SLR Investment Corp (SLRC) 2015 Q3 法說會逐字稿

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

Q3 2015 earnings conference call.

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

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(operator instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Chairman and Chief Executive Officer, Michael Gross.

Sir, you may begin your conference.

Thank you very much, and good morning.

Welcome to Solar Capital Ltd.'s earnings call for the quarter ended September 30, 2015.

I am joined here today by Bruce Spoehler, 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.

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 Ltd.

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 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 as 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, global economic growth concerns and uncertainty accompanying the Fed's direction of interest rates created a challenging quarter for risk assets and an upswing in bond and equity market volatility.

Market technicals were negative for both high-yield and bank-loan funds.

The S&P High Yield B Corporate Index yield to worst widened over 200 basis points in the quarter, with spreads at the highest levels in three years.

In middle-market corporate credit, lighter M&A volumes and transaction volumes, combined with lower refinancing activity [to reduce] financing activity in what is traditionally a seasonally slower quarter of [leveraged loan] issuance.

Measured by S&P Capital IQ, middle-market loan volume declined 28% sequentially and 47% year-over-year in the third quarter.

Against this challenging backdrop, we originated approximately $83 million of senior secured floating-rate loans.

Our new investments are comprised of senior secured loans with attractive risk-reward characteristics and reflect continued progress in our life sciences lending segment.

We continue to see growth opportunities for Solar Capital in niche asset classes whose risk-return profile is less correlated with the liquid credit markets.

During a quarter of tepid new-issue activity and muted repayments of approximately $33 million, we succeeded in growing our portfolio by approximately 3% to over $1.2 billion.

Year-to -date, our portfolio has grown by approximately 20%.

On September 30, our portfolio is over 99.9% performing on a fair-value basis.

In addition, we have no direct energy exposure, and we continue to be pleased with the credit quality of our portfolio.

Net investment income in the third quarter was $0.40 per share, fully covering our quarterly distribution.

We elected to waive a portion of our incentive fee this quarter while we grow [in our] investment income to deployment of available capital across our strategic growth initiatives that include unitranche, life sciences, and asset-backed senior secured loans through Crystal Financial.

Subsequent to the close of the third quarter, we announced that Voya Investment Management made an initial equity commitment of $25 million to the senior secured unitranche loan program, which we call SSLP, with an ability to [up-size] the program.

Voya plans to allocate additional capital to co-invest in unitranche loans alongside the SSLP.

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.

With the addition of Voya and the $300-million recommitment from our existing institutional investor, PIMCO, equity commitments to our unitranche initiative have now grown to $625 million.

Committed capital represents an excess of $1.5 billion of investable capital, including anticipated leverage.

Investable capital for unitranche loans is expected to be increased with additional co-investments by our partners.

We believe this strategic development will provide more opportunities to accelerate the ramp of our unitranche loan initiative and enhances our origination platform's ability to provide complete financing solutions to our clients.

We recently committed to our first unitranche loan transaction with both of our institutional partners, which we expect to close during the fourth quarter.

We plan to fund the SSLP with additional assets by the end of the fourth quarter, as well.

Bruce will provide additional details later in the call.

With strong origination and minimal expected repayments, we anticipate fourth-quarter net-portfolio growth will be in excess of $100 million, and close to the $125 million that we experienced in the second quarter.

As credit markets have shifted, the volatility has translated into better terms and wider spreads.

While it's too early to confirm a trend, we are encouraged by these developments and are pleased with our traction in our strategic growth initiatives.

At the end of the third quarter, our net-debt-to-equity ratio was 0.32 times.

We have ample capital to execute on our strategic growth initiatives as we move forward forwards our target leverage of 0.65 times to 0.75 times debt to equity.

After the close of the quarter, we also announced the Board of Solar Capital authorized the Company to purchase up to $30 million of its common stock.

At a time of increased market volatility, this share-repurchase program provides Management with additional flexibility and another tool with which to drive shareholder value.

As a reminder, under the Company's prior repurchase program, which expired on July 31, 2014, we purchased approximately $57 million of our stock in the open market at a weighted-average price below the then current net-asset value.

Our previous purchases demonstrate our willingness to buy back shares at a discount when we believe it provides a more attractive return on capital than funding new investments.

Finally, our Board of Directors declared yesterday a quarterly distribution of $0.40 per share, which will be paid on January 6, 2016, to shareholders of record as of December 17, 2015.

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

Thank you, Michael.

Solar Capital Ltd.'s net-asset value at September 30, 2015, was $913.9 million, or $21.52 per share, compared to $930.8 million, or $21.82 per share at June 30.

The decline in NAV was primarily related to net unrealized [depreciation] in the value of our investments from general mark-to-market conditions.

