SLR Investment Corp (SLRC) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Solar Capital Ltd. Earnings Conference Call. My name is Crystal and I will be the operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions).

I would now like to turn the call over to your host for today, Mr. Michael Gross, Chairman and CEO. Please proceed.

Thank you very much and good morning. Welcome to Solar Capital Limited's earnings call for the quarter ended September 30th, 2014. I am joined here today by our Chief Operating Officer, Bruce Spohler, and our Chief financial Officer, Richard Peteka.

Before we begin, Rich, could you please start off by covering the webcast and forward-looking statements?

Of course. Thank you, 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 Limited and that any unauthorized broadcast 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 earnings 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 Limited 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 the third quarter Solar Capital made significant progress on important growth initiatives that we outlined to shareholders earlier in the year.

Investments in our origination platform with the hiring of two senior professionals yielded solid portfolio growth in the quarter. We announced a strategic partnership that gives us a scale to underwrite and hold entire Unitranche Loans, thus extending the range of financing solutions we are able to provide to sponsors and their portfolio companies. With continued crossing in credit markets we believe Unitranche loans provide an attractive risk-return profile and represent an important growth opportunity for Solar Capital.

Geopolitical events, monetary policy divergences and outflows from leveraged loan and high yield mutual funds have increased market volatility. The Citi High Yield Index traded at approximately 6.5% yield to [worth] on October 15th compared to 4.9% on June 23rd early this summer reflecting what appears to be a turn in US investor sentiment.

The increased volatility and aforementioned headwinds in the large syndicated leverage loan market have at the margin positively impacted transaction pricing in the middle market. Although changes happen more slowly in our market and it is too soon to confirm the trend, we are encouraged by recent developments.

At September 2nd we announced a strategic joint venture with the fund managed by PIMCO to co-invest in Senior Secured Unitranche loans originated by Solar Capital. As a reminder, the joint venture vehicle named Senior Secured Unitranche Loan Program or as we refer to it, SSLP, will initially comprise equity commitments of $300 million from Solar Capital and approximately $42 million from the PIMCO affiliate.

PIMCO has also committed an additional $257 million in a sidecar vehicle to co-invest with the SSLP.

Solar Capital and PIMCO are in advanced discussions with third-party senior lenders to obtain debt capital for both the SSLP and sidecar vehicles with target leverage of up to two times debt to equity subjected to bond-based limitations. We expect these facilities to be in place over the next few months.

With this leverage, the Unitranche loan program will have approximately $1.5 billion of investable capital. In addition, we are seeking to raise additional capital in the form of separately managed accounts with the goal of being able to originate Unitranche loans with scale beyond our current capacity.

We are actively engaged with a partner and have a solid pipeline of opportunities we are evaluating. Solar Capital and PIMCO currently expect to begin funding the SSLP with new investments in the early 2015.

The joint venture provides long-term capital from a like-minded credit investor and creates a necessary scale to be more competitive in offering Unitranche solutions. Underwriting Senior Secured Unitranche loans creates an opportunity to be dollar-one risk in a more simplified capital structure, have greater control of responsiveness as a sole lender and most importantly, have the ability to negotiate loan structures with protective covenants.

The SSLP allows Solar Capital to utilize its balance sheet more efficiently. Once ramped we expect the joint venture to generate a return on equity in the low to mid-teens and to be accretive to Solar Capital's net investment income.

In the third quarter our portfolio activity resulted in new investments of $208 million across 11 portfolio companies and sales and repayments of $57 million. While net portfolio growth was favorable at approximately $150 million for the quarter, we are expecting elevated repayments in Q4 from legacy investments to result in essentially flat net portfolio growth for the second half of 2014 based on our current visibility.

While originations and repayments can be lumpy quarter-to-quarter, we believe our net historical origination pays will be enhanced with the addition of our Unitranche capabilities and expanded Origination Team and we should see material results in the first half of 2015 as the PIMCO joint venture kicks into gear.

Lastly, our Board of Directors declared a quarterly dividend of $0.40 per share, which will be paid on January 5th, 2015 to shares of record as of December 18th, 2014.

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

Thank you, Michael. Solar Capital Limited's net asset value at September 30th, 2014 was $948.7 million or $22.34 per share compared to $952.9 million or $22.44 per share at June 30th, 2014.

