SLR Investment Corp (SLRC) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Solar Capital Ltd.

earnings conference call.

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Michael Gross, Chairman and CEO.

Please proceed, sir.

Thank you, and good morning.

Welcome to Solar Capital Ltd.'s earnings call for the quarter ended March 31, 2014.

I'm joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka, our Chief Financial Officer.

Rich, 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 broadcasts in any form are strictly prohibited.

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

Audio replays of this call will be made available later today, as disclosed in our press release.

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 our future performance or financial condition.

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

Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC.

Solar Capital Ltd.

undertakes no duty to update any forward-looking statements 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, Rich.

In spite of a number of geopolitical developments and macroeconomic events, US and global credit remarks remain awash with excess liquidity.

The combination of historically low interest rates and investors' seemingly insatiable demand for yield products continues to result in tight spreads, higher leverage levels, and covenant protections that favor borrowers.

Against this backdrop, the large, syndicated leveraged loan market has continued its record pace, with first-quarter 2014 volume up over 25% over the fourth-quarter 2013.

According to recent first-quarter data from Thomson Reuters, large corporate LBO leverage levels have increased to 6.4 times debt to EBITDA, while middle-market LBO leverage levels are more than a full turn less, at just over 5 times debt to EBITDA.

There continues to be an attractive opportunity to capture an illiquidity premium in the underwriting middle-market loans.

In the current environment of elevated risk and compromised structures, Solar Capital continued to be disciplined and highly selective with its new investments.

Over the last five quarters, we have invested on average $100 million per quarter, a level that is consistent with our historical pace of originations.

However, we have continued to experience an elevated amount of repayments, as loans have repaid early.

We have not felt compelled to accelerate the pace of our originations, preferring instead to be patient and to stick to our underwriting disciplines.

We have purposely managed our portfolio to a higher percentage of senior secured and floating-rate investments in anticipation of expected changes to market conditions.

At the current stage of this credit cycle, and with the possibility of a rising rate environment as the Fed continues to taper, we believe the portfolio is defensively positioned to generate attractive risk-adjusted returns; and, importantly, it maintains the flexibility to take advantage of credit market dislocations, should they occur.

During the first quarter, we invested approximately $145 million across 10 portfolio companies.

Repayments for the quarter totaled $208 million, including $60 million for the previously announced repayment of our mezzanine positions at Earthbound Farms.

During the first quarter, the percent of our portfolio invested in senior secured and Crystal Financial, whose portfolio consists entirely of senior secured loans, rose from 69% to 76.4%.

And the floating-rate portion of our income-producing portfolio rose from 64% to 70%.

At March 31, 2014, we believe Solar Capital's portfolio had a lower risk profile and was more diversified than at any time in our history.

Solar Capital's net asset value at March 31 was $22.43 per share, down slightly from NAV at December 31, 2013.

And our net investment income for the quarter was $0.40 per share.

During the three months ended March 31, 2014, we repurchased $19.6 million of our common stock at an average price of approximately $22 per share, representing a 2% discount to the NAV per share at March 31, 2014.

Subsequent to the end of the quarter, we have purchased an additional $15.6 million of our common stock at an average price of approximately $22.01 per share.

The repurchase program continues to provide flexibility to generate incremental net investment income per share, and is a complementary tool in deploying our available capital.

At the end of the quarter, we had substantial unused credit capacity, subject to borrowing base limitations, and cash available for new investments.

We do not anticipate raising additional equity capital until we are close to our 0.7 times debt to equity leverage target.

We remain focused on increasing the efficiency of our capital structure by utilizing our available leverage to grow and further diversify our portfolio through prudent growth.

Our pipeline is strong, with a good mix of traditional senior secured floating-rate investment opportunities.

In addition, we continue to make progress on our efforts to develop other strategic initiatives to expand and diversify our earnings stream while remaining true to our middle-market lending mandate.

Finally, our Board of Directors declared a quarterly distribution of $0.40 per share, which we paid on July 1, 2014, to shareholders of record as of June 19, 2014.

At this time, I'll turn the call back over to our Chief Financial Officer, Rich Peteka, to take you through some of our financial highlights.

