SLR Investment Corp (SLRC) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q3 2017 Solar Capital Limited earnings conference call. (Operator Instructions). As a reminder, this call is being recorded.

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

Thank you very much, and good morning. Welcome to Solar Capital Limited's earnings call for the quarter ended September 30, 2017. I'm joined here today by our Chief Operating Officer, Bruce Spohler; and Rich Peteka, our Chief Financial Officer. Rich, before we begin, would you please start off by covering the webcast and forward-looking statements?

Of course. Thanks, Michael.

I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital 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 also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties. 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 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.

It's no secret that conditions in the cash flow leveraged loan market have become heated. Over the past 3 years, there has been an exodus of discipline in certain pockets of private credit investing. Many private and public credit funds, including some BDCs, have been taking on more risk by reaching for yield in order to maintain unrealistic dividend or term policies. Other firms have been forced to buy the market because of the sheer amount of capital they must put to work each quarter across their platforms.

Still other credit managers have reacted to the current market by shifting their focus to a syndication model in which they bid aggressively on mandates and syndicate the entire issuer-friendly loan tranches, which they view as too risky to own themselves, to passive market participants.

While we still believe that the long-term investment thesis for private middle-market loans remains intact, with no indication that banks will ever regain the market share they once enjoyed in this industry, we cannot predict how long the current environment, defined by loose structures and low pricing, will persist. And so we take into account both potential outcomes for this market.

When making investment decisions, we always assume we're in the late stage of the credit cycle and correspondingly maintain a lower risk portfolio. Conversely, our operating decisions are guided by the belief that that we cannot rely on rising interest rates or a market correction to drive increases of profitability.

Consistent with this approach in the third quarter, we continue to execute on our strategy of buying and building specialty finance vehicles in less competitive and low-correlated lending niches within the middle-market by acquiring Nations Equipment Finance, an approximately $327 million equipment finance platform.

Additionally, our Board Of Directors approved a 25-basis point reduction in our management fee. The new level will go into effect on January 1, 2018. This amendment, which is a permanent amendment to our (inaudible) agreement, continues our history of shareholder-friendly actions, which has included voluntary fee waivers to ensure that our net investment income has covered our dividend, as well as our restraint in raising equity capital and increasing leverage, which would've necessitated lowering our underwriting standards to invest in a frothy market just to earn higher fees.

Over the past year, we have been focused on reducing our cost structure. We amended our credit facility to lower our borrowing costs by 25 basis points, and we refinanced our $75 million of 5.875 senior secured notes with unsecured notes with a weighted average fixed-rate return of 4.53%. Additionally, last week we issued a notice to redeem $25 million of our 6.75 unsecured notes, which we are effectively refinancing through new issuance of $21 million of unsecured notes with a fixed coupon of 4.5% and a maturity of December 2023.

We believe our efforts to reduce our cost structure will help us grow our net interest margin, even in the event of a continued low interest rate environment. Furthermore, our specialty financed verticals, including the addition of NEF, position us well for either continued heated market conditions or a credit correction.

The investments in these niches, which at September 30 account for approximately 60% of our comprehensive investment portfolio, are always senior secured. Now 3 months into our ownership of NEF, we are pleased with this seamless integration and contribution to our earnings.

As a reminder, NEF is an equipment finance company that provides senior secured equipment financing to companies in the U.S. Solar Capital invested approximately $210 million to affect this acquisition, which closed at the end of July.

The company was founded in 2010 by former GE Capital Equipment Finance professionals to fill a void in the marketplace created by the dislocation of traditional lenders. The acquisition offered a compelling opportunity for Solar to invest in an established business whose experienced management team has underwritten approximately $1 billion of equipment finance transactions and has built a strong track record. NEF's sourcing channel enhances Solar's flexibility to originate across multiple business lines in order to find the best risk/reward investments. We expect our investment in NEF will generate a 10% to 11% cash yield, consistent with our other specialty finance assets.

NEF will distribute substantially all of its earnings to Solar on a quarterly basis. Based on its existing portfolio, the investment is expected to generate quarterly net investment income for Solar of approximately $0.04 to $0.05 per share. Bruce will provide additional details on the NEF transaction.

Solar Capital funded its investment with available liquidity, including borrowings under our existing credit facility. At September 30, we had approximately $475 million of debt outstanding and leverage of 0.51x net debt to equity. Also at September 30, Solar had over $775 million of available capital under its existing credit facilities subject to borrowing base availability to finance portfolio growth.