Our investment portfolio at September 30th had a fair market value of $1.13 billion in 47 portfolio companies across 31 industries compared to a fair market value of $984.1 million in 43 portfolio companies across 30 industries at June 30th.

For the three months ended September 30th, gross investment income totaled $28.4 million versus $28.0 million for the three months ended June 30th.

Expenses totaled $12 million for the three months ended September 30th compared to $11.9 million for the three months ended June 30th. Accordingly, the Company's net investment income for the three months ended September 30th, 2014 totaled $16.4 million or $0.39 per average share versus $16.1 million or $0.38 per average share for the three months ended June 30th, 2014.

Net realized and unrealized loss for the third quarter 2014 totaled approximately $3.6 million versus the net realized and unrealized gain of $1.0 million at the second quarter 2014.

Ultimately the Company had a net increase in net assets for Q3 resulting in operations of $12.8 million or $0.30 per average share. This compared to $17.1 million or $0.40 per average share for the three months ended June 30th, 2014.

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

Thank you, Rich. Our third quarter investment activity furthered our objective maintaining a predominately senior secured loading rate portfolio. Overall the financial performance of our portfolio companies remains steady and we have seen a pickup in both the organic growth initiatives as well as tuck-in acquisitions.

Across the sponsored community, we have seen a further tapering of refinancings and dividend recapitalizations and an increase in M&A and new platform acquisitions, which we view is a very positive development.

At September 30th, the weighted average yield on our income producing investment portfolio when measured at fair value was 10.3%, down slightly from 10.5% at the end of Q2. The weighted average investment risk weighting of our portfolio remained at approximately two when measured at fair value based on our one-to-four risk-rating scale with one representing the least amount of risk.

We have only one small position on non-accrual that is less than one-half of one percent of the portfolio at fair value and believe the credit quality of our portfolio remains extremely strong.

At the end of the third quarter, our portfolio consisted of 47 companies operating in 31 industries. When measured at fair value, our portfolio was comprised of 53% senior secured loans when excluding Crystal, 26% investment in Crystal's portfolio of loans, 13% subordinated debt, 2% preferred equity and 4% in common equity and warrants. When we include Crystal, this portfolio again consists entirely of senior loans. Roughly 80% of our total portfolio exposure is in senior secured investments.

At September 30th just under 80% of our income producing portfolio was floating rate with roughly 22% being fixed rate when measured at fair value.

For the quarter we originated approximately $208 million of investments across 11 portfolio companies. All of the loans that we originated were senior secured and floating-rate assets. Investments prepaid or sold during the quarter totaled approximately $57 million.

Now I'd like to give you 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 mid-market companies.

At the end of Q3, Crystal had $411 million of funded senior secured loans across 25 different issuers with an average exposure of just over $16 million. During the quarter, Crystal was extremely active funding new loans totaling $130 million and had assets of approximately $70 million.

Again, all of the commitments at Crystal Financial are floating-rate senior secured loans. At the end of Q3, total debt on Crystal's balance sheet was approximately $165 million for debt to invested equity ratio of 0.6 times. At September 30th, Crystal had $135 million of undrawn credit capacity subjected to borrowing based limitations under its $300 million credit facility.

For the third quarter our investment in Crystal paid Solar Capital a cash dividend of $7.8 million, the equivalent of an 11.3% annualized cash-on-cash yield, which was an increase from the $7.3 million dividend we received in Q2.

Now, let me highlight some of our third quarter new investments. We funded a $50 million investment in US Anesthesia Partners, which is a Welsh, Carson, Anderson and Stowe Portfolio Company, in support of the Company's recapitalization. US Anesthesia Partners is a leading provider of anesthesia services to hospitals in Houston, Dallas and Orlando marketplaces. Solar invested $20 million and $30 million in the first and second lien term loans respectively. Our blended yield is just over 8% on that investment.

In addition, we funded a $45.5 million second lien term loan to support ABRY Partner's acquisition of KORE wireless, a leading provider of machine-to-machine network services, which supports in excess of 1.5 million wireless devices for over 800 customers worldwide.

The yield to maturity on this investment is approximately 9.8%. We also made an additional investment of $15 million in the second lien term loan to Datapipe, which is in support of the company's acquisition of an additional data services business Layered Tech. Datapipe is a leading managed service provider of mission-critical IT services.

In addition, we acquired $7 million of the same second lien term loan in an opportunistic secondary transaction at the same price as our initial investment bringing our total investment to $22 million. Our loan attaches at 3.8 times and our leverage through the end of our tranche is 5.6 times with a yield to maturity of just in excess of 9%.

