SLR Investment Corp (SLRC) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to Solar Capital Limited Q4 2016 Earnings call. At this time all participants are in a listen-only mode. Later we will conduct a Q&A session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host, Mr. Michael Gross, Chairman and Chief Executive Officer, you may begin.

Thank you very much and good morning, welcome to Solar Capital Limited's earnings call for the quarter and year ended December 31, 2016. 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?

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 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 like to also call your attention to the customary disclosure 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.

Additionally, past performance is not indicative of our future results. 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. On all three primary metrics by which we measure our fundamental performance, credit quality, NAV preservation, and portfolio earnings power, Solar Capital had a successful fourth quarter and full-year 2016. First, the credit quality of our portfolio remains strong with over 99% of the portfolio performing, portfolio of companies collectively experienced revenue growth in 2016.

Second, our December 31, 2016 net asset value per share of $21.74 was up over 4.6% year-over-year and remains 5.4% above our adjusted NAV at the time of IPO seven years ago. The ability to preserve NAV is large determined by portfolio credit quality and net investment income distribution coverage, both of which are strong for Solar.

Third, our net investment income per share for the fourth quarter was $0.42. For the full-year, net investment income was a $1.68 per share, up 10.5% from net investment income per share of the prior year. Excluding non-recurring expenses related to the amendment and extension of a credit facility and cost related issuance of $50 million of unsecured notes, Solar's 2016 net investment income was $1.76 compared to our distributions of $1.60 per share.

In addition, we are able to grow our net investment income, while maintaining our $1.45 billion comprehensive portfolio at approximately the same size as the composition reflected significant progress with our strategic initiatives. Our senior secured loan program portfolios or what we call SSLPs grew 190% and our life science loan portfolio increased 70% compared to the respective portfolios at December 31, 2015.

As we look ahead to 2017, we are in a very strong position. We have a healthy, well diversified portfolio of predominantly senior secured floating-rate loans, a conservative balance sheet and the ability to continue grow net investment income as we invest significant available capital. Importantly, we worked diligently in 2016 on two new platforms, strategic developments that will benefit Solar Capital, which I'm pleased to now discuss.

First as you may have seen from our press release yesterday morning, we finalized a new life science lending joint venture with our sister company Solar Senior Capital affiliates of the joint venture between Solar Capital Partners and PIMCO, and Deerfield Management. Solar Life Science Loan Program LLC is expected to invest majority of its assets in the first lien loans to publicly traded companies in the life science industry, and will be incremental to our existing life science loan strategy.

Aside larger enterprise value of the target companies, the business model will be consistent with loans currently being originated by Solar Capital Partners Life Science team. To-date, our teams achieved a weighted average internal rate of return on all exit investments from the Solar platform of 18.6%. We are pleased to partner with the Deerfield Management, a top tier private investment firm with over $8 billion in assets under management. The firm specializes in healthcare investing from seed stage to matured companies across all segments of healthcare and has a tremendous track record.

Solar has committed $50 million to the total $350 million of equity committed to the JV. With anticipated leverage of one-to-one debt to equity, the venture is expected to have total investable capital of $700 million. Once fully ramped, the LSJV is expected to generate a mid-to-high teens return on equity.

Second at the end of 2016, our advisor, Solar Capital Partners formed a joint venture with PIMCO. This initiative should provide significant benefits to Solar. Through an expected larger investable capital base upon the solar platform, SLRC will be more of a full solutions provider. This should result in greater deal flow for Solar Capital. As an example, an equity commitment arising for the strategic partnership with PIMCO has helped make Solar Life Science Program larger and more relevant.

Similarly, with a large capital base, we anticipate having access to more sponsor-backed senior secured loan investment opportunities for the SSLPs and on solid balance sheet portfolio. Furthermore, the partnership with PIMCO provides access to credit resources of a world-class credit manager, which has invested $300 billion in corporate credit, and currently employs over 50 credit research analysts.

At year-end, our strategic initiatives with the senior secured loan programs and life science represented approximately 30% of the comprehensive portfolio, more than doubling the 13.4% allocation at 12/31/15. The strategic partnership with VOYA and SSLP and the launch of SSLP II with WFI in the third quarter were important engines of growth in 2016 and have allowed us to source attractive cash flow loans with dollar one risk and (inaudible) that meet our strict risk reward criteria.

