik Edward Zwick: Companies that are that are entering the market and how you see that that may impact the pricing and underwriting terms.
Bruce John Spohler: I think the most important thing that we can share with you, Erik, is that the number of participants departing far exceeds any new entrants. These were, as we've talked about, historically, regional banks were very active in these markets, and they have been continuing to pull back or reaching out, looking for ways to joint venture in their business model such that we would become their balance sheet, and they would retain relationships and deposits.
Erik Edward Zwick: I think the most important thing that we can share with you Eric is that the magnitude of participants departing.
Bruce John Spohler: Far exceeds any new entrants.
Bruce John Spohler: These whereas we've talked about historically regional banks were very active in these markets and they have been continuing to pull back or reaching out looking for ways to joint venture.
Bruce John Spohler: And their business model, such that we would become their balance sheet and they would retain relationships and deposits.
Bruce John Spohler: So we're really not that concerned about new entrants. The competition is difficult to enter these businesses, particularly ABL-related businesses, because you get significant investment in infrastructure. As you know, we have 18 offices around the country as well as a major investment in systems and people. We have 300 people across our $13 billion AUM platform, many of whom are dedicated to the ABL-intensive strategies for monitoring underlying collateral and borrowing basis. So it's not to say that there is no competition, but I would say, you know, directionally, there has been a reduction in competition.
Bruce John Spohler: So we're really not that concerned about new entrants the competition.
Bruce John Spohler: It's difficult to enter these businesses, particularly on ABL related businesses, because she is that significant investment in infrastructure. As you know we have 18 offices around the country as well as a major investment in systems and people, we had 300 people across our $13 billion AUM platform.
Bruce John Spohler: Many of whom are dedicated to the ABL intensive strategies for monitoring of underlying collateral in borrowing basis.
Bruce John Spohler: So it's not to say that there is no competition, but I would say directionally there has been a reduction in competition.
Bruce John Spohler: And where we are in the economic cycle is such that borrowers tend to borrow more on an ABL basis at this stage of the cycle as many borrowers are finding the cash flow market close to them if they are not in very recession-resilient sectors.
Bruce John Spohler: Where we are in the economic cycle is such that.
Bruce John Spohler: Borrowers tend to borrow more on an ABL basis at this stage of the cycle as many.
Bruce John Spohler: Borrowers are finding the cash flow market close to them.
Bruce John Spohler: They're not in very recession resilient sectors.
Bruce John Spohler: No, that's very helpful. I appreciate that. And it's good to hear that the way you frame that, that there have been many more exits and then new entrants. And, you know, we've heard a lot over the past few days with companies reporting that, you know, there's been a fair amount of spread compression in the sponsor finance market. So it's safe to say you're not seeing that a whole lot in the specialty finance lending verticals to the same degree. Yeah.
Speaker Change: No. That's very helpful. I appreciate that and it's good to hear that you're kind.
Bruce John Spohler: The way you frame that that there's been many more exit and then new entrants and we've heard a lot over the past.
Bruce John Spohler: As a company is reporting that.
Bruce John Spohler: Been a fair amount of spread compression in the sponsor finance market, though.
Bruce John Spohler: Would you say, you're not seeing that on a whole lot in the specialty finance lending verticals to the same degree.
Bruce John Spohler: Yeah, and as Michael mentioned, you know, our overall yield went up from 11.6 to 11.8 quarter over quarter, and that is driven by increased, actually, returns on the ABL asset classes. There is a cap on that, but I think the important point is that we don't see the compression on your specific question. These are more absolute return cost of capital strategies, and so they did not widen out as much as cash flow did over the last two years, going from 6%, 7% up to 12%, 13%.
Bruce John Spohler: And as Michael mentioned, our overall yield went up from 11, 6% to 11 eight quarter over quarter and that is driven by.
Bruce John Spohler: Increased actually returns on the ABL asset classes.
Bruce John Spohler: There is a cap to that but I think the important point is that we don't see the compression to your specific question. These are more absolute return cost of capital strategies and so they did not widen out as much as cash flow did over the last two years.
Bruce John Spohler: Going from six 7% up to 12, 13% and we have not and don't expect to see them compressed to the same extent that we've run correlation analyses in the specialty finance businesses. Unlike the cash flow business is really not correlated to movement in base rates in a meaningful way the way the sponsor cash flow businesses.
