SLR Investment Corp (SLRC) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Solar Capital Earnings Conference Call.

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

I would now like to turn the call over to Chairman and Chief Executive Officer, Mr. Michael Gross.

Please go ahead, sir.

Thank you very much, and good morning.

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

I'm joined here today by Bruce Spohler, our Chief Operating Officer; 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 would like to remind everyone that today's call and webcast are being recorded.

Please note that they are the property of Solar Capital Ltd.

and that any unauthorized 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 would 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.

On all 3 metrics, by which we measure our fundamental performance; credit quality, net asset value preservation and earnings power, Solar Capital had a successful fourth quarter and year 2017.

At the end of the year, our portfolio is 100% performing and our net asset value was $21.81 per share, up slightly from Q3 and up $0.07 per share from a year ago.

Fundamental credit performance continues to be very strong supported by continued stable economic conditions and corporate earnings growth in both the U.S. and globally.

As a reminder, we put in place a strategic plan over 8 years ago, when the impact of global EV monetary policies first became apparent.

Our plan was twofold.

First, to transition from fixed rate subordinated assets to senior secured floating-rate investments and sponsor-owned upper middle market companies; and second, to diversify our origination platform into asset-based lending strategies in less competitive niches with a risk-return profile was more compelling, we've not wavered.

We've made steady progress to position the portfolio and further diversifying our platform across attractive commercial finance strategies.

In the fourth quarter, SLRC generated $0.44 of net investment income per share compared to $0.41 per share in the third quarter.

With approximately 80% of our comprehensive investment portfolio in floating rate securities, we've begun to see the income benefits of a rising interest rate environment.

In addition, Solar's fourth quarter net investment income benefited from the first full quarter of operations with Nations Equipment Finance or NEF.

At December 31, over 98% of our comprehensive investment portfolio was in senior secured loans, which carried significantly less risk than junior debt or equities.

The portfolio was highly diversified across senior secured cash flow and commercial lending strategies, including nontraditional asset-based lending to Crystal Financial, Life Science lending and equipment finance through NEF.

In the fourth quarter, over 60% of the contribution to growth investment income was generated from our commercial finance lending strategies.

Our strategic initiatives have diversified and enhanced the earnings power of Solar's portfolio.

While we believe the long-term investment thesis for private middle market cash flow lending remains intact, near-term market technicals remain challenging.

Over the past 18 to 24 months, market conditions have led to tighter spreads, compromised structures and elevated risk.

In Q1 2018, global markets were interrupted by an abrupt sell-off in equity markets, sharply increased volatility and a pronounced upward shift in the U.S. treasure yield curve, all stoked by the prospect of higher inflation, rate increases and unwinding of Central Bank stimulus.

While we've not seen any significant middle market follow-on effect, we recognized the importance of having diversified origination capability with deep asset class specialization and expertise, maintaining a defensive portfolio and having capital available to take advantage of market dislocations.

SLRC is one of the couple of BDCs, which is built diversified origination capabilities across cash flow and asset-based lending niches with the ability to provide comprehensive financing solutions to middle market companies.

The higher risk-adjusted returns of our commercial finance businesses allow us to be highly selective in our cash flow lending strategy.

We have the flexibility to allocate capital to most attractive risk/reward investment opportunities, and we're not forced to chase compromised structures or above-market yields.

In addition, the mix of asset classes creates a differentiated portfolio with lower correlation, lower volatility, lower risk and countercyclical protection compared to peer cash flow loan portfolio.

Equally important, our barbell approach to investing in lower-yielding senior secured dollar-one cash flow loans and higher-yielding senior secured asset-based loans has enabled us to maintain a weighted average portfolio yield of approximately 10% without compromising credit quality in the face of continued spread compression and sponsor-backed cash flow transactions with questionable structures.

Bruce and I have had significant experience managing portfolio with economic cycles, including the Great Recession of 2008.

We've maintained an investment philosophy of assuming that we're always late in the credit cycle.

And this mentality seems even more relevant today.