In addition, the 70% growth in the life science portfolio year-over-year was driven by continued steady originations and the second quarter opportunistic acquisition of matured life science loan portfolio and a proprietary transaction. Bruce will provide more additional details of our strategic initiatives and portfolio activity in his remarks. We also made important progress in diversifying our funding sources and terming out our liabilities.

In the fourth quarter, we issued $50 million of private five-year unsecured notes. Subsequent to year-end, we closed on an additional $100 million, bringing the total issuance to $150 million, maturing in May 2022 with weighted average fixed interest rate of 4.53%. The issuance further diversified Solar Capital's funding sources and increases at attractive pricing, the amount of unsecured financings.

At December 31, the regulatory capital leverage of Solar Capital was 0.42 times net debt-to-equity. Pro forma for the issuance of the additional $100 million in unsecured notes, Solar Capital now has approximately $750 million combined available capital across our balance sheet and strategic joint ventures, including both the SSLPs as well as Crystal Financial. We believe our history of acting in the best interest of our shareholders played a big role in our success over the last several years and our strong positioning entering 2017.

Political, economic and corporate tax uncertainties have weighed heavily on middle-market M&A and sponsor activity, resulting in a very competitive middle-market underwriting environment. We will continue to be patient and highly selective with our new investments. With diversified originations engines and strategic initiatives in place, we anticipate uneven, yet meaningful portfolio growth in 2017. Once we ramp our portfolio to target leverage, we expect to generate sustainable net investment income in the mid-40s per share range per quarter. At that time, we'll consider increase our (inaudible) distributions to reflect the sustainable earnings power of the portfolio.

At this time, I will turn over the call to our Chief Financial Officer, Rich Peteka, who will take you through the financial highlights and then Bruce will walk you through portfolio details.

Thank you, Michael. Solar Capital Limited's net asset value at December 31, 2016 was $918.5 million or $21.74 per share compared to $917.6 million or $21.72 per share at September 30. At December 31, Solar Capital's on balance sheet investment portfolio had a fair market value of $1.31 billion in 63 portfolio companies across 25 industries, compared to fair market value of $1.36 billion in 66 portfolio companies across 26 industries at September 30.

The weighted average yield on our income-producing portfolio inclusive of our equity interest in Crystal Financial, SSLP and SSLP II was 10% at December 31, 2016, consistent with the 10% yield at September 30, measured at fair value. For the three months ended December 31, 2016, gross investment income totaled $36.6 million versus $39.8 million for the three months ended September 30. Net expenses totaled $19.0 million for the three months ended December 31, and this compares to $22.8 million for the three months ended September 30.

Accordingly, the Company's net investment income for the three months ended December 31, 2016 totaled $17.6 million or $0.42 per average share compared to $17.0 million or $0.40 per average share for the three months ended September 30. Below the line, the Company had net realized and unrealized gains for the fourth quarter totaling $0.2 million versus net realized and unrealized gains of $8.6 million for the third quarter.

Ultimately the Company had a net increase in net assets from operations of $17.8 million or $0.42 per average share for the three months ended December 31. This compared to an increase of $25.6 million or $0.61 per average share for the three months ended September 30. Finally, our Board of Directors declared a Q1 2017 distribution of $0.40 per share payable on April 4, 2017 to shareholders of record on March 23, 2017.

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

Thank you, Rich. I'd like to begin by providing an update on the credit fundamentals of our portfolio. Overall, the financial health of our portfolio companies remain sound, reflecting our disciplined underwriting and focused on the downside capital protection. On average, the most recently reported organic LTM revenue for our portfolio companies was up 5% and EBITDA has held steady year-over-year.

When measured at fair value, the weighted average interest coverage for our comprehensive portfolio companies was 2.75 times and the weighted average leverage to our investment was just over 5 times at year-end. At the end of the fourth quarter, the fair value weighted average EBITDA for our portfolio companies was just over $80 million. At December 31, the weighted average investment risk weighting our portfolio was 2.0 based on our one to four risk rating scale with one representing least amount of risk.