At September 30, our investment portfolio had a fair-market value of $1.21 billion in 54 portfolio companies across 30 industries, compared to a fair-market value of $1.17 billion in 50 portfolio companies across 30 industries at June 30.

At September 30, the weighted-average yield on our income-producing portfolio increased to 10.1%, measured at fair value, versus 9.9% at June 30.

For the three months ended September 30, 2015, gross-investment income totaled $30.4 million versus $28.0 million for the three months ended June 30.

Net expenses for the quarter ended September 30, 2015, totaled $13.5 million.

This compares to $12.0 million for the three months ended June 30.

For the three months ended September 30, as Michael noted earlier, the investment advisor voluntarily waived $700,000 in its performance-based incentive fees.

Accordingly, the Company's net investment income for the three months ended September 30, 2015, totaled $17.0 million, or $0.40 per average share, versus $16.0 million, or $0.38 per average share, for the three months ended June 30.

[Below the line], the Company had net realized and unrealized losses for the third quarter totaling $16.9 million versus net realized and unrealized gains of $1.3 million for the second quarter.

Ultimately, the Company had a slight increase in net assets from operations of $0.1 million, or $0.00 cents per share for the three months ended September 30.

This compares to a net increase of $17.3 million, or $0.41 per average share, for the three months ended June 30, 2015.

With that, I'll turn the call over to our Chief Operating Officer, Bruce Spoehler.

Thank you, Rich.

Let me begin by providing a portfolio update.

Overall, we are pleased with the credit quality of Solar's portfolio.

Our issuers are experiencing stable-to-modest EBITDA growth, and credit fundamentals remain healthy.

In addition, we have no direct exposure to oil and gas.

We continue to believe that our predominantly senior secured, float-rate portfolio construction should provide protections if the economic environment declines, and/or if interest rates rise.

In Q3, our NAV declined 1.8% to $21.52 per share, and primarily reflects the market sell-off and technical mark-to-market factors, consistent with the declines to the leveraged-loan and syndicated high-yield indices.

The technicals have reversed course thus far in Q4, and high-yield spreads have already recovered approximately 40% of the widening that we experienced last quarter.

At September 30, the weighted-average yield on our income-producing portfolio when measured at fair value was 10.1%, up from 9.9% in Q2.

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

Measured at fair value, 99.9% of our portfolio is performing at September 30.

At the end of the third quarter, our portfolio consisted of 54 companies operating in 30 industries.

Measured at fair value and including Crystal Financial's portfolio, 91% of our investments were in senior secured loans, including 66% in direct senior secured loans and roughly 25% through Crystal's portfolio.

The remaining 9% of our portfolio was comprised of just under 6% in subordinated debt, 1.5% in preferred equity, and just under 2% in common equity and warrants.

At September 30, approximately 90% of our income-producing portfolio was floating rate, when including Crystal's full portfolio measured at fair value.

Now let me provide an update on our strategic initiatives, including the senior secured unitranche loan program, Crystal Financial, and our life science lending platform.

As Michael mentioned, shortly after quarter's end we announced the addition of Voya as an additional joint-venture partner in our unitranche loan initiative and co-investment partner in the SSLP.

Over the last 12 months, we've established a successful co-underwriting process and working relationship with Voya through co-investments across 15 different investments we made in our first-lien loan program at our sister company, Solar Senior.

Voya's extensive mid-market credit experience and their interest in expanding their access to investments in the private middle-market senior secured loan asset class makes them an ideal partner to expand our unitranche loan initiative.

Voya's initial commitment to SSLP and their plans to allocate additional capital from their insurance company affiliates, together with the recommitment of $300 million of co-investment capital from PIMCO, enhances our origination capacity and ability to utilize the 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 NII.

We recently committed to a unitranche loan underwritten by Solar and both of our institutional partners, Voya and PIMCO.

And we expect the SSLP to invest in additional transactions during Q4.

Now let me turn to Crystal.

At September 30, Crystal Financial, which is our [stretch] and first-lien ABL lending platform, had a diversified portfolio consisting of approximately $530 million of funded senior secured loans across 28 issuers, with an average issuer exposure of approximately $19 million.

During the quarter, Crystal funded new loans totaling approximately $86 million and experienced repayments totaling approximately $11 million.

As a reminder, all of Crystal Financial's investments are floating-rate, senior secured loans.

At the end of Q3, Crystal paid Solar a cash dividend of $7.9 million, which is the equivalent of an 11.5% annualized cash-on-cash yield, consistent with Q2.

Crystal's net-debt-to-equity ratio was just under 1 times at September 30.

At the end of Q3, our life sciences portfolio has grown to approximately $110 million of first-lien senior secured loans across 11 issuers, with an average investment of $10 million and an average yield, including warrant-related values but excluding success fees, of in excess of 11%.

