Q2 2019 Earnings Call

Once again this is the operator today's conference call will begin momentarily.

That's all the time your lines when they can be placed on them.

Thank you for your patience.

Later, we'll conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during the conference. Please press Star then hero on your Touchtone telephone.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host Mr., Michael gross Chairman and co CEO . Sir. Please go ahead.

Thank you very much and good morning, welcome to solar capital <unk> earnings call for the quarter ended June Thirtyth 2019.

I'm joined here today by Bruce Spohler, Mike, our co CEO , and Chief operating Officer, and Richard <unk> Chica Solar Capital's Chief Financial Officer.

Rich before we begin would you please start off but covering the webcast and forward looking statements.

Of course, thanks, Michael.

I would like to remind everyone that today's call and webcast are being recorded.

Please note that they are the property of solar capital limited.

And that any unauthorized broadcast in any form or strictly prohibited.

This conference call is being webcast on our website at Www Dot solar Kathryn L.P.D. dotcom.

What are your replays of this call will be made available later today as disclosed in our earnings press release.

I would also like to call your attention to the customary disclosures in our press release regarding forward looking information.

Statements made in today's conference call and webcast may constitute forward looking statements, which relate to future events or future performance or financial condition.

These statements are not guarantees of walk into performance financial condition or results and involve a number of risks and uncertainties.

Additionally, 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 FCC.

Solar capital limited undertakes no duty to update any forward looking statements unless required to do so by law.

To obtain copies of our latest SEC filings.

Please visit our web site.

Or call us at two one too.

Nine three.

One 670.

At this time I'd like to turn the call back to our chairman and co CEO Michael gross.

Thank you rich.

So a couple of delivered solid operating results in the second quarter continue our long running history of strong credit quality, NAV preservation and solid earnings power.

At June Thirtyth, our portfolio at 100% performing Internet asked the value of $21.98 per share increased by five cents per share for the from the prior quarter.

During the quarter store capital generated 44 cents of net investment income per share and paid a distribution of 41 cents per share.

Fundamental credit performance remains solid supported by continued corporate earnings growth.

Albeit at lower levels than prior quarters.

Middle market commercial lending remains extremely competitive due to sustain inflows of capital the private credit funds and the lower volume of middle market transactions in the first half of 2019 compared to the prior year.

We believe it is vital to maintain our strict discipline in capital lending in the face of aggressive structures type pricing and the elevated risk.

While facing more frothy market conditions, and capital lending, especially if that businesses, namely Crystal financial Nations equipment, Finance and life science lending provide us with investments, having collateral coverage and strong structural protections.

These niche businesses have generated double digit digit IR ours continue to originate investments that are highly attractive on both an absolute and relative value basis.

During the second quarter on a comprehensive basis, we originated $120 million of new investments over 95% of which weren't specialty finance.

Our repayment of $152 million, where distributor Crawford lending strategies, resulting in $42 million of net portfolio repayments.

At June Thirtyth over 75% recovery of the portfolio, where the commercial finance investments, reflecting our successful transition to a diversified specialty finance platform focus on senior secured lending across a number of middle market niches.

Not only do worth bookkeeping loans carry strong credit protections and yield superior to those available taste capital market, but the higher income received from these loans enables us to be highly selective in underwriting in our market cap for transactions.

In the face of continued spread compression in casual lending our approach to portfolio construction is allowed solar capital to achieve a weighted average comprehensive portfolio yield of approximately 10.8% at fair value without having to take additional risk by investing in second lien Castro loans or in more volatile sectors, such as sick rules or energy.

Notably secondly, caseloads now represent less than 6% of our comprehensive portfolio, reflecting our preference for dollar one risk in a borrowers capital structure.

At June Thirtyth solar capital had over $460 million of unused borrowing capital under its credit facilities.

Which include a crystal when when including Crystal financial and holding the company had a current tone of a property $600 million of unused borrowing capacity under the revolving credit facility subsea barring base limits.

We intend to move closer to our target leverage range of <unk> 0.9 times to 1.25 times by growing our portfolio, but only at the market opportunity presents itself with investments that meet our strict underwriting criteria.