Thanks, Michael.

Solar Capital Ltd.'s net asset value at March 31, 2014, was $972.3 million, or $22.43 per share, compared to $995.6 million, or $22.50 per share, at December 31, 2013.

Our investment portfolio at March 31 had a fair market value of approximately $1.03 billion as compared to approximately $1.09 billion at December 31.

At March 31, 2014, we had investments across 43 portfolio companies in 28 industries versus 40 portfolio companies in 26 industries at December 31.

The weighted average yield on our income-producing portfolio was 10.9%, measured at fair value.

This compares to 11.3% at year-end 2013.

For the three months ended March 31, gross investment income totaled $32.6 million versus $35.4 million for the three months ended December 31, 2013.

Expenses totaled $15.2 million for the three months ended March 31, compared to $16.8 million for the three months ended December 31.

Overall, the Company's net investment income for the quarter ended March 31, 2014, totaled $17.4 million or $0.40 per average share, versus $18.5 million or $0.42 per average share for the quarter ended December 31, 2013.

Net realized and unrealized losses for Q1 2014 totaled $3.7 million versus gains of $10.4 million for Q4 2013.

For the three months ended March 31, the Company had a net increase in net assets resulting from operations of $13.8 million or $0.31 per average share.

For the three months ended December 31, 2013, the net increase in net assets resulting from operations was $28.9 million or $0.65 per average share.

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

Thank you, Rich.

As Michael highlighted, we believe our Q1 activity has further diversified and enhanced the composition of our portfolio.

We are pleased with the financial performance of our portfolio companies, and their management teams continue to see signs of higher levels of business activity, and are cautiously optimistic about their individual growth prospects.

At March 31, the weighted average yield on our income-producing investment portfolio was 10.9%.

The weighted average investment risk weighting on our portfolio remained at approximately 2 when measured at fair market value at 3/31, based upon our 1 to 4 risk rating scale, with 1 representing the least amount of risk.

At the end of the first quarter, our portfolio consisted of 43 companies operating in 28 industries.

Measured at fair value, our portfolio was comprised of 47% senior secured loans; just over 29% in Crystal Financial; 17.5% in subordinated debt; and 6% in preferred equity, common equity, and warrants, excluding our investment in Crystal's portfolio.

When we include Crystal Financial, whose portfolio consists entirely of senior secured loans, approximately 76% of the Solar portfolio exposure is across secured investments.

Additionally, at March 31, just under 70% of our income-producing investment portfolio is invested in floating-rate securities, when measured at fair value.

For the quarter, we originated approximately $145 million of new investments across 10 portfolio companies.

All of these loans were senior secured loans, and all were based on floating-rate interest rate.

Investments sold and prepaid during the quarter totaled approximately $208 million.

Before I go through our Q1 portfolio activity, I'd like to spend a moment on some recent portfolio developments.

Post-quarter-end, TIAA-CREF announced the acquisition of Nuveen for just over $6.25 billion, with expectations that the transaction will close in the fourth quarter of 2014.

Solar Capital first invested in Nuveen as part of Madison Dearborn's buyout in 2007.

The original cost of our equity investment was $30 million.

In addition, Solar bought a small, secondary equity position at a discount to cost, to bring the total position to just under $31 million of cost.

At the trough of our credit prices back in 2008, the Nuveen equity position was held at a $0.15 mark in our portfolio.

With respect to recovery, we currently believe that it will be well north of our 3/31 mark of $0.55 of cost.

If we were fortunate enough to experience a full recovery, we would add approximately $0.32 a share to our NAV.

We believe the outcome is positive for Solar on both a recovery basis, as well as creating the ability to reinvest these proceeds from a non-yielding asset into a cash-yielding investment.

The long investment horizon afforded by our permanent capital enabled us to be patient with this investment.

Secondarily, at March 31, Quantum Foods was under contract to be sold to a strategic buyer at a price that exceeded our cost on the investment.

Subsequent to the quarter, the strategic buyer defaulted on its purchase contract.

The Company was encouraged to pursue liquidation, as well as its remedies against the defaulted buyer.