No one knows that at this stage of the cycle, characterized by inflated, incentivized values, loose structures and low pricing will end soon or for 6 or 7 more years.

We believe our differentiated originated platform and diversified portfolio positions well for either outcome.

Over the course of 2017, we made significant progress and reduced our cost structure, diversifying our funding sources and terming out our liabilities.

We prioritized to reduce our cost structure to enhance our net interest margins in the face of a continued low rate environment.

The Board of Directors approved a voluntary 25 basis points permanent fee reduction in our management fee, effective January 1, 2018.

Given the company's increased run rate of net investment income, our board also approved an increase in the quarterly distribution to $0.41 per share for Q1 2018, concurrent with the management fee reduction.

This continued our history of shareholder-friendly actions, which have included voluntary fee waivers to ensure net investment income coverage of our distributions as well as restraint in raising equity capital and increasing portfolio leverage.

Importantly, the shareholder distribution increase is an initial step in allowing our distribution with our increased investment income, which we are confident in our ability to grow Solar's earning in 2018.

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

Thank you, Michael.

Solar Capital Limited net asset value at December 31, 2017, was $921.6 million or $21.81 per share compared to $921.2 million or $21.80 per share at September 30.

At December 31, 2017, Solar Capital's on-balance sheet investment portfolio had a fair market value of $1.46 billion in 93 portfolio companies across 34 industries.

This compares to a fair market value of $1.39 billion in 88 portfolio companies across 33 industries at September 30.

The weighted average yield on our income-producing portfolio was 10.1% at December 31 compared to 10.2% at September 30, measured at fair value.

At 12/31, Solar Capital had $541.6 million of debt outstanding and leverage of 0.58x net debt-to-equity.

When considering available capacity from the company's credit facility, combined with the available capital from the non-recourse credit facility of Crystal, Nations Equipment Finance and the senior secured loan portfolios, Solar Capital has more than $650 million to fund future portfolio growth, subject to borrowing base limits.

Going to the P&L.

For the 3 months ended December 31, 2017, gross investment income totaled $38.9 million versus $36.1 million for the 3 months ended September 30.

Expenses totaled $20.3 million for the 3 months ended December 31 compared to $18.8 million for the 3 months ended September 30.

Accordingly, the company's net investment income for the 3 months ended December 31, 2017, totaled $18.6 million or $0.44 per average share, compared to $17.3 million or $0.41 per average share for the 3 months ended September 30, 2017.

Below the line, the company had net realized and unrealized losses for the fourth quarter totaling $1.3 million versus net realized and unrealized losses of $0.2 million for the third quarter ended September 30.

Ultimately, the company had a net increase in net assets resulting from operations of $17.3 million or $0.41 per average share for the 3 months ended December 31.

This compares to an increase of $17.2 million or $0.41 per average share for the 3 months ended September 30.

Finally, our Board of Directors recently declared a Q1 2018 distribution of $0.41 per share payable on April 3, 2018, to stockholders of record on 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 and our fourth quarter activity, I'd like to take a moment to just set the table and review our diversified origination platform.

As most of you know, we spent this past several years building and attracting specialty finance lending businesses to our platform in order to advance our strategic objective of becoming a diversified commercial finance company that has expertise across both cash flow and asset-based underwriting.

Today, we have 4 core business lines.

Our largest is our cash flow business, which invests in senior secured loans to sponsor-backed companies in the upper midmarket with average EBITDA of approximately $65 million.

Included in this vertical, are assets held on balance sheet as well as in our SSLPs.

Our second line of business is our asset-based business, which encompasses nontraditional senior secured asset-based loans both the companies in transition as well as loans to other finance companies.

Much of this is invested through our 100% owned subsidiary, Crystal Financial as well as directly on SLRC's balance sheet.

These loans are typically made against the realizable liquidation value of our portfolio companies assets.

And these loans also come with meaningful upfront and prepayment fees.

Our third vertical is Life Science lending, which lends to privately held or small market cap drug and medical device companies.

