SLR Investment Corp (SLRC) 2018 Q3 法說會逐字稿

Good morning.

My name is Adam, and I'll be your conference operator today.

At this time, I'd like to welcome everyone to the third quarter 2018 Solar Capital Ltd.

Earnings Conference Call.

(Operator Instructions)

Thank you.

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

You may go ahead.

Thank you very much, and good morning.

Welcome to Solar Capital Ltd.'s earnings call for the quarter ended September 30, 2018.

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

Rich, before we begin, would you please start 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 replay of this call would 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 Ltd.

undertakes no duty to update any forward-looking statements unless required to do so by law.

To obtain copies of our latest SEC filings, please visit our website or call us 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.

For the third quarter, Solar Capital delivered solid operating results, continuing our long-running history of strong credit quality, net asset value preservation and increased earnings power.

At September 30, 2018, Solar Capital portfolio was 100% performing, and our net asset value of $21.95 per share represented our 11th consecutive quarter of net asset value growth per share.

During the quarter, Solar Capital generated $0.44 of net investment income per share.

Over the first 2 quarters of the year, our cumulative net investment income per share has exceed our dividends by 9%.

Fundamental credit performance continued to be strong supported by stable economic conditions and corporate earnings growth.

Middle-market capital lending continues to be extremely competitive.

We believe it is paramount to maintain our strict discipline in capital lending in the face of aggressive structures, tight pricing and elevated risk.

During the continued frothy market conditions at capital lending, our asset-based businesses, Crystal Financial, Nations Equipment Finance and Life Science lending, provide investments with strong structural protections.

At quarter end, approximately 69% of our comprehensive portfolio is in specialty finance investments.

Not only do our asset-based loans carry credit protections and yields superior to those in the cash flow market, but the higher income received from our asset-based loans enables us to be highly selective in underwriting middle-market cash flow transactions.

In the face of continued spread compression in capital lending, our barbell approach to portfolio construction has allowed Solar Capital to achieve a weighted average comprehensive portfolio yield at fair value of 11.2% without having to take additional risk by investing in second lien loans or riskier sectors such as cyclicals or energy.

Now we're at a point of progress with 2 important initiatives we believe that enhance the strategic position of Solar, and it significantly improves our flexibility and resource to drive long-term value for our shareholders.

The first initiative is the new asset coverage requirement.

On October 11, Solar shareholders overwhelmingly approved the reduction in the asset coverage requirement, thereby accelerating the timing of the adoption, which has initially been approved by Solar Capital's Board of Directors in August.

As a result, on October 12, Solar Capital's asset coverage requirements changed from 200% to 150%.

Given our investment focus on senior secured first lien loans, which traditionally have been financed at much higher leverage levels in private funds and banks, we have increased our target ratio to a range of 0.9 to 1.25x debt to equity.

This new target range allows for meaningful and substantial cushion to the new asset ratio requirement.

Over 96% of votes cast were in favor to proposal as a sign of shareholders' confidence in our ability to strategically and prudently manage the increased leverage flexibility.

We like to express our sincere appreciation to our shareholders for their support during this Solar proxy process.

As a reminder, Solar Capital's board also approved that amendment to the investment advisory agreement reducing the annual base management fee to 1% on assets financing in leverage above 1x debt to equity.

Importantly, what we want to reiterate that the asset coverage modification will not change our investment strategy.

It will, however, enhance our ability to further expand our specialty finance lending platform.

The new asset coverage ratio simplifies our business model as well.

Specifically, during the third quarter, we consolidated our interests in SSLP and SSLP II.

Previously, Solar's investment in the SSLPs were considered nonqualified assets.

By consolidating the SSLPs assets, our portfolio of cash flow senior secured loans has approximated same level on balance sheet as the previous look-through leverage of 0.52x at September 30, but the loans now count as qualified asset.

This has freed up significant 30% capacity giving us the flexibility to expand the specialty finance platform.

In addition, moving to SSLP and SSLP II assets on balance sheet has also resulted in enhanced transparency, simplicity of reporting and streamlined decision-making.

We intend to move closer to our new target leverage range by growing our portfolio over time, only when the market opportunity presents itself.

Consistent with our long-standing conservative investment approach, we were prudent with the use of leverage.

We view the increased leverage flexibility simply in another investment and risk management tool.

When combined with a management fee reduction, we believe the additional leverage flexibility provides Solar Capital the potential to generate incremental, long-term returns to shareholders.

