Q2 2019 Earnings Call

Ladies and gentlemen, please standby your Q2 due south anything solar senior capital Limited earnings conference call. It will begin momentarily.

Again, please stand by your conference call beginning two minutes. Thank you.

At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that site.

If anyone should require assistance during the conference. Please press star zero on your Touchtone telephone as a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Mr., Michael Goff, Chairman and co CEO you may begin.

Thank you very much and good morning, welcome to sort to your capital <unk> earnings call for the fiscal quarter ended June Thirtyth 2019, I'm joined today by Bruce Spohler, Our co CEO rich <unk>, our Chief Financial Officer Rich you. Please start off with some of the webcast and forward looking statements.

Of course, thanks, Michael.

I'd like to remind everyone that pays call and webcast are being recorded.

Please note that they are the property of solar senior capital limited and that any unauthorized broadcast in any form are strictly prohibited.

This conference call is being webcast on our website at Www Dot solar senior capital Dotcom.

Well your replays of this call will be made available later today as disclosed in our 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 our future 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 senior 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.

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One 670.

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

Michael gross.

Thank you rich we're pleased to report the solar senior capital continued its solid operating performance during the second quarter to build my team.

Net asset value was $16.34 per share at June Thirtyth. In addition, GAAP net investment income 35 cents per share fully cover distributions for the quarter.

A quarter's end, our comprehensive portfolio with $652 million, an increase of approximately 9% over the prior quarter.

Due to $58.2 million of net positive originations across the platform, including an acquisition by our <unk> subsidiary, North Mill, which will highlight in a moment.

Overall, the fundamentals our portfolio companies remain strong our diversified portfolio of senior secured cash flow and asset based loans is 99% performing at 630 on a cost basis with only one loan on non accrual status.

At June Thirtyth, approximately 98% of solar seniors comprehensive portfolio is invested in first lien senior secured loans with approximately 43% of the total portfolio in first lien asset based loans and 55% in first lien castle loves.

Middle market Castle lending continues.

Remains extremely competitive to sustain inflows of capital to private credit fund and the lower volume of middle market transactions in the first half of 2019 compared to a year ago.

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

Well facing frothy market conditions, the castle lending, our specialty finance businesses General healthcare finance and North no capital right investments with collateral coverage and strong structural protections.

These nets businesses generate low to yield double digit or ours.

To further capitalize on the favorable risk return characteristics available and our a b O niches, we're expanding Arabia footprint.

At the end of the second quarter, North No capital acquired summit financial resources, including a 40 million our portfolio.

In conjunction with a transaction to somewhat origination team has joined North mill somewhat expand north build your geographic footprint, particularly on the U.S. West coast.

Additionally, the acquisition enhances Northfield factor capabilities, which provides further diversity of SUNS portfolio as well as yield given factory loans tend to carry higher returns.

Driven by the acquisition approximately 78% of our companies are portfolio gross originations of second quarter came through our asset based lending business is jumping out in North America.

We're pleased with the progress we've made our effort to involve funds in diversified niche specialty finance company.

The asset coverage modification approved last year provide SUNS with additional flexibility and capacity to make control equity investments.

Especially finance businesses, we're actively evaluating additional portfolios of asset based loans, especially lending platform to acquire.

At June Thirtyth solar senior is in a strong liquidity position with net leverage of <unk> 0.81 times debt to equity.

We intend to move closer to target leverage of 1.25 times to 1.5 times debt to equity by growing our portfolio over time.

Well, considering the combined credit facility of SUNS balance sheet at a north on Gemini, though there's $157 million of available debt capacity across the funds platform subject to borrowing base limitations.

We will continue to be highly disciplined in deploying our available capital at this time I turn the call over Chief Financial Officer Rich for Tico.

Thank you Michael.

Solar senior capital limited net asset value at June Thirtyth.

With 262.1 million or $16 or 34 cents per share.

[noise]. This compares to a net asset value of 263.1 million or $16.40 per share at March 30, Onest 2019.

Solar seniors balance sheet investment portfolio at June Thirtyth, 2019 had a fair market value of 474.2 million in 50 portfolio companies operating in 22 industries [laughter] compared to a fair market value of 467.7 million.

