SLR Investment Corp (SLRC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Solar Capital Limited earnings conference call.

(Operator Instructions)I will now turn the call over to your host, Mr.

Michael Gross, Chairman and Chief Executive Officer, Solar Capital Limited.

Thank you and good morning.

Welcome to Solar Capital Limited's earnings conference call for fourth quarter and 2010 fiscal year.

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 please start off by covering the webcast and forward-looking statements?

Of course, thanks, Michael.

I'd 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 today.

I'd 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 conditions.

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 financial filings with the SEC.

Solar Capital Ltd.

undertakes no duty to update any forward-looking statements made herein unless required to do so by law.

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

At this time I would like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Nick.

We are very pleased with our results for the fourth quarter and for 2010 as a whole.

Our first year as a public Company was a highly successful one.

During the year we experienced 10% growth in our NAV per share.

Expanded our secured bond capacity from $225 million to $490 million across 10 different lenders.

We completed three follow on equity offerings and had over $330 million of portfolio realizations all at or above their marks at the time of the IPO.

We also originated over $340 million in successful new investments and saw credit improvement across our overall portfolio.

These successes allowed us to pay $2.14 per share in dividends fully out of taxable earnings.

Before I turn it back over to Nick, I would like to touch on some of these accomplishments.

Our NAV per share of $22.72 was approximately 3% above prior quarter's $22.09 and up 10% for the year.

The increase was driven primarily by appreciation in the fair values of our investments.

Our net investment income of $0.51 per share represents an 8.5% increase over net investment income in the third quarter, and we anticipate further growth in 2011.

We delivered earnings per share of $1.24 for the quarter ended December 31, 2010, bringing the total earnings for 2010 to $4.27 per share.

During the quarter we raised $68 million of common equity through a private placement and we established a new five-year $100 million credit facility.

The Company used the equity proceeds and drawings under this new facility to repay its $125 million of 8.75% senior notes at par.

This result allowed us to lower our cost of capital on a go-forward basis.

We remain in active dialogue with potential new lenders and expect to continue to expand our assets through debt capital.

During the fourth quarter, the Company originated over $150 million of new investments with approximately $92 million invested in four new portfolio companies and approximately $64 million in the three existing portfolio companies.

Solar Capital had approximately $325 million of capacity for new investments at the end of the year.

We continue to see a strong pipeline of new opportunities for investment capital on an attractive risk/reward basis.

In the fourth quarter the Company received principal repayments and sales proceeds totaling over $120 million.

From the time of the IPO through year-end, repayments and sales investments totaled approximately 40% of the portfolio's fair value as reported in the IPO prospectus.

Our portfolio is extremely healthy, with over 99% of our assets performing on a fair value basis.

The fair value weighted average market and credit portfolio is $0.95 on the $1, which in conjunction with an expected realizable value of our equity positions provide additional NAV appreciation potential in 2011 and beyond.

And finally, our Board of Directors declared a quarterly dividend of $0.60 per share.

The first quarter 2011 dividend will be paid out of taxable earnings on April 4, to holders of record as of March 17.

At this time I will turn the call over to Nick to take you through financial highlights.

Thanks, Michael.

The NAV at December 31, was $827 million, or $22.73 per share, compared to $732.6 million, or $22.09 per share at September 30.

Earnings of $1.24 per share for the quarter exceeded our dividend declared of $0.60 per share resulting in an increase in our equity value.

Our total investment portfolio had a market value of $976 million on December 31, as compared to $906 million on September 30, 2010.

The portfolio value increase for the quarter was primarily attributable to new investment activity and unrealized portfolio appreciation, partially offset by the repayment of assets.

As of January 3, 2011, investable capital totaled $1.3 billion with approximately $325 million available for new investing.

For the fourth quarter of 2010, gross investment income was $31.6 million, compared to $29.4 million during the prior quarter, and $28.5 million for the period ended December 30, 2009.

Improvements in investment income were driven by a higher invested balance, dividends received during the period, prepayment premiums, and recognition of unamortized fees related to prepayments.

Net investment income totaled $17.4 million for the fourth quarter, an 11% increase over the third quarter of 2010.

Net realized and unrealized gains totaled $25 million for the fourth quarter compared to $5.5 million for the prior quarter.

The net unrealized gain for the fourth quarter of 2010 reflects steadily improving stable portfolio values.

As of December 31, there was only one asset on non accrual status with a total market value of approximately $6.6 million.

We expect realizable value for this asset to be in excess of this December 31 mark.

The weighted average investment risk rating of our total portfolio has remained steady at just below 2.0.

Measured at fair market value at December 31, 2010.

