SLR Investment Corp (SLRC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2011 Solar Capital Limited earnings conference call.

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

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

We will conduct a question-and-answer session at the end of today's conference.

If at any time you require assistance, please press start zero and a coordinator will be happy to assist you.

As a reminder this call is being recorded.

I will now turn the call over to your host for today's conference Mr.

Michael Gross, Chairman and CEO.

Please proceed sir.

Thank you and good morning.

Welcome to Solar Capital Limited earnings call for the fiscal year ended December 31, 2011.

I'm 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 forward-looking statements.

Of course.

Thanks, Michael.

Before we begin let me start-off by covering the webcast and forward-looking statements.

I would like to remind everybody that today's call and webcast are being recorded.

Please note that they are the property of Solar Capital Limited and that any unauthorized broadcasts 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 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.

Thanks very much Nick.

2011 was a strong year for Solar Capital.

Despite macroeconomic and political headwind that impacted the capital markets throughout the year we are pleased with our performance across a number of important dimensions.

Following a low point reach at the end of the third quarter investor appetite for high yield and leverage loans improved over the course of the fourth quarter, which just had a positive impact on the evaluation of our private and middle market investments.

Specifically, our net asset value per share of $22.02 at year end represented a 4% increase from September 30, due to the improvement in market conditions during the fourth quarter.

The fair value weighted average mark on our credit portfolio was approximately 94% at December 31 compared to approximately 92% at the end of the third quarter.

As mentioned in our third quarter earnings call, our evaluation process takes into account at a single point in time the trading levels of the more liquid securities of comparable companies to those we own in our portfolio.

Spreads at September 30, were near at the widest levels of the year.

Since year end spreads at liquid markets have continued to tightening as capital has flowed into high yield and bank debt funds.

We continue to believe realizable value of our portfolio is north of $24 per share.

Market volatility and economic uncertainties impacted M&A transactions resulting in lower volume of new issuance middle market leverage loans in the fourth quarter compared to the prior period.

We have however seen a pickup in deal flow in the first quarter.

Supply and capital to finance middle market transactions continue to be constrained.

We expect more refinancing opportunities given the strength and leverage capital on credit markets.

In addition, financial performance and fundamentals of US middle market companies are stable to improving and are sponsor cumulatively continues to find opportunities for value creation through new buy outs or add on acquisitions, for which they need long-term financing partners.

The improving US economic climate couple with the continued limited financing options for the middle market companies favored our business model and creates compelling investment opportunities for Solar Capital in 2012 and future.

Over the course of the last year we strengthening both our investment portfolio and our corporate capital structure.

During 2011 we originated approximately $400 million new investments redemption sales for the year totaled over $330 million.

The high level repayments has resulted in a portfolio that is now comprised of over 70% of investments made for 2008 credit crisis.

Today over 99% of our debt portfolio is performing.

The performance of our portfolio helped us make enhancement of our capital structure as well.

We increased our credit facility commitments by $50 million bringing our total capacity to $540 million from 11 different lenders.

Also during the year we received investment grade credit ratings from both Fitch and Standard & Poor's.

These ratings are critical in developing long-term strategic relationship with a broader lending community and creating options for later funding maturities.

Post year end we announced reduction in the rates of LIBOR plus 275 basis points from LIBOR plus 300 basis points on the $100 million credit facility, which matures in December 2015.

As of yearend, in total our uninvested capital available to us totaled approximately $300 million.

Finally our Board of Directors declared a quarterly dividend of $0.60 per share, which is fully covered by our tax or earnings.

The first quarter 2012 dividend we paid on April 3, 2012 to hold it at record at March 20, 2012.

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

Thanks Michael.

Solar Capital's net asset value or NAV at year end was $805.9 million or $22.02 per share, up 4% from $21.20 per share at September 30.

Our investment portfolio had a fair market value of approximately $1.05 billion on December 31, the portfolio value increase for the quarter resulted primarily from an increase in its fair value of investments partially offset by redemption slightly higher than origination.

For 2011, growth investment income totaled $138.9 million an 11% increase over $124.6 million in 2010 due to a larger average investment portfolio in 2011.

For the fourth quarter gross investment income was $36 million versus $35.3 million in the third quarter of 2011.