Consistent with our longstanding conservative investment approach, we will remain prudent with the use of leverage.

We agree with the increased leverage flexibility, it's simply another investment and risk management tool to provide significant capacity to expand especially for that platform.

As well as enhance our ability to invest opportunistically when primary and second it caseloads offer more compelling risk rewards.

In the current environment, we will continue to invest in first lien senior secured loans.

Current emphasis on specialty finance loans.

At this time I'll turn the call over to our Chief Financial Officer, Rich Petite going to take you through the financial highlights.

Thank you Michael.

Solar capital limited net asset value at June Thirtyth 2019.

Was 929 million or $21.98 per share.

Compared to 926.7 million or $21 to 93 cents per share at March 31st 2019.

At June Thirtyth 2019, solar capitals on balance sheet investment portfolio had a fair market value of 1.5 billion in 109 portfolio companies across 28 industries compared to a fair market value of 1.5 billion and 122 portfolio companies across 28 industries at March 31st.

At June Thirtyth.

Solar capital at 563.2 million of debt outstanding and leverage of 0.59 times net debt to equity.

Compared to 595.8 million.

And 0.63 times net debt to equity at March 31st.

When considering available capacity from the company's credit facilities combined with available capital from the non recourse credit facilities at Crystal enough.

Solar capital had approximately 600 million to fund future portfolio growth.

Subject to borrowing base limits.

Turning to the piano for the three months ended June Thirtyth 2019.

Gross investment income totaled 38.7 million.

<unk> was 39.3 million for the three months ended March 31st.

Expenses totaled 20.3 million for the three months ended June Thirtyth.

Compared to 20.8 million for the three months ended March 31st.

Accordingly.

The company's net investment income for the three months ended June Thirtyth 2019.

Totaled 18.4 million or 44 cents per average share.

Compared to 18.5 million or 44 cents per average share for the three months ended March 31st 2019.

Below the line.

The company had net realized and unrealized gains for the second quarter totaling $1.2 million.

Gross and net realized and unrealized gains of $6.4 million for the first quarter.

Ultimately the company had a net increase and net assets, resulting from operations of 19.6 million or 46 cents per average share for the three months ended June Thirtyth 2019.

This compares to an increase of 24.8 million.

Or 59 cents per average share for the three months ended March 31st 2019.

Finally.

Our board of Directors recently declared a Q3 2019 distribution of 41 cents per share.

Payable on October 2nd 2019.

To shareholders of record on September 19th 2019.

And with that I'll turn the call over to our co CEO and Chief operating Officer Bruce Spohler.

Thank you rich.

Overall, the financial health of our portfolio companies remain sound, reflecting our disciplined underwriting.

And focus on downside protection.

At June Thirtyth, the weighted average investment risk rating of our portfolio was 1.9 based on our one to four risk rating scale with one representing the least amount of risk.

As further indication of the strong underlying fundamentals of our portfolio.

Our investments were 100% performing.

At the end of the second quarter.

A 1.75 billion dollar comprehensive portfolio is highly diversified encompassing 226 issuers across 97 industries.

The average investment per issuer was 7.7 million 4.4%.

98.3% of our portfolio consisted of senior secured loans.

Comprised of 88% first lien and 9.9% second lien secured loans.

Just under 6% of our second lien exposure is in cash flow loans with 4% being in second lien asset based loans.

We continue to prioritize reducing our exposure to second lien cash flow loans, which generally carry more risk than we believe is prudent in todays environment.

At quarter end, our weighted average yield was 10.8%.

By focusing on our niche commercial finance verticals, we've been able to maintain asset level yields around 11%. Despite the decrease in LIBOR and spread compression in cash flow lending.

Notably we have been able to maintain these double digit yields while actively decreasing our exposure to second lien cash flow investments, which generally offer higher yields.

Including activity across our four business lines originations totaled 120 million and repayment were 162 million, resulting in net portfolio repayments up 42 million.

Now, let me provide an update on each of our investment verticals.