Importantly, Solar Capital has sufficient debt capacity in place today to operate within the range of target debt to equity without having to raise additional debt or equity.

Our niche asset-based lending businesses across both Solar and our sister company, Solar Senior, have achieved double-digit asset level cumulative weighted average internal rate of returns and continue to originate asset-based investments that are highly attractive on a relative-value basis.

We are pleased with the results of our efforts to develop Solar into a diversified, niche specialty finance company.

Accordingly, the asset coverage modification will enable us to do more of what we have been doing: investing first lien senior secured loans with the current emphasis on asset-based loans.

The second initiative involving investment adviser, Solar Capital partners, also favorably impacts Solar Capital.

Solar Capital Partners recently announced the closing of private credit funds with total equity commitments of over $750 million, including new funds expected leverage, SMAs and our 2 BDCs.

The Solar Capital partners platform now has over $5.5 billion of investable capital.

The increased scale across Solar Capital's platform, to achieve leading position, Solar could be a solutions provider with an ability to speak for as much as $200 million in a given transaction while still maintaining our highly diversified portfolios.

We expect this great investment capacity across the platform to result in more investment opportunities for Solar with an enhanced ability to negotiate the terms that meet our stringent underwriting criteria.

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 Ltd.

net asset value at September 30, 2018, was $927.6 million or $21.95 per share compared to $926.8 million or $21.93 per share at June 30, 2018.

At September 30, 2018, Solar Capital's on balance sheet investment portfolio had a fair market value of $1.4 billion in 110 portfolio companies across 30 industries compared to a fair market value of $1.40 billion in 100 portfolio companies across 32 industries at June 30, 2018.

During the quarter, SLRC and its JV partners entered into purchase and sale agreements, whereby SLRC purchases JV partner's equity together with an agreement to sell them their pro rata share of the investments within the SSLPs.

These agreements resulted in SLRC owning 100% of the equity interest and now controlling the SSLPs.

Accordingly, the SSLPs were consolidated onto SLRC's balance sheet at September 30, 2018.

At September 30, Solar Capital had $489.2 million of debt outstanding and leverage of 0.52x net debt to equity, inclusive of the SSLPs consolidated leverage, compared to $473.6 million and 0.5x at June 30.

When considering available capital from the company's credit facilities, combined with available capital from the nonrecourse credit facilities at Crystal and NEF, Solar Capital had more than $700 million to fund portfolio growth subject to borrowing base limits.

Turning to the P&L.

For the 3 months ended September 30, 2018, gross investment income totaled $37.1 million versus $39.2 million for the 3 months ended June 30.

Expenses totaled $18.7 million for the 3 months ended September 30, 2018, compared to $20 million for the 3 months ended June 30, 2018.

Accordingly, the company's net investment income for the 3 months ended September 30, 2018, totaled $18.4 million or $0.44 per average share compared to $19.2 million or $0.45 per average share for the 3 months ended June 30.

Below the line, the company had net realized and unrealized losses for the third quarter totaling $0.3 million versus net realized and unrealized gains of $0.6 million for the second quarter.

Ultimately, the company had a net increase in net assets resulting from operations of $18.1 million or $0.43 per average share for the 3 months ended September 30, 2018.

This compares to an increase of $19.8 million or $0.47 per average share for the 3 months ended June 30, 2018.

Finally, our Board of Directors recently declared a Q4 distribution of $0.41 per share, payable on January 4, 2019, to shareholders of record on December 20, 2018.

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

Thank you, Rich.

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

At September 30, the weighted average investment risk rating our portfolio was 1.9, based on our 1 to 4 risk rating scale with 1 representing the least amount of risk.

As further indication of the strong fundamentals of our portfolio, only 3% of our portfolio was on watch-list status at quarter end, and 100% of our portfolio was performing at quarter end.

Our $1.7 billion comprehensive portfolio encompasses 230 distinct issuers across 92 industries.

The average investment per issuer was $7.4 million or 0.4%, highly diversified.

Also at quarter end, over 98% of our portfolio consisted of senior secured loans comprised of approximately 83% first lien loans and 14% in second lien loans.

We continue to reduce our exposure to second lien loans, which carry higher yields and higher risk than our first lien investments.

Yet the weighted average yield of our overall portfolio increased to 11.2% at quarter end compared to 10.9% in Q2.

Importantly, through our niche commercial finance verticals, we've been able to maintain this 11% asset level yield in spite of the spread compression we are all seeing in cash flow lending.

We've done this by replacing our second lien cash flow loans with lower risk yet higher return, first lien asset-based investments.