As a result of the business plan we put in place 5 years ago, when the impact of global [easy] monetary policies first became apparent, our credit quality remains strong. At September 30, 100% of the portfolio is performing. And our net asset value is $21.80, up a penny from Q1.

Additionally, we have increased the earnings power of our comprehensive investment portfolio. In the third quarter, we generated $0.41 of net investment income per share, and we expect both our Q4 2017 and Q1 2018 debt investment income per share to exceed that and be in the low 40s.

Given our increased run rate of net investment income in the low 40s resulting from a combination of a larger comprehensive investment portfolio and reduced expenses, our Board Of Directors has approved an increase in our quarterly distribution to $0.41 per share for Q1 2018, concurrent with the start of the reduced management fee. The distribution increase is an initial step in aligning our distribution with a greater projected net investment income. And we feel confident in our ability to continue to growth Solar's earnings.

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

Thank you, Michael.

Solar Capital Limited net asset value at September 30, 2017, was $921.2 million or $21.80 per share; compared to $920.9 million or $21.79 per share at June 30. At September 30, 2017, Solar Capital's on-balance sheet investment portfolio had a fair market value of $1.4 billion in 88 portfolio companies across 33 industries, compared to a fair market value of $1.2 billion in 57 portfolio companies across 24 industries at June 30.

For the 3 months ended September 30, 2017, gross investment income totaled $36.1 million versus $33.9 million for the 3 months ended June 30, 2017. Expenses totaled $18.8 million for the 3 months ended September 30, compared to $17.8 million for the 3 months ended June 30. Accordingly, the company's net investment income for the 3 months ended September 30, 2017, totaled $17.3 million or $0.41 per average share; compared to $16.1 million or $0.38 per average share for the 3 months ended June 30, 2017.

Below the line, the company had net realized and unrealized losses for the third quarter 2017 totaling $0.2 million, versus net realized and unrealized gains of $2.7 million for the second quarter of 2017.

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 September 30. This compares to an increase of $18.8 million or $0.44 per average share for the 3 months ended June 30, 2017.

Finally, our Board of Directors declared a fourth quarter distribution of $0.40 per share payable on January 4, 2018, to stockholders of record as of December 21, 2017. Additionally, and as Michael mentioned, the board declared an increased first quarter 2018 distribution of $0.41 per average share payable on April 3, 2018, to stockholders of record as of March 22, 2018.

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

Thank you, Rich.

Before diving into the details of our portfolio, I'd like to take a minute and just give you an overview of our origination platform. As many of you know, we've spent the past several years building and acquiring [niche] businesses in order to advance our strategic objective of becoming a diversified specialty finance company.

As a result of these efforts, today, we have four distinct business lines -- first off, our cash flow business, which invests in senior secured loans and sponsor-backed companies in the upper midmarket. Here, as you know, our average EBITDA is approximately $65 million at the borrower level. Included in this vertical are also our SSLPs through which we invest in stretch senior cash flow loans in partnership with Voya and another institutional investor.

Secondarily, we have our asset-based business, which encompasses loans to companies in transition as well as loans to other finance companies, much of which is done through our Crystal Finance platform. These collateralized loans are made against the realizable liquidation value of a borrower's assets and come with meaningful upfront as well as prepayment fees.

Our third vertical is our Life Science lending business, which lends to privately held or small market cap drug and medical device development companies. Our team previously founded and managed GE Capital's Life Science loan business over a 13-year period. These loans to companies in the late-stage of drug and product development are senior secured and often come with success fees or warrants.

Finally, our fourth vertical, Nations Equipment Finance, which we acquired in Q3, has given us an equipment finance capability, which now enables us to act as a full solution provider to our middle-market borrower clients.

In aggregate, at September 30, our investments across these four lines of business totaled $1.67 billion, encompassing 225 different borrowers across 93 industries. The average investment was $7.4 million or 0.4%. The increase in portfolio diversification at smaller average issuer size relative to the second quarter is primarily due to the acquisition of NEF's highly diversified portfolio.

Measured at fair value, 98% of our comprehensive portfolio consists of senior secured loans. The remainder, approximately 1.8%, consists of equity securities, which are mainly associated with our debt investments.

At 9/30, roughly 79% of our portfolio was floating rate. The uptick in our fixed rate loans resulted from the acquisition of NEF.

Including investments and repayments across our four business lines, originations totaled $413 million, $327 million of which was associated with the NEF acquisition. And repayments were approximately $124 million.

