SLR Investment Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 9, 2023

There are 6 speakers on the call.

Operator

Good day, everyone, and welcome to today's SLR Investment Corporation Second Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer period. Please note this call will be recorded. I will be standing by should you need assistance.

Operator

It is now my pleasure to turn today's call over to Mr. Michael Gross, Chairman and Co Chief Executive Officer of SLR Investment Corp. Mr. Gross, you may begin your conference.

Speaker 1

Thank you very much and good morning. Welcome to SLR Investment Corp. Earnings call for the Q2 ended June 30, 20 I'm joined today by Bruce Spohler, our Co Chief Executive Officer and our Chief Financial Officer, Shiraz Kajian. Shiraz, before we begin, would you please

Speaker 2

This conference call is also being webcast from the Events Calendar in the Investors section on our website at www.slrinvestmentcorp.com. Audio replay of this call will be made available later today as disclosed in our August 8th earnings press release. I would also like to call your attention to These statements are not guarantees of our future performance, financial condition or results and involve a number of risks Past performance is not indicative of future results. Actual results may differ materially as a result A number of factors, including those described from time to time in our filings with the SEC. SLR Investment Corp does not undertake to update any forward looking statements To obtain copies of our latest SEC filings, please visit our website or call us at 21299317 At this time, I would like to turn the call back over to our Chairman and Co CEO, Michael Woods.

Speaker 1

Thank you, Shiraz. We're pleased to report that for the Q2 of 2023, SLRC generated net investment income of $0.42 Over earning the quarterly distribution and continuing the steady growth in net investment income over the past several quarters As we rebuild the portfolio post our COVID area deleveraging and importantly during a very attractive investment environment. The improved NII performance resulted from the combination of a larger portfolio and the increase in index rates for a predominantly floating rate portfolio. At June 30, our net asset value per share was $17.98 compared to $18.04 at March 31. Before digging into our performance, I'll touch on the market conditions and investment climate.

Speaker 1

As the Federal Reserve has continued to fight to curve inflation, Labor statistics and consumer spending have remained relatively stable. Based on both the recent economic data and our portfolio company's In navigating higher interest rates as well as input expenses, we view recession as less inevitable. As the full impact of higher rates reverberates to the economy, we believe our defensively positioned portfolio should weather those conditions. As conservative credit investors, we have always managed our portfolio as that we are heading into a downturn and we will continue to do so Despite signs that the U. S.

Speaker 1

Government's fiscal policy may result in a soft landing for this cycle, the overall health of our portfolio remains solid And we did not place any assets on non accrual during the Q2. Our weighted average interest coverage on our sponsor finance loans remains at comfortable levels at We believe that this is the result of our investment focus in Sponsored Finance on recession resilient industries with high recurring free cash flow such Healthcare and Business Services as well as our emphasis on specialty finance investments with borrowing bases supporting our loans. Additionally, we are monitoring near term maturities and have not identified any loans for the material risk of non repayment. At June 30, 98% of our comprehensive investment portfolio was comprised of 1st lien senior secured loans. Our long standing investment focus on 1st lien loans has resulted in a portfolio better equipped to withstand continued inflationary and interest rate pressures and portfolios with finance assets, which are borrowing base of supporting and full covenant structures, we are defensively positioned should the economy prove unable to withstand the Our unique investment approach of coupling cash flow loans with structured finance loans provide us with Volume remained lighter than prior years.

Speaker 1

Much of the 2nd quarter activity was relating to add on to acquisition financings. We're beginning to see more M and A processes as the bid ask spread for assets narrows. Additionally, access to the broadly Syndicated loan market remains extremely limited for all but the largest and highest rated issuers in our market and the retrenchment by regional banks continues to benefit our Finance strategies. In the Q2, SLRC originated $394,000,000 of new investments across the platform. With repayments of $265,000,000 during the Q2, we had net portfolio growth in each of our forward lending strategies totaling $129,000,000 Looking forward, the current investment environment remains as favorable as we've seen in several years.

Speaker 1

We currently have a sizable line in which we believe will prove to be a strong vintage for private credit. Our specialty finance businesses are benefiting from the regional banking turmoil as these banks have historically Asset based lending strategies for working capital and liquidity management. We believe the structure and collateral supporting our loan provides our investors with greater downside protection across economic cycles. Our ABL businesses have historically outperformed during challenging market conditions When asset rich companies access to traditional lending sources is constrained and we have the flexibility to allocate more of our capital to these strategies to take advantage of Risk reward attributes. Firms with significant available capital such as the SLR platform are able to Fill the void left by regional banks, retreat and installing in the syndicated loan markets.

