SLR Investment Corp (SLRC) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Solar Capital Ltd.

year ended December 31, 2009 earnings conference call.

My name is Chanel and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr.

Michael Gross, Chairman and Chief Executive Officer of Solar Capital Ltd..

Please proceed.

Thank you and good morning.

And welcome to our first earnings conference call.

I am excited to, once again, be able to report to you, our shareholders, as a CEO of a publicly traded BDC.

I am joined here today by Bruce Spohler, our Chief Operating Officer and Nick Radesca, our Chief Financial Officer.

Nick, before we begin, would you start off by covering the webcast and Safe Harbor information, please?

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 Ltd.

and that any unauthorized broadcast in any form are strictly prohibited.

This conference call is being webcast on our website, www.solarcapltd.com.

A replay of this call will be made available on our website later this afternoon.

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

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

These statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in our filings with the SEC, including our annual report on Form 10-K dated March 4, 2010.

Solar Capital Ltd.

undertakes no duty to update any forward-looking statements made herein.

To obtain copies of our latest SEC filings, please visit our website at solarcapltd.com or call us at 212-993-1670.

At this time, I'd like to turn the call back to our Chairman and CEO, Michael Gross.

Thank you, Nick.

While I recognize that we are here today to discuss our 2009 results, which occurred prior to our becoming a public company, I would like to first highlight our initial public offering completed a little less than a month ago.

On February 9, we sold 5.7 million shares of common stock at $18.50 per share in an offering lead by Citi, JPMorgan, Morgan Stanley and SunTrust.

In addition, Bruce and I personally purchased 600,000 shares also at $18.50 giving us the highest percentage of management ownership amongst our peers.

The IPO unlocked a substantial amount of investable capital for us.

In addition to the nearly $109 million in IPO and private placement proceeds, the offering enabled Solar to close on a new senior secured revolving credit facility that matures in February 2013.

The facility size of $250 million was increased to $270 million with the addition of a new lender at the closing.

Our original bank lending group is intact and is now joined by three new participants.

Through incremental commitments, the facility can be upsized to $600 million over time.

We anticipate adding new lenders, increasing the line.

And we are very pleased that we were able to extend the maturity and increase our borrowing capacity as part of this transaction.

Also, we expect substantial loan repayments and realizations over the next six to nine months, including the repayment of our National Interest Security investment earlier this week.

NISC was acquired by IBM and as a result of the change of control, our $56 million in outstanding second lien and mezzanine loans were repaid at slightly more than 110% of par or $62 million.

In addition, we sold our equity investment in NISC with an original cost of $2.3 million for expected proceeds of approximately $20 million.

As a public company with permanent capital, we are positioned to redeploy these proceeds into new investment opportunities.

In addition, we expect that prepayment fees and realized gains such as these will provide additional support for our ongoing dividends.

In January, our Board of Directors declared our first quarterly dividend of $0.60 per share.

The first-quarter 2010 dividend will be paid out of taxable earnings and when prorated for the number of days we were public, it will be $0.34 per share, which will be payable on April 1, 2010 to holders of record as of March 18.

At $2.40 per share on an annualized basis, this represents a dividend yield of approximately 13%.

Our portfolio, which we will discuss in more detail, is in great shape.

At year-end, 100% of our portfolio on a market value basis is performing with no covenant defaults.

At this time, I will turn the call over to Nick to take you through some of our year-end financial highlights.

Thanks, Michael.

Let me start off with some December 31 balance sheet highlights.

Our total investment portfolio had a fair market value of $863.1 million on December 31 as compared to $792.4 million at September 30.

This increased portfolio value was from the addition of new investments, as well as appreciation of assets during the quarter.

The net asset value per unit and net income figures reported in our December 31, 2009 financial statements are not very relevant to our current shareholders.

The reported financial statements are those of Solar Capital LLC, which had a different capital structure than we have today.

In February 2010, Solar Capital LLC, our private company predecessor, merged into Solar Capital Ltd..

On a pro forma basis adjusting the NAV per share for the effects of the merger, the NAV per share would have been $21.50, which is at the top of the $21.40 to $21.50 range that we provided in the prospectus.

Further adjusting the NAV per share to reflect the effect of the IPO and private placement at $18.50 per share brings the pro forma NAV per share to $20.64 at December 31, 2009.

We had outstanding debt of approximately $88.1 million on our revolving credit facility at December 31.

As of today, we have no outstanding debt on our revolving credit facility and $125 million of senior unsecured term notes outstanding, putting our current debt to equity ratio at 0.18 to 1.

For the fourth quarter of 2009, gross investment income was $28.5 million.

Net investment income was $17.7 million.

Net realized and unrealized gains were $22.3 million and net income was $40 million.

For the year ended December 31, 2009, gross investment income was $109.7 million, net investment income was $67.3 million.

Net realized and unrealized gains were $19.7 million and net income was $87 million.

Now let me touch on credit quality.

At December 31, 2009, investments in three companies were on non-accrual status.

During the fourth quarter, no new assets were placed on or removed from non-accrual status.