Our team previously founded and managed GE Capital's Life Science lending business before joining Solar.

These loans are made to companies in the very late stages of either drugs or medical device development.

They are first lien senior secured loans and typically are accompanied with success fees or warrants.

Finally, our equipment finance business, lends the companies with a high percentage of essential used fixed assets in need of capital expenditure financing.

Solar entered this business through the acquisition of Nations Equipment Finance last year, which was founded back in 2010 by former GE Capital senior executives.

Included in this business, our equipment financings held both directly on Solar's balance sheet as well as in our wholly-owned subsidiary, NEF Holdings, which is setup for tax efficiency purposes for certain NEF investments.

The addition of equipment financing to the Solar platform enables us to act as a full solution provider across a variety of asset-based and cash flow products for middle market borrowers as well as our financial sponsored clients.

In the aggregate, at year end, our investments across these 4 verticals totaled $1.66 billion, encompassing over 200 borrowers across more than 90 industries.

Our average investment, per issuer, was $8 million or 0.5% of the comprehensive portfolio.

At year end, just over 98% of our comprehensive portfolio consisted of senior secured loans.

Of this amount, approximately 77% was in first lien senior secured loans and approximately 21% was in senior secured second lien loans.

Year-over-year, our second lien loan exposure declined by approximately 40% as we focused our origination efforts on first lien and stretch first lien senior secured loans to upper middle market sponsor owned companies as well as our commercial finance portfolios.

At year end, 80% of Solar's income-producing portfolio was floating rate.

The fixed rate loan exposure principally comes from NEF's short duration equipment financings with an average life of roughly 2.5 years at an average yield of 11% at year end.

Including investments and repayments across our 4 business lines, originations totaled approximately $160 million and repayments were approximately $180 million during the fourth quarter.

Now let me provide an update on the credit quality and earnings power of our portfolio.

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

At year end, the weighted average investment risk rating of Solar's portfolio was 2, measured at fair market value based on our 1 to 4 risk rating scale, with one representing the least amount of risk.

Approximately 97% of our portfolio was rated either 2 or 1, reflecting the portfolio's strong credit fundamentals.

In addition, 100% of the portfolio was performing at 12/31.

The weighted average yields on a fair value and current cost basis at year end was 10.1% and 10.6% in cost, up slightly from the weighted average yields a year ago.

Our diversified portfolio across both cash flow and asset-based lending enabled Solar to increase its overall yield in spite of the 50 to 100 basis point decline in year-over-year weighted average yields of our cash flow portfolio.

We're very pleased with the performance of the portfolio companies and believe that it validates our prudent investment approach and strategic focus on lower risk cash flow and ABL investments.

Now let me provide a brief update on our investment verticals.

First, the cash flow business.

At year end, our cash flow loan portfolio was approximately $714 million, representing 43% of the overall portfolio.

The weighted average trailing 12-month revenue and EBITDA trends were up mid- to high single digits, reflecting continued positive trends for our portfolio companies fundamentals.

For the companies in our cash flow segment, leverage to our security on average was 5x debt-to-EBITDA, consistent with the prior quarter.

Interest coverage was 2.5x.

And average EBITDA was $64 million.

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

During the fourth quarter, we originated senior secured cash flow investments of approximately $108 million, including $8 million in the SSLPs and had repayments of $36 million, including $2.3 million in the SSLPs.

The weighted average yield of the cash flow portfolio at year end was just over 9%.

A year ago, as I mentioned earlier, the weighted average yield was 50 to 100 basis points higher for our cash flow loans, reflecting primarily our focus on originating lower risk first and stretch first lien senior secured loans.

Now let me highlight a couple of our new cash flow investments.

During the fourth quarter, Solar made a $90 million investment across the platform with SLRC funding $60 million in the first lien term loan of on location experiences.

The funding helped the company's acquisition of Prime Sport, which is a leading provider of premium hospitality services for high-profile sporting events such as the Super Bowl, the NCAA Final 4 and the U.S. Open.

The U.S -- the loan yields just over 7% on our first lien investment.