Our investment thesis continues to be focused on building a diversified portfolio of senior secured loans, having very modest debt-to-equity ratios and (inaudible) enterprise-value protection, and most importantly, low loss given default risk.

Our life sciences portfolio activity now includes both originations as well as exits.

We have realized a blended IRR of close to 16% for our life sciences portfolio repayment to date, excluding any warrant values.

The results thus far validate our investment thesis and confirm the opportunity to underwrite loans offering attractive, risk-adjusted returns in this highly specialized healthcare segment.

Given the team's current strong pipeline, we expect further growth in our life science portfolio in Q4 and on into 2016.

Now let me turn to our originations.

During the third quarter, Solar originated approximately $83 million of senior secured floating-rate loans across 6 portfolio companies.

Investments prepaid during the quarter totaled approximately $33 million, resulting in net originations of approximately $50 million.

During the quarter, our life sciences team closed and funded three new and two follow-on transactions, totaling approximately $46 million.

We reinvested $20 million in a first-lien term loan for Pronutria Biosciences, which is a company focused on developing therapeutic proteins derived from naturally occurring amino acids to target a variety of medical conditions.

This loan refinanced our $10-million investment in Pronutria, which was repaid in Q3 and realized an IRR in excess of 12.5%.

This new loan has new call protection and a success fee.

The yield to maturity excluding the success fee is approximately 10.5%.

We also funded a $15-million first-lien term loan in Achaogen, a clinical-stage biopharma company that is developing an IV antibiotic used to treat multidrug-resistant bacterial infections, commonly obtained through hospital-acquired infections, that can have extremely high mortality rates.

This loan carries a success fee.

However, excluding that fee, our investment has a yield of just under 11%.

We also made a $15-million investment in a second-lien term loan to support J.C. Flowers' acquisition of AmeriLife, a large independent distributor of health, life, and fixed-annuity products to the senior market in the US.

Leverage to our second lien is 5.7 times, and our yield is just over 10%.

Finally, we funded a $22.5-million investment, $5 million in the first lien and $17.5 million in the second lien, term loan of AccentCare, which is a large, for-profit home-healthcare provider.

Pro forma senior and total leverage runs to 2.6 times senior and 3.7 times total leverage, respectively, and our blended yield on these investments exceeds 10%.

Now let me touch on our Q3 realizations, all of which came from our life sciences portfolio.

In addition to the Pronutria repayment we mentioned, we were also repaid at a premium to par on our $12.5-million first-lien term loan investment in Radius Health.

Including the value at 9-30 of our Radius common stock, which resulted from warrant exercises, our IRR in this investment exceeds 28%.

Finally, we were repaid on our investment of $10 million in Infraredx, as part of the sale of the company to Nipro.

Half of the loan was repaid in Q2, and the balance was repaid on October 1. The blended IRR on this investment exceeds 15.5%.

We are seeing the fruits of our efforts to expand and diversify our [sourcing] engines and to enhance our solution capabilities to sponsor back middle-market companies.

Our origination efforts across unitranche and life sciences lending and getting solid traction, along with continued strong performance from Crystal Financial.

As Michael mentioned, we anticipate meaningful net-portfolio growth in Q4.

The combination of anticipated strong originations and visibility on less than $25 million of repayments thus far in Q4 should translate into net-portfolio growth that is closer to Q2's level of $120 million than the $50 million we experienced in Q3.

Now I'd like to turn the call back to Michael.

Thank you, Bruce.

Those of you who have been following us for some time and have been our investors have known that we have taken a very prudent approach to investing during these frothy credit market conditions we have been experiencing over the past three years.

During this time, however, we have expanded our growth engines across our life sciences, unitranche, and ABL lending capabilities.

These strategic initiatives have created a diversified set of investment opportunities that we believe offer a unique, attractive risk-reward profile in the current environment.

Importantly, we have enhanced both the product breadth and depth of our [core underwriting of] business to sponsor back private middle-market companies.

The addition of Voya and the recommitment of PIMCO to our unitranche loan initiative gives us great origination scale and provides more opportunities to accelerate the ramp of the senior secured unitranche loan program.

As we build out the SSLP and more fully utilize its credit facility, the joint venture is expected to generate a return on equity in the low- to mid-teens and to be accretive to Solar Capital's net investment income.

Additionally, Crystal Financial and our life sciences lending business with the current ROEs in the low teens provide us with diversified earnings streams and further growth potential.

Based on current visibility of originations and de minimus repayments, we expect solid net-portfolio growth in the fourth quarter and for the full year.

We will continue to be prudent and highly selective with our investments and fully intend to be opportunistic in deploying our significant available capital into investments across our strategic growth engines that meet our strict [underwriting] criteria.