Including activity across our 4 business lines, originations totaled just over $200 million and repayments were approximately $280 million, resulting in net comprehensive portfolio reduction of approximately $80 million.

Given the continued heated cash flow market conditions, we intentionally allowed that segment to shrink.

The decline in our cash flow loan portfolio was partially offset by growth in our asset-based strategies, which currently offer a much more favorable risk and return profile.

Let me now provide a brief update on each of our 4 verticals.

Our cash flow business invests in senior secured loans, predominately first lien and stretch first lien investments to upper-middle-market companies with an average EBITDA on our portfolio of approximately $70 million.

During the third quarter, we originated cash flow investments of approximately $45 million, all of which were first lien loans, and we had repayments of approximately $165 million in our cash flow segment.

The reduction in this portfolio was the direct decision -- result of our decision to not participate in many of the refinancings of our incumbent investments, due to pricing and structure degradation, resulting in loan terms that did not meet our investment criteria.

At quarter end, our cash flow loan portfolio was approximately $500 million, representing approximately 30% of our total portfolio.

Our exposure to second lien loans has declined to under 15%, down from 35% at the beginning of the year.

We expect to see a continued reduction in our second-lien exposure over the coming quarters.

At September 30, the weighted average trailing 12-month revenue and EBITDA of our borrowers grew in the high single digits, reflecting continued positive fundamental trends at the portfolio companies.

On a fair weighted average basis, leveraged to our investment was just over 5x and interest coverage was just over 2.25x.

In addition, the weighted average yield of our cash flow portfolio is 9.8% compared to 9.6% in the prior quarter.

With the addition of the newly raised capital that Michael discussed, SLRC is already benefiting from Solar Capital Partners' increased scale and ability to be a full solutions provider.

As an example, we were recently able to support ABRY Partners' refinancing of Aegis toxicology sciences, which was an existing SLRC portfolio company where we had held a second lien investment.

We almost doubled our total dollars to $65 million and moved up the capital structure to a first lien investment.

Now let me turn to our asset-based lending, Crystal Finance platform.

These loans, as a reminder, are made against the realizable liquidation value of a portfolio company's assets and are accompanied by meaningful upfront and prepayment fees.

During the third quarter, we funded $63 million of new asset-based investments and have repayments of approximately $40 million, resulting in just over $20 million of asset-based lending portfolio growth.

At 9/30, the senior secured asset-based loan portfolio was approximately $590 million, representing approximately 35% of our total portfolio.

The weighted average yield was 12.3%, consistent with the prior quarter.

This platform paid Solar Capital a dividend of $7.5 million, equating to a 10.7% yield on cost.

Moving on to our equipment finance business.

Solar, as you know, entered this business through the acquisition of Nations Equipment, which was founded in 2010 by former GE senior executives.

Included in this business are equipment financings held on Solar's balance sheet as well as those that are held in NEF Holdings, a 100%-owned portfolio company that we utilize for tax efficiency.

During the third quarter, NEF had new investments of just over $60 million and had repayments totaling $44 million.

Our NEF equipment finance strategy has a total portfolio of just over $375 million, which represents a 15% increase since our acquisition just about a year ago.

The portfolio consists of loans to 147 distinct borrowers with an average issuer exposure of approximately $2.6 million.

In total, the equipment finance portfolio represents 22% of our combined portfolio.

100% of NEF's investments are in first lien loans and approximately 97%, fixed rate.

Here, we mitigate interest rate risk through, both, the relatively short holding period of NEF's assets as well as our efforts to match fund of fixed rate nature with our unsecured fixed rate liabilities of approximately $250 million on Solar's balance sheet.

The weighted average yields of the equipment finance portfolio was 11.2% compared to 10.5% the prior quarter.

Finally, let me provide an update on our Life Science Lending business.

As a quick reminder, these are first lien senior secured loans and typically are accompanied by either a success fee or a warrant.

During the third quarter, the team originated just over $30 million of loans and had repayments of approximately $34 million.

Our Life Science loan portfolio totals just over $200 million across 18 issuers with an average investment of just over $11 million.

In totality, Life Science's loans represent 12% of our comprehensive portfolio.

The weighted average yield in this portfolio was 11.6%, excluding success fees and warrants.

As Michael mentioned, the middle-market cash flow lending environment remains extremely frothy.

We benefit greatly from our diversified originations sources across not only cash flow but also asset-based lending verticals.

Now with our increased scale, provides us an even greater competitive advantage across these business lines.