In addition, we funded a $25 million investment in the first lien term loan of Datto a leading provider of business continuity services and disaster recovery services for IT service providers.

The yield on this loan is over 10%.

Now let me turn to our asset-based portfolio Crystal.

At year end, the senior secured asset-based portfolio was just under $400 million representing approximately 24% of our overall portfolio.

The weighted average yield at cost of this portfolio was 10.2%.

During the fourth quarter, we funded just over $24 million of new asset-based investments and had repayments of just over $100 million.

In addition, Crystal paid Solar fourth quarter cash dividend of $7.9 million equating to an 11.3% yield on costs, consistent with the prior quarter.

Turning to equipment finance.

As a reminder, Solar had closely followed NEF for a number of years given our investment activity in the leasing industry.

In addition, senior members of our investment team have longstanding relationships with NEFs senior executives as a number of both Solar and Crystal investment team members trained under NEF's Founder and CEO, Phil Carlson, while they were together back at GE Capital.

Today, NEF employs approximately 40 professionals.

Since their inception, NEF has directly originated and funded approximately $1 billion of equipment financings.

Collateral securing the portfolio consists of long life essential used assets such as trucks, trailers, machine tools and equipment, which can be readily liquidated.

Advance rates are typically below liquidation value, and our loan tenor is typically 3 to 7 years with an average life of just over 2 years.

The typical customer of NEF is a privately-owned midmarket business with a high percentage of fixed assets.

With its 100% collateralized loan portfolio, the addition of NEF to Solar complements our existing cash flow, asset-based, and Life Science lending businesses.

Importantly, we believe that NEF's business is highly scalable and provides Solar access to a middle market asset class that offers very attractive risk-adjusted returns, which are comparable to our other specialty finance businesses.

At year end, NEF had a total portfolio of approximately $310 million at fair value, lending to over 115 borrowers with an average exposure of just over $2.5 million.

The equipment finance asset class represents approximately 18.5% of our total portfolio.

The weighted average yield at cost on this portfolio was 11.1%.

During the fourth quarter, NEF had new investments of approximately $14 million and had amortization and repayments of approximately $31 million.

100% NEF investments are first lien loans and approximately $280 million of the portfolio is fixed rate.

Interest rate is mitigated here through the relatively short holding period of 2.5 year duration as well as our efforts to match fund this fixed rate assets class both with our unsecured fixed rate liabilities of approximately $250 million as well as some interest rate caps that bridge the gap.

During the fourth quarter, comprehensive net investment income from NEF's portfolio totaled $5.4 million, which equates to an annualized yield on cost of approximately 10%.

Now let me turn to Life Sciences.

Our portfolio totaled approximately $213 million across 23 borrowers with an average investment of $9.3 million at year end.

Life Science loans represent just under 13% of our overall portfolio.

During the fourth quarter, the team originated $11.5 million of new senior secured loans and repayments totaled approximately the same, $11.7 million.

The weighted average yield on our Life Science portfolio is 11.3% at fair value and 12.7% at cost, but this excludes exit and success fees in warrants.

The blended IRR on our realized Life Science investments through year end was 17.6% when including realized warrants.

As Michael mentioned, the middle market cash flow lending environment remains frothy, given the market technicals.

We benefit, however, from our 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 capital raised, the retreat of banks from middle market leverage lending and the approaching refinancing wave of existing leverage companies that need to refinance the balance sheets creates an extremely attractive supply demand dynamic for cash flow lending to middle market companies, which we see as a way to augment our strength in commercial finance verticals.

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

Thank you, Bruce.

From the inception of Solar Capital nearly 12 years ago, our investment and management decisions have been focused on building long-term shareholder value, protecting capital, maintaining alignment with our shareholders.

Solar Capital Limited had a very strong 2017, highlighted by continued progress on each of these strategic initiatives.

Our long-term strategy migrating the portfolio to senior secured, floating rate securities and diversifying our portfolio to multiple investment channels continued to drive superior results.