The fair value of the non-accrual assets was zero at year-end.

Presented another way, 100% of the fair value of our assets was performing.

In addition, we have three assets that are paying interest currently and are not in breach of covenants, but have capital structures that are highly levered such that we believe we may not receive 100% of our invested principal at maturity.

For these assets, we do not recognize interest income for GAAP purposes, but apply their interest payments to principle thereby lowering our cost basis.

During the fourth quarter of 2009, approximately $1.6 million of interest income related to these assets was not recognized in our financials.

You should keep in mind, however, that even though the income is not recognized for GAAP, it is still taxable income and will be included in our calculation of dividends payable.

The weighted average investment risk rating of our total portfolio was 1.9 measured at fair market value at December 31, 2009.

To give you some background on our ratings system, we use a scale from 1 to 4 to rate our investments with a 1 representing the least amount of risk and a 4 representing assets that are materially underperforming our underwritten expectation.

New investments are typically rated a 2.

Now let me turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Nick.

I would like to start by giving an overview of the portfolio as of December.

When we look at the year-end investment portfolio, it totaled $863 million at fair market value, which comprised of roughly three-quarters subordinated debt, approximately 20% senior secured debt and another 6% to 7% equity investments.

We expect the equity investments to remain to be a similar percentage of the portfolio going forward.

At 12/31, our weighted average yield was 14.8% based on fair market value and 13.7% based on costs.

Portfolio at December consisted of investments across 36 companies in 23 different industries.

As we've discussed, our business is a direct origination lending platform in which we provide private debt capital to private equity investors.

Today, the portfolio represents investments with over 40 different sponsors.

In addition, we source our transactions from in excess of twice the number of sponsors currently in portfolio.

Targeted investments are in what we consider the large end of mid-market.

Typically, our companies have EBITDA from $40 million to $100 million.

At December 31, '09, the median EBITDA of our performing debt portfolio companies was approximately $80 million.

We have found that these size companies have weathered the recent financial storm comparatively well.

In addition, these issuers have demonstrated the ability to attract and retain quality management teams and typically have represented a significant capital commitment by the private equity sponsor supporting the business.

Today, the portfolio is overweighted in defensive sectors with approximately 40% of the fair value in two discrete industries, food and beverage consumer staples and aerospace and defense IT services, including our successful investment in NISC recently exited to IBM as mentioned by Michael.

Our investments in these sectors have performed extremely well during the market downturn and we expect them to continue to outperform going forward.

Overall, the portfolio has exhibited strong resilience during 2009.

We saw steady quarterly improvements in both leverage levels and interest coverage ratios at the issuer level.

In addition, the portfolio experienced solid growth in both EBITDA and cash flow with the underlying companies which we finance.

During the fourth quarter of 2009, we invested over $65 million across one new and one existing portfolio company while also receiving proceeds in excess of $5 million from principal repayments across seven different portfolio companies.

Additionally, approximately $20 million of proceeds was realized from sales of securities in five different portfolio companies.

The one significant investment made during the fourth quarter of 2009 was in the mezzanine debt of Rug Doctor.

The company is one of the largest manufacturers and marketers of consumer carpet care machines and cleaning products.

Its primary operations being vacuum rentals through major retail outlets.

Rug Doctor is a company that we fully underwrote a couple of years back, but at the time had been purchased by another third-party who not only purchased the equity, but also the mezzanine debt issued by Rug Doctor.

In the middle of 2009, we had an opportunity to re-underwrite the business when the owner was considering a sale.

They subsequently decided to hold onto the company; however, we approached them and began negotiations to purchase their mezzanine tranche while they continue to retain controlling equity ownership.

Together with one other lender, we purchased a $120 million face amount of Rug Doctor mezzanine loans.

Importantly, there was only one other competing lender in the process with a capital base sufficient to execute this type of transaction.

The terms of the investment highlight the compelling opportunities that we are seeing in today's marketplace.

The investment bears interest at a rate of approximately 15% and matures in October 2014.

Based upon our purchase price, the yield to maturity for our investment is expected to be in excess of 17.5%.

Importantly, the leverage level at which we invested is in the 4.8 times area, representing an extremely compelling risk reward proposition for us.

Additionally, we were very comfortable with the transaction as we are able to watch it perform during the economic cycle as it's a mature leverage buyout.

As Michael is about to discuss, we currently have a very promising pipeline and are in various stages of due diligence on several prospective investments.

We employ a private equity style of investing, which means that our investment process will typically take from six weeks to six months and the closing of our transactions will therefore be lumpy as we move forward.

We are excited about a number of the opportunities which we are currently evaluating; however, we do remain defensive as we evaluate new investments at this stage of the economic cycle.

Now I would like to turn the call back over to Michael.

Thank you, Bruce.

Needless to say, Bruce and I and the rest of the Solar team are extremely excited about being a public company and the prospects for our future.

As we discussed, with 100% of our assets performing, the portfolio is in great shape and continues to improve in quality with each passing quarter.