Over 93% of the portfolio is rated two or better reflecting the strong credit fundamentals in our portfolio. Measured at fair value, 99.9% of our portfolio was performing at the end of the year. On a cost basis, our one investment on non-accrual accounted for 65 basis points of the portfolio. Excluding this one legacy asset from 2007, our portfolio is performing very well. The weighted average yields on a fair value and current cost basis are 10% and 10.4% respectively roughly similar to the prior quarter.

Now I'd like to provide some color on the composition of our comprehensive investment portfolio, which includes Crystal Financial's portfolio of asset-based loans as well as our senior secured loan program to our SSLPs. At the end of the year, our $1.45 billion comprehensive portfolio included 92 borrowers across 33 industries with neither direct energy nor commodities on that list. The average investment per issuer is just over $15 million or 1.1% of the portfolio. Our largest single investment is 3.8%. Measured at fair value, over 95% of the portfolio consisted of senior secured loans, consistent with the prior quarter. The remainder of our portfolio was comprised of 2% unsecured securities and 2.4% equity securities. At the end of the year, over 95% of our income-producing portfolio is floating rate.

Before turning to investment activity, I will provide a brief update on our strategic initiatives. In the fourth quarter, SSLP funded $40 million of senior secured loans, bringing the total portfolio to $180 million. At year-end SSLP had $67 million drawn under its $200 million credit facility. The annualized return on average equity for the fourth quarter was just under 11% for SSLP.

We continue to expect to achieve a low-teens ROE as the vehicle continues to ramp. In the fourth quarter, SSLP II funded just over $35 million of senior secured loans, bringing the total portfolio just over $90 million. Also during the fourth quarter, we opened a new credit facility for SSLP II, non-recourse to SLRC. At year-end SSLP II had drawn $33 million under this facility, the annualized return on average equity for the fourth quarter for SSLP II was 10.3%. Again similar to SSLP, we expect to achieve low teens ROE as the vehicle ramps. At year-end, the combined portfolio across our SSLPs was just over $270 million of senior secured loans to 13 different borrowers, and both portfolios were 100% performing.

Now turning to life sciences, at year-end our portfolio totaled approximately $200 million at fair value, which consisted first lien senior secured loans across 25 borrowers with an average investment size of $8 million. During the fourth quarter, our team originated $22 million of life science senior secured loans. Repayments and contractual amortization totaled $37 million. The weighted average yield of the life science portfolio was 11.3% at fair market value, which excludes any potential exit fees, excess fees or warrants. To-date, the blended IRR on our realized life science investments is 18.6%, when including realized warrants.

We continue to believe that $250 million to $300 million portfolio is the right target size for our life science initiative on balance sheet.

As Michael mentioned, the middle market environment remains competitive, given the muted sponsor activity. In the advanced stages of the current credit cycle, we believe it is imperative to remain highly disciplined in our investment process and extremely prudent in deploying our available capital into investments that meet our strict underwriting criteria.

Our strategic initiatives with life science lending and Crystal platforms create attractive growth opportunities while our SSLPs allow us to be highly selective with first lien sponsor-backed cash flow transactions. Longer term, we believe the record amounts of private equity dry powder as well as the retreat of banks from mid-market leveraged lending and the approaching refinancing wave of existing leverage companies creates an attractive supply-demand dynamic for cash flow lending to mid-market companies.

In addition, we expect our new Solar Life Sciences JV to begin investing in the second quarter. As Michael mentioned, this JV enables our life science team to include public later-stage, larger enterprise value companies in their target market. Our life science team frequently finance companies in this niche, while employed at GE Capital.

In our opinion, these larger companies present an attractive investment opportunity because of their more advanced product pipeline as well as their demonstrated proven access to public equity capital. Importantly, we view Deerfield's expertise in the public healthcare space as a valuable addition to this initiative. We are confident in the JV's ability to earn a mid-to-high teens ROE once fully ramped.

Now, let me give you an update on Crystal Financial, our first lien asset-based lending platform. At year-end, Crystal had a diversified portfolio, consisting of approximately $368 million of senior secured loans across 25 borrowers with an average issuer exposure of approximately $14.8 million. During the fourth quarter, Crystal funded new loans totaling approximately $38 million and had portfolio repayments totaling approximately $150 million.