Our cash flow business invests in senior secured loans, which are predominantly first lien and stretch first lien investments to upper middle market companies with an average EBITDA of approximately 60 million.

During the second quarter, we originated 5 million in first lien loans, which were primarily add ons to existing credits and we experienced repayments of 24 million.

Of note, we were repaid at par on our $15 million second lien investment in a mirror life group.

Generating an IR are up over 11% for this investment.

At June Thirtyth, our cash flow portfolio was just over 400 million, representing 23% of our 1.75 billion portfolio.

The reduction in our cash flow loan exposure reflects our decision to not participate in the refinancings of several of our existing investments.

Due primarily to pricing and compromise structures.

We expect to see a continued reduction in our second lien cash flow investment book over the remaining of the remainder of this year.

At June Thirtyth, the weighted average 12 month revenue in EBITDA of our issuers.

Grew in the low single digits, which reflects a slowing of the growth rate that we've seen over the last couple of years.

For the portfolio of companies in our cash flow segment.

Leverage through our investment.

Was 4.95 times down slightly from 5.1 times in the first quarter.

And interest coverage was consistent at two in a quarter times.

In addition, the weighted average yield on our cash flow portfolio was 9.8% down 10 basis points from the first quarter, which is primarily.

Related to the reduction in LIBOR.

Now, let me turn to our asset based lending Crystal financial segment.

And the second quarter, we funded $47 million of new asset based investments and had repayments of 93 million.

The senior secured asset based portfolio.

Was 595 million, representing approximately 34% of our total portfolio and had an average yield of 11.5%.

Our LTL platform paid solar capital.

Dividend during the second quarter second half million equating to a 10.7% yield on costs consistent with the first quarter.

Now turning to nations equipment.

During the second quarter.

Net invested 37 million and had repayments of $39 million.

At June Thirtyth Neps portfolio totaled over 396 million.

The portfolio is invested across 140 borrowers with an average investment of 2.8 million.

As a reminder included in this business our equipment financings that are held both directly on SLR sees balance sheet as well as in our wholly owned subsidiary net holdings, which you used for tax efficiency purposes.

The equipment financing asset class represented 23% of our comprehensive portfolio at quarter end.

100% of their investments are first lien and at June Thirtyth, the weighted average yield was 10.4% on that portfolio.

Finally, let me provide an update on our life science business.

At June Thirtyth, our portfolio totaled $320 million, representing a 25% increase from the end of last year.

The loan portfolio consisted of 20 borrowers with an average investment of approximately $16 million.

Life Science loans represented just over 18% of our total portfolio.

During the second quarter, the life science team originated $30 million of new investments and had repayments of just over 5 million, resulting in $25 million net life science portfolio growth.

The weighted average yield on the life science portfolio was approximately 11%.

But importantly, this excludes any success fees or warrants.

In conclusion SLR sees portfolio activity during the second quarter represents a continuation of the investment themes that have been driving our portfolio over the last couple of years.

A gradual increase in portfolio leverage.

Reducing our second lien cash flow loan exposure.

Increasing our investments in specialty finance assets, where we were able to get both structure as well as more attractive risk adjusted returns.

And generating and <unk> that more than exceeds our distributions.

Given the current market environment, we intend to remain patient and deploy our substantial capital selectively.

Preserving our flexibility to capitalize on compelling opportunities that may arise from market dislocations.

Now, let me turn the call back to Michael Thank you Bruce.

In closing we are pleased with second quarter results and believe its solar capital is very well positioned.

Our long term strategy of migrating the portfolio away from senior secured cash flow loans and developing diversified specialty finance verticals continue to drive superior results.

Src is firmly established as a diversified commercial finance company with a solid track record of providing solutions across the capital structure to middle market businesses.

Importantly, our diversified origination engines and enhanced platform scale affords us greater flexibility to allocate capital in the best risk return opportunities, while retaining our investment discipline across credit cycles.

We're still seeing interesting origination opportunity for remain highly selective and castle investing while maintaining a preference for specialty transload in the current environment.