We also funded a $28 million secured term loan to Varilease, which is an independent equipment lessor to large and mid-sized corporations. Our loan to value on this investment is approximately 85% against the Company's portfolio of leases and our yield to maturity is just over 9.7%.

Additionally, we funded a $20 million investment in the second lean term loan offered by TriMark in support of the Company's acquisition by Warburg Pincus. TriMark is the largest distributor of food service equipment and supplies in North America virtually providing all non-food products used by restaurants and other food service operators. Our yield to maturity on this investment is just under 9%.

Now I'll highlight our Q2 repayments, which fortunately is a short list at this point. Solar was repaid on our $26 million position in Granite Global's Mezzanine notes in connection with Genstar's sale of the company. As a reminder, Solar invested in Granite in May, 2011 in support of the acquisition by Genstar at that time. Solar achieved an IRR in excess of 13% and a multiple invested capital of 1.3 times on our investment.

In addition, we were repaid on our $10 million position in Active International's first lien term loan pursuant to the company's refinancing. We had invested in Active back in September of 2013 and realized an IRR in excess of 16.5%.

As Michael mentioned, we are expecting elevated repayments in sales in this Q4 largely from several of our legacy investments including the previously discussed sale of our equity investment in Nuveen and the anticipated repayment of our mezzanine loan for Adams Outdoor Advertising, which has been in our portfolio since 2010.

In addition during Q4, [Great Time] holdings was sold and Solar realized a 12.5% IRR in our investment and close to a two times multiple of our invested capital over a long investment period.

Finally, Tecomet is currently in the market to refinance their capital structure in connection with an acquisition. We expect this transaction to close in Q4 and that Solar will be repaid at premium to par on its investment.

Now, I'll turn the call back over to Michael.

Thank you, Bruce. In summary, we believe the overall credit quality of our portfolio remains very strong. In the third quarter we generated solid originations in attractive credits that met our stringent risk-reward requirements. While we expect elevated repayments of legacy investments in the fourth quarter to dampen portfolio growth in the second half of this year, recent market volatility has created more attractive investment opportunities and with our newly announced joint venture with PIMCO, Solar Capital is poised for growth in 2015.

I would like to reiterate that we will remain disciplined and we'll exercise patience and prudence in our investment decisions. Our primary investment objective, as always, is to preserve capital by staying seated in the capital structure with secured investments to minimize risk by shying away from covenant light structures and loans on the excessive leverage and to minimize volatility and duration risk through floating rate instruments.

We have constantly steered the portfolio in this direction as we've moved deeper into the current credit cycle. Secured and floating rate investments now comprise approximately 80% of our portfolio, nearly the opposite profile from five years ago.

In addition, we have taken a conservative approach with respect to maintaining balance sheet and portfolio flexibility.

Our origination efforts are centered on finding relatively higher credit investments that we believe will protect our net asset value and adequately compensate us for risk. The creation of the SSLP and strategic partnership with PIMCO to underwrite Unitranche loans is one of the ways we responded to the elevated risk structures in the current credit markets.

With our increased origination capacity, we can now offer a wider range of financing solutions to issuers and be more relevant to sponsors. We believe the SSLP provides the best path forward to grow the portfolio, enhance return equity and drive incremental net investment income for our shareholders.

At the end of the third quarter, with $67 million in cash and $490 million available under our credit facility subject to borrowing based limitations, Solar Capital has ample dry powder to take advantage of market dislocations and investment opportunities that meet our risk-return profile.

Based on last night's close of $18.56 per share, Solar Capital is trading at a 16% discount to net asset value and a dividend yield of 8.6%. This compares favorably to the 5.8% yield of the Barclay's High Yield Corporate index. We believe Solar represents an attractive investment on a relative and absolute basis.

At 11 o'clock this morning we'll be hosting an earnings call for the third quarter 2014 operations for Solar Senior Capital or SUNS. Our ability to provide senior secured financing through the vehicle enhances our Origination Team's ability to meet our client's capital needs. We continue to see the benefits of this value proposition in Solar Capital deal flow.

We appreciate your time today. Operator, please open up the line for questions.

(Operator Instructions). Our first question will come from the line of Richard Shane from JPMorgan.