A 100% of Crystal's investments are senior secured loans and approximately 99% are floating rate. The swings in the size of Crystal's funded portfolio from quarter-to-quarter are normal course of business and do not reflect any underlying systemic or macroeconomic trend. Since acquiring Crystal in the fourth quarter of 2012, the funded portfolio in Crystal has been as low as $350 million and as high as $530 million . The pipeline of new opportunities at Crystal remains healthy and we expect growth in their portfolio this year.

For the fourth quarter, Crystal paid Solar a cash dividend of $7.9 million, consistent with the prior quarter.

Now I'd like to turn to our fourth quarter portfolio activity. During the fourth quarter, Solar Capital originated approximately $86 million of predominantly senior secured floating-rate loans across six new and three existing portfolio companies. Investments repaid during the quarter totaled just under $110 million. Solar funded a $20 million investment in the first lien term loan of [rev spread], an outsourced provider, patient communication and building services and support for GTCR's acquisition of the company.

First lien leverage is 4.3 times and the yielded issuance is just under 7%. In total, the Solar platform committed just under $40 million to this transaction. In addition, we originated a $21 million investment in the first lien term loan of Professional Physical Therapy, a market leading provider of outpatient physical therapy in the TriState area. The company is owned by Thomas H. Lee Partners. It offers attractive covenant protection and a yield of 7.3%. Collectively, the Solar platform committed $40 million for this transaction.

We also committed $27 million in the first lien term loan to Alera Group, which is an employee benefits and insurance brokerage platform created by Genstar. The loan is levered to 4.5 times as covenant protection and carries a yield of 6.8%. In total, the Solar platform committed $45 million to this transaction.

Now turning to our life science platform, during the fourth quarter, we made through three new investments totaling $22 million. We funded $7.5 million investment in the first lien term loan (inaudible) medical device Company. The yield on the investment is just under 12%. We also funded a $10 million investment in the first lien term loan of Vapotherm, which is a manufacturer of respiratory therapy products. The yields maturity on this investment is just over 11%.

Now, let me touch on repayments during the fourth quarter. We repaid $49 million of our first lien term loan to LegalZoom, blended IRR in this investment 11.25%.We also repaid $21 million on first lien term loan to T2 Biosystems, a life science portfolio company. The IRR in this investment was 11.4%. We were also repaid $7 million of our loans to Orametrix. The investment was purchased from Capital One as part of our second quarter of 2016 acquisition of this portfolio. Our IRR in this investment given the short-hold period was 25%. In addition, we repaid [$14 million] on our second lien term loan investments in Genoa. In spite of the company's strong operating performance and deleveraging since our original investment, we elected to pass on the opportunity to reinvest based upon the risk adjusted returns that were being offered. Our investment produced an IRR of 10.65%.

And finally, we sold the remainder of our investment in (inaudible) second lien term loan at an average price above par, which resulted in a cumulative IRR of 11.4%. Solar has originated on average over $450 million of new investments over the last six years although originations can be lumpy from quarter-to-quarter. With our diversified origination engines in place, since the beginning of 2015, our portfolio has grown approximately 30%.

Importantly, the SSLP assets increased $272 million and our life science portfolio exceeds $200 million. As the frothiness in the credit markets returned in the fourth quarter, we maintained our investment discipline on all fronts; credit quality, structural protections, and yield. We believe the first lien loans to our life science platform, our Crystal platform as well as stretch first lien cash flow loans to the SSLPs offer the best risk-reward in today's environment.

As a result of our diversified investment platform, we are not totally reliant on the sponsor backed segment of mid-market lending, which has been slow year-to-date. However, given the significant amount of debt maturing in 2020 that will need to be refinanced, as well as the over $500 billion of private-equity unspent capital waiting to be invested, we are expecting a pickup in demand ahead for capital and sponsor on companies.

Our current leverage at Solar is 0.42 times, which is relative to our target 0.65 to 0.75 debt to equity. Including available capital to our strategic initiatives, Solar has approximately $750 million of balance sheet and joint venture available capital and the diversified originations to grow our portfolio.