We will, however, continue to be prudent and highly disciplined in deploying our substantial available capital.

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

Thank you, Bruce.

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

In 2018, we have put additional strategic building blocks in place in the form of reduced asset coverage requirements and enhanced platform scale that provides greater flexibility to drive long-term shareholder value.

Importantly, we have been prudent in the face of sustained frothy credit markets and remained disciplined in not compromising credit quality for yield.

The result is a solid portfolio foundation from which to grow.

We've always maintained an investment philosophy of assuming that we are late in the credit cycle, and we believe that in the current investment environment it pays to be cautious.

It remains to be seen whether the recent volatility in the equity markets will lead to new attractive investment opportunities, but we believe our differentiated origination platform and diversified portfolio position us well to navigate in any environment.

As the credit cycle does shift, we believe our history of conservatism will enable us to outperform our peer group.

I would like to take this time to reiterate our appreciation to our shareholders for their overwhelming support to approve the accelerated adoption of the modified asset coverage ratio.

The resulting increase flexibility does not change our investment strategy.

Rather, it meaningfully -- it enhances our ability to grow, build the potential requirements for specialty finance businesses, as we continue to broaden our diversified commercial finance platform.

Importantly, the new asset coverage requirement allows us to operate with an increased cushion to the regulatory leverage threshold, which is to be a significant benefit in more volatile markets.

At just 0.52x net debt to equity, we are under levered, and we have substantial dry powder to deploy via our differentiated investment verticals.

We believe Solar Capital has a clear path to a run rate quarterly net investment income per share at target leverage in low 50s from our current base of low to mid-40s today.

As our earnings increase on a sustainable basis, our Board of Directors will evaluate further increase in distribution to shareholders.

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

Our ability to provide traditional middle-market senior secured financing through this vehicle continues to enhance our origination team's ability to meet our clients' capital needs, and we continue to see the benefits of this value proposition in Solar Capital's deal flow.

Thank you for your time this morning.

Operator, would you please open the line for questions.

(Operator Instructions) And your first question comes from Ryan Lynch of KBW.

You guys spoke a little bit about the capital, you guys have recently raised outside of the BDC.

One of your guys -- part of your story is capital deployed within the BDC because you guys do have significant amount of capital given your guy's lower leverage in the recent passage of the 2:1 leverage.

So one of the concerns with the capital raised outside of the BDC is that could potentially soak up some of the capital or I guess the funding that could potentially be placed on SLRC's balance sheet.

Now you also spoke about this, sort of, additional capital can open up more opportunities across the platform.

Can you, maybe, just then further expand on how that additional capital outside of the BDC can potentially open up more opportunities for the Solar platform?

And on top of that, are there any areas specifically that you guys really see that -- being able to really benefit with enough cash flow lending or ABL or Life Sciences?

Sure.

Great question, Ryan.

I think you do have to look at it segment by segment.

I think the easiest one to address is NEF.

NEF, for example, with an average loan size of $2.5 million, $2.6 million, clearly is not capital constrained, and those assets will not be shared across the platform.

But I think to your point, if you look at cash flow where we are first lien and stretch first lien lender, exclusively in today's market conditions, and we're, as you know, lending to the upper mid-market.

Mathematically, if you're making a loan to a $50 million EBITDA company, and they need 4 turns of leverage, that's a $200 million loan.

So the ability to take down $200 million at SLRC, we may only hold $40 million to $50 million.

And again, we want to be highly diversified in each portfolio so that would result in a 2% or 3% average position.

But still with the additional capital in the sidecar fund, allow us to take down that incremental $100 million, $150 million, so that the borrower sees us as a $200 million provider.

So I think it will be extremely relevant.

We've already seen it, as I mentioned, in some deals in the cash flow segment.

I think additionally, as you look to both Life Sciences and ABL/Crystal, the ability for them to take larger hold sizes, and I think particularly in Life Sciences, where the larger hold size tends to be larger companies, which also may often be public.

That dovetails with this increased 30% flexibility because, as you know, large public companies greater than 250 million market cap are nonqualified assets.

So the combination of the scale for our Life Science team as well as our ABL team as well as the more flexibility on the 30% nonqualified, I think opens up a lot of opportunities for us.

I think importantly, as this is becoming more and more relevant, your counterparty people, whether borrowing money from you, want you to be a full solution.

And if your capital is not of the appropriate scale, you don't get invited to a transaction unless you can provide that full solution.

So $5.5 billion today, to Bruce's point, was really between the other transactions.