Net investment income for 2011 was $81.9 million or $2.25 per share versus $69.2 million in 2010 or $2.08 per share.

This represent a 18% increase year-over-year driven primarily by greater interest income on a larger investment portfolio and lower interest expense due to lower average borrowing costs.

For the fourth quarter, net investment income was $20.7 million or $0.57 per share consistent with our third quarter results.

Net realized and unrealized gains totaled $31.2 million for the fourth quarter driven by an increase in the fair value of our portfolio during the period due to improved market trends and realizations of our prior period marks.

For 2011, net realized and unrealized losses totaled $20.6 million, which was primarily attributable to a decrease in the fair value of our portfolio assets during the period due to market technical.

As of December 31, 2011 investable capital was in excess of $1.3 billion with approximately $300 million available for new investments.

As of yearend 99.4% of our debt portfolio is performing.

During the quarter we paid one asset direct price, which represents less than 1% of the portfolio at fair value on non-accrual.

The weighted average investment risk rating of our total portfolio has remained steady at approximately 2 measured at fair market value at the end of the fourth quarter based on our one to four risk rating skill with one representing the least amount of risk.

At this time I would like to 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 at year end.

The fair market value of the investment portfolio is just in excess of $1 billion comprised approximately 40% senior secured assets, 52% mezzanine and 8% in equity investments.

The market environment allowed us to proactively shift the portfolio higher up the cap structure towards senior secured assets and since 2010.

However, we continued to be able to meet our yield and risk return objectives.

The fair value weighted average yield on the income producing investments at 12/31 was approximately 14.2%.

This was comprised of investments in 40 different companies across 24 industries.

During Q4, we invested over $75 million in two new portfolio companies and two existing companies bringing 2,000 total originations to just under $400 million.

Throughout the year of viable market conditions we maintained our disciple and we are highly selective in our portfolio additions.

In the fourth quarter, new investments carried a weighted average yield of just under 13% and we are into track the leverage ratios.

Let me take a moment to highlight our activity for Q4.

We sourced a $36 million mezzanine investment to support every capital's acquisition of CIVT, which is a leading global provider of expedited travel documenting processing services.

This asset carries an all in yield of just over 14%.

We also invested $34 million in a first lean Unitron facility for grocery outlet, which is a leading value grocery retailer owner by Birtcher Partners with over 170 locations predominantly on the West Coast.

This loan provides first dollar risk in an attractive risk adjusted yield in excess of 11%.

Additionally, we increased our investment in Good Sam Enterprise to a secondary market purchased at a price below par from all in yield of approximately 14%.

Given our long history with this credit and comfort with the company's performance we were able to take advantage of market dislocation this past fall to add to our position at an attractive price.

This is a great example of how we can leverage our extensive prior due diligence in all driven asset and management team in order to make opportunistic investments.

During Q4, we also received approximately $93 million of repayments all at par or above prior quarters marks.

Seven Media, Fleetpride and Tri-star all were investments made during the 2006 2007 period they were already in full.

At their top evaluations during our investment in Seven Media carried market 74.5, Fleetpride $0.84 and Tri-star $0.50.

The recent repayment have far up or above for each of these assets speaks to both our conservative evaluation methodology as well as the benefit of our long-term patient investment approach.

Now, I would like to touch on a couple of Q1 recent developments.

DS Waters our largest investment is currently in the syndicated loan market to refinance its maturing capital structure.

In order to facilitate the refinancing we and other note holders have agreed to exchange our FIC notes into participating preferred equity.

The resulting security will have a dividend rate and liquidation preference consistent with our existing notes.

In addition our group will receive a majority of the company's common equity, control of the board and we will have control over significant corporate actions going forward including refinance and exit alternatives.

This transaction is expected to close in Q1.

The proposed recapitalization provides a constructive solution to an upcoming maturity and is supported by both the current sponsor and management team who collectively remains the largest shareholder.

The transaction will provide the company in long-term flexible capital structure and give us the control needed to maximize our value and ultimately monetize this investment.

Recently, our $27 million investment in AMC Entertainment was redeemed at par, this is an investment we had made back in 2007 and it carried a coupon of L plus 500 but did not have a LIBOR floor.

This security had been marked at [80] as of September 30.

We will now be able to recycle the proceeds of this asset entire yielding opportunities.