At the present time, visibility on originations and repayments for the first quarter is light. Our life science and Crystal pipelines are healthy. In addition with VOYA and WFI , our JV partners and the SSLPs, our collective dry powder gives us a competitive advantage as we further ramp these vehicles. We remain confident in our ability to prudently grow our portfolio during the remainder of 2017.

Now let me turn the call back to Michael.

Thank you, Bruce. For the fourth quarter Solar delivered another quarter of solid operating results, completing a successful 2016. Across a number of important portfolio metrics, balance sheet improvements and strategic developments, we are well positioned for 2017 and beyond. Our diversified portfolio has a strong credit profile, is over 99% performing. Net asset value per share was up 4.6% for the year and up 5.3% since our 2010 IPO, an outstanding achievement on both an absolute basis and relative to our peers.

Preserving net asset value, and frothy credit markets requires patience, selectivity and consistent application of underwriting disciplines. We believe our strong credit performance is also result of two key strategic portfolio decisions to shift the portfolio to senior secured floating-rate assets to better control downside risk and to diversify our sourcing opportunities across cash flow, asset-based and life science lending strategies. The flexibility we have built in our lending platform provides the diversified sources of growth and allows Solar to be less reliant on sponsor transactions when risk levels are elevated and structures are compromised.

The 10.5% increase year-over-year to our net investment income and our 104% dividend distribution coverage for 2016 reflect the earnings power of our current portfolio at very modest 0.42 times portfolio leverage. Our alignment with shareholders and Solar Capital's conservative investment philosophy has enabled us to attract and retain high quality investment professionals, diversified strategic partners and distinguished institutional investors. The strategic developments for the recently announced joint ventures of PIMCO and Deerfield expand the opportunity set for both Solar Capital's on balance sheet and SSLP investments and asset classes we believe offer the most attractive risk return profile in the current market environment.

Finally, we enhanced our balance sheet flexibility through the third quarter amendment and extension of our revolving credit facility with lower average pricing. And we further diversified our funding sources with the private placement of $150 million of five-year unsecured notes with a weighted average fixed interest rate of 4.53%. At December 31, our portfolio is defensively positioned. In what could be an extended challenging credit environment, we will continue to be selective and prudent with new investments. We feel confident that through our proprietary sourcing channels and strategic initiatives, we can use our available capital to opportunistically expand our comprehensive portfolio in 2017.

As we invest and move close to our target leverage, our quarterly net investment income should increase in the mid-40s per quarter range. At that time, we will evaluate increasing our quarterly distribution.

At 11 O'clock this morning, will be hosting an earnings call for the fourth quarter 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 clients' capital needs and will continue to see benefits of this value proposition and Solar capital deal flow.

Thank you very much for your time this morning. Operator, could you please open the line for questions?

(Operator Instructions) Arren Cyganovich, D.A. Davidson.

Clearly the results were solid at a relatively low leverage level. Michael, I think you said uneven but meaningful growth through the years. Is there anything in particular that's driving the comment about uneven and large repayments expected or they're just a reflection of the lumpiness of investing in middle market?

It's really just the lumpiness of the middle market. As you know, Crystal can clearly be lumpy if you look at their underlying portfolio, given the high churn and high velocity, given it's an average duration of 18 months asset class. And I think at the Solar balance sheet level on the direct sponsor-backed lending side is lumpy based upon M&A activity and it's just difficult to time when those deals will be closing. But we do see increased activity, but timing is a little bit difficult to predict.

In terms of the new JV with Deerfield, can you talk a little bit how that differs from the life science investments that you make currently and how that might, I guess, enhance the overall origination platform?

Just to step back, as you know, we brought on the life science team from GE, where they invested over $3 billion in their career. We brought on three years ago, and their focus for the last three years on our platform has been in private companies, because as you know with over $250 million of market cap are non-qualified assets. And so back in careers at GE one of the [errors they have to quiver] and one of the big parts of their investments was in these public companies. So by creating this joint venture, we're now allowing them to go back to doing what they were doing before which they've done very successfully.

Ryan Lynch, KBW.

First question, speaking with Deerfield loan fund. As I look at your financial statement, it says as of December 31, the fair value of non-qualifying assets in the portfolio is about 31.6% of total assets of the Company. So just from a technical standpoint, how are you guys able to actually -- did the Deerfield loan fund up and running, assuming that's going to be a non-qualifying investment?