Our interests remain closely aligned with you, our shareholders, through senior management's and the investment team's purchase ownership of 5.5% of the common shares outstanding.

Early in the fourth quarter, we announced a new program to authorize the repurchase of up to $30 million of our stock to provide Management with additional flexibility to drive shareholder value at a time of extreme market volatility.

We also waived a portion of the incentive fees in the third quarter, allowing us to fully cover our $0.40 per share of quarterly distribution while we deploy capital across our strategic initiatives and grow our net-investment income.

We appreciate the patient support of our shareholders through this process.

At the close of last night, Solar Capital was trading at approximately 0.8 times book value, with a current distribution yield of approximately 9.2%, compared to the Barclays US Corporate High-Yield Index yield to worse of 7.5%.

Given the anticipated higher return on equity on investments across our strategic initiatives and more efficient use of our balance sheet, we expect increases to our portfolio weighted-average yield to boost our net-investment income with the coming quarters.

We are confident Solar Capital has the credit discipline, sourcing, and balance-sheet flexibility to perform in an either an extended lower (inaudible) environment or a credit market [dislocation].

At 11 o'clock this morning, we will be hosting our earnings call for the third-quarter 2015 results of Solar Senior Capital, or [SUNS].

Our ability to provide traditional middle-market senior secured financing through this vehicle continues to enhance our origination team's ability to meet our client's capital needs.

And we continue to see benefits to this value proposition in Solar Capital's deal flow.

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

(operator instructions) Arren Cyganovich, D.A. Davidson.

Thanks.

With respect to the fee waiver, I was pleased to see that.

Would you anticipate using that again as you're continuing to ramp the leverage in SLRC?

I think we're going to look at it on a quarter-by-quarter basis, but it's a potential tool for us to use, yes.

Okay, great.

And then in terms of the SSLP adding a new partner, if you could talk a little bit about the underwriting that you have now that you have three folks involved in decision-making.

One of the benefits of SSLP historically, or different versions of this have been, quickly being able to underwrite something and not having to deal with a lot of different people involved in syndicate.

How does adding another person impact the process at all?

Sure, good question.

As you know, Voya, who just joined the program, has been with us at Solar Senior for close to a year and a half and has jointly underwritten with Solar Senior 15 transactions to date.

So it's important to note that we're not adding somebody that we don't have close experience with, someone we haven't been through the underwriting process with.

So I think, given that they will be in the JV with us, we think that that will actually accelerate the ramp, given our experience of co-underwriting together.

Separately, PIMCO also needs to underwrite, but they're underwriting for their balance sheet through their managed account, as opposed to through the joint venture for Solar's balance sheet.

So we think it's a win-win.

It expands our capability by having the balance sheets of all three of us.

And we think that Voya's experience with us should make it a very smooth transition.

Okay, thank you.

Rick Shane, JP Morgan.

Guys, thanks for taking my questions.

Obviously, there are sort of fits and starts in terms of deploying capital.

We've seen some good progress this year.

I'm curious, as you achieve full leverage and think about the different parts of the business, whether it's SSLP and Crystal and the impact of both of those businesses, what do you think is a realistic ROE when you achieve your leverage targets?

I think that -- obviously, it's going to depend on the asset mix across the portfolio.

I think as we've talked through -- Crystal is currently paying us 11.5%.

We think there's some upside there.

Obviously, we've highlighted the unitranche, should be in the low- to mid-teens.

And our life science business is already proven realizations in the mid-teens.

So I think it's really about balancing that math.

And we're further helped by the fact that we've seen some spread and widening in our core sponsored business, as well.

So we feel very good about the ROE potential.

And I think importantly -- as you know, you've run the numbers -- given that we are relatively unlevered today, as we deploy the capital, we will be increasing our net-investment income, and we'll be (inaudible) net income per share.

And that's going to put us in a position to actually talk about increasing our dividends, as opposed to what many other parties are having discussions about today.

Okay.

I don't think you actually answered my question.

I appreciate -- I hate to pin you guys down, but I'd love to get some sense of where you might see this going.

It's really hard to say.

We have to see where the mix of business comes.

I think -- as you know, we're opportunistic, and so we're going to follow where we think the best investment opportunities are and make sure it meets our return criteria.

Okay.

I guess I'm not going to get a specific answer.

Fair enough.

Other question -- you alluded to the competitive dynamic, and frankly, your advantage with dry powder on the balance sheet.

Are you starting to see that manifest in terms of less competition for potential transactions?

Are there peers out there that you would have expected to see competing for business historically that you just aren't seeing as much right now?