Speaker 1

Borrowers value our speed and certainty of execution, Flexibility and ability to invest $150,000,000 to $200,000,000 in a given upper middle market financing, which gives us greater pricing power and influence over terms. With $13,000,000,000 of total investable capital across the platform inclusive of anticipated leverage, SLR has a scale necessary to provide full financing solutions which benefits SLRC through co investment. Importantly, we have ample dry powder to capitalize on the stable investment environment. Our funding profile is in Strong's position to weather a rising rate environment with our next fixed rate maturity not until the end of 2024. Additionally, our senior unsecured fixed rate notes have a weighted average annual interest rate of 3.8%.

Speaker 1

With $1,200,000,000 of funded debt at June 30, our leverage was 1.23 times net debt to equity. This point in time level of leverage doesn't fully reflect the ramp of the SSLP through loan asset contributions from our balance sheet. Since the end of the Q2, we've continued to make progress on ramping the SFLP. Based on transfers from SLRC balance sheet during the Q3 to date as well as new deal activity, we expect to substantially increase investment commitments in SFLP by the end of the Q3. We believe we are on track to reach $250,000,000 of commitments by the end of this year.

Speaker 1

As a result of our continued efforts to ramp the SFLP, we Our leverage ratio to once again be in the middle of our target leverage range of 0.9 to 1.25 times. At June 30, including available credit facility capacity at the SSLP and our specialty finance portfolio companies, subject to borrowing base limits, SLRC had approximately $600,000,000 in available capital to take advantage of the current attractive investment environment. I'll Now I'll turn the call back over to Shiraz, our CFO, to take you through the Q2 financial highlights. Thank you, Mike.

Speaker 2

SLR Investment Corp. Net asset value at June 30, 2023 was $981,000,000 or $17.98 per share Compared to $984,000,000 or $18.04 per share at March 31, 2023. At quarter end, SLRC's on balance sheet investment portfolio at a fair market value of approximately $2,200,000,000 in 156 portfolio companies across 45 industries compared to a fair market value of At June 30, the company had approximately $1,200,000,000 of debt outstanding with leverage of 1.23x net debt The increase in leverage is temporarily higher as the company continues to ramp its SSLP. When considering the company's plan to utilize the SSLP's facility, as well as the available capacity from the company's credit facilities, Together with available capital from the company's specialty finance subsidiaries, SLRC has ample available capital to fund future portfolio growth while remaining Moving to the P and L, For the 3 months ended June 30, 2023, gross investment income totaled 50 $6,300,000 versus $53,500,000 for the 3 months ended March 31, 2023. Net expenses totaled $33,700,000 for the 3 months ended June 30.

Speaker 2

This compares to $31,400,000 for the 3 months ended March 31. As a reminder, at the time of the merger of SLR Senior Investment Corp, or SUNS, into the company last year, The investment advisor agreed to waive incentive fees resulting from income earned due to the accretion of purchase discount allocated to investments Acquired as part of the merger. During the quarter ended June 30th, the company waived approximately $125,000 of merger related incentive fees. Accordingly, the company's net investment income for the 3 months ended June 30 totaled $22,700,000 or $0.42 per average share Compared to $22,100,000 or $0.41 per ADS per share for the 3 months ended March 31. Below the line, the company had net realized and unrealized loss the Q2 totaling $3,700,000 versus a net realized and unrealized loss of $15,300,000 for the Q1 of As a result, the company had a net increase in net assets resulting from operations of $19,000,000 or $0.35 per average share for the 3 months ended June 30, 2023.

Speaker 2

This compares to a net increase of $6,800,000 or $0.13 per For the 3 months ended March 31, 2023. Finally, on August 8, the Board of SLRC declared a monthly distribution of $0.137 per share, Payable on August 30, 2023, holders of record as of August 18, 2023. Moving forward, the company intends to make its distributions on a quarterly

Speaker 3

Thank you, Shiraz. Let me begin by providing an overview of our portfolio. At June 30, on a fair value basis, the comprehensive portfolio consisted of approximately $3,100,000,000 of senior secured loans To approximately 780 distinct borrowers across over 115 industries With an average exposure of just under $4,000,000 measured at fair value, 99.4% of our portfolio consisted of senior With approximately 98% invested in 1st lien loans, including investments in the SSLP attributable to the company, and only 0.2% was invested in 2nd lien cash flow loans with the remaining 1.2% invested in 2nd lien asset based loans. Our specialty finance investments account for approximately 76% of the portfolio with the remaining 24% invested in senior Cash flow loans to upper mid market sponsor backed companies. We believe that this defensive portfolio composition positions us well for potential economic weakness and provides a differentiated risk return profile for our shareholders.