During the quarter, we more than replaced the cash flow loans which were repaid during the second and third quarters, with investments in our specialty finance businesses, where we believe the current investment opportunity is more compelling than the currently frothy cash flow sponsor-backed lending market.

Now I'd like to end with an update on the credit quality and earnings power of our portfolio, which includes our equity interests in NEF, Crystal, and our SSLPs. Overall, financial health of our portfolio companies remains sound, reflecting our disciplined underwriting and focus on downside protection.

At September 30, the weighted average leased 12-month revenue and EBITDA trends continue to be positive across our portfolio companies. For the portfolio investments in our cash flow segment, leveraged [to our] security was 5.2x, consistent with the prior quarter; interest coverage was 2.7x, and average EBITDA was approximately $64 million. The current U.S. economic environment, with stable earnings and low defaults, continues to remain favorable for disciplined credit investors.

At September 30, the weighted average investment risk weighting of our total portfolio was 2, based on our 1-4 risk rating scale, with 1 representing the least amount or risk. Approximately 96% of our portfolio is rated 2 or better, reflecting the portfolio's strong credit fundamentals. And 100% of our portfolio was performing at September 30.

The weighted average yields on a fair value and current cost basis at quarter's end was 10.2% and 10.6% respectively, slightly higher than the prior quarter. Importantly, Solar was able to maintain its portfolio yield without compromising credit quality or taking on additional risk.

We're very pleased with the performance of our portfolio companies and believe it validates the prudent investment approach and our strategic focus on specialty lending middle-market niches that we've maintained over the last several years.

I'll now provide a brief update on NEF and then touch on our other verticals. By way of background, our investment team is very familiar with the leasing industry, having diligent key market participants as well as independent lease finance companies in the context of evaluating both debt and/or control equity investments.

Solar had been closely following NEF for a number of years, given our investment activity in the leasing industry. In addition, senior members of our investment team at Solar have longstanding relationships with NEF's executives, as a number of both Solar and Crystal investment professionals trained under NEF's founder and CEO, Phil Carlson; while they were all together at GE Capital. Today, NEF employs a team of approximately 40 professionals.

As Michael mentioned, since their inception, NEF has directly originated approximately $1 billion of equipment financings. Collateral securing their portfolio consists of long-life essential use assets such as trucks and trailers, machine tools and equipment, which can be readily liquidated. Advance rates are typically less than the liquidation value of the equipment, and the lease [tenure] is typically 3 to 7 years, with an average life of 2-plus years. The typical borrower from NEF is a privately owned midmarket business with a high percentage of fixed assets.

With its 100% collateralized loan portfolio, the addition of NEF complements our existing cash flow, asset base and Life Science senior secured lending platforms. Importantly, we believe NEF's platform is highly scalable and provides Solar access to a midmarket asset class which offers attractive risk-adjusted returns which are comparable to our other specialty finance businesses. At quarter's end, our NEF equipment finance strategy had a total portfolio of approximately $323 million of funded assets to 143 different borrowers with average exposure of $2.3 million.

During our 2 months of ownership in Q3, NEF had new investments of approximately $12 million and had portfolio amortization totaling approximately $18 million. 100% of NEF's investments are asset-based loans, and most of them are fixed rate. Interest rate risk is mitigated through both the loan's short duration as well as our efforts to match-fund NEF's fixed rate assets with fixed rate liabilities. For our 2 months of ownership during the third quarter, our equipment finance strategy generated a net yield of approximately 11%.

Now I'll provide a brief update on our other business platforms. At quarter's end Crystal Financial had a diversified portfolio of approximately $370 million of funded secured loans to 24 borrowers with an average exposure of approximately $15 million. During the third quarter, Crystal had new investments of approximately $60 million and had reductions totaling approximately $63 million. 100% of Crystal's investments are senior secured loans, and approximately 99% are floating rate. For the third quarter Crystal paid Solar a cash dividend of $7.9 million, equating to an $11.3% yield on cost, which is consistent with the prior quarter.

Now turning to our Senior Secured Unitranche Program -- during the third quarter, SSLP and SSLP II collectively funded just over $13 million of senior secured loans, bringing the total combined portfolio to $290 million. The SSLPs had senior secured loans to 15 borrowers with an average exposure of just under $20 million, and both vehicles were 100% performing. Combined repayments, including amortization, totaled approximately $4 million. The SSLPs are currently earning approximately a 9.5% return on equity, and we expect that to move into the low teens once the vehicles are fully ramped.