Bruce John Spohler: And we have not and don't expect to see them compressed to the same extent. We've run correlation analyses, and the specialty finance businesses, unlike the cash flow business, are really not correlated to movement in base rates in a meaningful way, the way the sponsor cash flow business is. And as you know, we are already seeing pricing compression just because of the amount of capital coming into the cash flow market relative to the deal opportunity set.
Bruce John Spohler: And as you know we already even with elevated base rates are seeing pricing compression just because of the amount of capital coming into the cash flow market relative to the deal opportunity set.
Bruce John Spohler: Very helpful. Thanks for taking my questions today.
Speaker Change: Very helpful. Thanks for taking my questions today.
Speaker Change: Thank you.
Operator: And once again, as a reminder, that is star and one for your questions. We will pause for a moment until any further questions stick. We'll take our next question from Melissa Wedel with J.P. Morgan. Please go ahead.
Speaker Change: And once again as a reminder, that is star and one for your questions. We will pause a moment to allow any further questions. Thank you.
Operator: We will take our next question from Melissa Wedel with JP Morgan. Please go ahead.
Melissa Wedel: Good morning. Thanks for taking my question. Just one for you today.
Melissa Wedel: Good morning, Thanks for taking my question.
Melissa Wedel: Just one for you today I was hoping that you might elaborate a little bit on your comment about having.
Melissa Wedel: I was hoping that you might elaborate a little bit on your comment about having the willingness and availability of capital to do additional tuck-ins. Obviously, you guys have diversified your strategy and your origination approach over the years. When you look at that portfolio in totality, where are you seeing the potential for additional tuck-ins? Would it be within the same verticals that you have existing now, or are there other opportunities out there? Thank you.
Melissa Wedel: And the willingness and availability of capital to do additional tuck ins.
Melissa Wedel: Obviously, you guys have diversified your strategy and your origination approach.
Melissa Wedel: Are the years when you look at that.
Melissa Wedel: It portfolio in totality, where do you where are you seeing the.
Melissa Wedel: The potential for additional tuck in would it be within the same vertical that you have now or are there other opportunities out there. Thank you.
Bruce John Spohler: It would be in the same verticals, predominantly across the asset-based strategies. I think anything we would do as an adjacent vertical would more likely be a Greenfield organic approach to that side of the market, but the tuck-in opportunities are definitely coming out of our existing ABL strategies. It allows us to take advantage of the significant investments we've made in infrastructure at those companies.
Melissa Wedel: Yes, it would be in the same verticals.
Bruce John Spohler: <unk> across the asset base strategies.
Bruce John Spohler: I think anything we would do.
Bruce John Spohler: As an adjacent vertical would more likely be a greenfield.
Bruce John Spohler: Organic approach to that side of the market, but the tuck in opportunities are definitely coming out of our existing <unk>.
Bruce John Spohler: And it allows us to take advantage of the significant investment we've made in infrastructure at those companies. As you know, we have close to 300 people, a lot of them spread through the ABL strategy, so we're in a position where we can buy portfolios and service them without having to put much more overhead into those entities.
Bruce John Spohler: <unk> strategies and allows us to take advantage of the significant investment we've made in infrastructure at those companies, we have close to 300 people.
Speaker Change: Got it.
Bruce John Spohler: A lot of them spread through the ABL strategy. So we're in a position where we can buy portfolios and service service them without having to put much more overhead into those entities.
Speaker Change: Thank you.
Speaker Change: Thank you.
Bruce John Spohler: Yeah.
Operator: And again, that's star number one for your questions. We'll pause another moment. And there appear to be no further questions at this time. I will turn the call back over to Michael Gross for any closing comments.
Bruce John Spohler: And again Thats Star one for your questions, we'll pause another moment.
Operator: And there appears to be no further questions. At this time I will turn the call back over to Michael gross for any closing comments.
Michael Stuart Gross: No closing comments other than to thank you for your attendance this morning, and we realize it is a very busy time, so if you have any follow-up questions, please feel free to reach out to any of us. Thank you.
Michael Stuart Gross: No closing comments other than thank you for your attendance. This morning, and we realize it is a very busy time. So if you have any follow up questions. Please feel free to reach out to any of us.
Operator: Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.
Michael Stuart Gross: Do you.
Michael Stuart Gross: Thank you. This does conclude today's program. Thank you for your participation you may disconnect at anytime.
Operator: Okay.
Operator: Okay.
Operator: [music].
Operator: Yes.
Operator: Okay.
Operator: [music].
Operator: Okay.
Operator: [music].
Operator: ?? ?? ?? ?? ?? ?? Thanks for watching!