We're utilizing the last $50 million commitment of the $300 million commitment we had made a few years back. And just to refresh your memory, that broke out as $175 million to SSLP, $75 million to SSLP II and now $50 million to the Deerfield joint venture. So, we're just utilizing the unfunded $300 million commitment we had made a few years back.

So that unfunded commitment was included in the balance of your non-qualified investment on December 31?

No, wasn't. It's just a timing of when you make the commitments and then what happened was, we have some of these life science deals that go on and off hit $250 million market cap under, over. So it's not an actual purchase of new assets where -- if we tip over to 30%, it's not on active something on all parties. It's the life science deals that all of a sudden moved to $250 million and they going to $240 million etcetera and they go back and forth. So, that's not something that was done on an active part. The commitment, as Bruce mentioned earlier, was done before the new life science deals that did go public and did tip over the $250 million market cap.

Speaking with fund, obviously you mentioned larger companies, public companies are maybe going to be safer assets. I would think, if you are doing larger public companies, there would probably be larger size deals, which could mean maybe faster deployment than you're doing on the private side. So just what is your expectation for capital redeployment within the Deerfield bond fund?

Yes. I'll hit on the first part. I think you hit it right the nail around the head. The reason we put together much capital as we did is we wanted to have approximately $700 million of investable capital because the deals you have are $30 million to $40 million and on our own balance sheet at Solar or Solar senior -- we were not couple taking down that kind of size for diversification reasons. So, our target here is 3% to 5% positions and so this should ramp fairly quickly.

Switching over to just totally AUM/the PIMCO JV; while the PIMCO JV or the credit fund that's not in the BDC, that's definitely going to increase the size and scale of the entire Solar platform, which will certainly help Solar shareholder. So I don't know if you can disclose us now, but can you disclose if you can the size or the AUM size that you expect that private credit fund, what PIMCO to be, and then also how much total AUM would you guys now have across the Solar platform when you guys head to the market to make investments?

I apologize, but unfortunately we're being advised by counsel that we can't disclose that at this stage. Obviously we will as we make more progress on that JV, but suffice it to say that there will be a substantial increase in our capital base.

And it will allow us to take down across the platform substantially larger positions, which will benefit Solar, the BDC.

Jonathan Bock, Wells Fargo Securities.

Michael, I mean looking at where the stock sits at [$102 of book] plus the opportunity to continue to grow and generate earnings you're kind of going to be presented with a choice, and the choice will be is you could choose to take equity now which I'm sure would please some folks, but not the vast majority, or you could choose to wait and leverage up to your target level before you'd even consider an equity offering, which way would you consider going?

We choose plan B.

Moving into the life sciences JV for a second; understanding PIMCO's participation, I actually thought that maybe say about six quarters ago, maybe seven quarters ago, PIMCO was a bit of a governor on the growth of the SSLP program, thus the addition of VOYA etcetera. What's to make us think that they will not be the same or even perhaps be more restrictive on your ability to grow this JV, based on their past actions with SSLP.

Just a couple quick comments Jonathan. What I would tell you is that the JV where Solar-PIMCO joint venture is going to participate in this Deerfield joint venture is going to be driven by Deerfield and Solar. So, that's first as it relates to your specific question, they will not be an active participant in that process.

Yet they still gave $150 million that's --

$75 million, Deerfield's $150 million.

Deerfield's $150 million, $75 million from Solar-PIMCO JV, but on a broader basis, away from that specific JV, the strategic partnership between Solar, the advisor and PIMCO is effectively a dedicated direct lending initiative where both parties are extremely incentivized to build out a business.

You were thinking -- I think you mentioned $30 million bite sizes for this fund. Is that going to be where you will exactly focus or if you were going to stick to that 3% of total fund size? It seems more or like a $15 million to $20 million for diversification purposes. And more importantly how would your lenders view diversification in this portfolio because that's going to be just as important? Are the terms and covenants that are put on a new facility in this fund going to require a bit more diversification in the 3% chunks that you'd be looking to take?

