SLR Investment Corp (SLRC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Solar Capital First Quarter 2011 Earnings Conference Call.

My name is Maria, and I'll be your operator today.

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

Later, we will conduct a Q&A session.

(Operator Instructions)

I would now like to turn the conference over to Mr.

Michael Gross, Chairman and Chief Executive Officer.

Please proceed.

Thank you, and good morning.

Welcome to Solar Capital Limited's earnings conference call for the first quarter of 2011.

I'm joined here today by Bruce Spohler, Solar Capital's Chief Operating Officer, and Nick Radesca, our Chief Financial Officer.

Nick, before we begin, would you start off by covering the webcast and forward-looking statements?

Sure, 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.

The 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 condition.

These statements are not guarantees of our 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.

Solar Capital Limited 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'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Nick.

We are very pleased with the results for the first quarter of 2011.

Our NAV per share of $23.48 is up over 3% above prior quarter's $22.73.

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

Our net investment income of $0.53 per share represents a $0.02 increase over Q4 2010, and we anticipate further growth in 2011.

During the first quarter, the Company originated over $80 million of new investments with approximately $50 million invested in two new portfolio companies and approximately $30 million in four existing portfolio companies.

In addition, Solar Capital had approximately $340 million of capacity for additional investments at quarter end.

We continue to see a strong pipeline of new opportunities for investing this capital at attractive risk-adjusted returns.

In Q1, the Company received principal repayments totaling $80 million.

In addition, during the quarter, we strategically cycled out of two assets with little or no yield totaling $29 million.

All add values in excess of our year end marks, and we collected $8 million in escrow proceeds from a 2010 asset sale.

As we have previously stated, when afforded the opportunity, we will seek to actively improve the yield on our portfolio.

Our portfolio is extremely healthy with 100% of our assets performing.

The fair value weighted average mark on our credit portfolio is approximately 95%, which in conjunction with the expected realizable value of our equity positions provide additional potential NAV appreciation.

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

The second quarter 2011 dividend will be paid out of taxable earnings on July 5, 2011 to holders of record as of June 17, 2011.

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

Thanks, Michael.

The NAV at March 31, was $854.2 million or $23.48 per share, compared to $827 million or $22.73 per share, at December 31, 2010.

Earnings of $1.35 per share for the quarter exceeded our dividends declared of $0.60 per share, resulting in an increase in our equity value.

The total investment portfolio had a fair market value of $989 million on March 31, as compared to $976 million on December 31, 2010.

The portfolio value increase for the quarter was primarily attributable to portfolio appreciation particularly in our equity investments.

As of April 1, 2011, investable capital was in excess of $1.3 billion with $340 million available for new investments.

For the first quarter of 2011, gross investment income was $32.2 million, compared to $31.6 million, the prior quarter.

Improvements in investment income were driven by prepayment premiums and the recognition of unamortized fees related to prepayments, as well as increased interest and dividend income.

Net investment income totaled $19 million for the first quarter, a more than 9% increase over the $17.4 million generated in Q4 2010.

Net realized and unrealized gains totaled $29.9 million for Q1, compared to $25 million for the prior quarter.

The net unrealized gain for the first quarter of 2011 reflects steadily improving stable portfolio values.

We've taken steps to actively manage our balance sheet and interest rate risks.

During the first quarter of 2011, we capped the LIBOR rate on $100 million of notional amount through the purchase of a multi-year interest rate cap.

This derivative effectively caps the interest rate payable on our recently closed $100 million credit facility at 4%.

As of March 31, 2011, the portfolio is 100% performing as our one non-accrual asset consummated a restructuring of its capital structure during the quarter.

Bruce will cover this transaction in more detail later in the call.

The weighted average investment risk rating of our total portfolio has remained steady at approximately two, measured at fair market value at March 31, 2011, based on our one to four risk rating scale with one representing the least amount of risk.

At this time, I'd like to turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Nick.

I'm going to start by giving you an overview of our portfolio.

Just to reiterate Michael and Nick's comments, we are thrilled to be able to have positioned our portfolio to be a 100% performing as of March 31.

At that point in time, our portfolio was approximately $1 billion, constituting 35 different portfolio companies in 23 industries with approximately 28% senior secured, 63% subordinated debt and 9% equity positions.