And finally our $22 million second lean investment in Randy's was redeemed above par in conjunction with the Company's recent IDR.

The supply and demand and balance capital up on mid market transaction has resulted in continued rational behavior on the part of lenders.

We remain focused on leveraging our platform, to source and structure transactions that meet our fundamental investment criteria on both an absolute and relative risk adjusted basis.

We will continue to be highly selective as we move forward on our portfolio originations.

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

Thank you, Bruce.

As we move into the first quarter of 2012 we have witnessed the higher level of activity in the middle market sponsor community.

Significant amount of uninvested private equity capital raid in recent years continue to provide responsive of ample capital to fund new and existing platform.

The less active IPO market is increasing appeal of exiting investment through a sales from another sponsor, which creates financing opportunities for us.

We are also seeing an uptick in request for financing add on acquisitions for sponsors existing portfolio companies.

Additionally, the refinancing market has improved for those companies with healthy fundamentals and we expect significant continued refinancing in light of the substantial maturity wall for existing leverage issuers.

As long time veterans in leverage class industry we could make predictions about the macroeconomic environment and market technical 2012 but that is not our business model.

We do not rule and growth scenario for investments we invest in recession resistant stable companies that generate strong free cash flow and reduce leverage throughout and economic cycle.

In conclusion, we continue to believe the realizable value of the portfolio exceeds $24 per share.

We continue to work towards exiting our equity investments at or above recent marks and recycling lower yielding credit assets like Roundy's and AMC into higher yielding investments.

In 2012 we will continue to adhere to restrict underwriting standards as we invest $300 million of available capital.

At 11.00 this morning we will be hosting a earnings call for the second full quarter of operations for Solar Senior Capital or SUNS.

Our ability to provide senior secured financing through this vehicle enhances our origination team's ability to meet our client's capital needs.

We are seeing benefits of this proposition in Solar Capital deal.

Thank you for your time.

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

(Operator Instructions)

Your first question comes from the line of Jonathan Bock with Wells Fargo.

Please proceed.

Good morning guys and thank you for taking my questions.

The first question on leverage so really looking at the financials over the past two years we see that net leverage really hasn't exceeded 0.5 times now today it sits at around 0.2 could you give us some color on why you remain under levered related to peers despite what seems to be a good lending environment as well as the meaningful debt capacity you guys have on your balance sheet and what you expect this to change going forward.

Yeah, I think you know if you look at this past year we originated about $400 million of new investments but we repaid on $330 million.

Frankly, we think meanings repay is a good thing although it limits growth if you will but all our repayments have been at par and above and it allowed us to generate more taxable earnings than dividends we've paid out today.

If we look forward I think we are comfortable with about $400 million investment page for the year that will be very lumpy as we've always said.

We believe that given that the portfolio has turned so much over the last two years and we are now sitting at a portfolio who carries advantage of much more recent years that our repayments will not be as higher than it were in prior years.

And you will see us eat into our credit facility and move towards our target leverage of 0.6 to 0.65 times.

With that said we are not going to stress to do that, we truly at our principle at our business here we own 6% of the common equity ourselves we are one of the largest shareholders and so to the extent we don't find the right investments to allow us to mark that level we won't.

Okay, okay great thanks for the color.

Now given the desiceable debt capacity could you tell us how you are viewing the need for additional equity capital in the current environment?

(Inaudible) that could be used up and as quickly as two quarters or it can take up the full year.

It's very hard to predict that, it's very hard to predict when you can and are able to raise equity.

That said we are always been very disciplined with rates we've only done one follow on offering for the company since we've been public.

But we will have to watch market conditions and price and see where and if it makes sense to issue more equity.

Okay and just two more questions looking into the $35 million term note believed at a cost of 8% is there a reason this note remains outstanding despite the capacity you have on the over cost line?

Yeah, the term note actually carries identical terms to revolving credit facility so it's [325] over LIBOR.

Okay, thanks for that alright.

Then that answers it now last one.

DS Waters I appreciate your comments on the restructuring now Michael could you provide a little bit more color on how you plan to realize value for shareholders following the restructuring, I understand that the new capital structure is likely going to make this fail or liquidation of this asset a little bit more difficult in the current environment.

