SLR Investment Corp (SLRC) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Solar Capital LTD Q1 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

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

Sir, you may begin.

Thank you very much, and good morning, everybody.

Welcome to Solar Capital Limited's Earnings Call for the Quarter ended March 31, 2017.

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

Before we begin, Rich, 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 broadcasts in any form are strictly prohibited.

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

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

I'd like to also 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.

Additionally, past performance is not indicative of 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 [has] 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.

The first quarter of 2017 marked yet another solid quarter for Solar Capital.

As a result of the steadfast investment discipline we've maintained over the past several years during heated credit market conditions, coupled with the diverse strategic initiatives we have built, our portfolio continues to perform extremely well, as evidenced by our stable March 31 net asset value of $21.75 and a continued low nonaccrual rate of 64 basis points on cost.

Equally important to our strong performance is our ability to originate attractive investment opportunities in what many managers are describing as a challenging underwriting environment.

And by many broad middle-market measures, the first quarter was challenging.

Although new issue volume was up from the fourth quarter's anemic levels, much of it consisted of refinancings as new issue spreads overall ground another 25 to 50 basis points tighter.

Despite the pressures facing many lenders to our differentiated platform, we neither had to limit our investment activity nor sacrifice our stringent underwriting standards.

On the contrary, the first quarter was a very active quarter for Solar, with $136 million of senior secured loans originated across our differentiated sourcing channels.

We built our business to capitalize on market inefficiencies in niche middle-market credit asset classes.

While our sponsor backed cash flow channel focused on the upper middle market continues to source attractive senior secured loans that attach at dollar-one of the capital structure, we are not exclusively reliant on it for portfolio growth.

Our Life Science and asset-based loan verticals continue to source proprietary investments with attractive risk-adjusted yields.

Accordingly, to borrow a pun used in the past a research analyst who covered us, the sun is shining on Solar Capital and our future looks bright.

We remain confident in our quarterly run rate net investment income per share with ability to reach the upper 40s per share through the expansion of our SSLPs, our Life Science portfolio and Crystal Financial.

Additionally, we expect our 2 [recent] platform initiatives to benefit Solar Capital over the coming quarters.

As mentioned on our last earnings call in Q1, we finalized a new Life Science lending joint venture with our sister company, Solar Senior Capital, with Deerfield Management and with affiliates, the joint venture between Solar Capital Partners and PIMCO.

Solar Life Science Program LLC is expected to invest majority of its assets in first-lien loans to publicly traded companies in the Life Science industry and will be incremental to our existing Life Science loan strategy.

Aside from the larger enterprises of the target companies, the business model will be consistent with the loans currently originated by Solar Capital Partners' Life Sciences team.

Solar has committed $50 million of the total $350 million of equity committed to the joint venture.

With the anticipated leverage of 1:1 debt to equity, the venture is expected to have total investable capital of $700 million.

Once fully ramped, this joint venture is expected to generate a mid- to high-teens return on equity.

In less than 2 months since the announcement, the JV has already developed a meaningful pipeline of potential investments.

And our Life Science team is hopeful the program will commit to its first investment around the end of the second quarter.

Additionally, we are benefitting from Deerfield Management's extensive industry knowledge.

We are even more confident today that this top-tier firm, which specializes exclusively in health care investing, is the optimal partner for our joint venture.

Also, as a reminder, at the end of 2016, our advisor, Solar Capital Partners, formed a joint venture with PIMCO.

This initiative should provide significant benefits to Solar.

To an expected larger investable capital base across the Solar platform, Solar will be more of a full-solution provider, which we believe will result in greater deal flow for Solar Capital.

For example, with a larger capital base, we anticipate having access to more sponsor-backed senior secured loan investment opportunities for the SSLPs and on Solar's balance sheet portfolio.

Furthermore, the partnership with PIMCO provides assets to the credit research resources of a world-class credit manager which has invested $300 billion in corporate credit and currently employs over 50 credit research analysts.

At quarter end, our differentiated activities, including the senior secured loan programs, Life Science lending and our asset-based loan portfolio through Crystal Financial, represented the majority of our comprehensive portfolio.

Bruce will provide color on our strategic initiatives and portfolio activity in his remarks.

During the first quarter, we completed our efforts to diversify our funding sources and term out our liabilities.

We closed on an additional $100 million of 5-year unsecured notes maturing in May 2022, bringing the total issuance to $150 million with a weighted average fixed interest rate of a very attractive 4.53%.

The issuance further diversified Solar Capital's funding sources and increases at attractive pricing our unsecured financings.

Additionally, the notes prefunded the repayment of our $75 million of 5 7/8 senior secured notes which mature next week.