I would say -- you have to go niche by niche, but I think -- obviously, in life sciences, GE exited that business, and it's not clear that the acquirer of the healthcare portfolio is going to continue that business.

So we still have the three or four people who are active, and it's a bit of a club.

But generally speaking, competition is a little bit lighter.

I think if you look at Crystal, they've seen a couple of competitors sit on the sidelines, as well as banks be a little bit less aggressive in asset-based lending.

So I think directionally, they have been helped, as well.

And then I think as you look at, whether it's unitranche or other products into the sponsor community -- I wouldn't say that there are fewer competitors, but I would say that the competitors are working together more so and clubbing things rather than trying to take down the entire tranche.

And that could be a result of capital constraints at our peers.

I don't know.

But we have definitely seen more clubbing over the last couple months than we had the last few years.

And given your liquidity, is there any opportunity for you to lead those transactions and scrape some of the fees?

Yes.

Okay.

Thanks, guys.

Doug Mewhirter, SunTrust.

Hi, good morning.

Two questions.

First, you talked about your stock repurchase authorization.

It looks like you didn't have any meaningful activity in the third quarter.

Have you repurchased any shares to date in the fourth quarter?

As you know, we put the plan in the middle of October, and we were in the middle of our blackout period during the period of time.

So we have not been permitted to buy any stock legally from when that plan was in place until we released earnings.

Okay, thanks for that.

My second question -- you mentioned in your prepared remarks about the activity in the joint venture SSLP.

You said you had one deal that could potentially close in the fourth quarter.

And then you had mentioned, quote, additional investments, which are implied to be in the fourth or first quarter.

Does that mean -- is that from an organic pipeline, are you talking about buy-downs from the Solar portfolio?

Or are you talking about a club deal, or are you talking about adding liquid assets?

I just wanted to (multiple speakers)?

No problem at all.

Not liquid assets.

The point is really that -- and one of your peers asked it earlier, how are you, Voya, and PIMCO working together?

And we already have a transaction that all three of us have committed to.

It's not yet funded, but we expect it to fund shortly.

And then in addition to your question, we have some additional unitranche assets that we're currently underwriting that we hope to close this quarter, as well as potentially some assets on balance sheet.

But no liquid assets.

It's all illiquid, privately-sourced unitranche.

Okay.

So it sounds like a mix of a pipeline plus some Solar assets, okay.

Thanks, that's all my questions.

Vernon Plack, BB&T Capital Markets.

Thanks very much.

Mike [and Doug], could you give me some color on what you're thinking in terms of your industry concentration in healthcare?

If you look at all the sub-groups, whether it's providers and services, pharma equipment suppliers, facilities, technology, tools and service -- if you add all those up, you get to 29.9%.

Obviously, lots of diversification within that group, but just wanted to get your thoughts on what you think about regarding healthcare-industry concentration.

It is something that we're focused on.

It's a place that clearly we think you need expertise.

Just as we have stayed away from energy because we lack expertise, we feel that we've built a nice team with healthcare expertise, particularly around potential reimbursement (technical difficulty) stay clear of.

And so I think between Anthony Storino and the life sciences team that we brought over from GE last year, as well as -- our sister company, Solar Senior owns a business called Gemino Healthcare Finance with 20-plus investment professionals there.

So I think that we feel like we have a great deal of expertise on platform, and it is a sector where we think expertise is extremely important.

And if you have that expertise and good access to due diligence and sponsors who also have industry specialization, we believe we found some pretty attractive risk-adjusted returns.

So it is a focus of ours, but to your point, we want to remain extremely disciplined and diversified.

Okay.

And I don't know exactly what it means in terms of -- if you look at that whole area as a group.

But I guess what I'm also hearing you say, perhaps, is that your healthcare exposure could actually very well go up from here, correct?

(multiple speakers) as a percentage, I don't think so.

Because you're going to see us add meaningful (inaudible) in the unitranche space, which most likely will not be healthcare.

Okay.

All right, that's very helpful.

Thank you.

Greg Mason, KBW.

Good morning, guys.

Just a couple of followups.

Just on Arren's question about the underwriting with Voya and PIMCO, do you -- at least it's been our perception that PIMCO has seemed to be dragging its feet on investments.

Maybe that's an incorrect perception, but do you have the ability to just do deals with Voya?

Is the capital separate from each other?

Yes.

The answer is Voya and Solar are in our joint venture, and PIMCO's capital is in a managed account -- as it had been historically.

It's just now completely in a managed account, whereas historically part of it was in the joint venture.

So short answer is, we all underwrite for each other, but if Voya and we decide to do a transaction and hypothetically PIMCO doesn't, we can still invest in that asset.

Okay, great.

And then one last followup on the stock buy-back.

I know you've been in a black-out period so far.