In 49 portfolio companies operating in 21 industries at March 31st.

At June Thirtyth 2019, SUNS net leverage increased to 0.81 times from 0.78 times at March 31st.

As a reminder, solar seniors target leverage is 1.25 times to 1.50 times debt to equity under the reduced asset coverage requirement.

From a piano perspective gross investment income for the three months ended June Thirtyth 2018 totaled 10.0 million versus 10.2 million for the three months ended March 30, Onest 2019.

Net expenses for the three months ended June Thirtyth 2019 were 4.4 million compared to 4.6 million for the three months ended March 31st.

Net investment income for the quarter ended June Thirtyth, Therefore was 5.7 million or 35 cents per average share.

As compared to 5.7 million and 35 cents per average share for the three months ended March 31st.

Below the line solar senior had net realized and unrealized loss for the second fiscal quarter totaling 1.1 million.

Compared to a net realized and unrealized gain of 1.7 million for the three months ended March 31st.

Accordingly.

Solar senior had a net increase and net assets, resulting from operations of four point Sixmillion for 29 cents per average share for the three months ended June Thirtyth 2018.

This compares to a net increase and net assets, resulting from a refund of 7.4 million or 46 cents per average share for the three months ended March 31st.

Lastly, our board of directors declared a monthly distribution for August 2019.

Of 11.75 cents per share.

Payable on August Thirtyth 2019.

To stockholders of record on August 27, 2019.

At this time I'd like to turn the call over to our co CEO Bruce Spohler.

Thank you rich.

As Michael highlighted our intention is to expand our portfolio by investing in our three core strategies first lien cash flow loans to upper middle market sponsor owned companies.

Personally asset based loans secured by accounts receivable midsized companies operating in the health care industry through our wholly owned subsidiary Gemini though.

And lastly through North mill, which offers first lien asset base.

And factoring facilities secured by accounts receivable to midsize companies operating primarily in the manufacturing services and distribution industries.

Additionally, we are actively evaluating opportunities to further expand our specialty finance business lines.

Through either control equity Stakes.

In specialty finance platforms as well as through organic growth.

In the aggregate at June Thirtyth, our investments across all three businesses totaled 650 million company and encompassing 232 borrowers.

The portfolio is highly diversified with an average investment.

Issuer of approximately 2.8 million, 4.4% of the portfolio.

Approximately 98% of our portfolio consisted of senior secured loans of which approximately 55% are in first lien Costco loans and approximately 43% are in first lien asset based loans with only 1.6% second lien cash flows.

Our equity exposure increased slightly in the quarter, 2.5% of the portfolio as a result of the fair value appreciation of this equity investment.

So the weighted average yield on a fair value basis at June Thirtyth was 10.1%.

Including investments in repayments across all three business lines, our second quarter gross originations totaled 87 million and we had repayments of 29 million, resulting in net portfolio growth of 58 million for the quarter.

Now, let me provide an update on the credit quality and earnings power of the portfolio.

At June Thirtyth, 98.5% of the portfolio on a cost basis was performing with one investment on non accrual status.

Our internal risk assessment maintain and approximately two rating when measured at fair market value based on our one to four risk rating scale with one representing the least amount of risk.

And at June Thirtyth, our watch list represented approximately 40% of our portfolio.

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

Cash flow segment.

At quarter end, our cash flow portfolio totaled 370 million, representing 57% of the portfolio.

It was comprised of loans to 48 borrowers with an average investment of 7.7 million.

The weighted average asset level yield of the cash flow portfolio was just under 8% consistent with the prior quarter.

Our second lien exposure represents 1.6% for only $10 million of the 652 million dollar total portfolio and we expect this to continue to decline over the coming quarters.

At quarter end, the weighted average EBITDA of our first lien senior secured cash flow investments was 110 million.

On a fair value weighted average basis first lien leverage through our investment is 4.7 times and interest coverage was 2.4 times, representing a lower risk profile than the liquid leverage loan market.

In addition, the weighted average latest 12 month revenue and EBITDA growth for our portfolio companies was in the mid single digits, but has been slowing relative to the prior quarter.

During the second quarter, we originated cash flow investments.

Just under 19 million and had repayments of just under 12 million.