We've been prudent in the face of credit market frothiness remain disciplined and not compromising credit quality for yield.

Importantly, we have been able to maintain close to 11% weighted average asset level yields through growing our specialty finance verticals, while actively reduce exposure to second lien capital investments.

The result is a solid portfolio well positioned for growth.

At the credit cycle does shift we believe our history of conservatism will enable us to outperform our peer group will allow us to deliver attractive all in returns for our shareholders.

As a reminder, late last year towards investment advisor Solar capital partners announced the closing of private credit funds with total equity commitments of over $750 million, bringing combined and vessel capital across all fund mandates to $5.5 billion, including expected leverage.

The increased scale across the platform strategic positions solar capital partners to be a solution provider with an ability to speak up for up to $200 million in a given transaction well maintaining diversified portfolios.

The greater hold capacity across the platform has already resulted in more attractive investment opportunities for ethanol RC.

At approximately 2.6 times net debt to equity, we have leveraged capacity and the accompanying dry powder to deploy via our differentiated investment verticals. We currently believe Src has a clear path toward run rate quarterly net investment income per share a targeted leverage in the high fortys to low fiftys.

As the earnings increase on a sustainable basis, our board of directors will evaluate further increasing our quarterly distribution to shareholders.

At 11 o'clock. This morning, we'll be hosting an earnings call for the second quarter results of solar senior capital limited or SUNS, our ability to provide traditional middle market senior secured financing through this vehicle continues to enhance origination team's ability to meet our clients' capital needs and we continue to see benefits its value proposition.

In solar capital deal flow.

We appreciate your time operator could you. Please open the line for questions.

Ladies and gentlemen, if you have a question at this time. Please press star agenda number one on your Touchtone telephone.

If your question has been answered and you wish to remove yourself from the queue pressed to bounce.

Our first question comes from the line of Robert Dodd from Raymond James.

[noise] hi, guys.

Just oh much following up to <unk>.

Your last comments Michael on the front page press release, you say.

We believe solar is positioned for net income growth over the balance of 19 I mean.

Are you talking you ever be a sequential I mean can you give us more color. Obviously, that's contingent on on growing the portfolio is the market environment today, and a condition, where you do believe thats appropriate or is that contingent on on the market out there and actually improving a little bit.

I think we would bifurcate the response in the following way.

To the extent that the dislocation that we saw yesterday does not continue over an extended period of time, we think we're positioned for continued growth in our specialty finance vehicles verticals I think to the extent that we see continued dislocation you would also see a growth in our cash flow segment. So it's really I think some modest growth during the remaining year in a benign environment that we saw over the last couple of quarters, but the chance for accelerated growth is the cash flow market were to pick up.

Got it got it. Thank you and then somewhat unrelated to that on the net.

Asset the owned by the owner Thats balance sheet.

If I look at the return on our equity.

Position cost, but now I mean.

First quarter 18, it was generating somewhere.

Little over 8% this quarter, it's a little bit too obviously, that's the tax reasons and things like that but is there is there a major investment going on within that business that as that has resulted in lower dividend payments and lower return on the invested equity or is that.

And can you give us some more color.

You really have to look at on a blended basis because to your point.

The assets go either on our balance sheet enough balance sheet, depending tax characteristics and the all the overhead of the neff business in India in the net equity if you will so thats, where all the costs are sort of at the portfolio and balanced on that bounce you go down in there or are we going down but the reality is we look at on a completely blended basis across the portfolio and its been very consistent since we bought it on a blended basis and that's what's relevant.

Okay I got it I appreciate it thank you guys.

Thank you.

Our next question comes from the line of Crazy York from JMP Securities.

Good morning, guys and thanks for taking my question.

So Chris.

Good morning.

Rich what drove the large increase in other income this quarter and how much of that income do you consider recurring.

Thanks, Chris.

The other income we there are there with our specialty finance investments, especially the life science deals. There there are all kinds of fees that we get when we negotiate those depending on the structure and some of the preferences with what we have and also the borrower. So sometimes there is just a a fee that's really effectively part of the yield and it's amortized sometimes therapies that include that plus prepayment penalties, sometimes therapies that are contingent upon a particular event at a portfolio company.