In all of those 3 segments that Bruce just went through, we now are positioned to become a full solution solutions provider, and that will only increase the deal flow we've seen -- what we have seen, historically.

But we can't emphasize enough the importance of maintaining the discipline and the underlying diversity of those hold positions.

Great.

Yes.

That's helpful color, good context.

The cash flow lending portfolio continue to shrink again this quarter, which you guys have talked about that being more of an intentional move, as you guys are finding that very competitive.

When I looked at your cash flow lending portfolio 2 years ago, it was over 50% of your comprehensive portfolio.

As I look at it today, it's less than 30% of your portfolio.

Given that the environment, it doesn't seem be improving in that segment, and it doesn't look like there's going to be improvement over there over the coming quarters.

I mean how much more could you guys shrink that portfolio?

In a year or 2 from now, could we see that be in 20% or less of the overall portfolio or does it -- there comes at some point where we are kind of stabilized, and I don't know if that -- where it is today?

Or if you could just comment on that, that would be helpful.

I think it's important to know a couple of things.

First, we will see, as you mentioned, our second lien portfolio, which is predominantly cash flow loans, continue to shrink.

As we mentioned with the Aegis transaction, there are a couple of second liens that we are rotating into larger first/stretched first lien loan holds, so you'll see that sort of migration of the portfolio as the cash flow of mix moves to first lien.

But I think it's important to understand that during this time period, there's also been a reduction by addition.

And what I mean is we've added other platforms: we've grown our Life Science, as you know that was 0 just 3, 4 years ago; we've acquired NEF last year, which is now approaching a $400 million portfolio.

So a part of the reduction is not just the absolute dollars.

It's just the expansion of the ABL businesses and specialty finance businesses.

But we don't wake up and have a target for any additional segment.

I think we're blessed with having diverse segments, and we look at where deploying capital to where the least risk is, and then where we can optimize the return.

Okay.

It's helpful, and then just one last housekeeping one.

A look at the dividend income our income upstream from NEF entity, there was $3 million in Q1 and then there was $2 million in Q2 and Q3.

Can you just talk about, is that kind of a good run rate, the $2 million, from that entity going forward?

Or would that expect to go any higher, as you guys potentially grow that NEF segment?

So I personally don't think you should focus on the dividend from the entity.

We look at the equipment leasing business as a whole because we have assets on balance sheet and assets off balance sheet, which is in the vehicle that we get the dividend from.

And as a function of whether they're tax-efficient leases or not.

We look at the contribution as a whole, which we've disclosed, and that's what I would focus on.

Yes.

Because, to Michael's point, the dividend from that entity has shrunk because the assets in that entity has shrunk.

Meanwhile, the assets on balance sheet from NEF have grown.

So -- as Michael mentioned, we compressed the 2, and we look at the NEF business regardless of whether they're putting them in this 100%-owned subsidiary or directly on our balance sheet.

And that's the combined number where you've seen that portfolio grow to 15% that we referenced since we acquired them a year ago.

And your next question comes from Casey Alexander of Compass Point.

How does the Crystal $7.5 million dividend compare to prior quarters?

And given the fact that portion of the portfolio has grown, how do you see that dividend developing over the next several quarters?

Yes.

So as you may recall, the Crystal business in particular is a very high-churn underlying asset class.

That's a good thing because we get paid back quickly.

It's also a good thing because we accelerate fees.

But it makes, Casey, difficult to sort of smooth out on the quarter-to-quarter basis.

We really look at Crystal over 12-month time periods given the duration of their assets.

So I think, the short answer is, the dividend has been very consistent.

And you'll see earnings higher and lower than that on a quarter-to-quarter basis.

But I think we feel very good that it will be stable.

I think, the real question is, if we see dislocation in the markets broadly, as we have in the equity markets, as that creeps into the credit markets?

We believe Crystal can grow.

And when they do that over a course of a couple of quarters, you'll see that dividend grow.

Okay, great.

And in conjunction with that, can you talk about your acquisition-sourcing efforts?

Obviously -- okay, not giving away any names or anything, but talk about your efforts, and then how you go about sourcing acquisitions and -- which might give us a sort of a feel for how long it might take you to actually execute on something?

Sure.

I think that's a great question.

As you know, we have a dedicated team.

The team is obviously elated at the increased flexibility of Solar now with the 30% basket expanded, both by collapsing the slips and the increased leverage capability.

So the team is out there constantly looking for new platforms.

They are long lead time.