Once you come out of that, what is your view at current prices on utilizing that $30-million buy-back?

I think we're going to be opportunistic, as you can tell from our conversations so far this morning.

We have a lot of growth ahead of us and experience, so you're going to see us tap in another $100-plus million into our revolver this quarter.

So our true available capital for buy-back is not as significant as you may think.

And with returns that we can generate in the low- to mid-teens on an ROE basis on our various businesses, the bar is pretty high.

That said, when we put the plan in place, our stock had traded as low as the mid-15s.

And to the extent there's severe market dislocation, we want to be in a position to take advantage of that.

Got it.

So what I'm hearing is that at current prices, not necessarily on the top of your list to use it, but available if the stock goes back down?

Correct.

Great.

Thanks, guys.

David Chiaverini, Cantor Fitzgerald.

Thanks, good morning.

A couple questions for you.

First, on Crystal financial, can you talk about the driver behind the strong origination, and also what the target leverage is there?

You mentioned that it's now at 1 to 1 as of September 30.

Sure.

As you know, over the last couple years, we've been fortunate enough to be partners with the Crystal platform.

They're portfolio has moved from $400 million to over $500 million on a quarter-to-quarter basis, the point being that, as you know, this is a high-churn portfolio.

Back in 2013, 80% of the portfolio turned over in one year.

So we really don't measure Crystal quarter to quarter.

We look at it over sort of a trailing 12-month period.

And so you will see their portfolio grow their originations.

I wouldn't say it's [thematic].

It's a little bit episodic.

That can reverse itself this quarter.

But having said that, we see consistent performance from the team and are extremely pleased with how they've performed.

I think in terms of target leverage, this is about where they will get up to.

There's a little bit more borrowing capacity there, because, again, these are first-lien ABL loans.

So they do have more capacity.

But their leverage, as you know, has vacillated between 0.3 and 1 times.

I think that's a fair range.

Okay, thanks for that.

And then, within the unitranche product, which industries appear attractive in this environment?

It's a little bit hard for me to be specific in responding to that.

The choice of a unitranche versus first-lien, second-lien [cap] structure is really determined by the sponsor or the buyer of the company, together with their management team.

And so it really isn't so much industry-driven.

I think what we've begun to see evolve is -- the value of a unitranche to a borrower is, to state the obvious, you have a very small group or one lender.

And so it's an ease of execution, ease of amendment, assuming that they understand your business and work with you.

And so what we find is it's more been -- depends on the sponsor rather than the industry, and it depends on the stage of their holdings in that company.

If they're going to make a lot of add-on acquisitions and change things around a fair bit, a unitranche is a pretty convenient product to have in place until you are in a more mature stage of holding that investment.

You might something more like a first-lien, second-lien, or a bond deal.

And so it's less industry-centric, to be honest with you.

I see.

So it sounds like it's more of a bottoms-up process and you're not targeting any specific industries, per se.

Yes, exactly.

We are offering it to all of our clients, and then it's very client-specific as to whether they want that product for that company at that stage.

And so it's more of a life-cycle-type product than it is industry-centric.

And given Solar's overall very low leverage, as you use up that available capacity, how much is going to come from you ramping up the SSLP versus, say, life sciences or any other -- whether it's first-lien, second-lien, or unitranche -- can you kind of break out where some of that available capacity is going to be used up?

We have a [$300-million] commitment to the SSLP.

I think our anticipation and expectation is that we will fully use that commitment over the next 12 to 18 months.

And then we'll fill in from there with life sciences and Crystal.

So it's kind of a blend across the board?

Yes.

Yes, and we do have a stand-by equity commitment into Crystal of $50 million.

They've yet to tap into that, but that's growth that we -- capital that we've set aside for them, should the market come their way.

And obviously, they can leverage that equity a little bit further.

And then -- as I think we've talked in the past -- the life science portfolio -- while the team at GE was anywhere from $300 million to $400 million, we've sort of targeted $250-plus million, depending on the opportunity set.

So those are just some broad parameters.

Thanks very much.

Christopher Testa, National Securities.

Hi, good morning guys.

Thanks for taking my questions.

Can you elaborate on the SSLP?

It seems like it's been slower to ramp than was originally forecast, I guess why that's been the case, and how quickly you see that ramping over the next couple quarters.

I think -- there's no one answer as to the ramp.

As we've talked about in the past, sometimes sponsors might choose a first-lien, second-lien, and we might fund that asset on our balance sheet.

But you won't see that we actually have proposed a unitranche, as well.

So there's been a lot of product mix historically.

We do think the average size of the unitranche has increased in terms of what borrowers are looking for from one lender.

Historically the target had been sort of that $100-plus million.

Today, I'd say it's probably closer to $200 million.