Thanks for taking my question. I know we can total up the math ourselves and we'll do it after the call but love to get an idea. You had indicated that you think that net originations will be flat on the quarter. If you total up all of the repayments that you described, what is -- what are you expecting for repayments this quarter roughly?

Yes I think a good estimate would be roughly $200 million of repayments, which again is similar to our originations in Q3, which is why we're saying that we would expect roughly a flat net portfolio growth for the second half of 2014.

Meaning specifically our portfolio will be down at year-end from where it is today.

Okay that's actually an important clarification. Second, when we think about what is going on with the portfolio in terms of repayments and originations, you have a big equity piece coming off. Can you talk about what -- and again, you probably have some higher yielding paper repaying so you have a little bit of reinvestment risk. On a net basis do you think that you will be able to enhance interest income, net interest income?

I think the answer is we are, to your point, most of the fourth quarter repayments are heavily weighted towards legacy investments, in one case a non-yielder that's an equity investment, Nuveen, but in the case of both Adams Outdoor and [GreatCon], these are higher yielding fixed rate older unsecured investments and so there will be -- they have some spread give up there. However, as we mentioned, as we begin to ramp the joint venture with PIMCO, we expect higher ROEs on that $300 million of capital so that will over time mitigate some of the spread compression from these legacy investments coming off this quarter.

How long do you think it will take to deploy the $300 million?

We're optimistic that while it takes a little bit of time to ramp that effort, it is rather chunky in terms of the traditional investment size that we'll be taking so we're targeting conservatively 12 to 18 months.

And I think importantly we are hopeful that that's all going to be incremental deal flow and origination versus what we've been originating, on average about $400 million a year in non Unitranche [investments].

And I think to that point none of the $200 plus million of originations in Q3 involve the Unitranche [product].

Got it. Thank you guys very much.

Greg Mason, KBW.

I appreciate the commentary you've been giving. On the SSLP I assume you have to be talking with third-party debt providers at this point and what are you thinking in terms of leverage and the cost of that leverage?

We're talking about leverage; it varies asset to asset up to two times but I think on average we're assuming closer to 1.5 times conservatively and I think -- I'm sorry, the second part of the question?

Pricing?

Pricing should be somewhere in the L250 to L300.

Okay great and then how much of -- obviously you've got to put up some equity capital first and get some assets in there for the third-party debt guys. How much of your $300 million do you think you have to be funded before you can start utilizing third-party debt and driving the ROEs higher? Do you have to do the full $300 million?

No definitely not the full $300 million but the exact amount is still being negotiated but I think you should assume at least 25% needs to be put up as an equity vetting.

Great and then one last question and I can hop back in the queue, you had previously done a share repurchase and you were buying below book value. Now that you're significantly below book value, any thoughts of doing another share repurchase?

Not at this point. As you know, we just committed $300 million to our joint venture with PIMCO so we don't want to turn around and shrink our available capital based on that. I think if we're sitting here six months from now and the stock is still depressed like it is today and we haven't been able to originate, we would re -- the Board would revisit that.

And one additional question I forgot, just because it's been asked, given the some of the turbulence at PIMCO and the outflows, does that at all impact their ability as your partner with this joint venture?

It does not at all. The capital that's been committed to us is out of a private equity self fund. It's locked up for seven to 10 years so it's had no impact at all.

Great, thanks, guys.

Greg Nelson, Wells Fargo Securities.

Thanks for taking my questions. We've seen a lot of repayment activity. Obviously this quarter was positive. When you look to do the PIMCO facility and get net portfolio growth going positive, what gives you the confidence to be able to grow that facility? Is it being able to do the Unitranche deal so it's different than what you do now or take bigger bite sizes? What's exactly giving you the confidence that you'll be able to grow it?

Sure, I think just to touch on the first part of your question, clearly the repayments and particularly what we're seeing Q4 are understandably older more legacy investments. It's unique for an investment to not offer you some degree of duration so obviously given that the SSLP will just be ramping, we expect that the assets that go in that vehicle we will get some duration out of prior to seeing any headwinds from potential repayments. And yes, to your point, it is there are larger bite sizes and it is a product that prior to this joint venture we were unable to be competitive in so we don't view it as cannibalizing our existing investment flow. As you saw, we had a very strong origination activity in Q3 away from the Unitranche vehicle so we do view it as additive.

And I think importantly given the duration of those assets, you know, stated maturity is five or six years, typical duration is two or three years, we would not expect as we're ramping this to really have any repayments at all in the Unitranche product.