But obviously we're constantly in dialogue.

For example in Crystal, we have been talking to them for 2 years before they joined us in 2012.

NEF, we have been talking to for 4 years before they joined us last year.

And there's a similar history with both North Mill and Gemino over at our sister BDC, Solar Senior.

So you don't always know when it's going to be time for them and for us.

But we do have ongoing dialogues.

And as you know, we also like to lend to many of these platforms before we bring them on, and it gives us all the chance to get to know each other and also get to see how their portfolio's perform.

So you will see more activity now that our 30% basket is opened in terms of what we called lender financed where we are getting to know and lending into these companies.

And as you know, we get out sized returns and are fully collateralized in those loans.

But more importantly Casey -- this is not a business where we can kind of tell you where our backlog or is or what's eminent.

These are -- each of these are strategic acquisitions where, frankly, the stars that we each then have to align because that should be the right team, the right business, the right culture.

And so they're more kind of episodic than then you can count on, on a semiannual basis, if you will.

Your next question comes from Chris York of JMP Securities.

So how does the approval of the reduction in asset coverage and expansion potential in your commercial finance companies affect your thinking about accessing either the unsecured or convert market to lower the cost of capital of these businesses?

So as we disclosed earlier, we have enough dry powder in our unfunded revolving credit facilities, which we're borrowing at LIBOR plus 2% to 2.50% depending on the facility.

And frankly that is the lowest cost form of financing we can get.

So we currently have no intention of accessing those markets at this point.

But what I would add, as you look at our liabilities, we do have -- we have in the past accessed, both the private unsecured market as well as the public IG market.

And we'll be opportunistic as we move forward.

Sounds good.

And then considering that Solar owns both equity and NEF and Crystal, is it conceivable to think that the additional origination capacity, creates by the sidecar funds, at these companies could increase the franchise value or valuation?

Sure.

I think look -- I think one of the -- we touched it earlier, but one of the biggest beneficiaries of additional capital is Crystal.

Crystal has a balance sheet limited by our equity commitment, we can hold at most at Crystal $30 million to $35 million there.

So this gives them the tool now to go out to market and pitch $100 million, $200 million deal that they otherwise could not have done before.

So I think that will increase origination.

As Bruce mentioned, this is a high-churn business.

So the more origination you can do, the more fees it brings into the company, which hopefully will [indiscernible] to the ultimate valuation of it.

So -- I mean, following up on that.

So I think you guys did investment contained in the quarter at Crystal.

Is that an example of where essentially having more capacity could allow you to keep all of that?

I don't know if you syndicated out a portion of that but just trying to think about an example.

Which investment?

I'm sorry, you broke up.

Vince.

Vince.

No, but yes.

The short answer is we are not, today, syndicating anything unless there's a strategic reason behind it.

We are keeping -- we're [full of] of the assets across the platform.

Where we have in the past, syndicated, yes.

Okay.

And then do you expect to be refinanced out of your Core Wireless loan this quarter?

Yes.

As you know, they are in the market.

They have launched the refinancing.

So we'll see how that goes.

As you know, that's one of our few remaining second lien positions.

But we do like the company and are in dialogue in terms of how to perhaps maintain an investment there.

But we'll see how that process unfolds.

Okay, last one.

What's rolled the sequential increase in the weighted average yield in equipment finance portfolio in the quarter and is this change sustainable?

I think the change is sustainable.

We're not expecting continued increases there, but we do think that the change is sustainable, and directionally, while, as I've mentioned, he can keep all of his assets on our balance sheet.

We have been looking at some larger loans where he has been able to drive some higher returns.

And I think you'll see more of that as we move forward.

(Operator Instructions) And your next question comes from Rick Shane of JPMorgan.

It's Melissa on for Rick today.

I wanted to follow-up about a practical time line for taking advantage of this increased ability to bring on more leverage.

Given where we are in the market cycle, how long -- it depends on the opportunities that are out there, of course, but practically speaking, how long do you think it could take to get to sort of within that target leverage range of 0.9 to 1.25?

I think that today's market environment, you hit the nail on the head.

It's not going to be capital lending that drives that.

Increase -- and as you know, we have leverage as a target, but what really drives our balance sheet composition on the liability side and the usage of the liabilities is the opportunity set on the asset side.

So today I would tell you it's probably going to be slow and steady growth across our commercial finance vehicles, and that's probably 12 to 18 months.

I think if you see market dislocation on the cash flow side that could accelerate.

I think if we, to Casey's question, if we find an acquisition in commercial finance, you could also see it accelerate.