Speaker 3

At quarter end, our weighted average asset level yield was 12.1%, up from 11.9% at Q1. The weighted average investment risk rating was under 2 based on our 1 to Risk rating scale with 1 representing the least amount of risk. During the Q2, we restructured our investment in AmeriMark, Which we have placed on non accrual last quarter. While it is still early days, we are pleased with the results of our efforts thus far. To date, we foreclosed on the business, contributed transition capital, which has since been fully repaid at par, Sold certain assets for cash, entered into a partnership with both operating and financial investors with respect to the company's core operations and expect to exit bankruptcy later this month.

Speaker 3

As a result, we increased our 2nd quarter mark by 10% from the prior quarter. We view the successful restructuring of this investment as evidence of our team's long standing private equity style approach to investing. It's in our team's DNA to approach a restructuring with an operational mindset using our expertise and experience to maximize our Now let me turn to our 4 investment verticals, sponsor finance or cash flow business. Here, we're originating 1st lien senior secured loans to upper mid market companies such as healthcare providers and diversified financials. Our historical focus on these sectors has helped to reduce the impact portfolio from rising input costs.

Speaker 3

As a result of the positive market dynamics Michael highlighted, We're continuing to see new issue yields of 12% to 13% in comparison to the recent historical range of 8% to 10%. Importantly, these investments are carrying less leverage than we had seen historically. Middle market loans continue to be priced at a premium to leverage loans with the added benefit of having these better structural protections and lower leverage levels. Our Q3 pipeline has an average yield of just under 13% and a loan to value of just under 40 Which supports our thesis that this year should be a great vintage for investing in sponsor finance cash flow upper mid market loans. Given our current pipeline and reduced level of expected repayments, we expect continued portfolio growth during the remainder of this year.

Speaker 3

Quarter end, our cash flow portfolio was approximately $740,000,000 or 24% of the total portfolio invested across 48 borrowers. We have defensively positioned this portfolio with borrowers that have an average EBITDA of over 140,000,000 And low loan to values of approximately 40%. Interest coverage ratios have come down from the high of 3 times a few years ago, Either recurring or reoccurring revenues and have low capital intensity. Overall, the portfolio has exhibited solid credit metrics that have remained Steady this year. During the quarter, we originated $115,000,000 of new loans and experienced repayments of $55,000,000 These investments were made on compelling terms.

Speaker 3

Our 2nd quarter investments were focused on existing borrowers with over Borrowers with over 85 percent of this capital committed to companies that we have exposure to and have exhibited strong operating performance. At quarter end, the weighted average cash flow yield was 11.6%. With approximately 98% of this portfolio invested in 1st Now let me turn to our ABL segment. Historically, the ABL segment has performed well during periods of market volatility and contraction such as today's environment. Borrowers which are asset rich but have cash flows that are pressured by rising interest rates and slowing demand are Forced to raise capital in the ABL market rather than the cash flow market.

Speaker 3

The rising rate environment and economic challenges have put pressure on these borrowers, particularly those in more cyclical sectors, which has resulted in an increased opportunity set for our ABL teams. We're seeing increased deal volume that we believe will continue throughout this year. With limited access Capital. As regional banks largely continue to sit on the sidelines, we expect the rate of repayments Slow translating into additional portfolio growth. Our ABL team has been working to provide All solutions to potential borrowers, including working closely with our life science team.

Speaker 3

At quarter end, the senior secured ABL portfolio totaled just under $1,000,000,000 or 32% of our total was invested across 165 issuers. The weighted average asset level yield was 14 0.6% compared to 13.6% in the Q1 and our average loan to value is approximately 74%. For the Q2, we originated $113,000,000 of new investments and had repayments of just under 100,000,000 Now let me move to Equipment Finance. At quarter end, the portfolio totaled just under $1,000,000,000 representing 32% of our total portfolio And was highly diversified invested across 550 issuers. The credit profile of the portfolio is as strong as it's ever been.