As a result, we are expecting substantial realizations in the coming year, some of which will be from our lower-yielding assets.

Realizations at par and related prepayment premiums represent realizable value in excess of our current fair values and should drive higher net asset values going forward.

The combination of these realizations and our undrawn $270 million credit facility gives us substantial dry powder to take advantage of our robust investment environment without having to come back to the equity markets in the near future.

Before I open it up for questions, I would like to make a few comments about the investment environment.

Notwithstanding the rally we have all witnessed in the large liquid leveraged loan and high-yield markets over the past year, the illiquid credit market in which we participate has not seen a similar move.

Why?

Simply put, we believe there has been a fundamental shift in our marketplace as many of our historical competitors for investing in our types of illiquid loans are no longer in business.

Namely hedge funds, banking prop desks and several mezzanine providers.

And we do not think they will be returning in the foreseeable future as investors will continue to be resistant to investing in illiquid assets.

However, there is and will continue to be substantial demand for our capital given the significant amount of uninvested capital that the private equity firms are sitting on, not to mention the tremendous number of refinancings of existing capital structures that will need to occur over the next few years.

We are uniquely positioned to take advantage of this demand for capital through our deep relationships with our private equity sponsors.

As a result of this supply/demand imbalance, we are seeing opportunities to invest our capital on an extremely favorable risk reward basis.

To put it into perspective, historically, we financed mezzanine loans in the four to six times total leverage range with up to four turns of first lien bank debt ahead of us.

Today, we are seeing opportunities at 2.5 times to 3.5 times leverage through our security, which has historically been bank debt levels.

Notwithstanding the lower risk we are taking however, given the lack of competition, pricing has remained in the very attractive 15% to 17% range.

As a public company, we are well-positioned to drive long-term sustainable dividend yields for our shareholders.

As I mentioned earlier, we are sitting on a large amount of investable capital.

Specifically our undrawn credit facility will allow us to borrow at LIBOR plus 325 and then invest in the 15% to 17% range.

We also anticipate cycling out of our lower-yielding assets and putting this money to work at higher yields.

In conclusion, we have a disciplined and patient approach to investing.

Given substantial ownership of the Company by Bruce, the team and I, we act as principals and are fully aligned with our shareholders.

This, coupled with our experienced team of investment professionals, will allow us to remain active and successful players in the private lending market.

Thank you for your time.

Operator, at this time, we would like to open up the line for questions.

(Operator Instructions).

Vernon Plack, BB&T Capital Markets.

Thanks very much.

Michael, you talk about it being a great time to deploy capital.

Just trying to get a sense for the pace at which that will occur.

And I guess my question is, is looking at your IPO proceeds of around $100 million and your revolver, how soon do you think it will -- or long will it take you to put those proceeds to work?

Yes, that's a good question.

As you know, and I have always spoken about this back to my days of creating (inaudible) BDC, this is an extremely lumpy business, very difficult to predict timing.

So I can't kind of give you a quarterly run rate, but I think comfortably we will invest the capital over a six to nine-month period.

And by the proceeds, do you think you'll also be using your revolver as well?

Yes.

Okay.

And with NIS being -- I think that transaction being completed on March 1, at the end of the year, I think you had the equity portion valued at about $16.3 million and I believe -- I think it was actually -- the value was $20 million in terms of when it was actually sold.

So is there some additional gains that we can expect from that?

There will be a small additional gain.

Some of those proceeds are in escrow and so those will not be fully valued until realized.

Great.

Thanks very much.

Troy Ward, Stifel Nicolaus.

Hi, good morning.

Thank you.

Quickly, guys, when you think about where you have invested in the past and kind of the current opportunity set that is available today, do you anticipate that you will be moving in and out of syndicated and/or self-originated loans or how do you view what your long-term asset class will look like?

I think our long-term asset class is no different from what it has been historically, which is directly originated loans.

We pride ourselves on spending a substantial amount of time with our perspective issuers, typically six weeks to six months.

We want to be able to have access to that information and that only comes from doing direct originations.

The typical deal we are involved in either is just us or a club of two to three other people.

Great.

And then you talked about getting -- moving out of some of your lower-yielding assets, realizing -- moving into higher-yielding assets.

Do you think that will -- is that easier done based on the size of the companies you are in?

Can you kind of dictate that or will you be still waiting on refinancings [to come]?

It's a great question.

As you know, our strategy has been to invest in the upper end of middle market.

Our average EBITDA coming to $80 million today.

What that means is some of the larger companies are having access to the high-yield markets and even potentially the IPO markets.

So we have several companies in our portfolio that we think will be refinanced out over the near term.

And actually, some of our lower-yielding assets are things that are marketable that we could sell that are already trading close to par.

Great.

That's helpful.

Thanks, Michael.

That concludes the Q&A session.

I would now like to turn the call back over to your Chief Executive Officer.

Again, thank you for your time.

We are available directly if you have further questions and we look forward to talking to you soon.

Ladies and gentlemen, that concludes the presentation.

Thank you for your participation.

You may now disconnect.

Have a great day.