Actually, I disagree with that I will tell you why what happened with DS Waters the company is literally in the market today to refinance its capital structure from one that's maturing next few months to a capital that's maturing in five years.

As part of that transaction, we and the other holders of the whole notes are taking back the exact same principle amount back with a more of new preferred stock, which carries similar dividend rate as the interest rate on the existing security.

But what we are getting with that is we are getting control of the company so I suppose to having a third party control the refinance our investment or liquidity of the asset we now are in the driver seat to control it.

So we can execute a refinancing we can execute a sale and get us liquidity much quicker than were we in the hands of a private equity sponsor.

Okay guys thank you for your answers I appreciate it.

Pleasure, thank you.

Your next question comes from the line of Arren Cyganovich with Evercore.

Please proceed.

Thank you.

Just kind of touching on the expectations of increased refinance activity.

I know you mentioned that you expect that to slow given the higher net of churn but we are seeing a little bit of an additional trend this quarter.

Maybe you should broadly about if your expectations for your ability to grow the portfolio over this year.

I know you indicated to the M&A environment picked up or even talk about the decreased activity of private equity sponsors?

Sure, just to touch on the repayment side.

I think that look the activity that we experienced across three assets in Q4 were all 2006, 2000 vintage assets.

So you know from our perspective to have five years of duration on this asset class is typically averaged three years and to get paid out at par or better it was fine, it's a great outcome it's a natural evolution of the investment process.

And the two assets we highlighted have been repaid since year end are both low yielding assets so this is an opportunity for us to recycle into higher yield assets.

And I think schematically you will see us focus on trying to do more of that whether it's recycling equity in yielding assets or low yielding credit assets into high yielding assets.

So there is a focus on trying to increase our net investment income by increasing the yields on those lower yielding assets or non-yielding assets.

I think on the origination side schematically it is common to see a slow start to the year in January but the increased stability that people are feeling out there not both just in the US economy but the reaction from the credit markets both high yield and loan, you are seeing people feel much more comfortable going out and opportunistically refinance their capital structure.

So that volume is building for us and others as you know there is a huge wall of maturities an existing levered capital structures coming up as we approach 2014 and people generally try to get ahead of that.

So I think that activity will pick up as it did sort of in Q2 and Q3 of 2011 and then the M&A side to your point is definitely picking up there is obviously a lead time given the long gestation period in due diligence that we and the private equity sponsors undertake.

But I think we feel like the market will be heading on both sides as we head into Q2 there.

Great and also you talk about you mentioned that the recycling has provided some taxable earnings it's not included in it and do you have any estimate or amount of undistributed taxable earnings that you have at year end?

In the tax on the 10-K you will see the number is approximately $22 million.

Okay, thank you very much.

Thank you.

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

Please proceed.

Thank you.

Good morning gentlemen.

Hey John.

How are you doing?

With regards to current market conditions you talked a little bit about liquidity coming back in space and I was wondering if you could talk about pricing as well as terms.

Not just leverage but more importantly covenant so as we see from things like DS Waters and some of the activities that you've taken to maximize shareholder value what kind of covenants are in place today that may not have been there kind of in the past, just wondering kind of where we are at least in terms of covenant protection or structural control that you can have over some of your investments today related to the past.

Sure, I would say one of the nice things about the mid market John is that terms don't change dramatically in the near term.

They have been stable over time as pricings in the mid market because you don't have the same technical drivers that you see in the large liquid markets where in doughtier times people will strip away covenants and use pick toggles and covenant like features.

In mid market we generally always have a couple of maintenance financial covenants rather than incurrence always that on the junior capital side, a bit behind your first lean covenant so it's always a full suite.

And so we've really haven't seen any movement in terms of risks or structural protections in the mid market.

Recently you are really over the last couple of years.

Great and then just to make sure I kind of read between the lines here.

If you guys have gotten some exits AMC and some others this quarter and we've seen spreads continue to tighten and we should certainly be looking for assuming everything continues to carry through at current levels in the market.

NAV should be higher next quarter than it is this quarter assuming all that's equal.

Yes, that's a fair statement.

Okay, great.

Thank you, guys.

Your next question comes from the line of Troy Ward with Stifel Nicolaus.

Please proceed.

Great, thank you.

Following up real quick on one of Jon Bock's questions, on DS Waters and your ability to better drive an exit even at DS.