Speaker 3

Weighted average asset level yield is 9.6%. During the Q2, we originated $150,000,000 of new assets and had repayments of just under $110,000,000 Our current investment pipeline in equipment finance has increased significantly over the past quarter. Finally, let me turn to our life science segment. Activity has moderated in the wake of the SVB failure. Our life science team continues to be extremely selective as borrowers seek to increase leverage as an alternative to issuing more Equity at this time where valuations have come down in the markets.

Speaker 3

However, due to our strong presence, we are still seeing attractive investment We anticipate that the opportunity set will continue to improve as we move through the second half of this year. At quarter end, our portfolio totaled $340,000,000 across 15 borrowers. Substantial majority of the portfolio is invested in Loans to borrowers that have over 12 months of cash runway. Life Science loans represent 11% of our portfolio And contributed just under 23% of our gross investment income for the quarter. During the Q2, the team committed to $20,000,000 of new investments commitments, which may be drawn by borrowers based upon hitting important milestones such as FDA approvals, revenue metrics, liquidity and other milestones.

Speaker 3

At quarter end, the weighted average yield on this portfolio was 13.2% compared to 12.8 These yields exclude any success fees and warrants. In conclusion, all of our lending verticals inked a strong On the origination front, while maintaining consistent credit quality. Given our available capital and ability to provide a wide spectrum of Debt financing solutions. We believe we are well positioned to take advantage of the attractive investment environment. Now let me turn the call back to Michael.

Speaker 1

Thank you, Bruce. In closing, we are pleased with our progress in re ramping our portfolio since our COVID era lows Into investments that have more attractive turns than we've seen in many years. Our specialty finance businesses, which were particularly impacted by borrowers having access to government stimulus During the pandemic, have either reached or are nearing pre COVID portfolio balances. Importantly, the available capital across our platform provides us The capacity for additional earnings growth. With our investment strategies benefiting from the reduced competition from regional banks and the BSL market, shareholders continue to be one of our guiding principles.

Speaker 1

The SLR team owns over 8% of the company's stock, including at a significant percentage of the annual incentive Compensation invested in its stock. The team's investment alongside fellow SLRC shareholders demonstrates our confidence in the company's defensive portfolio, Stable funding and favorable position. Thank you for your time today. Operator, will you please open up the line for questions?

Operator

And we'll take our first question from Sean Paul Adams with Raymond James. Please go ahead.

Speaker 1

I was hoping you guys were able to share some commentary on whether you plan to amend your credit facility to extend their maturities since both mature in 2026 And provide some insight whether the revolving period for the secured credit facilities are the same as the maturity?

Speaker 3

Yes. We have some time on our primary corporate revolver. I think that maturity, if I'm not mistaken, is in 2025 in terms of the investing period. And then we have the smaller SUNS facility that came with the merger with SUNS, which matures next spring, and we're already in conversations Both upsize it and extend it.

Speaker 1

Okay, perfect. Thank you. And as a follow on, can you Provide and just any details on the impact of the banking market tightening?

Speaker 3

I'm sorry, can you just reiterate in terms of specifically what you like us to address on that front?

Speaker 1

Yes, yes, of course. So in regards to the like just generally the banking market tightening and just issuance and I guess, general flows, can you provide some just general targets for the next couple of quarters? Sure. I would just say high level,

Speaker 3

the cash flow market has been impacted by the tightening on the Money centered banks who are the biggest players there, the BSL market is really only open for the largest of issuers. And so on Cash flow side, as you can see in our origination numbers year to date, we've seen great opportunity in the upper mid market there. I think on the specialty finance businesses, they're most impacted and benefit from the tightening in the regional banks, Whether it's equipment finance, all the way through ABL strategies into life sciences, where obviously Silicon Valley and to some extent Signature Bank, were put on the sidelines. Those teams have resurfaced, but we'll see whether The banks that they landed at will actually put up the capital to support that sector. So we have seen that dislocation Create better opportunities for us, not so much in terms of the fundamentals, but as you know, the regional banks were relatively aggressive when they liked investment aggressive when they like investment opportunities, relative to direct lenders such as ourselves.

Speaker 3

And so having more rationality in those I think has led to higher quality opportunities as well as better pricing. Too soon to know how long that will last, But it has definitely given us a better opportunity, Seth.

Speaker 1

Perfect. Thank you for that insight. Thank you.

Operator

Question from Paul Johnson with KBW. Please go ahead.