At March 31, the aggregate cost of our investment in Quantum, between both Solar Capital and Crystal Financial, was just over $44 million.

While we are disappointed with the potential for impairment on this investment, the benefit of investing on a senior secured basis is that we anticipate our recovery, inclusive of interest and fees, to be between $0.90 and par.

At this time, it is not possible to quantify with precision the impact of these two subsequent quarter-end events.

However, on a net basis, we believe the ultimate proceeds from both the sale of Nuveen and the recovery on our investment in Quantum will not have a material effect on Solar's net asset value per share.

Finally, I'd like to give a quick update on Crystal Financial.

As a reminder, Crystal is a commercial finance company that provides asset-based and other secured financing solutions to midmarket companies.

At March 31, Crystal had $442 million of funded senior secured loans across 25 issuers, with an average loan balance of $17 million.

All of the commitments from Crystal Financial are floating-rate, senior secured loans with a weighted average yield of 12.3%, similar to the yield at year-end.

At the end of Q1, total debt on the Crystal portfolio was approximately $171 million, for a debt to invested equity ratio of 0.62 times.

At 3/31, Crystal had $65 million of available capital, subject to borrowing base limitations, under its credit facility.

For the first quarter, our investment in Crystal paid Solar a cash dividend of $7.8 million, which is the equivalent of an 11.3% annualized cash-on-cash yield.

In addition, Crystal Financial was able to increase their revolving credit facility by $25 million, to aggregate $300 million during Q1.

I will now highlight some of our first-quarter investments.

We funded a $19 million investment in the second lien term loan of Ikaria in support of Madison Dearborn's acquisition of a majority stake in this leading critical care company, and the only significant provider of nitrous oxide therapy for patients with acute respiratory conditions.

The all-in targeted yield on this investment is 9%.

In addition, Solar funded a $25 million investment in the second lien term loan offering by Bishop Lifting Products to support an add-on acquisition of Delta Rigging & Tools by AEA Investments.

Pro forma for the acquisition, Bishop will be the market leader in the highly fragmented wire rope, rigging, and lifting distribution segment.

The all-on yield in this investment is targeted to exceed 9.25%.

We also funded a $21 million investment in the second lien term loan offering by Aegis toxicology services in support of ABRY Partners' purchase of the company.

Aegis is a leading player in the fragmented pain medication monitoring and specialty labs services segment.

Our all-in yield here approaches 10%.

During the quarter, we invested $10 million in the new second lien term loan of Asurion in conjunction with the company's refinancing in which Solar Capital's 2012 investment of $12 million in Asurion's Holdco loan was repaid.

You may recall that Solar was an original investor in Madison Dearborn's acquisition of the company back in 2007.

Across the Solar Capital and Solar Senior Capital platforms, we had been redeemed on, or sold, approximately $135 million at a weighted average sale price of 101.

Our experience with Asurion is a great example of our ability to leverage our knowledge and expertise with a familiar issuer across our platforms to achieve investment duration in a highly attractive credits.

In addition, we funded a $10 million investment in the second lien term loan for LANDesk in support of Thoma Bravo's recapitalization of the company.

Solar Senior Capital had originally invested in LANDesk back in early 2012 in support of the company's add-on acquisition.

LANDesk provides software tools that enable IT departments to manage and secure network devices, ranging from PCs to mobile services.

The all-in yield on this investment approaches 9%.

I will now highlight some of our Q1 repayments.

As Michael mentioned, Solar Capital was repaid on its approximately $60 million investment in the mezzanine notes of Earthbound Farms, as part of the sale of the company to WhiteWave Foods.

Solar first invested in Earthbound, the largest producer and marketer of organic salads in North America, back in 2009, as part of HM Capital's buyout of the company.

A follow-on investment was made in December 2010 in support of a recapitalization of the company.

Solar was paid a premium to par in Q1, resulting in IRR at just over 17%, and a 1.6 multiple on invested capital.

In addition, Solar's $25 million investment in the second lien term loan of TriNet was repaid at a premium to par, as a result of proceeds the company received from its recently completed IPO.