SLRC has become a more diversified commercial finance company, providing solutions across the capital structure to middle market businesses.

Our origination engines provide us with the opportunity to source loans in specialty niches that are less competitive.

In addition, the specialty finance strategies are less correlated to the liquid credit markets and have a risk return profile that is highly complementary to our cash flow lending.

Our diversified origination platform affords us greater flexibility to allocate capital to the best risk return opportunities and stick to our investment discipline.

Meanwhile, we have a flexibility to pivot back towards the higher percentage of cash flow loans in the portfolio should conditions in the sponsor market improve.

The increase of our quarterly distribution to $0.41 per share is a direct result of the successful execution of our strategy to expand our commercial finance capabilities.

At just 0.58x net debt to equity, we are under-levered and we've substantial dry powder to deploy via differentiated investment verticals.

We expect steady progress in growing our comprehensive portfolio in 2018.

As a result, we believe Solar Capital has the growth engines in place to eventually achieve run rate quarterly net investment per share in the mid- to upper 40s.

As our earnings increase, our board will further evaluate increasing our distribution to shareholders.

At 11:00 this morning, we'll be hosting an earnings call for the fourth quarter and 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, and we continue to see benefits of this 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) And our first question comes from the line of Ryan Lynch with KBW.

First question has to do with Crystal.

I know that you guys talked about in the past as well as countercyclical business so you guys can experience maybe stronger growth in that business when the economy is struggling or a bit choppy.

And so when I look at that business, when I look at the portfolio of that business kind of year-over-year, you guys portfolio declined by, maybe, $70 million?

And when I look at the net income in 2017 versus 2016, which maybe is not always the best priority for the potential dividend income you guys can distribute, but it went down quite substantially.

So I was just wondering with that portfolio going lower, how confident are you guys or how reasonable is it to expect a kind of steady consistent $7.9 million quarterly dividend from that business?

Sure.

Good question.

I think first and foremost, as you know, Ryan, the 30,000 feet because we have 4 different verticals.

Good news is we don't rely on any one vertical, and I think you hit the nail on the head.

Crystal does have an element of counter cyclicality to it.

So that we think as some of the other verticals in particularly the cash flow vertical might dislocate for either market or economic reasons, we tend to see more activity in Crystal.

But stepping back, over the last 3 years, for example, as you know, this is a -- the Crystal portfolio is a short-duration asset class, in large part because it is expensive ABL money for companies in transition.

So we typically seen that portfolio turn close to 60% a year.

So we're not surprised of the churn.

And as you know, the churn accelerates both upfront fee income as well as repayment fee income.

I think as we head into Q1, we're already seeing growth in that portfolio and the underlying income in part because of the economic headwinds that the retail sector is facing.

As you know, Crystal cut their teeth back when they started the business and 1980s lending to retail and power companies in large part.

And so they've been extremely opportunistic in that sector looking at fully secured financing.

So that portfolio will move around quarter-to-quarter.

As well the underlying income, but we think it's extremely well positioned long term and as I mentioned, short-term we're already seeing some increased activity this quarter.

So we feel great about the business.

And as you know, the income may bounce around quarter-to-quarter, but over the course of a 12-month period, we tend to smooth it out.

Okay.

It's helpful.

And this quarter you guys had very strong growth in the cash flow lending business, specialty finance verticals saw a little bit of net repayments.

Given that the competitive nature of the cash flow lending versus the specialty lending verticals would you expect future portfolio growth to mostly come in specialty and new verticals?

Or do you expect to continue to grow the cash flow lending business fairly substantially like you guys did this quarter going forward?

Yes, I think, look, we love attractive market conditions in all 4 verticals ahead at the exact same time.

So we see growth across all 4. But as you know, it's a little bit episodic.

I think that we saw a couple of nice opportunities in the cash flow side.

As I mentioned a moment ago, in Q1, Crystal has seen growth.

Life Science is seeing a little bit of growth.

NEF equipment finance business, as you know, it's a straight line amortization.