Speaker 4

Yes. Good morning, guys. Thanks for taking my questions. On the equipment financing vertical, specifically the SLR equipment, On a basis equipment financing, this year, there's obviously been no return out of that Investment, I know there was no dividend return on investment last year as well either. Can you just remind us, I guess, how I guess what you intend to do with the return from that investment and if there's anything

Speaker 2

I guess that You say the portfolio seems

Speaker 4

to be performing quite well. So was there, I guess, anything that's lumpy in there on Timing or is there anything pressuring the return at this moment? Just any kind of thoughts around that investment would be helpful.

Speaker 3

Sure. So just as a reminder that we have 2 equipment finance verticals. 1 is the Kingswood vertical that provides Equipment Finance for investment grade borrowers and then there's the equipment finance vertical formerly NEF That is more focused on non investment grade borrowers. And that vertical particularly has been repositioning itself And of the borrower and a little bit less reliance surely on the liquidation value of the equipment. So it's a short way of saying we've been Taking down the risk in that portfolio, having said it, it has been growing.

Speaker 3

And just as a reminder, that portfolio is housed On balance sheet as well as in that subsidiary. So the expense of the team is in the subsidiary, but the majority of the assets are on balance sheet. So when we report, we report on a consolidated basis rather than just look at that legal subsidiary. So it has been Generating nice income. We expect that to grow, but you need to look at it consolidated between the subsidiary as well as the assets on balance sheet.

Speaker 4

Got it. Thanks. That's pretty helpful. And then just kind of broadly, you guys saw a lot of growth this Quarter, it sounds like you're you like what you see in terms of coming up with the pipeline and expect growth this year. Leverage is up to about 1.2 times on a gross basis this quarter.

Speaker 4

However, the ROE is obviously clearly lagged the space Quite a bit to date. I'm just wondering, what are kind of in your mind the catalysts to get that ROE up, Maybe increased return on some of your verticals. Is there any sort of repricing catalyst in front of the new portfolio somewhere? Yes. Your idea is there with what else we hope.

Speaker 1

Sure. There are several levers we can pull in our point to accomplish that across our strategies. The first, as we mentioned, our leverage we quoted was at a point in time. With the actions we have in place to put more assets That's the SFLP that will bring our leverage back down to kind of the midpoint of the range. It will also have the effect of We've been selling assets into that with our JV partner at par and these are assets yielding L+550.

Speaker 1

So we're able to take that capital we get back from those sales and redeploy it Into assets today, they're yielding anywhere from 12% to 15% depending on the strategy.

Operator

Thank you. We'll take our next question from Casey Alexander with Compass Point. Please go ahead.

Speaker 5

Hi, good morning and thank you for taking my questions. Can you quantify the capacity that the JV Has in terms of how much can you sell down to the JV that then you can replace on balance sheet?

Speaker 3

Sure. So, Casey, at June 30, we had about $79,000,000 down in the slip and it's been set up To take 3,000,000 of assets, so roughly another $220,000,000 of assets.

Speaker 5

Okay. That's helpful. My second question is, and this may be an entirely ignorant question, but it seems to me that one of the assets The JV was designed to take was some of the lower yielding assets from Solar Senior. But it seems to me that the assets from Solar Senior are now yielding more Then the average yield on the equipment finance portfolio, is there anything that prevents you from downstreaming of the equipment finance loans so that you can replace those with significantly higher yielding assets on balance sheet?

Speaker 3

Great question. The JV is set up both from an equity partnership perspective as well as the credit facility to only Cash flow loans. So to your point, it was set up to take the lower yielding SUNS cash flow loans, which as Michael just shared, are in the L5 handle Brad, at par versus the new cash flow loans, which are coming at so for $650,000,000 at $97,000,000 So there is a nice yield delta there. But I think on the equipment finance business, as you know, those are fixed rate assets. They do have a longer life, but they do amortize down monthly.

Speaker 3

And so we are looking to continue to cycle out of those assets and bring on higher yielding equipment finance Or not. If we are seeing better opportunities elsewhere, we'll deploy the capital into higher yielding strategies.

Speaker 5

Okay. Thanks. We'll see what happens when you give an analyst a calculator. He'll start trying to get you to do things you're not allowed

Speaker 2

to do. We

Operator

And it does appear that we have no further questions at this time. I'll turn the call back to Mr. Gross for closing remarks.

Speaker 1

Just thank you for your time and

Operator

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

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