The fair value weighted average yield on income producing investments in our portfolio was approximately 14% as compared to just over 14% at December 31.

Overall, credit quality of the underlying companies continued to demonstrate improvement throughout this quarter.

As Michael mentioned earlier, we continue to opportunistically reposition the portfolio.

We exited our $15 million investment in [Ambion] Business Services at par.

This is an asset that we originally purchased back in 2007 and has performed extremely well for us.

But at LIBOR plus 500 basis points, with LIBOR under 30 bps, we felt we could redeploy this capital at a significantly higher yield.

We also began exiting our equity investment in NXP Semiconductors.

NXP has completed the IPO back in last summer at $14 per share.

During the quarter, we sold approximately 490,000 shares at an average price of just over $29 a share for total proceeds in excess of $14 million.

We view these sales, which were above our initial cost as an excellent outcome for an asset that was valued at 5% of cost just over a year ago.

Together with other asset sales, approximately $37 million was generated for reinvestment during this quarter into higher yielding assets.

Principal repayments during Q1 totaled approximately $80 million.

Separately, we originated over $80 million face value of new investments during the quarter.

Let me highlight some of the activity during the quarter.

Solar originated a $31 million mezzanine investment in Granite Global Solutions, which is a leading Canadian provider of outsourced insurance services and risk mitigation solutions.

Our security carries a 13.5% coupon in addition to upfront fees and has attractive call protection.

Additionally, with total leverage in the low four times debt-to-EBITDA, the investment provides a very attractive risk reward proposition.

As previously mentioned, our only asset on non-accrual, Grakon, was restructured and returned to accrual status during Q1.

The company which manufactures lighting systems for OEM truck manufacturers suffered during the difficult environment over the last couple of years.

Grakon received a new investment from its lenders, including Solar, to improve the company's liquidity and provide growth capital as the company improves with a rebound in the trucking cycle.

As a result of this transaction, coupled with significant improvement in the company's operations, fair value of our existing investment has increased by approximately $9 million from year-end 2010.

In connection with the transaction, we provided the company with a $1.4 million of additional funds to represent our pro rata piece of a new 14% senior PIK loan.

We also converted our existing $23 million sub debt investment into a $9 million second lien 12% cash pay and a $14 million 12% PIK loan.

In March, Ares Capital repaid the [six and five-eighth] bonds that it assumed in connection with its acquisition of Allied.

We were called out of our $14 million par value investment at 102.

You may recall that we had originally purchased these bonds back in middle of 2009 for approximately $7 million.

Additionally, Ares has further announced that it will repay its 6% bonds, also assumed in the Allied transaction, of which we own a little more than $15 million face amount purchased for similar purchase price of roughly $0.50 on the dollar.

The portfolio continues to experience positive developments post quarter end.

During second quarter, shareholders of West Australian Newspapers approved the purchase of Seven Media, the Australian television network that we have an investment in.

As a result, in April, our approximately $9 million mezzanine loan was repaid.

In addition, we received cash and freely tradable WAN shares in exchange for our equity investment.

We expect to realize value on this investment in excess of our initial cost.

Additionally, Birds Eye Iglo, the Permira-owned European frozen food group, has accessed the term loan market to refinance its mezzanine debt.

In May, we expect full repayment of our approximately $19 million of euro and pound sterling denominated Iglo mezzanine investments.

Redemptions like these will continue to drive NAV growth.

However, we do see the pace of redemptions in the portfolio slowing during the remaining part of Q2.

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

Thank you, Bruce.

As you can see, we've had a very strong start to 2011.

At quarter end, we had $340 million of available capital for new investments and continue to see a large pipeline of new opportunities, but we remain highly selective.

We'll continue to spike a lot of low and non-yielding assets, such as the $18 million current market value of our remaining NXP equity and the recently received WAN equity as the year progresses.

Deployment of our substantial available capital at low borrowing costs will fuel growth in net investment income.

It's just a matter of time before NII exceeds our current $0.60 per share dividend level.

We also believe that our 100% point portfolio mark at approximately 95% of par, together with the potential upside in our equity investments, offer significant NAV appreciation above our current NAV.