The repayment of senior secured notes will decrease our average interest expense, and the reduction in our secured debt will increase our flexibility.

At March 31, the regulatory leverage of Solar Capital was 0.38x net debt to equity.

We intend to re-leverage our balance sheet toward our target leverage of 0.75 as we continue to invest in the SSLPs, Life Sciences and Crystal Financial.

We believe our history of acting in the best interests of our shareholders played a big role in our success over the last several years and our strong positioning in 2017 and for the future.

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 flexible in new investments.

With our diversified origination engines, we anticipate meaningful portfolio growth throughout the remainder of 2017.

Once we ramp our portfolio to target leverage, we expect to generate sustainable net investment income in the high 40s per share range.

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

Thank you, Michael.

Solar Capital Limited net asset value at March 31, 2017, was $918.8 million or $21.75 per share.

This compared to $918.5 million or $21.74 per share at December 31.

At March 31, 2017, Solar Capital's on-balance sheet investment portfolio had a fair market value of $1.32 billion in 61 portfolio companies across 23 industries, compared to a fair market value of $1.30 billion in 63 portfolio companies across 25 industries at December 31.

For the 3 months ended March 31, 2017, gross investment income totaled $34.4 million versus $36.6 million for the 3 months ended December 31.

Net expenses totaled $18.1 million for the 3 months ended March 31, compared to $19.0 million for the 3 months ended December 31.

Accordingly, the company's net investment income for the 3 months ended March 31, 2017, totaled $16.3 million or $0.39 per average share compared to $17.6 million or $0.42 per average share for the 3 months ended December 31.

Below the line, the company had net realized and unrealized gains for the first quarter of 2017 totaling $0.8 million versus net realized and unrealized gains of $0.2 million for the fourth quarter of 2016.

Ultimately, the company had a net increase in net assets from operations of $17.2 million or $0.41 per average share for the 3 months ended March 31, 2017.

This compared to an increase of $17.8 million or $0.42 per average share for the 3 months ended December 31, 2016.

Finally, I'd say our Board of Directors declared a Q2 distribution of $0.40 per share payable on July 5, 2017, to shareholders of record on June 22, 2017.

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

Thank you, Rich.

Let me begin by providing an update on the credit fundamentals of our portfolio.

Overall, the financial health of our portfolio companies remains sound, reflecting our disciplined underwriting and our focus on downside protection.

On average, the most recently reported LTM revenue for our portfolio of companies in which we hold debt securities was up just over 3% and our LTM EBITDA was also up just over 3% year-over-year.

Measured at fair value, the weighted average interest coverage for our comprehensive portfolio companies was 2.7x.

And the weighted average leverage through our investment security was 5.2x.

And the end of the first quarter, the fair value weighted average EBITDA across our portfolio companies was just over $75 million, again indicating our focus on the upper midmarket.

The U.S. economic environment with stable earnings and low defaults continues to remain favorable for credit investment.

At March 31, the weighted average investment risk weighting of our portfolio was 1.9x based on our 1-to-4 risk rating scale, with 1 representing the least amount of risk.

Over 96% of the portfolio is rated 2 or better, reflecting the strong credit fundamentals.

Measured at fair value, 100% of our portfolio is performing at March 31.

However, on a cost basis, our one investment on nonaccrual accounted for 64 basis points in the portfolio.

Excluding this one legacy investment from 2007, our portfolio is performing extremely well.

The weighted average yields on a fair value and current cost basis at the end of the end of the first quarter are 10.2% and 10.5% respectively, modestly above the prior quarter.

Although spreads further compressed during Q1 in the sponsor-backed cash flow market, we were able to increase our weighted average yield through further investing in our diverse asset niches, such as Crystal Financial and Life Sciences.

Now let me provide some color on the composition of our comprehensive portfolio, which includes Crystal Financial's portfolio of asset-based loans as well as our senior secured loan investment program.

At the end of the first quarter, our $1.48 billion portfolio included 90 different borrowers across 32 industries, with no exposure to direct energy or commodities.

The average investment per issuer is just over $16 million or 1.1% of the comprehensive portfolio.

At fair value, just under 96% of the portfolio consisted of senior secured loans consistent with the prior quarter.

The remainder of the portfolio was comprised of one unsecured investment, which actually was just repaid at PAR this quarter; and 2.3% in equity securities.

At the end of the first quarter, 96 1/2% of our income-producing portfolio was floating-rate.

Before I turn to our investment activity, let me provide a brief update on our strategic initiatives.

During the first quarter, SSLP and SSLP II, which house our stretch senior secured loan investments, collectively funded $44 million of senior secured loans, bringing the combined portfolio to $315 million.