Finally, an update on Life Science -- our portfolios totaled approximately $208 million of first-lien senior secured loans across 23 borrowers with an average investment of $9 million. During the third quarter, the team originated one investment of about $4 million and had amortization and repayments of about $12 million. The weighted average yield on our Life Science portfolio is 12.2% at cost, which excludes any potential exit fees or warrants. The blended IRR on our realized Life Science investments through third quarter was 17.7% including realized warrants.

As Michael mentioned, middle-market lending environment remains frothy, given the market technicals. We are fortunate to have diversified origination sources and will continue to be disciplined and prudent in deploying our available capital.

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

At this time, I'll turn the call back to Michael.

Thank you, Bruce.

From the inception of Solar Capital 11 years ago, our investment and management decisions have been focused on building long-term shareholder value, protecting capital and maintaining alignment with our shareholders. As credit markets deteriorated, we consciously migrated Solar's portfolio to one that is comprised of over 98% senior secured loans. We formed the SSLP with strategic partnerships with institutional investors, allowing us to invest in lower-risk first lien secured loans, while utilizing modestly higher leverage in the vehicles to generate attractive return on equity.

We established separate joint ventures with partners to enhance origination opportunities and create additional scale. And importantly, we diversified into specialty finance verticals such as asset-based lending through Crystal, Life Science lending, and now equipment finance with the recent purchase of NEF. All of these steps were taken to maintain a defensive lower-risk and high-quality portfolio, while building a broader origination platform.

The acquisition of NEF is a significant event. Today, we are a diversified specialty finance company, providing solutions across the capital structure to middle-market businesses. Our origination engines provide us the opportunity to source loans in specialty niches, focus on collateral loan-to-value lendings that are less competitive than traditional cash flow lending. In addition, the specialty finance strategies are less correlated to the liquid credit markets and have a differentiated risk-return profile that is complementary to our cash flow lending. They afford us greater flexibility to stick to our investment disciplines.

At the beginning of this call, I referenced a few ways credit managers have been reacting to the current relatively heated credit market conditions. We believe that firms which have focused on building out differentiated sourcing engines will outperform. And there are a handful of manager teams taking [this] approach whom we greatly admire.

The addition of NEF gives us four distinct engines of growth and enhances Solar's earnings power, with approximately 60% of our growth investment income in the third quarter derived from investments in our specialty finance businesses. The increase in our quarterly distribution to $0.41 per share beginning in 2018 is a direct result of a successful execution of our strategy to expand our specialty finance capabilities. At 0.51x net debt to equity, we are under-levered and have substantial dry powder to deploy via our differentiated investment verticals. Therefore, we believe Solar Capital has a clear path to achieving a run rate quarterly net investment income in the upper 40s. As our earnings increase, our Board of Directors will evaluate additional continued dividend distribution increases.

At 11:00 this morning, we'll be hosting an earnings call for the second quarter 2017 results of Solar Senior Capital or SUNS. Our ability to provide traditional middle-market senior secured financing through this vehicle continues to enhance our origination team's ability to meet our client's capital needs. We continue to see benefit to the value proposition in Solar Capital deal flow.

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

(Operator Instructions). Your first question comes from the line of Chris York with JMP Securities. Your line is open.

Michael, you said in your prepared remarks that you're under-levered. So could you update us on your views of an optimal level of balance sheet leverage at Solar Capital, given that you have multiple specialty finance businesses that each have their own form of balance sheet leverage?

Yes, I think our target is still 0.75x. And the reason for that is these specialty finance vehicles tend to be levered consistent with that as well. These are not high-levered vehicles.

Got it. Okay. And then, combining that, and then combining your comments again in the prepared remarks of attractive ROE -- so what is your target range here today for ROE at Solar Capital, given that leverage of 0.75 and then, maybe now, the reduced management fee?

So if you kind of jump back into the math, but if we say, which we are, that we can achieve the high 40s NII -- just do some quick math . . .

9-ish?

It gets you to 9-ish, yes, ROE.

Okay. And then, switching gears a little bit, are you content with your capital structure right now? Or are you considering new supplemental financing instruments that could provide you some more flexibility to fund future growth?

Well, the answer is we're never content. We're always looking to lower our costs. I think the obvious place (inaudible) lower costs, we still have $75 million outstanding of the 6.25% notes, and we'll look at ways to continue to nibble away at those with hopefully unsecured debt in the force.