On a quarterly basis, we rate our assets on a scale from 1 to 4 with 1 representing the least amount of risk and a 4 representing assets that are materially underperforming our underwritten expectations.

New investments are typically rated at 2.

At this time I would like to turn the call over to our COO, Bruce Spohler.

Thank you, Nick.

I'd like to start by giving everybody an overview of the portfolio.

At quarter end the fair market value of our investment portfolio was approximately $1 billion of which over 99% was performing.

We had investments in 36 different portfolio companies across 23 industries, with approximately 25% of the portfolio invested in senior secured notes, 67% in sub-debt, and approximately 8% in equity investments.

As of December 31, the fair value weighted average yield on our income producing investments was approximately 14.3% as compared to 14.1% at September 30.

Overall, credit quality of the underlying companies demonstrated further improvement during the quarter.

We're pleased with where our current leverage levels are and are encouraged by the underlying trends in the portfolio of companies.

Principal repayments in sales during Q4 totaled in excess of $120 million.

For the full year, we had more than $330 million of realizations, all at values at or above the prior quarter marks.

We view these exits as continued validation of the original investment thesis.

Also during the quarter, we originated over $156 million face value of new investments, resulting in net portfolio growth for the quarter of approximately $36 million.

For 2010, in total we originated over $340 million of new opportunities.

Let me highlight a couple of the Q4 investments.

We funded a $40 million secured term loan investment in National Vision, which is a leading value-oriented optical retailer owned by Berkshire Partners.

In addition, we made a $22.5 million mezzanine investment to support the acquisition of Richelieu Foods by Centerview Capital.

Richelieu is a leading private label pizza manufacturer that sells into most major supermarket chains.

The notes carry a 13.75% coupon, consistent with where we've been deploying capital during the course of the year.

Additionally, we funded an $18.3 million unitranche investment into Van Pool Services to support the acquisition of the Company by TPG.

Van Pool is the largest provider of professionally managed commuter van pools in the States.

We're attracted by the modest leverage coupled with a 12% base coupon as being highly attractive for us on a risk adjusted return basis.

During the quarter we also made new investments in three existing portfolio companies.

First off, Adam's Outdoor, which provides outdoor advertising services into major markets in the midwest, southeast, and mid-Atlantic states.

They completed a refinancing of their entire capital structure.

In connection with the refinancing, Solar was repaid on its approximately $57 million investment.

Concurrently we provided a new $42.5 million mezzanine investment to conclude the refinancing.

Additionally, we increased our exposure to Earth Bound Farms.

Earth Bound had de-leveraged significantly since our original investment through strong operating and financial performance.

We increased the size of our investment from $40 million to $59 million.

In connection with the investment, we reduced our coupon to 14.25% cash pay.

However, we were able to increase our call protection, thereby extending our expected duration on this proven asset.

For the credit investments funded in 2010, our weighted average yield based on current fair value is in excess of 14%, and our current leverage approximates 4.3 times.

We find that the mid-teens yield on rather reasonable leverage levels is extremely attractive from a risk return perspective.

Importantly, across the portfolio we continue to see positive developments since year end.

Four of our portfolio companies have experienced liquidity events, all at levels at or above their 12/31 marks.

Redemptions like these, in addition to expected redemptions, should continue to drive our NAV growth as we head into 2011.

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

Thank you, Bruce.

As we've discussed we had a strong year both in terms of our investment portfolio and strengthening our balance sheet.

Given the strength of our portfolio, we expect additional NAV appreciation in 2011.

At year-end we had $322 million of available capital for new investments.

We continue to see a large pipeline of new opportunities, but remain highly selective.

Our substantial amount of available capital at low borrowing rates will fuel growth in net investment income throughout the year.

While 2010 was a successful one for us we are not satisfied.

We continue to seek ways to increase shareholder value and are focused on delivering on our strategic objectives during 2011.

Thank you for your time and your support.

Operator, at this time we will open up the line for questions.

(Operator Instructions) Vernon Plack, BB&T Capital Markets.

Thanks very much.

Michael or Bruce, had a question about just the origination pace, the new investment pace for 2011.

I know that 2010 the pace increased as the year went on, and with your fourth quarter at roughly $157 million in investments.

I'm just trying to get a sense for, and also realizing the lumpiness of the business, can we expect this type of pace for 2011 around $150 million a quarter?

As you know, and you pointed out, it's so hard to predict on a quarterly basis.

It's very lumpy.

I think what we're comfortable saying is our targeted debt to equity target is 0.6 to 0.65 times.

We expect to get towards that number as the year progresses, and it'll come in fits and starts based on where we see the opportunities, but we'll get there by the end of the year.