Can you tell us what the proposed prepayment penalties, premiums are associated with the new debt structure what's being proposed anyway.

The new debt structure on the first lean has a nominal prepayment fee that winds down still movement I think it's [103] [101] par so nothing significantly.

And then secondly it has a non-call one and then also a couple of points of prepayment.

It's a pretty prepayment premium.

Yes.

And then you talked about your new security basically it sounded like your old security is kind of the same rates are in place I'm assuming that means it's the new security that preferred equity will be pick instrument.

Yes.

Consists some of the odd one yes.

Right and is there any difference when you think about a pick instrument moving from a debt instrument to a equity instrument in your desire ability to accrue the pick on that instrument.

It's the same path where we think it's realizable value or no different.

Okay and then the last question you outlined a couple of kind of big prepayments in the current quarter.

Can you provide some color on the originations quarter-to-date?

No, we typically don't do that we will have to wait for the next quarter.

We just mentioned that the prepayments that they are out in the public market.

All right, understood.

Thanks guys.

Your next question comes from the line of Rick Shane with JP Morgan.

Please proceed.

Thanks guys.

Just a couple of quick questions following up on DS Waters.

When you look at the capital structure for DS Waters going forward is the debt service going to be higher or lower is this transaction going to basically enhance or reduce the cash flows at Waters?

There is no amortization at all in this structure it's a five year but there has only been amortization but not significant.

The interest is higher the company had benefited in the last several years by the fact that miscalculations put in place five years ago at the peak of the credit markets and so you are looking at a lot of change in credit facility so that's been re-priced to reflect current markets.

Got it and I guess given that how does that reconcile with keeping the value of your, if it sounds like you are going to keep the value of your preferred based on what you said in the K about no material impact pretty close to the current fair value.

Wouldn't look reduced cash flows potentially impact the value of your instrument.

It would impact more the value of the common equity, which we had zero out prior to this transaction and which our investor will have a majority of post transaction.

So if there is a real change in value would be the common equity not going to be preferred.

Okay and then the last question I guess I want to make sure I understand this I think it probably has to do with the voting rights of the preferred versus the common.

You've made the comment that the existing sponsors and management would be the largest holders or largest equity holders but you would have essentially majority voting rights.

Can you just make sure; can you help me understand that point?

They are the largest single holder yet our group will have majority in control the vote.

Okay, got it.

Great.

Thank you, guys.

Thank you.

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

Please proceed.

Good morning most of my questions have been answered but I do have one in quarters past you have drawn down the full value of the credit line prior that a day prior to the end of the quarter and then repaid it.

Go ahead I'm sorry.

And you didn't it looks like you didn't do it this quarter I'm just curious why?

Yeah, we decided the marginal benefit we are getting for doing it and quite as flexibility was worth the confusion it caused for all of our investors.

And so we are not going to continue that policy.

Okay, well I appreciate that because it certainly confused me so I appreciate.

Thank you.

Also I think as you recall in prior quarters we were even less levered we begun to go into the credit facility and deployed the leverage.

So it's less necessary to demonstrate what our investable capital base is because you can just see that by looking at the balance sheet.

Yeah, thank you.

(Operator Instructions)

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

Please proceed.

Thanks, first of all what do you think in a turn you mentioned rotating out of possible rotating out of lower yielding investments we saw that this quarter with AMC and just curious sort of big picture what are you thinking in terms of is it not that there is a set cost, which I wouldn't expect there to be with saying again that's yielding under what percent is a candidate for at least it's higher up in terms of your priority in terms of maybe exiting the investment and reinvesting the proceeds is that like a 10% number and a 11% number.

Exactly, I think 10% is a fair target range.

Right.

You know and that's expected yield so that you might see something that's got to stated coupon a little bit below but has called protection and we are going to get some prepayments that will drive us north to that.

And then that there are things obviously yield big or nothing on the equity side, which opportunities looked at NXP for example is up about 50% since our year end mark so it's something that we are actually evaluating.

Okay, that's great.

Thank you.

There are no further questions at this time I would like to go ahead and turn the call back over to Mr.

Michael Gross for closing remarks.

Thank you for all for your attention and your continued support.

I appreciate your all your great questions.

Have a great day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.