So there's always a constant repayment trickle effect there, but they also are seeing growth in originations and that team expects sort of steady growth quarter-to-quarter throughout the year.

So I think we really expect to see growth in the 3 specialty finance verticals.

And then, the cash flow business, to your point, to some extent, depends upon market conditions there, but we have been able to find some interesting attractive assets to bring on the platform.

So I think a year from now, we'll be sitting here and you'll probably see growth across all 4 verticals.

Okay.

Got it.

And then, as far as the dividend goes, I mean, you guys put a $0.44 this quarter.

You guys have the lower base fee starting in Q1 of 2018.

Can you guys just talk about -- it clearly looks like there is the potential for meaningful dividend growth.

I mean, how do you guys kind of determine dividend growth?

You guys want to have dividend kind of match earnings or do you guys want to leave yourselves cushioned?

Just how are you guys thinking about as earnings kind of continue to ramp forward when you guys -- what's kind of your dividend policy as far as matching the dividend closer to earnings?

So I think we want to leave some cushion.

And we also want to see ourselves put up a few quarters consecutively above the dividend before we consider raising it again.

So we look at sustainable NII with some cushion above the dividend.

But to your point, we do see growth and sustainable NII through the year, so you could expect the distribution to follow.

Okay.

And then just one final one, if I can.

I didn't see that there is any growth in the Life Sciences JV.

Can you just provide any update on that?

I mean, you guys started that almost a year ago now and really hasn't taken off at all.

So is that, I guess, what is the delay in growing that and you guys see any growth in that entity in 2018?

Sure.

The short answer is we do see some growth in that in 2018.

As you may recall, the JV is specifically focused on large cap public Life Science opportunities.

Everything else either small public companies or private companies, which may be very large, we just did a fairly large investment this quarter for a private company.

But everything else comes into Solar's balance sheet.

So the JV is only for large Life Science opportunity in large public companies.

And so that is a narrow universe.

But the team is actively looking for those opportunities, and we do expect it to ramp.

From our perspective, we're somewhat indifferent as to whether it's on the balance sheet or in the JV.

And I think from 30,000 feet, the team has a very nice pipeline of investments.

And as you know, this is also a short-duration asset class given the straight line amortization and the nature of the assets themselves tend to be 2- to 3-year in duration.

So there is a element of running in place similar to the Crystal ABL portfolio.

But as we run in place, we generate extremely attractive return.

As we mentioned, the team has delivered just under 18% realized IRR.

So I think you'll see that as a continued high velocity portfolio with some room for growth regardless of whether it's in the JV or on balance sheet.

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

Joe Mazzoli filling in for Jonathan Bock.

So the first question there is no doubt that you have assembled a very attractive portfolio of specialty niches that are really providing very attractive returns for investors.

But the question is, with other BDCs and other finance companies looking to diversify away from the pure play kind of sponsor-lending model, can you walk us through some of the competitive dynamics within those businesses because they are less competitive today.

But is that changing?

If you could provide some color around some of the barriers to entry into those businesses?

So the good news is as opposed to cash flow lending where there are literally dozens and dozens of competitors, in the specialty finances, each have their own set of competitors, but they're literally a handful.

And as we've seen -- we've seen in the private credit space, tons of people enter the cash lending business.

Frankly, a lot of private equity firm platforms saw that they can take the exact same skill set of value in cash flow complicated doing private equity and apply that to cash flow lending.

That's just not the case when it comes to the ABL that we own.

We now have 150 people across our platform.

Half of them are back-office people focused on collateral management and asset management.

So this is not a business that you can just hire few people and go after.

It's no coincidence that the businesses that we are in today, we did either through acquisitions or bringing on teams that have been doing it for 30-plus years.

So we don't see today, our BDC brethren kind of entering these businesses, at this point.

And we can talk about the competitors of this business, but again it's literally 3 to 5 in each of these business and that's why there's been no spread compression to speak of.

I think just echoes Michael's comments.

Good question.

There are competitors, although it's more oligopolistic as you get into our commercial finance verticals.

But importantly, we don't have the same competitor in any of these verticals.