Okay. Last one for me -- can you help us think about the portfolio mix, given that you got four lines of businesses, cash flows at 38%? You've got Life Sciences here at 12.5. It is rather evenly distributed. But maybe you'd just comment on how you were thinking about that, and then the allocation of capital in the form of new investments?

Sure. I think that clearly we're looking to allocate capital in the best risk-adjusted return assets that we see in the current market environment. Today, I think that we continue to see good opportunity in Life Sciences in spite of having a somewhat slow third quarter. We see a nice pipeline there. I think as you appreciate, these are monthly amort loans once you get into a seasoned state of your portfolio. So we will see a constant trickle of repayments contractually there. But we're always happy to get repaid. But I think we'll see Life Sciences continue to grow. As you know, on the cash flow side, we're really focused on the stretch senior. And I think that will be a little bit more episodic. We do see a couple of nice opportunities out there, but we are being highly, high selective on cash flow underwriting. And I think as we look at NEF, it should be steady growth. They also have a monthly amort structure for repayments. But I think you will continue to see steady growth there. And then, I think, as you know, Crystal is extremely opportunistic and a little bit tougher to forecast there. But I think we expect to see a little bit of growth across all four segments that should amalgamate to a comfortable growth rate over the next year.

Perfect, thanks, Bruce. Thanks, Michael. That's it for me.

Thanks for your questions.

Your next question comes from Mickey Schleien with Ladenburg. Your line is open.

I sort of have a follow-up question to what Chris was asking about. I'd like to ask your thoughts about allocating capital on your own balance sheet versus the senior loan funds. Because when I look at them, after almost 2 years of operations, SSLP I has leverage at 0.7x, which is clearly below the target. And SSLP II is only at 0.4x. So what factors are keeping you from getting those north of 1, maybe even closer to 2, to get the ROEs that you've been looking for for quite a while?

Sure. I think, Mickey, it just goes to the overall state of the market. You the cash flow market, even if it's stretch senior loans, has been under pressure in terms of some of the structures that we've seen out there. I think it's more structure than price, although pricing has compressed. So we've been extremely selective there and have been blessed with having these alternative options. I think as you saw in our press release, at the asset level, the yields on [cash flow] loans are the largest relative to what we can do in Life Science lending, equipment finance with NEF, as well as asset-based lending at Crystal. So until things broaden out, we're going to continue to invest first and foremost in those higher-yielding structures and verticals. And be mindful, as I think you appreciate, those are also because they're predominantly asset-based loans, generally carry much more attractive risk profile, lower defaults and higher recoveries. And so we will continue to allocate capital in that way.

And I think just to highlight that, we have the luxury of not having to chase those. Because (inaudible) are all yielding double-digit ROEs and, as Bruce said, with [slightly] less risk than we're seeing in the cash flow loans.

So Michael, what I'm trying to understand, then, is the SSLPs could pursue, or are pursing, investments in larger companies which tend to be less risky. And if you do the math, with leverage up to 1.5 or whatever, you can still generate a nice ROE without taking on excessive risk. Are you saying that that's just not feasible in this market at this point in time?

No, what we're saying is that the relative risk, Mickey, to our specialty finance verticals is higher. And so we have the luxury of doing a [re-eval] from a risk/reward perspective across four different lending verticals. And today, given -- yes, you can find attractive returns, but we think the risk is elevated in the cash flow sector relative to the specialty finance verticals. I think there will be some optimization of the leverage in those SSLPs to drive a little bit better return. But I wouldn't expect us to allocate substantially more capital to those unless market conditions change.

Okay. So the leverage at those vehicles, it would be reasonable to expect them to stay in the neighborhood of where they are today?

No, I think we're going to try to increase the leverage slightly to boost the ROEs there. But I wouldn't expect a lot of new equity capital to go in them in this current environment.

Right. Well, that's a good segue to my next question, because there's a footnote in the SOI that indicates your non-qualifying assets climbed above 30% of your total assets. I realize there's some optics there because of the repo and the T-bill. But what's your perception, or what's your strategy in terms of managing that ratio and getting it back into compliance?

Hi, Mickey. We are in compliance. So that's not the question. We're allowed to go up and over based on value changes and commitments that have been previously made, with a dynamic portfolio. It's just once your over 30%, you can't make an additional commitment investment into those vehicles. So those commitments are already static.

Okay, I understand. I appreciate your time this morning. Thanks.

Thank you.

Thank you, Mickey.

(Operator Instructions). Your next question comes from the line of Jonathan Bock with Wells Fargo Securities. Your line is open.