So in Q2 this quarter there was a fee on a life science deal that was contingent upon an event that event did happen. These things happen from time to time in the life science business. So.

I would tell you that this quarter, while there was technically two of them. One was significant the other one is more of the normal day to day. So we didn't have a lifeline name that had an event that generated some additional other income for us during the quarter, but they seem to happen from time to time almost on a regular recurring basis you just.

As you know that that asset class doesn't have a long duration. So these things seem to be hitting on a quite frequent basis, but that particular event is not going to happen each quarter that was a onetime event for that one portfolio company, but to Rich's point.

As this portfolio has become seasoned.

We are seeing starting to see these.

Fairly regularly but they do vary and amounts to Richard's point.

So to be clear where those too.

Fees exit fees, and then Bruce that he touched on the portfolio seasons. It. It's large it's grown so should we expect other income just comparing.

Does the go forward.

10, chilled versus maybe the last 12 quarters to increase.

I think it will vary quarter to quarter, but I think over the course of a years time it will start to level out at a pretty consistent level given the seasoning of the portfolio and keep in mind, Chris that these fees. If it's considered a part of the company's yield is being accreted into earnings on a real time basis. So that will you that would be an interest income if it's an event driven contingent fee. Then that's something that's going to go into other income.

Got it very helpful.

And switching gears I know talked about this investment with you before but American Telecom was written down this quarter and it's still a little bit above other BDC values that own. It. So could you maybe explain to us what inputs drove the write down in the quarter and then what other factors may explain your mark relative to other peers.

Yeah, I can't address other People's marks, but I can say that we are this is effectively a private investment while it is a large tranche.

600 million or so it is was club together by a small group of investors holding the vast majority of it. So we don't look to quotes for this one because it trade by appointment of it trades at all.

And what I would say is that.

We are in.

Close dialogue with our co lenders as well as.

The the management team and the sponsor.

Two.

Look at how to best capitalize the company going forward and we feel.

That these conversations have been very constructive and so the valuation reflects.

Private information that we have.

Got it so essentially media the decline in the fundamentals that your daughter as opposed to evaluation input.

We're always looking at the fundamentals I wouldn't say that there's there's a necessarily a decline there but it's.

Definitely at a crossroads and.

Has underperformed.

On a near term basis, but we feel very good about the long term prospects.

Got it helpful. Bruce Thanks, and then net income and that in dividend income appears at Nab.

Because solar was was low maybe the lowest from a record that acquired the company no you use that for tax efficiency purposes, but could you explain maybe what's driving that situation and where we show that.

The trends so.

I apologize is not.

Easy to model, but as Michael mentioned, a moment ago.

The entity that we take the dividend from.

Is where we put assets that are NEP generated for tax efficiency purposes, because that's effectively a blocker and so what happens is we're sweeping out all the income effectively but more and more of our assets have been as you look at the net.

So why on balance sheet that has been growing whereas those held in the subsidiary have been shrinking. So it's just reflecting what the assets and interest income in.

Our is in that entity, but the total mix has been rather consistent so the real we disclosed in our press release, we show the contribution for each of the business units.

And that's really the way to look at it. So it shows that in Q2, our contribution from Nap was $5.5 million that takes into account both the dividends from the equity that we own is while the US we have a balance sheet and that number has been pretty consistent quarter to quarter right. So so the dividend went from a million two down to 1 million, but the consolidated number at five and a half where the net business was rather consistent.

Got it okay. So there's some some there.

Shift and counting for some of that income from that business. She is that that was 1 million.

It goes to where the assets are held whether they're in that subsidy or on the balance sheet. So that's what Rick but again on a consolidated combined basis, it's been consistent.

Okay, and then I mean, so if I look at dividend income, it's declined a little bit here sequentially and year over year.

So that 1 million run rate.