T. medically, we're continuing to increase our investments in existing cash flow credits that had been performing well.

Through doing incremental financings for these companies.

Now, let me turn to North mill.

At quarter end, our north <unk> portfolio was approximately 160 million, representing 24.5% of the combined portfolio and so.

During the second quarter, we funded 56 million of new.

Investments and had repayments of 9 million.

Including the 40 million factoring portfolio that we acquired with summit financial the portfolio. Now consists of 151 issuers with an average funded loan size of just over a million.

The weighted average asset level yields at North Malay was 13.5% compared to 31%.

For the quarter the first quarter.

This increase was driven by the acquisition of summit.

We are pleased with the increased issuer and geographic diversification at summit brings to North mill.

Additionally, we view factoring is a highly attractive asset class.

And this portfolio as well as the addition of the 17 increases north mill's exposure to an expertise in factory.

Summit strong Midwest and Western U.S. presence complements north mills existing footprint.

The summit team has a strong credit culture, consistent with North Mills, and we anticipate that the addition of some it will result in continued portfolio growth for North America.

During the second quarter, North no pain sounds a cash dividend of 1.4 million equating to an annualized yield of 11%.

Now, let me touch on Geminos.

At quarter end Geminos portfolio was just under 120 million, representing 18% of Sun's combined portfolio.

Jay Leno had loans to 33 borrowers with an average funded loan size of 3.6 million.

The weighted average asset level yield for Jim and I was just over 12.25%.

During the second quarter Geminos funded 12 million of new loans and have repayments of just under 8 million.

During the second quarter Geminos was able to refinance its credit facility. The new four year 225 million dollar credit facility with reduced pricing relative to the prior facility.

For the second quarter Geminos paid sounds a dividend of 900000.

As Michael mentioned, the middle market cash flow lending environment remains frothy.

At SUNS, we benefit from our diversified origination sources across both cash flow and asset based lending verticals, which allows us to allocate capital to investments that meet our strict underwriting criteria.

In addition, we believe that the growth of investment advisors platform will result in more investment opportunities.

Across both cash flow and specialty finance asset classes for SUNS.

We will continue to be prudent and highly disciplined in deploying our substantial capital.

Now I will turn the call back to Michael.

Thank you Bruce since inception of SUNS in 2011, our investment decisions consistent been focused on generating strong returns for shareholders over the long term.

While maintaining alignment of interest with you our investors.

Importantly, we've been prudent in the face of sustained frothy credit markets remain disciplined not compromising credit quality for yield.

The result is a solid portfolio foundation from which we can grow.

We've always maintained investment philosophy of assuming they were late in the credit cycle, we believe that in the current environment. It pays to be cautious we're confident that our differentiated origination platform and diversified portfolio position us well to navigate in any environment.

And just over <unk> 0.8 times debt to equity we are under Levered relative to our target of one a quarter times to one and a half times net debt to equity we have substantial dry powder to deploy our differentiated investment verticals.

The credit cycle does shift we believe our history of conservatism will enable us to outperform on a relative and absolute basis.

And we will be well positioned to take advantage of market dislocations.

As a reminder, late last year. So it seems advisor solar capital partners announced the closing of private credit funds with total equity commitments of over $750 million, bringing or combine investable capital across all phone mandate to approximately $5.5 billion, including expected leverage.

The increased scale across the platform strategically positioned solar capital partners to be a solutions provider with an ability to speak from the $200 million in a given transaction, while still maintaining highly diversified portfolios.

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

At last nights close of $16.22 per share SUNS carries a dividend yield of 8.7%, which represents a significantly higher rate of return and a 6% implied yield of the S&P LSTA leverage loan 100 index.

Given the overall credit quality of Sun's diversified portfolio, our differentiated origination engine and our disciplined investment strategy. We believe SUNS represents an attractive investment opportunity on both a relative and absolute value basis.

We thank you for your time this morning, and look forward to speaking you next quarter operator could you. Please open the line for questions.

Absolutely ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchstone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

[noise].

I'm showing no further questions at this time.

I would now like to turn the conference back to Mr., Michael Gross you May proceed.

No further comments here other than to thank you for your participation today and look forward to talking to you soon.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may now all disconnect.