Our investment generated an IRR exceeding 17%.

And, finally, we were repaid a premium to par on our $25 million position in SMG's second lien term loan as part of a recapitalization transaction.

As a reminder, SMG is the largest venue management company, providing management services for public assembly facilities.

Solar made this investment in June 2012, and generated an IRR in excess of 12%.

Based upon our current pipeline, we continue to see opportunities that would allow us to invest at our historic average quarterly pace.

Now, I will turn the call back to Michael.

Thank you, Bruce.

In conclusion, I would like to reiterate that we have always run our business with a long-term perspective, and as shareholders.

We believe that adhering to this philosophy is even more important during periods of frothy credit market conditions like we've experienced over the last few years.

This philosophy translates into being patient and highly selective with our investment decisions.

Our permanent capital and investment horizon allows us to be an attractive and a reliable provider of capital to sponsors and entrepreneurs, and also enables us to be prudent during periods of tight spreads and excessive risk.

It simply means we have to exercise continued patience in sourcing opportunities that meet our underwriting criteria.

We take our investment management responsibility very seriously; and with our over 5% ownership, we are well aligned with our fellow shareholders.

We are continuing to focus our origination efforts on finding higher quality investments that we expect to protect our net asset value, rather than lowering our credit standards to achieve growth that may not benefit shareholders in the long run.

If the current lending environment persists, we believe our distribution rate is at a level that will allow us to invest selectively and continue to generate sufficient net investment income to cover our dividends.

Portfolio activity during the first quarter 2014, along with announced and realized exits from our non-income-producing equity investments, further enhances the composition of our portfolio.

We have purposively and proactively managed the portfolio into a predominantly higher percentage of senior secured and floating-rate assets, and believe it's appropriately and defensively positioned.

We are actively pursuing growth initiatives and strategic partnerships, including third-party capital that would allow us to expand the range of investment solutions, including unitranche structures that we can provide to issuers.

In addition, we continue to evaluate niche investment opportunities with differentiated income streams that we believe can further diversify our portfolio and lower the overall correlation to traditional, sponsor-backed, cash flow enterprise, value-based lending.

In the first quarter, we added two seasoned professionals whose incremental networks of relationships are already enhancing our sourcing capabilities and expanding our investment opportunities.

We remain focused on utilizing our available capital to build a larger and more diversified portfolio that can protect capital and generate attractive risk-adjusted returns for our shareholders.

At 11 o'clock this morning, we will be hosting an earnings call for the first-quarter 2014 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 clients' capital needs.

We continue to see benefits of this value proposition in Solar Capital's deal flow.

Thank you all for your time.

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

(Operator Instructions).

Troy Ward, KBW.

Bruce and Michael, can you speak to the yields on new assets?

And Bruce, I know you said you believe you can continue to go at the historical average pace, volume-wise, on originations, but can you speak to where the yields are?

I know, this quarter, it was a little bit south of 9%, based on what we saw as just the stated coupon.

I know it's slightly higher than that, based on expected fees, maybe.

But how do you feel the yields well hold in there, going forward on the portfolio?

Sure.

I think your question is a good one.

The yields, on a going-in basis, have been between 9% and 10% when you look at the upfront fees, to your comment.

But I think it's important to note -- good news, bad news -- as you went through and heard some of our repayments, many of these were 2012, 2013 investments that we were underwriting, say, at 10%, 10.5%, whereas you heard me comment we were earning anywhere from 12% to 17%.

Good news, higher IRRs; bad news, short duration that accelerated the amortization of the upfront fees; and, in some cases, we had a little bit of prepayment fees.

So the yields, actually, because of the churn, are exceeding our expectations.

We're underwriting to 9.5%, 10%, and realizing low- to mid-teens.

But I think that as we look at the environment this quarter and looking into the summer, it feels as if the compression that we have seen consistently over the last 18, 24 months has abated, and that this feels like this is the level that we continue to invest at -- that 9% to 10% yield to maturity; again, with the caveat that the duration short of those yields will be heightened.

Okay.