It's reasonable to expect that to continue or obviously, there's there's things that we can't see with that but just trying to understand maybe it for modeling up again I think you need to look I think the run rates that thats consistent to continue with the 500 million of kind of earnings from it which the combination of.

Interest income on the loans, we hold on our balance sheet and the dividends from the study itself and that's the way to kind of model, let's look at the blended basis not isolate it in terms of the dividends and the interest earnings.

Okay.

Last question.

Kind of on strategy and know about the advisor so.

Michael you touched on the size of raising capital late last year looks great in light of that you maybe update us on how many investment professionals exist at the manager today, and then secondarily I'm, Michael Bruce could you update us on your view of the opportunities in the market for acquiring other complementary commercial finance company.

Sure. So so today across the platform.

We have about 150 people.

And that includes our commercial finance businesses that are housed at solar has that SUNS.

As well as at the manager.

In terms of the opportunity set at the moment for potential acquisitions.

Seems to be pretty active out there as you know.

We like to look at everything and.

Actually acquire very few.

But we have been successful in both.

Thank you Baiding businesses as we did with the life science team as well as.

Acquiring platform. So we are more active I would say today than we had been in some time.

And too early to say, how that's going to.

Unfold, but we do see some nice opportunities in terms of quality platforms and teams to add to the existing platforms. For example, we will talk about in the upcoming call at 11 o'clock, We just completed an add on acquisition.

Within funds for our North mill subsidiary.

And what's been interesting is that in these processes and things look out. We're we're more of a strategic buyer today, but we have synergies to bring to bear which allow it to be pretty competitive and to buy things at a relatively attractive basis.

Great. That's very helpful. And then kind of following up on just investment professionals, you know given the cash flow that business. There may be on a portfolio basis is declining does that present any challenges to retain professionals I think there's kind of a war for talent among direct lenders occurring just curious if that does present challenges to your business.

I think actually.

We've been adding some people.

On a net basis.

And what I think.

Our professionals find is the opportunity to invest across these asset classes a number of the team members, our underwriting or originating across verticals and so that creates we think a distinct.

Career opportunity for an individual as opposed to being at a dedicated cash flow shop.

So we'd like to believe that's actually been a bit of a differentiator.

Great. That's it for me, Thank you and Bruce congratulations on the recognition.

Thank you thanks for the support.

Our next question comes from the line of TV Alexander from Compass point.

Hi, good morning.

I had a couple of questions.

Yeah, I think investors appreciate your conservative investing philosophy, and the high quality standards that you've kept for the portfolio.

But it does become a fair question the the significant additional capacity.

But across the solar capital platform that you opened up that you know is that making it more difficult to push solar capital towards its target leverage ratio.

Yes, I think I think it's an interesting question I think if we were.

Raising capital hand over fist.

And just taking capital that was available.

That's something that we could be challenged on but I think there is there is a method to our madness in sizing the aggregate capital between the Bdcs and the private capital that Weve raised and I think the focus really there Casey has been to make sure that we have enough capital. So that we can across the platform be a solutions provider in each of our investment verticals and have the hold sizes that.

As required but still be diversified in each of the portfolios in this case in SLR c.. So you've seen our average hold size come down and that's still our C., we think thats a good thing.

But to give you a real time example, if you were to look at our life science vertical it solar at June Thirtyth, we have a portfolio of about 320 million across the solar platform. The life science portfolio is about $450 million.

Now to your specific question, we would not feel comfortable taking that additional $130 million of loans and put it all in SLR see because we would not have the diversification that we feel comfortable with in SLR c. So the breadth of the platform has enabled.

Our team at life Sciences led by Anthony Serino to go out and take much larger hold sizes is competing for 100 hundred $25 million life science loans and yet still take the 30 40 50 million dollar holds at solar that we're comfortable with.

Okay. Thank you added the additional capital is giving us the ability for solar the BDC to participate transactions that otherwise would not have been able to because it would not have been wide situations because of a lack of size.

[noise], Okay secondly.

Just curious you mentioned the acquisition at North Mill, and North mill as an ABL lender Crystal financial as an ABL lender why was that acquisition more appropriate for North Mill, then maybe four.