The SSLPs had loans to 15 different borrowers, and both vehicles were 100% performing.

Combined repayments in these vehicles including amortization totaled only $1.5 million.

At quarter's end, the SSLPs had total equity of just over $175 million and $121 million drawn under the respective credit facilities, equating to a combined net leverage of 0.65x.

The combined annualized ROE for the first quarter was just over 9%.

We continue to expect to see that grow as we ramp the portfolio, such that we achieve a low-teens ROE once these vehicles are fully ramped.

Now turning to Life Sciences -- at the end of the first quarter, our Life Science portfolio totaled approximately $213 million of first-lien senior secured loans across 24 borrowers with an average investment size of just under $9 million.

During the first quarter, the team originated $38 million of senior secured loans, and repayments and amortization totaled just over $28 million.

The weighted average yield on our Life Science portfolio is 11.4% at fair value and 11.8% at cost.

This excludes any potential exit fees or success fees or warrants.

To date, the blended IRR on our realized Life Science investments is 18.6% when we include realized warrants.

We continue to believe that a target portfolio of $250 million to $300 million of divided Life Science first-lien senior secured investments is the right target for our balance sheet.

In addition, we expect our new Solar Life Science program JV with Deerfield to begin investing as early as late 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 these companies 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 access to public equity capital.

Importantly, we are already seeing the benefits of Deerfield's expertise in the public health care investment space.

We are confident in the JV's ability to earn a mid- to high-teens ROE once we've fully [ramped up].

Now let me turn to Crystal Financial, which is our secured first-lien asset-based lending platform.

At the end of the first quarter, Crystal had a diversified portfolio consisting of approximately $347 million of senior secure loans across 24 borrowers with an average exposure of just over $14 million.

During the first quarter, Crystal funded new loans approximating $25 million and had repayments approximating $49 million.

100% of Crystal's investments are senior secure loans, and approximately 99% are floating rate.

Recently, Crystal has seen an increase in its pipeline of new opportunities.

And accordingly, we expect growth in the Crystal portfolio during the remainder of 2017.

For the first quarter, Crystal paid Solar a cash dividend of $7.9 million, equating to an 11.3% yield on cost, consistent with the prior quarter.

Now let me touch on our first quarter portfolio activity.

During the quarter, Solar originated approximately $136 million of predominantly senior secured floating-rate loans across 14 companies.

Investments repaid during the quarter totaled approximately $86 million.

Now let me touch on a couple of those investments.

We funded a $17 million incremental investment into American Teleconference.

As a reminder, the company is a global provider of audio conferencing and video collaboration solutions.

This add-on investment brings Solar's total investment to over $37 million.

Leverage through our investment is 3.5x, and the blended yield is just over 9%.

Affiliates of Solar also invested in this opportunity, bringing our franchise's total exposure to just under $70 million.

Additionally, we funded an incremental $15 million investment in AccentCare's first-lien term loan, bringing our total exposure to $30 million.

In conjunction with this transaction, Solar was repaid on its $7.5 million investment in the second-lien term loan of AccentCare at a premium to PAR.

The add-on capital here funded [in] acquisition.

Net leverage through our tranche is 3.3x and our loan yield 7%.

As evidenced by both this investment as well as our incremental investment in American Teleconferencing, our existing and prior portfolio companies are an important source for new investments.

Our familiarity with their past performance gives us an edge when re-underwriting these companies.

Amongst our Life Science team's originations was a $10 million increased investment in the first-lien term loan of Vapotherm, for which Solar acted as the sole provider.

As a reminder, the company manufactures high-flow respiratory therapy products and carries a yield of just over 11%.

Also during the quarter, Solar realized its $8.5 million Life Science investment in the term loan of Cardiva and provided $6 million of a new loan to Cardiva in conjunction with this refinancing.

The IRR on the realized investment was just under 12%, and our new loan also carries a 12% yield.

We were also repaid on our $6.5 million Life Science in Lumeris during the first quarter.

And we reinvested the proceeds into a new $16 million investment in the company's first-lien term loan.

Our realized IRR on the prior investment was just over 23%, and the new loan carries a yield of just over 12% before any success fees or warrants.

During the first quarter, we were repaid on our $27 million investment in the second-lien term loan of EMC, or Emerging Market Communications.

Our IRR realized in this investment was just under 14%.

As Michael mentioned, the middle-market environment remains extremely 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 prudent in deploying our available capital into new investments that meet our strict underwriting criteria.

Our strategic initiatives in both Life Science lending and asset-based lending through Crystal create attractive growth opportunities, while our SSLPs allow us to be highly selective, with stretch first-lien senior secured sponsor-based cash flow transactions.