Here, the heart of your question, we've put together a unique platform and that we have all of these verticals under one roof.

And really what's lost in our comments is conveying adequately to all of you that from an origination perspective, if we had our team on the phone here.

What they would tell you is they have the ability to go to middle market borrowers, which is our only source of assets.

We are exclusively focused on U.S. middle market corporation, but we have the ability to underwrite risk in many different ways.

Our team can look at cash flow streams, they can -- if they're not comfortable with cash flow streams on a projected basis, and maybe the industry is in retail and has headwinds where they can bring in our asset-based team and underwrite the underlying liquidation value of that collateral.

If it's an equipment heavy business, we can underwrite equipment.

So we have a lot of ways to look at providing capital to a borrower.

So our relevance is not only the scale of the platform in terms of the balance sheet that we have put together here to take large hold positions for borrowers and be a solutions provider, but we have a breath of product and all of it goes out from our originators with one team talking to the borrowers.

The underwriting and the risk mitigation and the risk management is done on a specialized bases in each vertical.

So we have that expertise to access risk.

But the sourcing is done by one team that's broad in terms of their product offering, and I think that's what's unique.

I think the barriers that Michael touched on are extremely high given that each of our teams has done this for 20, 30 years.

And so you need expertise in underwriting collateral, assessing -- it could be working capital assets, it could be intellectual property, in our Life Science business, and so the barriers are high.

And I think that's really the difference.

I know a number of people are looking at these segments, but they're not easy to access.

That's very helpful.

And there's no doubt that your investors benefit from that diversity.

And just one final question.

This touches on a question that was asked earlier.

But in relation to the dividend and NOI clearly there's a runway to further NOI growth and the portfolio is demonstrating stability, right?

So as we kind of look forward, there is precedent in the BDC space for more of a variable special dividend on top of a recurring level.

Is that something you will consider?

Or are you more focused just on increasing the stable quarterly dividend?

At this point, we're just focused on increasing the quarterly dividend.

As you look at the nature of our income too, right, it's pretty predictable income.

And so we have pretty good visibility.

It's not like there is equity in our portfolio that would lead to onetime gains that might justify special dividend.

And our next question comes from the line of Casey Alexander with Compass Point.

I just have one question.

You mentioned that the dividend that came from Crystal was the standard $7.9 million quarterly dividend.

But in your release, it suggested that the gross investment income generated by Crystal was $10.8 million for the quarter.

Could you explain where the additional income comes from so that we can kind of understand the various ways in which Crystal contributes to the platform?

Sure.

I think from 30,000 feet, their income, Casey, is, obviously, a combination of coupon as well as upfront fees and then prepayment fees.

And as we talked about a moment ago and as you appreciate, this is a high churn portfolio.

So while we're across our platform amortizing upfront fees across the holding period in the life of the security, they get accelerated more quickly in Crystal.

But these are -- we don't have a lot of visibility on repayments at Crystal, because their capital is expensive.

We sort of get a prepay notice sometimes a couple of weeks in advance and that's about it.

And so there is a lot of variability quarter-to-quarter in their earnings stream given the mix of fees relative to coupon.

And so we have done, since we've held Crystal for last 5 years, is try to deliver a smooth distribution, understanding that some quarters it would be a little higher and some quarters it would a little lower at the income level.

(Operator Instructions) Our next question comes from the line of Christopher Testa with National Securities.

Just regarding your comments on, obviously, maintaining the mentality that the credit cycle will be ending very shortly when you do underwrite.

Are you assuming just a kind of one of the middle recession or something much more severe like a 2008, 2009 recurrence?

So couple of things.

We are not predicting that we are at the end of the cycle.

All we're saying is, we invest as if we do.

And so which means as you know, we've avoid those industries that are particularly susceptible to economic downturn.

What we do?

I mean, just to step back, the fundamentals are very strong across all -- the entire portfolio.

But what we do is we do stress the portfolio to look at the scenarios of these companies actually went through back at that time to see what's the impact on the capital structure would be.