Actually, the way the credit facility work is it's like some of the other SPVs that we have for example at our SSLP joint ventures. The difference here is given the underlying asset level returns, leverage will be closer to 1 turn, than the 1.5 turns or 2 turns that you see people put in place on direct cash flow loans. So, it will be little less levered, but from a diversification perspective, consistent. They're looking for 5% to 7% diversification position.

So I'd say Jonathan, our bite size here is $20 million to $40 million.

Michael, is there a set level that it has to reach before leverage can effectively be drawn five assets at $100 million, or is there kind of a sense of guidance that you could give us on what level it needs to be from an asset perspective before you could draw leverage on that portfolio and grow as you go?

Yes, I think 4% to 5% is a good estimate consistent with other facilities like this.

In terms of just general competition for that segment, clearly giving your GE investment and your life sciences team more flexibility is a good move. The question would be is, once you move into particularly the public category, we've actually seen similar financings from Hercules which is also well respected lender. What makes us think this niche is somehow less competitive relative to the broader, public corporate debt landscape once these companies are public. You'd imagine that perhaps lending to these companies would be done so on a tighter spread basis than what you'd be looking at, if you were to do it privately. So, can you walk us through just the general competitive dynamics for lending into that niche and why?

So to echo of Michael's earlier comments, the team has already been in this end of life science investing during their 15-year career at GE. So, it's not a new entrant. It's just going into later stage -- late stage life science companies because they are now public. From a competitive perspective, it's really no different from who is playing in the private company life science businesses to your point, Hercules is a participant both in the private company as well as the public company side of this; A, because they have the balance sheet and there aren't many people with the balance sheet to do the larger deals, life science companies, but it's the same expertise to your point from an underwriting perspective, because these are still late stage venture-capital backed. They may have public equity in there as well, but they still have a meaningful ownership from the VC community and they, generally speaking, are still cash flow negative to neutral as they're building out their platform. They've just supplemented private capital with public capital.

The expertise from an underwriting perspective, the relationships, the industry expertise, it's the same players that we see in our private company life science lending business with one caveat that not everybody has the balance sheet, who plays in the private company to go to these larger holds in the public company side of it. But Hercules, the folks at mid-cap, the folks at Oxford, similar to the competition we see in the private lending market is consistent. So it's more you have to look at this from a life science perspective when you're thinking about the competitive landscape and we find extremely attractive is the number of competitors fit on one hand.

I wish to add to that -- you didn't ask, but I'm going to answer it anyway. Deerfield is a very meaningful strategic partner here. They manage $8 billion to $9 billion of capital today, (inaudible) healthcare, a lot of in public equity, so they have tremendous relationships across public companies. So, not only will they help us kind of in decision process, but they'll also probably help us in sourcing additional investments.

Just as a quick follow-up and it relates to tax policy, etcetera, and obviously, who the heck knows is generally the operating answer, but if were to look at Crystal's business of predominantly ABL loans to the retailing sectors and then a great business asset, well run. How would you think or have you trouble shot potential impacts of border adjusted taxation and/or loss in interest deduction etcetera? Those tax policy items that are bit contentious for retailers, how could that be perceived to affect Crystal's business? That's it for me.

Good question. So first Crystal for better for worse, is typically many of the companies that probably are not paying taxes. Given that, they are going through some kind of transition. So I think the tax deducted interest for Crystal business will have really zero impact. And these companies need the money to get the transition so they almost want to do at any price. And frankly, if the border adjustment tax has a big negative impact on retailers, that's going to drive a tremendous amount of additional business to Crystal's platform because we're going to see more and more companies go through distress as we've seen the past year with companies like Aeropostale and Wet Seal which are kind of prime candidates for Crystal will lend to.

Remember too Jonathan, Crystal is underwriting liquidation value of assets so taxes in some way hit one of their retailers, again they're fully collateralized by inventory receivables, etcetera.

(Operator Instructions) Mickey Schleien, Ladenburg.

I just want to start with a clarification. When you say the new healthcare JV is going to invest in public companies, you're not implying they're going to invest in debt of public companies, is that correct?

No, no, these are privately negotiated deals into public companies. Same type of structure they were doing in the private company today.

So in other words, the stock is listed, but there is no debt that's --

Correct, correct.

I wanted to clarify that. And secondly, could you just give us a sense of perhaps on an average EBITDA basis and maybe leverage at your attachment point where the current life science business is operating and where the new JV will operate in a broad basis?