Okay.

And just a follow-up on fourth quarter activity.

We know fourth quarter can sometimes be a particularly active quarter for originations, and just wondered if you wanted to kind of comment on what you're seeing so far.

Sure.

Thank you.

I think that throughout the year, we have seen a fair amount of activity across all of our verticals, and that hasn't changed in the fourth quarter.

It's really about being able to find opportunities that we are comfortable and find attractive in today's environment from not only a fundamental perspective, which generally -- the fundamental's extremely strong, both within our portfolio and in the market broadly speaking but more so on the structures and the underlying terms of the investments.

And that hasn't changed materially, but we continue to be active.

I wouldn't say it's any different from the prior quarters.

Your next question comes from Christopher Testa of National Securities.

Just on top of the detail given all the Solar platform expanding nicely.

Looking at the cash flow lending side I know you guys have mentioned that ABL and Life Sciences will be big beneficiaries.

How do you see this as a potential to drive better pricing power for you guys being able to provide certainty of close and have larger hold sizes?

Yes.

I think it's not so much just pricing.

The pricing's on the margin, but it's really driving what's near and dear to our hearts, which is less risk.

And that means driving better structures because on the margin the borrowers will accept it if you're delivering certainty for size.

We generally don't try to just squeeze out the last nickel but do want to take down the risk.

And as you know, we believe historically in all of our segments, bigger has been safer as you look at the credit cycles.

So I think for us it's really going to be more about driving lower risk.

And then also getting large holds because, as Michael mentioned, we are getting -- we're expanding our opportunity set by having the balance sheet to take down these larger positions.

And so we're not abandoning what we already do very well, but we are expanding our opportunity set with this increased scale.

Got it.

And what the commitments raised across Solar Capital Partners, are those somewhat siloed off into different segments?

Or are they just generally run, as SLRC has run, where you guys could invest in any sort of loan throughout your verticals in the private capital?

It's the latter, essentially the capital we've raised, the funds we move to being greater than $750 million.

Really invest across the platform, they will not invest, as Bruce mentioned earlier in like equipment leasing for NEF because those loans are too small or at loans with Gemino on the healthcare lending side or North Mill loans, which are both in SUNS.

Essentially, they'll be lending to Life Science asset-based lending and cash flow.

Got it.

Okay.

And Crystal, the yield was up about 30 basis points, I guess year-over-year.

I know that's not much, but is there some sort of prolonged stress in the retail sector that we'll be -- need to see before yields could potentially tick up even more?

I think it's not the retail sector.

I think it's more the economy in general.

I think we're very happy that we've seen the portfolio grow to greater than $500 million in a very benign credit environment.

If you think about Crystal's business, when we do hit a more difficult economy or a more difficult financing environment, the need for that capital grows dramatically.

And we have the sourcing to take advantage of that-- because a lot of those companies will exist in people's private equity portfolios.

At that point not only you'll see demand go up, but you'll see spreads widen as well.

So we're excited that -- for that eventual encounter.

Got it.

And do you guys have thoughts on the timing of potentially collapsing and rolling up the SSLP facilities into one?

Well, we have consolidated them onto our balance sheet, and we're just looking at how to optimize the individual credit facilities.

I think that something we'll be addressing over the next quarter or so.

(Operator Instructions) And your next question comes from Finian O'Shea.

Just to sort of continue on the cash flow loan outlook.

With the SSLP collapse, can you just give color on if you'll expect the current split to kind of hold?

Understanding that you'll do what makes most sense obviously, do you have an intention to keep kind of a blend of senior and stretched senior as we think about the yield composition in that cash flow book?

Yes.

I think importantly, the collapsing of those vehicles and getting the approval to increased leverage does not change at all the target companies that we're looking to do in the cash flow space or frankly any space.

So you're going to see more of the same, stretched first lien and first lien at similar pricing that we've been doing historically.

That's not going to change.

Okay.

And then just a bit more on the nature of the deal.

I think Bruce talked about sort of a hypothetical $50 million where you can take all $200 million.

Understanding you have a larger dedicated cash flow lending capital base, it does seem to drift from your historical larger middle-market club deal, correct me if I'm wrong, but is this sort of a new line of work, if you will, in terms of what kind of deals are targeting to do?

Yes, no that's -- if you think about the borrowers, right, we're still going to the same borrowers, Finian, than we have.

We've always been at this upper mid-market for the last 12 years since inception, average EBITDA, $65 million to $75 million.