The solar capital platform.

Sure Great question so.

We've touched on this before but north mill, let's just talk about north mill versus Crystal North Mill is a.

Relationship bank for very small companies. So they provide typically a million dollar working capital line of credit secured by receivables.

So that business is a pretty low risk and lower return business than what you'd see a crystal, whereas you know crystal is more of an ABL lender lending to companies with cash flows that are in transition, but still have very strong assets to lend against and so it tends to be a higher return higher risk business and see medically as you look at SLR see versus sons, that's how we it's.

Structured those portfolios SLR see is doing.

Stretch senior on a cash flow basis, and and some of the more stress ABL opportunities, whereas SUNS is doing traditional lower yield lower risk first lien cash flow and lower return lower risk first lien ABL. So this acquisition at North mill was a small factoring business.

Typical 800000 dollar lines of credit factoring.

And it fits very well with a low risk lower return profile it sounds.

Okay. Thanks for taking my questions.

Thank you.

Our next question comes from the line of Chris Kotowski from Oppenheimer.

Good morning.

It it.

You know it states in the 10-K that you you're using about 24% of your 30% bucket and.

You indicated that you are still.

Actively pursuing others specialty finance acquisitions and I guess the question is at what point does it become an issue and is it it philosophically.

Is there is there a way to to to move the 30% bucket up.

You know then that keeps you going for a while or is it or is it in the longer run just at the BDC is not the right structure in which to have kind of this platform of specialty finance companies.

Let me make a quick comment and then I'll turn it over to my colleagues here. So.

If you remember one of the uses of that 30% bucket is life science loans into large public companies. They are constantly churning, we love them, but as you know they have a very short average life of about 22 months. So.

That's a constantly emptying and refilling part of that bucket.

Which gives us a lot of flexibility I think the other point is we've talked about in the past.

Is the.

Crystal.

Platform uses some of that 30% basket as you know the assets at crystal or not.

[noise] nonqualified, if we were to consolidate those that would free up capacity.

Just as when we brought on our SSL piece.

The structure of Crystal that uses the basket. So we have a lot of levers to pull there.

But let me turn it over to my colleague any other back if you take a nap actually is not a quote unquote bad assets. So leasing companies do not fill up our capacity and lastly, the way the whole 30% test work its an incurrence test. So if we're at 2020, 4%. We can do with larger trends actually wanted to go over the 30% at that point would not be able to do anything more going forward, but it's not a limiting factor at all today.

Okay.

And then I just wanted to go back to the kind of the success fees that you mentioned on the life Science right is that I mean are these typically triggered by a transaction or buy a drug approval or by.

The milestone or what are they triggered by its a comedy above all the above so basically embedded in our loan Doc with actually the second one docket is even after we get repaid.

We tend to have a success fee that goes as long as you know.

Seven eight years after the repayment alone that gives us a success fee. If there is to your point a drug it gets approved an IPO a change of control of selling the business, there's a variety of.

Things that trigger that payment.

Okay and and.

Is this the kind of thing where theoretically overtime, we should see a build up in these success fees. You know just as you've had the portfolio longer on your books and as it ages more and more of that but you kind of have this backlog of companies where are you now have us this contingent interest.

Yes. The answer is yes, you will see it back on the we do from a GAAP perspective, we can't take any credit for the income until it actually happens because all contingent. So there is this theoretical backlog that exists, but it's not something that we quantify.

Right Okay.

And Joe and we'll just have to wait and see a couple of more quarters. And then then we can decide what the trend and the volatility around that is.

Yes, and just to be clear. These these are.

[noise] structured as as a fixed warrants so very often the life science loans, either have warrants or they have success fees. So very often we structure them as success fees.

Okay, and then finally I guess you know most of us.

Kinda BDC analysts were used to doing our earnings model off the consolidated income that's on page six of your press release.

And if I hear you right I mean, it sounds to me like you're saying no no don't look at that look at page look at page three because those are the categories. I mean, that's how we manage the business am I reading you right on that.

Yes, yes.

Okay.