Okay, that's helpful.

Thank you.

John Stilmar, SunTrust.

Thank you.

Guys, with the comments that you've had success and seemingly moderate leverage of your portfolio, other people have pointed towards at least some potential areas of risk seeking in might be more liquid parts of the bond market.

Can you differentiate or give us some perspective about what it is that you're seeing on either the deals that you're rejecting or accepting and how those might differ than kind of the broader bond market, or are you seeing some of the drift-down that some of us are a little bit concerned about?

Wondering if could you address your market and how it's different than maybe some others in the middle market more broadly syndicated?

Just to compare and contrast, the liquid high yield market is kind of back to, frankly, peak levels.

It's a sub-7% market.

Leverage has crept back up.

There are no covenants.

Really, that's been fueled by technical factors, tremendous amounts of in-flow into liquid credit vehicles.

The good news for us is those vehicles are not capable of buying the illiquid issues that we and other middle market BDC's are focused on, namely companies looking to raise between $40 million and $125 million of sub-debt.

They just can't reach down that low because there's no liquidity in those assets.

We have not seen that pricing come into our market.

We have not seen that kind of leverage ratio coming back into our market.

I guess the best way to describe it, if you look at our Q4 investment as we've highlighted, the average coupon on that $150 million was north of 14% and leverage ratios continue to be in the mid fours, which is consistent with the rest of our portfolio.

That's what we're seeing on the pipeline in the new things we're investing in today.

Great.

Then how should we think about cap structure as you end in 2011?

Should we sort of anticipate and think about you guys diversifying your liability mix a little bit more, and if so, is there any sort of thought that you can kind of lead us to, at least in terms of type of structure or technology that you might be using?

I think as we did during 2010, looking to diversify the source as well as the types of funding on the liability side, we'll continue to do that in '11.

You've seen people tap into the term market, tap into the convert market, tap into the SBIC market, and I think all of those are under consideration for us as we continue to term out as well as diversify our funding sources.

Great.

Thank you, gentlemen.

Thanks, John.

Jim Ballan from Lazard Capital Markets.

Thanks a lot.

Bruce, could you give us a little more detail on the four portfolio companies you saw liquidity events on in the quarter?

Just the size of that and whether or not you've re-upped in those like you did with the three existing portfolio companies in the fourth quarter?

In the first quarter, no.

I really don't want to give you too many specifics, but I think if you look in the public market you can look at things, Jim, such as Direct Buy that did a bond deal.

We hold a $38 million mez investment there, approximately.

And that was marked in the low 90's at year end.

I think publicly it's been out there that Booze Allen did a big bank deal to refinance the rest of the mez position that we hold.

Those are some of the things.

I think as people note, we do have an investment in NXP on the equity side which went public last year, and we will have some liquidity rights there as we get into this year.

We do expect to see additional churn in the portfolio, and we'll selectively reinvest in opportunities.

Okay, that's great.

One other thing.

Given the other fund that you've raised, what are your thoughts on having more subordinated debt type of floating rate debt going forward and maybe talk a little bit about the implications of your profitability of having floating rate debt in a rising rate environment?

Well, first of all, Jim, as you know, the mez market really is not a floating rate market.

No, no, but whether it's unitranche or second lien, whatever, things like that.

Yes, as you saw in the fourth quarter we did a couple of unitranche investments, or floating rate investments, unitranche first lien across the Van Pool as well as National Vision.

While they both have floors, they do have floating rates, but we do have an up side to the extent that rates exceed those floors.

So we're continuing to look at that as a mix in the portfolio going forward.

But to Michael's point, the traditional mezzanine does tend to be fixed rate.

Right.

But in terms of just your liabilities versus the assets, is there a lot of up side?

Do you think once we get past the floors on the asset side, or are you pretty well matched in that way?

I think we feel like we're pretty well matched.

We do have, as you know, a fair bit of floating rate assets north of 20%, but we also have floating rate liabilities, and I think what we will be looking to do, is as we're looking at financing the business going forward, putting some fixed rate liabilities and perhaps hedging some of the floating rate liabilities.

Thanks a lot.

Arren Cyganovich from Evercore.

Thanks.

Getting back to the new BDC, are you comfortable with the level of investment professionals that you have currently, and do you have any plans to expand on that front?

The answer is we are comfortable, we are adding through ordinary course.

We'll add three people this year.

But we're very comfortable that we can execute the business plan for both businesses with the existing team.

Okay.

And then onto -- I know you don't disclose what your excess taxable carry-over income is, but do you have any excess that's available to support the 2011 dividends going forward?