And then one of the comments you had made about talking about exploring diversified income streams, obviously one of the things we've seen in the BDC sector is a bolt-on fund, a senior loan fund -- we call it the SSLP in some -- and other BDCs are doing something similar.

But how do you look at the availability for you to do something like that inside of Solar here, because you have Solar Senior already?

And then a follow-on to that is how you view the expense construct at Solar Capital as you move further into senior and floating-rate?

Is 2 and 20 the right cost structure for your new asset focus of where you about have to be focused in this market?

Yes, with regard to unitranche and Solar Senior versus Solar, the unitranche asset class tends to be much larger facilities, $100 million to $200 million.

And so for Solar, on its own balance sheet, we would not want to be anywhere near that large from a diversification perspective.

So it would make sense that if we wanted to pursue the unitranche market aggressively to bring in outside money alongside of us, and also to co-invest alongside SUNS, there'd be more than enough to go around.

So that's something we are actively pursuing.

And I think to add to that, it's important to note, as you just asked on the yields for Solar -- when we talk in a half hour on SUNS, you'll hear that the yields there are probably closer to 6% than this 10% area at Solar.

And obviously that's a good indicator of the underlying risks.

So we believe that the spread senior unitranche second lien type assets that we are investing more prominently over at Solar clearly carry a higher level of risk than your traditional first lien big market bank debt over at SUNS.

Not to say we won't do little bit of unitranche at Solar -- at SUNS, I'm sorry -- but it's a predominantly, as you know, lower-risk, lower-return, lower-volatility, traditional, midmarket bank debt portfolio.

And I think that that goes to your follow-on question regarding the underlying fee structures.

Obviously, as you know, SUNS carries a fee structure that is roughly half of the structure at Solar.

And we think, again, that is indicative of the relative risk of the two portfolios and the appropriate return for that risk.

As you've seen the returns in the market be competed down on the traditional Solar Capital assets, has the Board had any discussions about addressing the expense structure at Solar Capital?

The Board, in its ordinary course, goes through the [renewal] process, which happens on an annual basis, and chose to do [a dip].

But I think, importantly, if we were sitting here, Troy, invested at our full [$7 billion] level -- which means we're doing it just for fees, but after the books we could have that conversation.

But the fact that we are running at under-invested [we are], which we have willingly done, it means we have willingly chosen to significantly decrease our management fees.

Yes, that's a very fair point.

Thank you.

Doug Mewhirter, SunTrust.

Just two questions.

First, Bruce or Rich, have your leverage levels for your portfolio -- either total debt to EBITDA, or debt to EBITDA to your security -- and compare that with the 4Q leverage levels.

And I guess while they're looking for that, maybe Michael, a bigger-picture question.

Obviously a relatively large amount of exits and repayments, and Bruce had noted the shortening of the duration of your securities, but unintentionally.

I remember, a while back, I was talking about the how either you or one of your competitors said a slow-growing economy is great for BDCs because they -- your portfolio companies can't grow their way out of the portfolio as easily, so they basically refi with you, instead of with a bigger entity or the public markets.

Is this churn more of a maybe a commentary that the economy might be better than people expect?

Or is it more about the availability of capital?

It's more about the availability of capital, and, importantly, the willingness of investors to take on more risk, frankly, than we think we should.

I think were we in a more stable credit environment where you didn't see continue to compress yields and people were willing to do covenant-light deals, we would have seen the duration we expected because the economy hasn't grown that fast.

But what's grown faster than the economy is people's willingness to take on outside risk and finance these companies.

And just for clarity's sake, we do believe that the fundamentals across all of the portfolios that we have visibility into -- whether it's Solar or SUNS or Crystal or Gemino -- we think the fundamentals are stable to growing.

To Michael's point, the growth rates are single-digit, but that's just fine as a lender.

So we're seeing good free cash flow generation.

I think the challenge for us, as we've talked about, has really been on that availability of capital, and what it's done to underlying terms that are available to issuers in terms of both lack of covenants; and also leverage levels that are approaching levels that exceed anything we saw, pre- the credit crisis.

And so, in a rising rate environment, even a strong cash flow generating company, if you put 6 to 7 times leverage on it, will start to be challenged on their debt service requirements.