Our goal is to increase shareholder value as we focus on delivering on our strategic objectives.

Tomorrow, we'll be hosting an earnings call for the first month of operations of Solar Senior Capital or SUNS, which we've completed an IPO in early March.

Although only in operation a short period time, we've already found this to be additive to our origination capabilities at Solar as expanded the importance of Solar to the sponsor community.

Thank you for your time.

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

(Operator Instructions)

Your first question comes from the line of John Stilmar with SunTrust.

Please proceed.

Yes, thanks.

Good morning, gentlemen.

Good morning.

I wanted to follow up on two points that you brought up, the first is, is NII would see the dividend as a matter of time.

Can you -- I mean, I know it's very easy for us to kind of put into our models and put origination growth, but we certainly appreciate the discipline that you seemingly have taken.

What is the time period that you're kind of thinking, or at least, what should we be thinking under today's current environment of sort of pretty frothy liquidity for reaching that sort of threshold?

Or, how should we kind of think about the deployment of the liquidity you have?

Yes, and again, caveat this by it's hard to predict originations, but as Bruce alluded to, we think repayments will slow as we've seen kind of the churn already go through our portfolio.

So I think we believe, all things being equal, that we will cross that barrier sometime in the second half of this year.

And then --?

Fully -- and when you fully expect to see in Q2 continued sequential NOI growth over the $0.53 we just posted.

Perfect.

And then, with regards to the progress that you seemingly made with Solar Senior that you've alluded to, is there some actual specific example?

Or, is it more of just kind of a relative call volume that's nothing that -- or is this that you're alluding to, is there a specific example of (inaudible) --?

There is no specific example.

It's just the feedback we've gotten from our guys, who are actively calling on sponsors and the reception we've gotten, and the ability to kind of have a much more fulsome discussion about potential investments since we can now play anywhere in the capital structure.

I think just to add to that, John, what happens in the dialog now is the sponsors generally don't decide what their capital structure is until further along in the decision to make an acquisition.

And it enables us to come to the table earlier, because we can offer them senior as well as junior unit tranche et cetera, and so they can bring us in earlier and figure out the capital structure later and not worry about whether we actually have that product in our product offering.

Perfect.

Thank you, gentlemen.

Your next question comes from the line of Vernon Plack with BB&T Capital markets.

Please proceed.

Thanks very much.

Bruce, I know that you mentioned, someone mentioned the fact that -- one of you mentioned that you've hedged out your secured -- the $100 million secured loan.

Any thoughts on hedging your $355 million facility?

I think that as we have talked about in the past, we are constantly evaluating how to match our assets and liabilities.

We do have, as you know, in excess of $200 million of floating rate assets, which provides a natural hedge on -- meaningful piece of the revolver facility.

And we are also exploring various fixed rate alternatives on the liability side.

But I think the short story is it is something that we are evaluating.

Okay.

All right, great.

And, Bruce, I know you talked about - or rather, Mike, I know you talked about the -- a little bit just in terms of the pipeline, but wanted to get some additional thoughts just regarding the environment overall.

And I guess, how that manifests itself today in the terms and conditions that you are seeing say, versus 90 days ago?

I would say that what has changed from 90 days ago, because as you know, that's a relatively short period of time in the life of a deal.

But what has changed, Vernon, as we head in the -- beginning of Q1 coming out of a very strong Q4, I think broadly for the market was a fair amount of M&A activity that occurred that really tailed off in Q1.

And so the Q1 volume, I think, across the mid-market leveraged finance environment is really focused on refinancings, recapitalizations, and not as much driven by M&A activity, given the long lead times to consummate an M&A transaction.

I think as we look at it today, the pipeline is more heavily populated with M&A activity.

And I'm sure you -- that is consistent with what you'll hear from our peers as you head into Q2.

Okay, great.

Thank you very much.

Your next question comes from the line of Daniel Kim with JPMorgan.

Please proceed.

Hi, guys, it is [Rick].

Sorry, I had a little bit of trouble queuing in.

Just to follow up on the last question in terms of what the pipeline looks like, you guys have given some very specific events within the pipeline in terms of refinance activity and that makes sense, obviously you have a great deal more visibility one quarter out based on your conversations.