Joe Mazzoli filling in for Jonathan Bock. Earlier in the year, you announced a Life Sciences JV that was targeting investments in public companies. So I think, reading through the doc here, Solar's commitment was made through the SSLP III. But I also see here that the SSLP was dissolved. So is the Life Sciences JV still a strategy for Solar? Or can you provide any kind of an update here?

Sure, yes. No, that was not dissolved. We just have not funded into that at this point. So we are continuing, our team is continuing to seek opportunities for the, to your point, public Life Science lending investment. It's been a little slower than we all would like, but those tend to be a little bit later stage. And we just haven't seen as many attractive opportunities there yet. But you should expect that to maintain and get funded over the next couple of quarters.

Okay, thank you. And just to clarify, I see that the SSLP III was dissolved, it says, on March 10, 2017. So is the joint venture commitment, is that now on the balance sheet at SLRC?

No, the SSLP III effectively was renamed the JV.

The JV, yes.

Oh, okay, absolutely. I understand, thank you.

So the next question -- when you purchased NEF, and I guess also on a go-forward basis, how do you determine which equipment finance deals sit within the core Solar portfolio versus within NEF's portfolio?

So I'm going to answer one, I'm going to let Bruce -- at the end of the day, from an earnings perspective, it frankly doesn't matter. Because we're getting 100%, we own 100% of NEF. But certain assets will be put on the NEF balance sheet that are tax-inefficient for the BDC. And those that are tax-efficient more likely will be on our balance sheet. But you should see the -- and just, to Michael's point, it's really just aesthetic in structure, it doesn't change the underlying economics, which [inured] 100% to the benefit of Solar. But you should see the number of investments and dollars invested shift somewhat from off-balance sheet to on-balance sheet over the next few quarters here. But there will always be a mixture of both. And it goes to Michael's point, the nature of the underlying loan, and whether it's more efficient to put it in the C Corp or not.

That makes sense, and that's very helpful. And then, just one last question -- are you in the market for more opportunities to grow the capabilities in some of these specialty niches through the acquisition of more of these companies? I know the 30% bucket is an issue. But as we've seen with NEF, you actually have underlying assets there, so that doesn't qualify as a finance company -- underlying assets versus securities or loans. So do you still see opportunity for growth, or are you comfortable with the current mix going forward?

I think the answer is we still see opportunities for growth. They could be either new platforms or add-ons to these platforms. As you'll hear us talking about for Solar Senior in a few minutes on our next earnings call, we just made an acquisition there of a small asset-based lender that was appropriate for that platform. And so we continue to look for ways to expand what is broadly old-world commercial finance businesses where we do have collateral, lower risk, and generally some pretty attractive returns.

Great. Thank you very much for taking my questions.

Thanks for your time.

(Operator Instructions). Your next question comes from Rick Shane with JP Morgan.

It's Melissa for Rick. Question about the potential for spread compression in the diversified verticals. I'm wondering if those are at risk for the same kind of spread compression that we've seen in the more sort of sponsor-backed cash flow lending space.

Sure. I would say that there's very few lending verticals broadly out there in the credit markets that haven't seen spread compression. So we have experienced some, but much less so, given that the number-one participate historically is a lender. The banks are not players in most of our specialty lending verticals. And so there's been much less spread compression. And so we feel we've seen what's happened. It's not as if they've been immune. But it is much more protected, higher barriers to entry into those verticals.

Okay. And looking forward into 4Q, if you don't want to provide specific items on pipeline and what volumes can look like in the fourth quarter, I'm wondering if you are looking at a certain portion of the portfolio as being potentially at risk for repayment or refinancing.

Yes, I would say no. We do have steady amortization from a contractual perspective in both NEF as well as our Life Science lending businesses; less so in Crystal and our cash flow businesses. But no, we don't see any material repayments. And we will see selective growth [for] all four verticals. But I think you should expect sort of nominal steady growth. But we feel very good about the earnings power of the existing portfolio that we have in place, given that it's 100% performing and seems to have generated a nice stable yield, to your earlier question relative to compression.

Okay. Thanks for taking my questions.

Thank you.

(Operator Instructions). And I'm showing no further questions at this time. I'd like to turn the call back over to Michael Gross, Chairman and Chief Executive Officer, for closing remarks.

Thank you. We have nothing more to add at this point, other than to thank all of you for your continued support and patience with us as we continue to grow our business together. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you all may disconnect.