That continues to be the same.

The markets though have evolved, as you know, in direct lending and the pullback of the banks, post credit crisis.

So that if you're an upper mid-market company years ago, and you were borrowing $200 million, they would club several one of us together 5 or 6 of us and a bank or 2. And so everyone's holding $25 million.

Today that's not the case.

Today, as Michael mentioned, the same borrowers that we always underwritten are looking for fewer providers, and the banks aren't generally providers because they don't want to hold the risk on the balance sheet.

So to get invited to these opportunities, we have to have to have the balance sheet to hold $200 million.

Rarely, would they let us take the entire $200 million.

They, typically, will put 2 or 3 of us together.

But again you won't see the opportunity unless you have the balance sheet to take down $200 million.

And then you'll end up, as I've said in my example, holding $75 million or so each across 3 of you.

And so that's -- to maintain the relevance at that upper mid-market, you need increased scale than you did many years ago.

And that, as you know, there are only a handful of us that have it.

That is helpful.

And then on the -- on sort of the earnings ramp eventually to the mid-50s, outlined in opening remarks.

I think in Melissa's question you mentioned 12 to 15 months, is that the same topic there?

And then kind of tacking on to that, as you ramp in specialty finance, what level of origination in those verticals are you able to grow incrementally, add on to what we've been seeing now that sort of the runway is clear for that?

So yes, we -- as I've mentioned, it was 12 to 18 months.

And look, I think the advantage is that we have 4 different verticals.

We don't need all 4 of them to be offering good growth prospects at a given point in the cycle to grow in totality.

The commercial finance businesses are a little bit more of a steady drip in part because they have steady amortization.

So we're always getting repaid; whereas, as you know, cash flow deals are a little lumpier on the repayments.

But the flip side is we are, to your point, seeing nice, steady growth across those verticals.

And I think, the increased flexibility from the modification of our leverage, the opening up of our 30% unqualified bucket, which many of those assets are used in, I think you'll see consistent growth in that 12 to 18 months.

Today, we would say most of it will come from commercial finance rather than cash flow.

I think it's really important to step back and understand in its environment where every single cash flow lender that you and we respect is saying the same thing, "Structures are scary." If you look back over the last 20 years, and you look at average annual default rates in cash flow lending, it averages about 3.5% a year.

In asset-based lending, that's just over 1% a year.

And it's extremely stable.

There's no spikes in defaults in ABL lending the way they were in cash flow back in '08.

And if you look at the actual losses over the last 20 years, cash flow loans had average annual losses of just over 1%.

Really attractive as an asset class.

But guess what?

Asset-based loans had an average loss on an annual basis of 50 basis points.

So we are going to continue, in this environment where everyone is nervous about structures and cash flow lending, to emphasize our commercial finance businesses.

But we know, having done this for 30 years that times will shift.

And it'll be a much better opportunity to deploy capital in cash flow lending once the teeth and structure comes back into the documentation because the fundamentals are phenomenal.

And so that's really what's driving our asset mix and, obviously, inevitably the growth that you asked about.

But I think 12 to 18 months borrowing dislocation, which will help us to deploy capital, and borrowing a new strategy on platform is a fair target.

And just one more small-modeling question.

I see a bit of a drop in G&A this quarter, combining both G&A items.

Is there something -- is there -- apologies if I'm forgetting something, but was there something driving higher rates recently?

Or is this sort of a something that we should see bounce back?

Finian, this is Rich.

Let me take a quick peek, one second.

I would say that expenses did come in a little bit lower this quarter.

Nothing really that was nonrecurring.

But I would think they've inched up a little bit because we've seeing some natural growth in the portfolio.

And 100% of it doesn't translate, but ultimately, I think that year-over-year the numbers are fine.

Quarter-over-quarter it could vacillate-- $100,000 or $200,000.

But also it depends on end of year and excise tax estimates because, as you know, we've been over-earning our dividend pretty significantly.

So there is some accruals in there for taxes that may or may not happen based on the underlying business that we have, and they're book versus taxable income.

So there's not more -- nothing to say higher or lower, but I would say they've inched up a little bit more from where we were for the Q3.

(Operator Instructions) And we have no further questions at this time.

So I'll turn the call back over to Michael Gross, Chairman and Chief Executive Officer.

Please go ahead.

We thank you for your time this morning and all the great questions.

And we look forward to those of you who are participating on our Solar Senior call to talking in about 4 minutes.

Bye-bye.

And this does conclude today's conference call.

You may now disconnect.