Longer term, we believe the record amounts of private equity dry powder sitting on the sidelines as well as the retreat of banks from middle-market leverage lending as well as the approaching refinancing wave of existing borrowers, creates a very attractive supply-demand dynamic for cash flow lending into the middle-market companies.

Now let me turn the call back to Michael.

Thank you, Bruce.

In conclusion -- while we are pleased with our first quarter results, we are even more optimistic about the remainder of 2017 and beyond.

Our diversified 90%-plus performing portfolio provides us with a solid foundation for future growth through our strategic initiatives.

We believe that our net asset value at March 31, which has increased from the time of our IPO 7 years ago, validates our assertion that we maintain the most

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and focus our efforts on niche markets with less competition.

Additionally, the flexibility we have built in our lending platform provides diversified sources of growth and allows Solar to be less reliant on sponsor transactions when risk levels are elevated and structures compromised.

At March 31, investments resulting from our differentiated sourcing channels comprised the majority of our comprehensive investment portfolio.

Our [alliance] with shareholders and Solar Capital's conservative investment philosophy has enabled to attract and retain high-quality investment professionals, diversified strategic partners and distinguished institutional investors.

The strategic developments with a recently announced joint venture with PIMCO and Deerfield expand the opportunity set for both Solar Capital's on-balance sheet and SSLP investments in asset classes we believe offer the most attractive risk return profile in the current market environment.

At March 31, our portfolio is defensively positioned.

We feel confident that through our proprietary sourcing channels and strategic initiatives that we can use our available capital to opportunistically expand our comprehensive portfolio through the remainder of 2017.

As we invest and move closer to our target leverage, our quarterly net investment income should increase into the high 40s per share range.

At that time, we will evaluate increasing our quarterly distribution.

At 11:00 this morning, we'll be hosting an earnings for the first quarter 2017 results of Solar Senior Capital, or SUNS, as we call it.

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

At this time, we'd like to open up the line for questions, operator.

Thank you.

(Operator Instructions) And our first question comes from the line of Arren Cyganovich, D.A. Davidson.

The interest income came in a bit lighter than what we had expected.

Was there anything in particular that drove that timing of investment activity, or perhaps any fee income that was included in the prior quarter?

Arren, this is Rich.

It is exactly the timing.

So it was timing both in this quarter and in Q4.

Q4 we had some contributions of some assets for most of the quarter that came out in the end of Q4.

And for Q1, we lost some assets early in the quarter.

And then when we put assets back on, it was really the culmination of the quarter's work.

And those assets came on at the end of the quarter.

So it was just timing for both Q4 and Q1 that impacted the change in income.

Okay.

And then, in terms of the overall balance sheet leverage, you clearly had a good, comprehensive investment opportunity amongst your off-balance sheet vehicles this quarter.

But in terms of getting the overall leverage higher in reaching the goal or the expectation in terms of NII growth, have you considered doing some buybacks?

Because I think the portfolio is down like 11% since the second quarter last year.

And there you still seem somewhat underleveraged from a overall balance sheet perspective.

No, [we've] not doing buybacks.

Our stock has been trading fairly consistently at book or above book.

And buying back shares, frankly, at a 7% dividend yield is frankly dilutive to the future of this business.

And our next question comes from the line of Chris York from JMP Securities.

So Michael, I just wanted to clarify a comment in your prepared remarks, is you stated you expect to generate net investment income in the high 40s.

So this guidance appears to be up quarter-over-quarter.

So one, is that increase correct?

And then, do you expect to achieve this guidance by the end of 2014 (sic) [2017], so kind of maybe fourth quarter?

Yes.

So the guidance should be pretty consistent.

But as you know, we've put the Deerfield joint venture in place just within the last quarter.

So that might give us the ability to get there a little bit faster.

But we still think that the high 40s is a very good target if you run the math with the ramping of the various joint ventures between the SSLPs, Crystal's continued performance and the ramp of the Deerfield-Life Science joint venture.

I think, as you know, it's a little bit difficult in our business to pick the quarter.

But I think you will see us heading in that direction, to your point, over the course of '17.

Okay.

So the trajectory is into the high 40s, but the time line isn't defined.

Is that correct?

Yes, correct.

Okay.

And then, maybe subsequent to quarter end, how did the pipeline look?

And what has the investment activity been thus far?

Yes.

As you can see in Q1, the activity was high.

We just allowed certain investments to move on.

Because, as Michael mentioned, there's a fair bit of refinancing activity across the platform, but particularly in the sponsor vertical, as contrast with Life Sciences and Crystal's asset-based portfolios.

So as things came to market, we were opportunistic on refinancings where we want to stay in the investment based on the risk-return equation but let a lot of them go through.