Okay and then just one more, because it's a question that we get asked pretty frequently on our side about individual names and then the industry generally, [generally] we've kind of seen for you guys is we've seen dividends come down. We've seen book value kind of flat to slightly down but at the same time management fees have obviously increased. Just I wanted to hear your thoughts there because that's obviously something we get asked a lot.

Well, actually our management fees have decreased pretty dramatically this year. We had in Q2 and Q3 zero incentive fees and so we're bearing the brunt of the fact that we've allowed our portfolio and willingly had our portfolio shrink. We actually get asked by investors why haven't you just taken your capital and buy liquid loans to create yield and the answer is if we did that all that incremental interest income would effectively flow to our benefit as the investment manager so I think we've been very shareholder friendly in our behavior.

Right yes obviously you guys are below the hurdle now so there would be a pop in NOI to the extent you get heavily invested. Thanks for taking my questions.

Doug Mewhirter, Suntrust.

Yes she got it right. Good morning. You talk about these separately managed accounts that would sort of hopefully expand your capacity further. I was a little unclear. The SMAs, is it a completely separate and distinct entity that will have its own sort of buckets of loans or is it somehow tied to this JV with PIMCO where you sort of bring them in to add the equity base of the fund?

The intent would be their capital would be segregated so each investor would have his own capital. We would to the extent investors want, we would arrange for similar leverage facilities and then those parties would invest side-by-side in the loans that the SSLP and PIMCO invested.

So again to be clear if we were to raise another $300 million of equity, then we would take down $150 million loan and put it 50/50/50 across PIMCO, ourselves and the SMAs so they're just flying the same assets alongside us.

Okay that makes -- that clears it up. Thank you and my second and last question, Crystal had an active quarter and I know that it fluctuates quite a bit. Maybe a more general question, what triggers activity with Crystal? Is it actually bad things happening to retailers where they need a bit of a bailout or is it good things happening where they're expanding and maybe they're a little short of capital and they need something quick to expand?

The answer is it's sometimes bad, sometimes good, not always retailers but asset heavy businesses and I would say the biggest driver is uncertainty and volatility because they offer certainty of capital very often companies who are asset rich but might be cash flow light and you need somebody to go in there and really be able to understand liquidation value of your asset base and so that's where they differentiate themselves. You're right they did have a very active quarter and continue to see activity at an elevated level in Q4 but it's a churn business because they offer certainty. They close quickly and then they also can get repaid quickly as businesses generate new cash flow streams and on cheaper terms.

And we've been very pleased with the team and the group as a whole and also by the fact that they've been able to originate high quality loans in an environment where the economy is quite strong. I think if we saw more choppier, if the economy was (inaudible) happen, we'll see a lot more growth on the portfolio.

Okay great thanks. That's all my questions.

Vernon Plack, BB&T.

Just some clarification here, I know that you mentioned that you plan on committing $300 million to the SSLP PIMCO plans all committing $300 million to the SLP. That's $600 million leveraged two to one. It's at $2 in debt for every dollar in equity? Is that -- I just wondered how you--

Sure. I think conservatively we view it -- we view the $600 million of equity getting us about $1.5 billion of buying power.

Right.

That's assuming sort of a 1.5 on average, Vernon.

Right, right, okay. All right I just wanted to make sure that I understood that. The second question relates to the classification of Crystal. I know that initially that was classified as an equity investment. Then for a while it was classified as debt and equity on your scheduled investments. And now I think it's back all to equity?

Okay hi, Vernon. On last Friday the staff of the SEC just released some guidance to the industry so the entire industry received some guidance and I think you'll see a lot more of this but effectively what you're seeing is the consolidation of the holding company and the reflecting, the SOI reflecting our equity investment in the operating company, again per the guidance that was published on Friday.

Okay. All right got it; that's all I have. Thank you.

(Operator Instructions). Mickey Schleien, Ladenburg.

Good morning, Michael and Bruce. Just wanted to step back and take the 30,000 foot view, it seems you're getting a little bit more comfortable with terms in the market. I just wanted to confirm that I am hearing you correctly and more importantly, what do you think the outlook is for perhaps for the coming year in terms of spreads and multiples and will it be a friendlier environment for you do you think?