And that's sort of the size of the deal that I referenced earlier that we have committed to with PIMCO and Voya this quarter.

So I think that having that increased scale with Voya and PIMCO -- because Voya will also invest on their balance sheet alongside the joint venture -- makes us more competitive as a threesome.

And in terms of additional ramp (technical difficulty) I think as Michael mentioned, sort of the next 12 to 18 months we expect meaningful ramp.

Okay, great.

And how do you expect, or how are you seeing the pricing change across life sciences, Crystal, and the traditional middle market?

Is the traditional middle-market loans, is that where you're seeing the most -- the best pricing?

Is that a good way to look at that, where life sciences and Crystal are kind of remaining where they've been historically?

I would say that life sciences have been consistent, but consistent at some pretty high relative level --

Right.

-- realizations have been north of 15% for us.

So those are just good absolute returns.

But I don't think there's been much movement.

It is a competitive niche amongst the four or five players who compete in that business.

So we haven't seen much compression.

It seems to have stabilized, but it's a clubby sector.

I think as you look at unitranche, as you look at Crystal, we would all say that spread compression has stopped for the time being, and if anything, in the past quarter we've seen some widening out, anywhere from 50 to 150 basis points, depending on the situation.

Okay, great.

And just, I guess, touching on that same point, there.

Are you still seeing much wider spreads in the second-lien market?

I know that that's bounced back somewhat.

So are you seeing a good amount of opportunities there to get some incremental yield?

We're looking at a situation today, for example -- the short answer is yes.

But to give you an anecdote, we're looking at one today where we've made an investment historically in the mid- to high-7s over LIBOR as a spread, and they're looking to maybe make some add-on acquisitions and keep leverage the same, so generally de-risking.

We believe bigger is better, even at the same leverage ratio, more diversified cash-flow streams, etc.

And spreads are probably going to widen out 75 to 100 basis points, in spite of that lower risk.

So a long-winded way of saying, yes, we're seeing spreads widen out there.

And more importantly for us, as you know, risk is coming down a little bit.

Right.

And last one from me would just be -- how do you see the sponsor versus nonsponsor originations going forward, and what [do you make] about sponsor-finance volume potentially bouncing back in this quarter into next year?

First of all, our unitranche business, our traditional middle-market lending business, is really 95%, 98% sponsor business.

The life sciences [effectively is a] sponsor [bit], as well [if it's] all venture capital [firms] whereas Crystal generally is not.

Look, I think we're going to see volumes bounce back.

There is a huge amount of unspent [private equity] capital on the sidelines that will be spent.

And there will be exits that will take place for sponsor refinancing.

So we're not worried about where volumes are headed.

It's just -- you always go up these dips here and there, and we're pretty confident next year is going to be a big year.

Great.

That's all from me.

Thanks, guys.

The last thing I would tell you is, a lot of the add-on -- a lot of the volume is add-on acquisitions that we're seeing, which as I mentioned, can be very nice, attractive transactions and de-risking.

Right.

Okay.

Thank you, guys.

Chris York, JMP Securities.

Good morning, guys.

Just a couple questions.

We noticed a small fair-value [write-down] Crystal.

And we also noticed that the 10-K disclosed that net income at Crystal declined year-over-year [to about] it was $3.8 million, which was about half the dividend payment to Solar.

So can you talk a little bit about this distribution disconnect?

Hi, Chris.

With regard to -- I just want to make sure I understand your question -- with regard to Crystal, yes, there was a mark-to-market there of about $7 million.

But what was your question, was Crystal's net income?

Yes, correct.

Not Solar's?

Yes, there was a change.

But usually it's just to do with timing, and there's a lot of noncash things like depreciation and such.

So there wasn't really any driver to that.

And the mark-to-market -- I'm glad you brought up -- you saw our NAV went down about 2% for the quarter overall.

That really is, for the most part if not all almost all, a reflection of the [technical] factors of the marketplace in the quarter.

And Crystal, for example -- our job is to fair-value that every quarter.

And if you think about the peer group of companies in this sector, they all experienced some weakness in the quarter from a valuation perspective.

So it was appropriate to mark that down.

But we think these write-downs we've taken are truly temporary.

Okay.

And then, a question on the buy-back.

So what recently changed in the Board's support of buy-back program?

Because the last couple calls, it seemed you expressed limited interest to put a program in place --?

What changed wasn't led by us at the manager level.

It was that, when we saw our stock hit [$15.50] in October, we really wished we had an ability to buy stock at that point in time, because at that value and that return, it's more compelling than the investment opportunities we have.

So we think -- look, we're in a world of volatility today, and it could happen again in three weeks when the stock is back at that level, given just the volatility.

And so by having this in play, we could potentially buy some stock really cheaply.