And that's part of our investment thesis, but that's clearly not our base case.

I think it's more of a -- more of manageable recession, if you will.

And just to reiterate, Michael's point, the fundamentals are strong.

We have 300 investments across the platform.

As you've seen, we reported good revenue and EBITDA growth on our cash flow portfolios.

And our watchlist, which is always a good indicator of how we're feeling in terms of future stress has continued to shrink quarter-over-quarter.

So we feel very good, but to Michael's point, we're always defensive.

Got it.

Okay.

Yes, I know you guys are always defensive.

I was just trying to see how you're stress testing it versus a crisis versus a regular recession, so appreciate the color on that.

Also just wondering if you guys know at the top of your head approximately how much of the first lien book is stretched first lien?

It is mostly stretch first lien at Solar.

I can't give you an exact percentage.

But it starts to stretch, but that's really defined by leverage ratios, if you know.

And so we have seen with an average leverage ratio of 5x, a lot of our stretch migrating quickly to first.

And that's when we decide this is an opportunity to get out or maybe there is a refinancing at lower leverage and lower pricing, and we'll look at it for Solar senior to optimize on our history with the company.

We've seen good deleveraging for us.

Okay.

Great.

That's helpful.

And obviously, I know, in terms of Crystal and ABL that you guys have very, very limited visibility into the future really just on a quarter-to-quarter basis.

But just from a more high-level view, what are your thoughts on what the ABL opportunities will be if retail kind of regains its footing and it's not as stressed of its sector?

So I think [Jeff] if you look at -- since we've owned Crystal for 5.5 years now, the portfolio has bounced around between $350 million and $550 million.

And that's probably where it would be unless we are in a prolonged economic downturn, if you will.

But if we do hit countercyclical earlier, this could easily be a $1 billion portfolio.

Got it.

Okay.

And last one from me.

Just could you quantify -- I know obviously you hold some of the NEF loans on balance sheet.

How much of the comprehensive NEF portfolio?

What percentage of that is held on balance sheet and off the ones on balance sheet?

What is the contribution of that to your interest income?

There $73 million on balance sheet of the $308 million total.

[And you got] 11-ish percent, you can do the math.

(Operator Instructions) Our next question comes from the line of Mickey Schleien with Ladenburg.

I realized we're running out of time, so I'll just ask a couple of questions.

First, on-location, events that's obviously, a large position.

But it's one of your lowest rates.

So I was curious what the rationale for that investment is?

As it looks like, it's not accretive to SLRCs earnings?

Yes, you should expect that to migrate into the SSLPs where that type of yielding investment has been housed in the past.

Okay.

So you transferred and levered up to get the ROEs that you're looking for?

Exactly.

Okay.

And maybe for..

And just as an aside, Mickey, so that the yield is just over 7%, leverage is under 5x, call it 4.75x.

And it's a short maturity loan.

So we expect that realized IRR, which is obviously what matters at the end of the day as opposed to yield to maturity that we quote.

We expect to be extremely attractive even on an unlevered basis.

I understand.

And maybe quick question for Mr. Peteka.

Can you tell us what the main drivers were of the unrealized gains this quarter?

Sure, hold on.

Of the unrealized gains?

Unrealized, yes.

Sure.

I have it right here.

Unrealized gains were driven by Breeze Technologies, Bishop Lifting, Achaogen, and Core, Vapotherm as well, Accela.

So I would say those were the top.

Breeze was 824,000, Bishop was 679,000 and Achaogen was 528,000, Core Wireless was 512,000 and those were the top contributors on an unrealized basis.

And Rich, was that driven by technicals in the market or company performance?

Company performance.

And I'm showing no further questions at this time.

So with that said, I would like to turn the conference back over to Chairman and Chief Executive Officer, Mr. Michael Gross, for closing remarks.

Thank you all very much for participating this morning.

We look forward to talking to you soon, and we will talk to some of you in 10 minutes at our Solar Senior conference call.

Thank you.

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

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

Everyone, have a wonderful day.