So the activity has actually been high, and it continues to be that way in Q2.

But the wildcard is also where we decide to let investments go, given the pressure we have on the refinancing side.

Okay.

That's helpful.

And then, maybe could you share with us your thought process in choosing to not waive fees in this quarter to cover the dividend shortfall but choosing to waive fees in the prior year period to cover the shortfall?

Yes.

I think we kind of view it as a vote of confidence in our future.

I think last year, we earned $1.3 relative to our dividend of $1.06, so we covered it very nicely.

We're very confident that for the full year we will more than cover dividend as well.

So we see no need to waive dividend to make that up, since we expect to make it for the full year.

Got it.

And then, maybe last one here, Rich, how much OID in prepayment fees are in the quarter, and then maybe relative to prior years?

And then, were there any exit fees or success fees in the quarter as well?

There was -- every quarter, there's different types of fees.

Some are being accreted in.

Some come out via the exits.

Every quarter is a little bit different.

I would say, quarter-over-quarter, we're probably $0.01 or $0.015 lower than we were in Q4.

But it is timing, and it goes to Bruce's point about where we decide to [use] our legacy position to stay in versus exit a credit, given whether it be pricing and/or terms or just terms.

So it's, I would say, about almost $0.02 or maybe $0.015, something like that, with regard to the difference in fees quarter-over-quarter.

And then, do you think -- so that $0.015 to $0.02 of what we'll call maybe nonrecurring income is consistent on a quarterly basis?

No, I think what Rich is saying, that we have $0.015 less in Q1 than Q4.

In the prior quarter.

Yes.

And keep in mind, our fees, given our conservative accounting, are not recurring.

Where other companies really take in fees upfront, they may be more prone to nonrecurring fees, where in our case, because we're amortizing those fees over the life of every loan, we don't have the same type of -- it's not necessarily recurring for us, given our change in accounting -- change with our difference in accounting.

And our next question comes from the line of Casey Alexander from Compass Point Research & Trading.

This is a little bit higher level.

But you said that -- first I'd clarify, you said that you've seen spreads compress 25 to 50 basis points.

Kind of over what timeframe is that?

Because 50 basis points, if that was quarter-to-quarter, would be an awfully high number historically.

Yes, I would say in the quarter, roughly an additional 25 basis points.

And you could see that in terms of the liquid loan market and where the index moved during the course of Q1.

So I would say for that quarter, it was roughly at 25 BIP.

So then, from a higher-level perspective, do you fear that the compression of rates is going to increase the velocity of our portfolio to the extent that it makes it very, very difficult for you to get to that fully levered figure?

I think that's a great question.

I think if were just in the sponsor-based, second-lien investing business, we would probably sleep a little less well at night.

But as Michael mentioned, because we have the differentiated engines with our asset-based lending platform at Crystal as well as our Life Science platform, you heard, as we talked through some of our deals there, the yields realized IRRs over 18% and yields currently in the 11% to 12% before we consider exit fees or warrants.

It allows us to absorb a little bit of this compression.

But where we're focused on in the sponsor business today is mostly on the stretch senior loans, where there is some spread compression but not nearly as much.

Okay.

This next question, I promise you, I'm going to ask it badly.

Because I'd have to sit down and write it out for a while to ask it goodly.

But you have these various platforms, and all of them are going to have excellent ROAs when fully ramped.

None of these platforms necessarily operate on the same sort of economic timeline.

Crystal Financial is almost countercyclical to the rest of the portfolio.

Does it make it very difficult to get the entire platform operating at a high level when you have these various platforms that don't reach target ROAs until they're fully ramped, but they're asymmetrical to each other?

Well, let's go kind of business-by-business.

So Crystal is currently generating 11% or 12% ROE for us.

That was our target.

So for us, if the environment shifts, to your point, and becomes more distressed, those returns will go up significantly from there, because we'll be able to deploy a lot more capital.

So we're very comfortable at that level.

Life Sciences kind of marches to the beat of its own drummer completely.

They're not really correlated to anything we do.

So we don't feel there's any risk to that ramping.

All things point towards being able to continue to grow our portfolio on balance sheet as well as to ramp the JV that we put in place.

And I guess, the wildcard is the sponsor, cash flow senior secured business.

Look, we believe that over the medium to long term, there's still a tremendous amount of unspent private equity capital that eventually the sponsors are going to get impatient, and they're going to start to deploy again.

And we're poised, particularly with the additional joint venture with PIMCO, to play a major role in that growth of new transactions.

Because the average check size that we can write across a platform will be significantly larger and puts us within a small group of people who can do that.