Yes, makes sense.

And then lastly, it seems just listening to the call, here, I'm hearing a bunch of questions about the senior loan fund and the slowness in the ramp in the [JV].

So do you think there are any issues of marketing or potentially unawareness among sponsors in your ability to provide the unitranche?

No.

I think that, as you mentioned, it's really been situational, as well as getting our partners up to speed.

That's something I think we have accomplished, both with Voya over at Solar Senior now joining the mix, as well as having been through some transactions with PIMCO.

So we feel very good about it.

I don't think it really goes to the marketing of the product, per se.

But again, it's very situational as to whether sponsors decide to go with a unitranche or not.

We've had some bad luck, but we do feel we're well positioned with the clients.

There's a handful of us that are known to have the capability on the unitranche.

And as we mentioned earlier, there's an increase in clubbing on that unitranche product, because the average unitranche loan has gone up from $100 million to $200 million to $300 million.

And so people are looking to club these together with two or three of us.

Got it.

Thanks for the additional color, Bruce, and thanks for your time, guys.

Fin O'Shea, Wells Fargo Securities.

Hi, guys.

Thanks for taking my question.

First, just a couple of company portfolio holding names -- Global Tel Link and Easyfinancial.

[These had previous slight] marks.

So if you could give us any color on how you feel about these or if there's anything company-specific.

No, nothing is company-specific on Easyfinancial.

It's a business that -- you may recall we've been an investor since the middle of 2012.

There is some currency volatility because it's Canadian dollars -- it's a Canadian-domiciled company -- but nothing fundamental.

This is a first-lien.

We're lending against the pool of assets, so we feel very good about Easy.

So nothing other than technical in the mark.

Global Tel Link -- good question.

That's a name that has gotten some press in the last week or two, post quarter-end.

And so what I would say there is, we do expect a little bit more pressure.

If you called up a broker today, it would be marked lower than the 90, or so, that we had it marked at.

And that's predominantly to the recent announcement by the FCC to examine intrastate rates being charged.

This is a company that has, along with its sister company, has a duopoly on managing phone calls in security around communications for prisoners.

And so there was an issue, actually, a couple years ago on intrastate rates, which the company resolved after an 18-, 24-month period, favorably.

But that creates a little bit of an overhang right now, as the FCC is putting pressure on these two companies to lower the rates that they're charging on intrastate calls.

And so we think this is going to be borne out over the next 18, 24 months, as intrastate was.

Fortunately for us, Global Tel Link is a business that has over $150 million of EBITDA, and as we mentioned, is a duopoly providing these services into prisons.

And so from our perspective, it's de-levered nicely from 6 times to the mid 4s.

And we believe that even if there was no change in what the FCC is currently proposing that we believe we're going to be in a fine situation with no risk of impairment, given that the leverage has come down rather meaningfully.

But I think there's going to be some volatility around the name around the next year, or so, as this gets resolved between the companies and FCC.

So that is a name that we are watching, but not a name that we're worried about risk of impairment or nonaccrual.

Okay, very well.

Thank you.

And a quick question on the SSLP.

To the extent that the strategic partners co-invest alongside, would they be able to use leverage?

And does that affect the economics of the SSLP equity position?

So at SSLP, itself, we will be using leverage, and that's why we're getting returns in the mid-teens.

With PIMCO, they intend to use leverage, and so their $300 million gives us about [750] of investable capital there.

And Voya, in all likelihood is just putting assets on their own balance sheet and not using leverage.

Okay.

And just one final question.

As it relates to the buy-back program, sort of a global question -- from your perspective as somebody who's done one in the past -- so we've recently seen a lot of BDCs jump on and launch buy-back programs, but very little repurchasing relative to this.

And kind of what we're seeing here is that this has to do with the nature of the 10b-18 discretionary program that you could say has much fewer teeth, in terms of actually -- in terms of the automatic programs.

And sort of to segue off the dialog you had with Greg on today not being the right price, what's to stop BDCs if, say, you believe 75% of book is the right price to put it in an automated program there, and that would help avoid insider allegations, black-out periods, etc?

Any perspective on that would be helpful.

Thank you.

All I can tell you -- if you look back historically, we bought back [$57 million] of our stock.

We did it both during our open-window periods, and we have not -- we actually put in a 10b [5] plan in the past to allow us to buy during the black-out periods.

So that is definitely a tool available to BDCs.

And if the Board is serious about using it, taking advantage of certain prices, that's something that should be put in place.

Okay, very well.

I appreciate your questions.

Unfortunately, we're going to have to cut it off at this time, as we have our other call beginning in 2 minutes.

If there are any questions we were not able to answer, we are available after our 11 o'clock call to handle those calls.

Thank you very much for your time.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.