All right that's it for me thank you.

Once again, ladies and gentlemen, if you have a question. Please press star on your Touchtone telephone.

Our next question comes from the line of Rick Shane from JP Morgan.

Hey, guys two questions. This morning.

First on the equipment financing business was there any impact from trade tariffs that we should think about it is that.

Either a headwind or a tailwind as an impact asset prices and in place a equipment.

Well, we really to the most recent activity in the trade war, we really have no meaningful exposure to the AG sector.

So and as we look across the portfolio, we have not seen any impact.

Okay great.

Second question stock is now trading at about a 7% discount to any of the.

You guys have bought back stock in the past I don't believe you have a current authorization.

I'm curious given your outlook and your confidence in your portfolio, whether it makes sense at least include an authorization and then to consider buying back stock.

That's a great question, we've talked about I think we kind of look a little differently.

We're sitting with a great balance sheet. We are investment grade rated we have access to capital both on the debt and equity side and if you look about look at kind of where our stock trades today at our target debt to equity expectation, we have a blended cost of capital of under 6%.

It's extremely low cost of capital that we don't want to lose and we will take advantage of and that that cost of capital helped us a great deal and looking at potential acquisitions, and so we want to kind of play out our card and see where the growth potential it before we make any kind of commitment like that.

Got it.

The.

Two.

Pieces of the <unk>.

The two pieces of feedback I would give there presumably reducing equity the equity component and levering up a little bit what impact lower cost of capital.

And doesn't it at least make sense defensively to have it in place and again I understand that.

Six months from now if you have an authorization in place and you Havent bought any stock back. The risk is that you are on the call and I'm asking why you didn't buy any stock back given your authorization.

[noise].

Hey, guys laughing there.

No [laughter] no I am, but I wasn't Uh huh.

I think a lot of people a lot of other people have put plans in place with maybe didnt have genuine intention to buy back in.

To put a plan in place that we had a one day blip yesterday. It drove the discount we don't expect vessel lastly, we don't know.

But I think we'll we'll take it as it comes and we will see.

Great. Thanks, guys.

Thank you.

Once again, ladies and gentlemen, if you have a question. Please press star one now on your Touchtone telephone.

Our next question comes from the line Afinion of Shane from Wells Fargo Securities.

Hi, guys good morning.

Just first question on a portfolio company Southern auto was refined and I think we saw a little bit of that come on in the.

Solar private income BDC can you give us some color on you know as to why solar didn't participate in the new financing.

Yes, it really goes to the earlier conversation that some was talking about in terms of maximum flexibility for the 30% basket.

Saf goes we call it uses up the 30% basket.

It's been with us for a number of years and we had more attractive opportunities in life Sciences. So we felt it more prudent.

As part of that refinancing to take down the exposure.

Thank you.

That's helpful and.

As to the expansion of specialty finance broadly.

You know understanding.

Crystal in any you know partially run their own gionee lines.

As you expand into these comprehensively.

Should should we anticipate a somewhat of a.

Improved our OE as as that.

DNA can maybe partially run off on the on the comprehensive fee side.

Definitely I think you had that one of the you know it's one of our efforts internal growth whether its at now.

Or crystal will clearly drive or are we crystal for example, we've talked about a lot in the past is built to be a much bigger portfolio.

And and for that business, we hope for volatility because that will drive much more deal flow to them.

And we could easily in a different environment to that portfolio double in size and your question. They will not go up much at all to do that so yeah, you're you're absolutely right.

Thank you and then just one final question.

Prior to allocation to.

Solar the BDC and other funds does the advisor receive any economic such as the.

Broker or upfront fees or anything else.

No.

Never have never will.

Very well thanks for taking my questions.

Thank you.

We have no further question at this time I will now turn the call over back to Mr., Michael gross chairman and co CEO .

Thank you very much for your time today and all of your great questions and we look forward to talking to you again, and we will look for jockey those who participate with us on the 11 o'clock offer if you want to thank you.

Ladies and gentlemen, thank you for joining US. This concludes today's conference call you may now disconnect.