When you look at your own pipeline going forward, what's your sense -- are you starting to see the new origination, M&A activity starting to pick up as a percentage of what's in the pipeline?

Is that what gives you confidence that refinance activity is going to start to slow down?

It's not so much that refinance will slow down, it's just the M&A activity will be additive to the refinance activity, thereby just expand in the universe of deal opportunities.

Okay.

But when you're really looking at what the pipeline is today that mix is really -- has already started to shift?

Yes, if you look at the statistics, Q1 -- as opposed to the last couple of years, leaving aside the recession, Q1 you had about 76% of loan volume in the leverage marketplace was for refi and recap.

Historically, that's been closer to 50% with the other 50% being M&A related.

And I think that's consistent with what you are going to see into Q2, Q3 and consistent with our pipeline.

Okay, great.

That's very helpful.

Thank you.

Your next question comes from the line of [Eric Cohen] with Guggenheim Partners.

Please proceed.

Hi, guys.

How are you?

Good.

How are you?

Good.

I was wondering if you could walk us through the restructuring of the one non-accrual loan?

Sure.

As you may recall, we had just over $20 million subordinated debt investment in Grakon.

And had been -- we are just under 20% of the tranche.

And so, we are not the lead player there, but we had lead rights.

And so, we and the other two lenders were in negotiation with the company sponsor and management over the last six months, they had put the asset on non-accrual last summer, because they had been impacted by both the economic cycle as well as the truck cycle for new builds.

And what we were able to do at high level in connection with the restructuring was, reinstate our debt claim, plus all of the accrued interest that we did not receive last August and post August, and basically position the company sponsor so that they have some sharing of equity upside beyond recovery of our full debt claim and accrued interest.

So, we thought it was a very good outcome from our perspective.

We put in place what we thought was the prudent amount of debt from a cash, pay perspective, which is why you see that portion of the restructuring proceeds that we received valued in the mid-90s, because we think that is a pretty good asset and will accrete to par here as the company continues to perform.

And then, purposely, made some of that a PIK investment, so that we keep the cash burden on the company to be on the very conservative end as they continue to recover.

And they have a high-class problem right now that they are growing very strong and they require cash to invest in working capital to continue to help build out trucks for PACCAR and others.

So we feel very good about the investment; we have all along, as we've told you all, but I think that we really needed to get past the restructuring, so that we put in place what we thought is a more permanent capital structure.

Thank you.

Your next question comes from the line of Joel Houck with Wells Fargo.

Please proceed.

Thank you.

I had trouble queuing in, so if you've already addressed this.

I apologize.

I think in the last quarter call, you had talked about NAV going to $24.50 to $25 in the next few quarters and obviously we saw progress here in Q1.

Can you talk a little bit more about that, and maybe provide some color in terms of where you see the NAV upside potential with respect to maybe your equity portfolio versus the mezz?

I think we now believe, given kind of the movement we saw in NXP and now our kind of maybe revised expectations for equity investment in [Nuveen] as well as Grakon being restructured, I think we believe that our realized NAV is now north of $25 and we hopefully will realize that sometime in the next four quarters.

You said, four quarters, Michael?

Yes.

Okay.

Thank you very much.

Your next question comes from the line of Casey Alexander with Gilford Securities.

Please proceed.

Hi, good morning.

Good morning

Good morning.

I'm sure that there is a good answer for this and it's probably just my inexperience with the Company, but why carry $340 million in cash on a $400 million credit facility outstanding?

Why not pay down some of the credit facility?

This is something we do at the end of every quarter just for balance sheet management and then we pay it down the next day, so it doesn't cause any interest expense to the Company whatsoever.

What is the point of it?

It allows us to maximize flexibility investing on a proactive basis as BDC.

Okay.

All right.

Thank you.

Thank you.

(Operator Instructions)

At this time, there are no further questions.

I'll turn the call over to Michael Gross for final remarks.

Thank you all for participating today and for your important questions, and we look forward to talking to all of you, or most of you tomorrow morning at the same time on our SUNS earnings call.

Thank you.

Bye-bye.

Ladies and gentlemen, that concludes today's presentation.

Thank you all for your participation.

You may now disconnect.

Good day.