Yes, I think be mindful Mickey that these are late stage venture companies so they generally don't have EBITDA. They may have revenues, they may not, they may still be getting through Phase III approvals with the FDA. So we're underwriting loan to value against recent equity/ cash raise and we're underwriting value by PE. So. it's more or loan-to-value, which tends to be in the 20% to 30% range than it is in EBITDA multiple.

In the loan-to-value in the public companies is less than the loan-to-value in the private companies.

And these public companies to which you are referring would you also characterize them as generally having negative cash flow?

Most of them. Yes, but less negative cash flow, because they are later -- they are closer to getting towards breakeven, they are further in their development.

Okay. So these are businesses that perhaps Hercules or Triple Point would be looking at, is that correct?

Yes.

Christopher Testa, National Securities.

Is there going to be any overlap between the on-balance sheet life sciences lending and the new joint venture or is that going to be strictly separate?

It's been mostly separate because the life science lending in the JV are all public companies, and as we talked about that earlier, we're pretty much at our cap on non-qualified assets today.

Just with Crystal Financial obviously the yield to Solar has been very constant. Just with the continued stress in retail, just wondering if that or any other factors could contribute to possibly bolstering the yields from Crystal?

I think that we feel very comfortable with where it is. As you know, it moves quarter-to-quarter but over a 12-month period, the 11.25% to 11.50% has been pretty consistent. I think there is some upside, but to your point we would need to see an environment where they can extend the duration of their assets. Normal course, it's sort of an 18-month average life, but during periods of dislocation those assets stay on the books a little bit longer and that would be an earnings opportunity.

Just what you're seeing in the pipeline so far in the first quarter, just wondering what you're seeing the best risk adjusted returns and whether it's the off-balance sheet JVs or life sciences or asset-based lending?

I would say all three.

Is there one that stands out that maybe hasn't had the spread compression to the extent the others have?

I think generally speaking Life Sciences has as we took in response to somebody's earlier question, it has less competition given the specialization of that niche. So I think they are more immune to spread compression and then I would say the Crystal asset-based lending business, if I were to rank them has a similar dynamic where there is only a handful of competitors. And then last but not least, the SSLPs direct sponsor business has felt probably the most compression, but less so in the stretch senior asset class, which is what we're investing in.

(Operator Instructions) Casey Alexander, Compass Point Research & Trading.

Most of my questions have been answered. It sounds like in the traditional middle market just a very senior, very conservative lower yields, can I get a sense as the JVs and all of them seem to have some ramping to do over the course of the year, would we look for your weighted average yield to increase during the course of the year or would you balance that off with an increase in more of the traditional middle market, very senior stuff that would keep the weighted average yield fairly constant? Which way should we think about it as you go through the course of the year?

So, let me one (inaudible) Bruce's call. I think big picture you should expect that our ROE in total will increase because of the lower yielding assets you mentioned we're putting into our JVs and we're leveraging those more we own on balance sheet so that enhances our ROEs. It's kind of hard to say where we're going to be on a weighted average basis because we don't know where the mix is going to be between Crystal, between life science and sponsor business for the year. But in general, you should expect our ROE across the businesses to continue to increase.

Just to add to that, if you think about it life sciences on balance sheet has been generating close to 18% on a realized basis with warrants, yield maturity on the portfolio was over 11%, Crystal's over 11% and the SSLPs are around 11%. So it should start to pull it up particularly given to Jonathan's earlier question. We have no plans to issue equity in our under-levered on balance sheet. So as we grow the leverage on balance sheet and ramp these joint ventures, I think mathematically you start to pull it up a little bit.

Just thought that you can remind us what -- because you are very under-leveraged, what is your target leverage ratio on balance sheet?

0.65 to 0.75.

Thank you. I'm showing no further questions. That does conclude our Q&A session. I would now like to turn the call back to Mr. Michael Gross, Chairman and Chief Executive Officer for any further remarks.

Thank you very much for your time and attention this morning. We look forward to speaking to those of you who will be involved in our SUNS call in five minutes.

Ladies and gentlemen, thank you for your participating in today's conference. This concludes today's program, you may all disconnect. Everyone have a great day.