And just to put some numbers behind that, Michael's comments on the stretch senior loans, where we think the JV with PIMCO will provide us additional strategic scale, we have taken our SSLPs from 0 to $315 million of loans at the quarter end.

At Life Sciences -- we've been in that business for about 3 years -- we've taken that portfolio from 0 to just over $210 million.

So these businesses are not going to be built out in a quarter.

But we feel we've made significant headway in a challenging investing environment and are well on the way to moving those to fully ramp.

Bruce, that's a fair point.

Lastly -- and I think every investor appreciates your focus on credit, and I think it's commendable -- it does allow the owners of the stock to sleep well at night.

Does it also narrow your opportunity set of deals?

And therefore, has it become more competitive spread-wise in that narrower set of deals that meet your specific credit criteria?

Well, the good news is that a narrow set of deals is fine for us, given the size of our platform.

If we were sitting here with $12 [bil] into our portfolio, we'd be really struggling to kind of keep that portfolio inside, because you'd have to do that much more transactions.

With $1.5 billion of company's portfolio, it doesn't take a lot to move the needle for us.

So we can afford to be extremely picky and still generate $150 million, $200 million of new originations every quarter.

And I think, look, as Michael mentioned, when fully ramped, NII would be up in the high 40s.

But there's a big distance between 40 and high 40s.

And so it doesn't take a lot for us to make significant progress on that growth in NII.

As you know, last year, we were doing $0.46, $0.45 a quarter.

That's come down.

But we see that getting back up there pretty quickly.

And our next question comes from the line of Jonathan Bock from Wells Fargo.

Curious, if we look at the unitranche assets just for a moment -- Bruce, can you tell me which of those deals you sole-agented and originated?

Sole agent, not admin, just sole?

Which ones of those did you solely agent?

I would say everything we're doing is club, club-oriented, in our stretch senior deals.

Okay.

So club -- so would that mean that -- are you brought in at a point after which the loan has effectively been structured and made, and you're willing to hold a piece of that tranche?

Or are you brought in at the point of actual origination with the sponsor?

John, you know us better than that.

Our DNA is that we're control freaks.

So we are brought in typically by the sponsor and then married up with a partner, no different from years ago, when we got started in the big mezz deals were club-oriented also.

So we are, to your question, doing direct origination direct underwriting.

We're not buying syndicated paper in that regards.

But as you know, as the unitranche product has moved upmarket in terms of larger EBITDA businesses, the sponsors have realized they need a lending partner that not only can provide the capital for the initial acquisition but for the add-on acquisitions.

So the delayed-draw term loan, which I know you're familiar with, has become a big part of these transactions, which are basically standby funding commitments subject to certain conditions being met by the borrower.

And so the capital need is growing for these larger companies.

And so typically, they're clubbing us up.

And I might have a better relationship than one of our club partners with XYZ sponsor, they might have a better relationship with somebody else.

But we're working very closely with some of our peers out there to club these transactions on a direct basis.

And at the end of the day, as you know, the sponsor picks who their borrowers are.

Got it.

So then, I guess a question in terms of club deals -- typically, the one that originates in admin agents -- what percentages of the tranche are you effectively taking?

So if we look at AccentCare, how much of AccentCare do you own relative to the other club partners that participated?

I don't have that number in front of me, I can get back to you.

But I would say that that percentage is increasing.

And so is the -- but also the tranche size is increasing.

As I touched on in some of my comments, we're investing x dollars in Solar, but we also have, as you know, exemptive relief to co-invest across the platform.

So we very often will also put some, if the risk is appropriate, in Solar Senior as well as in some other private-managed accounts that we have on platform; and then, eventually, in the joint venture that we're raising with PIMCO.

So that size is increasing in the stretch senior loan product.

Okay.

And so one additional question, because the JVs are such an important part of the earning story and certainly the part I would want to highlight in today's relatively difficult environment.

At the current portfolio size, you also utilize the purchase of T-bills on repo in order to, I don't want to say artificially, but effectively increase your total asset size so that you do not run afoul of the 30% nonqualified limitation.

And so to the point right now, [were] you looking at it, if those hadn't been added, you'd be at about a 35% nonqualified ownership bucket.

Michael and Bruce, and Rich -- Rich, I know you also did this at Apollo -- at what point do you start thinking about the spirit of the law as opposed to the letter of it?

Because the spirit is to limit exposure here to effectively 30%.

And this might not have any bearing on all of the assets or equity investment that you funded.

But I'm curious about the $50 million in Life Sciences funding that would only likely, assuming the portfolio remains stable, only likely increase your exposure to nonqualified assets.

Albeit that's a good thing, but still running afoul of [the rules] every other BDC has to navigate.

Jonathan, we've talked about this quite some time now.