Absolutely.

We had carry-over for the year and we've had realizations already in Q1 that give us more than enough to cover our dividends throughout the course of the year along with net investment income.

Thanks, guys.

David Chiaverini from BMO Capital.

Thanks, good morning.

First question is on -- could you tell me the size of the companies that for the new portfolio of companies in the fourth quarter what the average EBITDA was for those companies and what you're targeting over the next few quarters?

Yes, the average EBITDA, I'm going to give you a range, because I don't have it at my fingertips, but I would say it's in the $40 million to $50 million range.

Great.

And you mentioned the 13.75% coupon on the mezzanine.

I missed what you said what the pricing was on the $18 million unitranche in the fourth quarter?

It's a floating rate structure but the base coupon is 12%.

12%, Okay.

And then touching on, again, these four portfolio of companies that had liquidity events, you had 30 portfolio of companies at the end of the year.

So having four having liquidity events is somewhat significant.

Do you have enough attractive opportunities in your near-term pipeline to replace these and potentially show portfolio growth in the next couple quarters?

I'm sorry to correct.

It was actually 36 portfolio companies when you include the equities.

But, the point, yes, we do see the opportunities out there to replace the churn that we've seen.

Either because we're going reinvest in that situation or new portfolio opportunities.

I think you have to understand that we obviously want to grow our portfolio, but we're also going to be opportunistic how we manage our portfolio.

We have some lower yielding things in our portfolio that we are proactively selling when they hit par, given the market strength.

So we want to grow our portfolio, but we also want to do it in a way that creates the highest ROE for ourselves as shareholders and all of our other shareholders.

Thank you.

Stephen Laws, Deutsche Bank.

Thanks for taking my questions.

It's been touched on in some of the answers before but can you talk about the competitive aspect right now of seeing a lot of the other competitors have recently raised some capital as well.

Can you maybe talk about how terms are changing, or how the lending markets changed in the last six months and where you see that headed near-term?

Frankly, it really hasn't changed that much.

Maybe 25 basis points here or there in the margin, and leverage ratios I think continue to remain in the mid 4's to 4.75 times, 5 times.

I think investors are keeping their discipline.

I think they're remembering the cycle.

While, yes, there's been money raised, it's literally a drop in the bucket given the sheer amount of activity that's going on.

And it was expected, frankly, with all the unspent private equity capital and all the companies to refinance heading to 2011, 2012.

Great.

So it's still the expected to see a strong opportunity for investment throughout this coming year?

Absolutely.

Great, thanks a lot.

[Jim Whole] from Wells Fargo.

Michael and Bruce, I'm wondering if you can maybe give us your perspective on how you look at the second lien and unitranche product versus mez?

In other words, you're getting close to the same coupon with the floating rate, mostly a floating rate security with second and unitranche versus the fixed rate on mez.

Particularly as you begin to leverage your balance sheet, I think you made comments earlier about wanting to be hedged for a rising rate environment.

Give us your perspective on the risk/reward trade-off in those two products versus mez right now as you guys see it.

I think that we like the risk/reward in both products, but I think, to your point, the unitranche is really a stretch first structure, separate and apart from second lien.

I think second lien is a bit more akin to mezzanine, maybe a little bit less levered.

But on the unitranche side, it's a bit of a stretch first.

So that's where we are focused in deploying capital.

We do like the risk/return there.

The all-in returns to your point, are a couple hundred basis points lower than the mez or second lien opportunity.

But we think that that spread has more than made up for the lower risk.

Okay.

And if we were kind of to assume that you guys get to your 0.65 leverage ratio, so 35%, 40% of your capital is kind of fixed duration equity, is the right way to think about this is higher percentage, perhaps 40% or 50% will be in the floating rate securities, whether it's senior, unitranche, or second lien?

That's really hard to predict.

We're going to be opportunistic, seeking the best risk/reward.

It could be, but it equally could not be.

I can't really predict it.

Okay, but if the risk/reward is not there, then one would presume you'd have to do something else like swap out or swap into floating rate investments, or do something on the debt side to kind of hedge yourself against a rising rate environment, right?

Yes, and as we mentioned, we are exploring additional financing options on the liability side, most of which are fixed rate in nature or we look at various hedging mechanisms to cap those rates.

Okay.

Thanks, guys.

And we have no further questions at this time.

I would now like to turn the call back over to Mr.

Michael Gross.

Please proceed.

Thank you very much.

We appreciate all your questions and all the time you spent with us, and we look forward to talking to you in the near term.

Thank you.

This concludes the presentation for today, ladies and gentlemen.

You may now disconnect.

Have a wonderful day.