And so we've had structural concerns, not fundamental concerns.

Back to your earlier question, the leverage levels from Q4 to Q1 across the portfolio really have not moved much from about 4.9 to 5 times.

And same on the interest coverage levels: relatively flat.

Okay, thanks for that.

That's all my questions.

(Operator Instructions).

Jonathan Finger, Finger Interests Ltd.

I had a question just about your share buyback, and your thoughts there.

I guess my question was, why not keep your powder dry for when there's more of a market dislocation, as opposed to buying back shares at just a modest discount?

Well, a couple comments.

One is, we have a lot of capital to do that.

We have $600 million available to us today between cash and borrowing facilities, subject to our borrowing base.

So we bought back $50 million of stock, so we've taken away less than 10% of our capacity.

So we just think that we like our portfolio a lot; and, frankly, when we look at the alternatives in the marketplace, we'd rather invest more in our portfolio, in some cases, than new assets.

So we think it's been a good tool for us.

A good balance.

All right, thanks.

That's my only question.

Jonathan Bock, Wells Fargo Securities.

Michael, Bruce, perhaps talking a little bit about the new investments this quarter.

You mentioned about 9.5% to 10% targeted returns.

And looking at the composition, while I see the investments are senior secured, what percentage of the new investments made are second lien?

Yes, most of the ones in Q1 were second lien.

Okay.

So, when we look at a 9% second lien or maybe we look at -- I'm going to mispronounce it, but -- Ikaria, the healthcare technology firm, second lien, 8.8%.

And I think you put about $20 million in.

Can you give us a sense of the risk/reward in this security, given that it is a covenant-light security, of which you own less than 10% of that second tranche at L plus 7.75?

Some might argue that this is where the froth is, in this in environment.

And I'd be interested in hearing why this investment is different.

Certainly.

So, as you well know, most of the leverage levels out in the marketplace today are somewhere in the 6 to 7 times total leverage.

But Ikaria is levered to 5.1 times, with strong free cash flow generation.

There's $237 million of EBITDA, and only $12 million in CapEx.

And we have a very strong relationship with Madison Dearborn, given our relationship dating back to Nuveen and earlier on in our careers.

And so we were able to get direct due diligence beyond what the broader market was able to see.

So we felt extremely comfortable with their dominant position.

Having been blessed with triplets who were born prematurely, this is a phenomenal product in terms of helping premature children, and really is the dominant position to get nitrous oxide into children and patients, more broadly, with respiratory problems.

And we felt that there was just substantial de-risking here.

This is a great example of an asset where, as we commented on some of our repayments in Q1, where I would expect -- we have call protection.

We'll have a couple points this year and next year.

We expect to be taken out probably over the next 12 to 18 months as the company continues to grow.

And we will probably see returns significantly in excess of the 9 and change that we underwrote to.

Having said that, even at 9 and change, to your point about the risk side, again we think the dominant market position, the substantial size of the business, as well as the strong free cash flow and our access to direct due diligence, really justified this investment.

Makes some sense.

And maybe perhaps in terms of investing in middle-market club deals that are covenant-light, only because there's been a resurgence, and that seems to carry a bit of a negative stigma associated with it.

Walk us through where a covenant-light loan effectively makes sense; because a number of people would assume that if you're doing covenant-light transactions and have no ability to reprice, in the event EBITDA goes the wrong way, that only increases the risk profile of an investment.

So I'd just be interested in the contrast to that point.

Yes, again, I think as you know from working with Michael and I and Rich and the team here, given our substantial ownership, for us it is all about having access to direct due diligence and believing that this is a very stable, if not growing, free cash flow story.

But having said that, the best defensive move is to make sure that you keep these positions diverse, and I think you've seen us actively enhance the diversity of our portfolio.

This is a $19 million position.

Obviously relatively small in the context of not only our portfolio, but our available capital.

So we are very focused on where we would accept an investment that is covenant-light.

Some of these investments that we were repaid at 12% to 17% returns in Q1 were also covenant-light.

Asurion, As you may know, has been covenant-light now for a few years.