And I disagree with the assumptions there.

You have to understand that we are far less levered than all the other BDCs out there.

So then, when the BDCs that you're looking at have 0.8x leverage, and we're sitting at 0.3, we can't use that basket, that 30% basket, unless we were full levered.

So all that, all the Treasury bills are doing is effectively -- if you look at not just our [N2], but if you look at every BDC's N2 , there are sections full of temporary investments.

And it's meant for just that purpose.

And this goes back to 1980.

I know you're not that old.

But back in 1980, with [David Glascone], and what he used to do -- and plenty of BDCs are doing similar things, but some do it less effectively than others.

Some do it more effectively.

Our choice of method is to basically re-lever our balance sheet towards our target leverage, so that we can portfolio-manage without having to manage the timing of closings from one deal to the other, is all that Treasury bill does.

And as you know, we don't charge management fees on that.

So this is not anything to really do with the spirit.

Yes.

I think, just to reiterate that, we don't think we're crossing the spirit of law at all.

Our financials are reviewed every year by the SEC.

Our shelf just got declared effective by the SEC yesterday.

We are very transparent about what we do.

So we're very comfortable with what we've been doing from day 1.

Got it.

And the reason this becomes just a focal point is simply because, Rich, your ability to get to target leverage today on the 70% other parts of your book that we know are fairly difficult to effectively grow in this environment, to your point -- it might cause us to rethink one's ability to get to that target leverage and effectively draw on the JVs that are out there.

And so again, definitionally speaking, it's 30% exposure to nonqualified assets.

How we want to define the denominator we'll leave up to the regulators.

And those guys have already opined.

But it's certainly a question of, if one can't deploy the way you're looking because of your stringent credit policy today, one might also ask, well, how can you be able to access nonqualified assets today if we're really not going to see much portfolio growth, either?

Yes, I think, Jonathan, we actually don't believe we're not going to see much portfolio growth.

Because as you look at things like Life Sciences, which is predominantly on-balance sheet, apart from the new joint venture with Deerfield that has yet to start to ramp, which we expect next quarter as well as, as you know, Crystal -- we can co-invest with Crystal on-balance sheet and have done so rather successfully in the past as well as the loans that are stretch senior unitranche loans in our SSLPs.

We also do put some of those on-balance sheet and did so last quarter.

So we don't feel as constrained in our ability to grow that nor do we feel any constraints in funding our joint ventures.

Yes, again, no -- everyone understands you can -- you have the ability to fund them.

It's whether or not one should.

And I do appreciate the color around it.

Then, the last point, just as an item -- as folks continue to focus in on BDCs in kind of tighter spread environment, Michael, you've made a conscious decision to support the shareholders in other ways through stock buybacks as well as fee waivers.

How do you look at a [2-in-20] management fee in light of a current ROE at book at about 7 1/2 and slightly going potentially higher?

Some might argue that that would -- you'd be considered a higher or, in some cases, highest-cost producer of your current risk returns relative to others.

And I just -- in light of the new fee structure dynamics that are aligning via incentive fees and lower base fees, this is nothing you've not heard before.

But tighter spread environments cause shareholders to start to look inward at true costs.

And…

Sure.

And we always do.

I think we feel confident and comfortable, as does our board, that if you look at our overall expense ratio, taking everything into consideration, we're amongst the lowest, even with the structure.

And importantly, our business is not a simple business.

We have very complex businesses with Life Sciences and Crystal.

We're not just buying pieces of people's syndicated loans.

And so it does cost money to keep the lights on to do that with the talented team we have.

So we're…

And when you say amongst the lowest, Michael, are you referring to the fact that like your total fees in G&A as a percentage of average assets -- is that what you're referring to?

You can look at it many different ways -- as a percentage of revenue, net assets, gross assets.

Jonathan, if you look at all expenses all in, not just any individual line item on a P&L, but all expense all in relative, across the board, across all the BDCs, we're actually among one of the lowest expense ratios.

And our next question comes from the line of Mickey Schleien from Ladenburg.

I realize you need to get on another call, so I'll try to be quick.

Michael and Bruce, with spreads compressing about as fast as LIBOR has been going up, we've seen a hampering effect on yield.

Given that trend in the vintages of your investments, how do you feel today about the portfolio's refinancing risk on a go-forward basis?

We always say that we feel like it's behind us because of the recent vintage of our portfolio, Mickey.

And usually, you don't get a lot of visibility unless there's a sale process going on that you know about.

So we do feel like it's somewhat muted, although I did mention in my remarks that we just got refinanced on our last unsecured investment in the Solar portfolio; a $27 million loan to Allegis just came out above PAR.

We think that's a good thing.