I think that we clearly -- the recent volatility has clearly benefited us on the margin, both in terms of the risk side and I think to some extent on pricing 25, 50 bps in our favor. So really the question is as we head into next year do we see that uncertainty and volatility continue because I think that's what would drive better terms fund flows leaving a loan in high yield market, which we've seen, as you know, over the last couple months as that trend continues. That works in our favor so yes it has been, as you know, for us a market where we find ourselves having to be very picky in real asset selectors.

We were fortunate enough to find a lot of things we liked in Q3 and, as Michael highlighted, away from what we had traditionally invested in. Having the Unitranche capability I think that will allow us to take even more investment opportunities on balance sheet because we like the fundamental risk return proposition of Unitranche asset class but it's crystal ball for next year is a longer conversation and happy to have that with you off line.

Okay and not to beat a dead horse but in terms of the SSLP besides getting the financing in place, which is obviously a prerequisite to actually launching, what steps are you taking to get the pipeline moving in terms of having people dedicated to this product? Are they out there marketing it now? I am just trying to understand how this 12 to 18 month curve is going to work out?

Yes it's effectively making -- it's analogous to when we started Solar Senior. We had the exact same investment professionals calling on the same sponsors and issuers, just having the ability to issue bank debt as well as junior capital. Well, now really since this joint venture was formalized in September, the team has been out offering the Unitranche product as another way to finance the same issuers so it's an easy ramp for us. It's just like any of our investments, as you know, there's a long lead time and not everybody is going to choose Unitranche.

They may choose an all bank deal or they may choose first lien, second lien bank mezz so it's just really what it's done is it's enhanced our dialogue. It's made us more relevant to the sponsors because we believe we now have the full suite of products that they're looking for and it's just a matter of having deals start to work their way through the pipeline. But the team has been out there since September actively marketing the product. The leverage we expect to come, as you can imagine. It's just more efficient to close the leverage once we begin to book some assets so that we're not carrying to many unused fees.

So, Bruce, is there a backlog and pipeline in the SSLP product today?

Yes.

Okay thank you for taking my questions.

Casey Alexander, Gilford Securities.

Good morning and thanks for taking my questions. I noticed that there's a $3 million realized loss under foreign currencies and derivatives. I am curious what that relates to and is there an offset to that somewhere in the portfolio that that is a hedging mechanism to how that comes about?

All this is is a closeout of a remaining instrument hedge that we had on our credit facility. That's all it is.

So you said -- is there an offset to it somewhere else that we can't see?

Yes there's timing. They happen as these forwards roll off over periods of time intra quarter and other quarters and they're hedges through borrowings in foreign currencies and forward currency contracts throughout the year so they roll off and you're just seeing different timing effects of it.

Secondly, I am curious what the creation of the SSLP says about your basic business. I mean is this a requirement in order for you to feel as though you can earn a competitive return for the BDC because as currently constructed with the leverage constraints of the marketplace you basically can't earn the dividend or more than the dividend? I mean what does this really say about your basic business?

Sure. Well, first of all, we have been -- we are earning our dividend and have been without the Unitranche product. I think what this says, and we've been saying this for quite some time, is that we don't like what the market has been offering as investment alternatives. We think many of our peers are taking inordinate risk, taking on structure with no covenants and much higher levered capital structures. We strategically went after the Unitranche space starting a year ago because we like the credit exposure of being a Unitranche lender, meaning your dollar would exposure through four to 5.5 times paying the credit and very importantly every single Unitranche transaction has covenants and we view that as tantamount and a requirement for us to invest in these types of companies.

All right thank you.

(Operator Instructions). Greg Mason, KBW.

Great, just a quick follow-up to Vernon's question on Crystal, does the reclassification of debt into equity, did that in any way change the cash flows? It looks like you may have restated interest and dividend income in the second quarter. Did that actually change the ultimate numbers at all?

No none whatsoever. It was merely whole of the substance for us at Solar, just a reclassifications between interest and dividends for that portion that was interest. Now, just to note, that interest technically is still there. It's just we're reflecting it on a consolidated basis so once that's done, it's just a look through and again, only reclassifications, no impact to NAV, no impact to NII or EPS, zero.

Great, thank you.

And with no further questions, I would like to turn the call back over to Michael Gross for closing remarks.

No closing remarks but thanks for all your participation today and for those of you are shareholders are interested, we'll be having our Solar Senior call in about 15 minutes. Thank you.

Ladies and gentlemen, that concludes today's call. You may now disconnect. Have a great day.