But if you have a high-growth cash flowing story, what's going to happen is they will delever to the point where they can take our leverage down, so that we really should be first lien.

So what happens is, we're in at 5.1 times.

Importantly, we attach at 3.7, which is an extremely high attachment point on this business, where we don't have much in the way of senior debt ahead of us.

The business has EBITDA margins North of 60%, which is obviously pretty impressive.

So our expectation is, just through free cash flow generation, our second lien will basically delever into the low 4s in the not-too-distant future, and we will probably be refinanced out with cheaper first lien debt.

Got it.

Got it.

So that underwriting thesis is critical.

(multiple speakers) The key thing is where we do covenant-light deals, which are few and far between, are ones where we have real visibility into cash flow, and we see our way to immediate deleveraging.

So there's this cushion built in, right away.

I understand, and do also believe that there is another argument that can be made that having covenants -- particularly if there's a commercial bank that chooses to act irrationally -- can, at times, jeopardize the entire enterprise value of the firm if someone rushes to a sale.

So it's good to see you thought through that.

One additional question, as it relates to Adams Outdoor Advertising.

Obviously the yield here is outsized.

And as we see outsized deals continue to be prepaid, it's worth the question.

So at a 17% sub debt piece, I believe coming on maturity of 12/8 of 2015, with now trading at a premium to par.

Can you give us a sense of the call protection, or protection of refinancing here, and how that looks in light of the current financing environment we're in?

Sure, great question.

I think it's fair to say, as you know, we've been in Adams Outdoor for several years now.

And we've been blessed with this investment, as this is real niche player in the outdoor sector, and also a 50% EBITDA margin type business.

Importantly, we had very good call protection in terms of non-call periods that do disappear, as well as call premiums at the end of this year.

So we would anticipate, in either Q4 or Q1, that either we will modify the rate and adjust it for today's return environment, or be refinanced out.

Okay.

All right.

Thank you so much for taking my questions.

(Operator Instructions).

Mickey Schleien, Ladenburg.

We had a lot of discussion about where the best risk/reward is in the market.

I just want to step back, looking at Solar versus Solar Senior.

We Solar Senior's portfolio grow in the last quarter; and Solar's shrank.

Was that idiosyncratic, or do you have an overall preference for first lien floating-rate investments at this point?

It's not idiosyncratic.

If you look, we originated $147 million in Q1 in Solar, which is, frankly, above our historical average.

So it's not for lack of trying to grow; it's just that we had over $200 million in repayments that we could not control.

In SUNS we invested about $50 million, which is basically our historical average since we started three years ago.

So it's not a statement as to where we think there's better risk/reward involved.

Okay.

And I noticed that you restructured Crystal's balance sheet, converting half of your equity into debt.

What was the reasoning for that?

Hi, Mickey, this is Rich.

I think that there was just some confusion as to the overall structure of Crystal.

It is 100% senior secured; and, as you know, BDCs.

And just from a perception issue, we've looked at the structure.

We tried to get some leverage on the equity, and we just thought probably more representative of the underlying portfolio and asset class.

And we have been approached by third parties, debt providers, to provide that piece of debt.

So we thought it's just better positioned, long-term, to the extent that we would avail ourselves of that.

Okay.

Lastly, I was just curious, working through some math, did you waive any part of your portfolio management or incentive fees in the first quarter?

No, we did not.

The reason our incentive fees are lower is because we are in the hurdle in the catch-up.

So where any decline -- and that's when income comes directly out of us, at this point.

Yes, and I could take you through it off-line, Mickey, if you wanted (multiple speakers).

Yes, I think I will, Rich.

Because when I did the math, I couldn't get it to foot, so I will follow up with you.

Those are all my questions.

Thanks.

And with no further questions, I would now like to turn the conference over to Mr. Michael Gross for closing remarks.

We have no closing remarks.

Thank you for your time, and all your great questions.

And for those of you are participating, we'll talk with you in about 15 minutes on Solar Senior.

Thank you.

Thank you for joining today's conference.

That concludes the presentation.

You may now disconnect, and have a great day.