While we love the investment, we have been in it for a few years.

And it's naturally a time to get revised and reevaluate whether we want and have the opportunity to reinvest.

So we think the risk is somewhat muted; clearly nothing like what we had experienced a couple years ago, when we were averaging $500 million, $600 million a year.

I appreciate that.

My next question regards health care.

You have a team there or access to a lot of individuals with expertise in that field.

How do you feel about the reimbursement risk in all of your health care investments, given all the uncertainty as to what the federal government may or may not do with the Affordable Care Act?

Sure, great question.

It's something that, to your point, we are blessed with very deep industry expertise between our team at Gemino, who understands how to underwrite reimbursement risk, cod-by-code, receivable-by receivable.

But that is their collateral.

And so that's a great resource for our cash flow lending team to tap into as well as, obviously, Anthony Storino in our Life Science team.

Importantly, though, our Life Science exposure, which is a meaningful part of our health care exposure at Solar -- as you know, these are late-stage health care companies focused on drug or device development.

And so we're not yet, in most cases, at the point of commercialization.

So it's not about reimbursement risk; it's about the viability and the future potential of that intellectual property, drug, device, et cetera.

So it is something we are extremely focused on.

I'd give you an example.

Egis, one of our portfolio companies which we felt very good about, did have some modification downward of their reimbursement codes about a year and a half, 2 years ago.

Went down about 40%.

The company had negotiations with the authorities and the regulators, and they just increased reimbursement back up another 25%.

So these are things you have to monitor.

But we feel very good, and it's something we have to look at investment-by-investment.

Appreciate that, Bruce.

Just a couple of housekeeping questions -- could you repeat how much total available capital you said you have?

And what caused G&A to decline so much quarter-to-quarter?

And that's it for me.

Sure.

The available capital -- we actually didn't state it -- it's rather substantial, when you look at our credit facilities -- $800 million, $900 million.

And in the G&A, lower insurance, professional fees, debt issuance costs.

So you'll see the G&A come back up a couple hundred thousand next quarter, to the usual run rate.

And our next question comes from the line of Steve Masarik, Cliffwater.

It's a very high-level housekeeping one.

And I apologize if you already mentioned, but what percent of the portfolio is in sponsored deals currently?

As the new JV ramps up, do you expect that to change materially?

So in our cash flow lending fees (inaudible) about 100% is sponsor.

And then, Crystal is largely not sponsor.

And then, Life Science is effectively all sponsor, because it's all venture capital-backed.

And the new joint venture on the Life Sciences side will continue to be venture capital-backed as well as private -- I'm sorry, as well as public equity-backed companies.

And our next question comes from the line of Christopher Testa from National Securities.

Just wondering, obviously the JVs are unitranche-heavy.

Just curious, given the popularity of that product, whether we should expect more unitranche loans on-balance sheet as well, or whether you're trying to keep the overall leverage of the comprehensive portfolio in check?

I think, asset-by-asset, you will see us put some of the unitranche loans on-balance sheet as well as in the SSLPs, depending on the underlying return profile.

Got it.

And when you talk about the potential to take on larger bite sizes, given the partnerships you have via the joint ventures, just curious how much you think you could kind of scale up in terms of either the average loan size or average EBITDA for the borrowers.

The average EBITDA won't change much.

What we'll be looking to do is taking larger pieces of same deals.

So across the platform (inaudible) to 75 to 100 across the various accounts.

And relations we have with the PIMCO JV, that could easily double.

Okay, great.

And just curious -- obviously, much of the volume across the market was refinanced in the first quarter.

Just wondering, second quarter-to-date, where you're seeing the use of capital kind of break out.

Yes.

I think, look, refinancings have continued in second quarter.

But we are selectively staying involved in some of those, as we did in the first quarter, and continue thematically on the sponsor side to see more add-on acquisitions to existing portfolio companies.

So we have room to grow and are deploying more capital as our sponsors are growing their portfolio companies.

So a lot of add-on acquisitions.

Got it.

Is it safe to say that, year-to-date, the majority of your originations have been existing portfolio companies?

Yes.

Okay.

Got it.

And just curious, this is the first quarter in quite some time that the NII fell short of the dividend.

If this happens because the portfolio shrinks due to heavier prepayments or whatnot, just curious if the management company will step in to waive fees if there's a shortfall again.

I think if we muted the prolonged shortfall like we did in the past, we would.

This concludes today's Q&A session.

I would now like to turn the call back over to Michael Gross, Chairman and Chief Executive Officer, for closing remarks.

Thank you, everybody, for your time and you good questions this morning.

If there's anything else you need that we weren't able to address during our limited time, please feel free to follow up with us.

We'll get back to you.

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

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