SLR Investment Corp (SLRC) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

We welcome to the Solar Capital Earnings Fourth Quarter 2018 Earnings Conference Call.

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

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

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, 2018.

I'm joined here today by our 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 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 of 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.

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 a strong 2018.

At year-end our portfolio remains pristine and 100% performing and fundamental credit performance continues to be strong supported by ongoing stable economic conditions and corporate earnings growth in the United States.

Our net asset value was $21.75 per share at December 31, down 0.9% or $0.20 per share from the prior quarter.

The approximate 1% decline in NAV was primarily due to technical mark to market unrealized losses resulting from the selloff in a liquid leverage loan market and the specialty finance comps that impacted the valuation process for private loans and commercial finance platforms.

Since the year-end, the liquid loan market has already recovered approximate 2/3 of the fourth quarter unrealized losses.

In spite of the volatile market at year-end, Solar delivered another consistent quarter of net investment income performance with GAAP NII of $0.44 per share, exceeding our quarterly distributions of $0.41 per share.

For the full year, Solar Capital's NII of a $1.77 per share comfortably covered annual distributions of a $1.64 per share.

Our earnings power continues to reflect the benefits of our initiative to diversify Solar's origination platform into specialty finance farm strategies and less competitive niches were the risk return profile is more compelling.

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

Our strategic initiatives have diversified and enhanced the earnings power of Solar's portfolio with our specialty finance lending strategies now representing just under 75% of total portfolio exposure.

Following the end of the year market turmoil, we are seeing some positive signs in our pipeline of an improved upper-middle-market cash flow lending environment with respect to covenant structure.

While it's still too early to confirm this is a trend, we recognized the importance of having a diversified origination capability with deep asset class specialization and expertise, maintaining a defensive portfolio and having capital available to take advantage of market dislocations when underwriting conditions improve.

Solar has built diversified origination capabilities across cash flow, asset-based lending and specialty finance 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 selective in cash flow lending.

We have the flexibility to allocate capital to most attractive risk reward investment opportunities and are not forced to chase compromised structures or above market yields.

In addition, we believe the mix of asset classes creates a differentiated portfolio with lower correlation, lower volatility, lower risk and countercyclical protection compared to a pure 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 Solar to maintain a weighted average asset level yield of approximately 11% at fair value without compromising credit quality.

In 2018, we made significant progress on 2 important initiatives that we believe have great strategic long term value to our shareholders.

The first initiative was the adoption of the new asset coverage requirement.

On October 11, the shareholders of Solar and SUNS, our sister BDC, overwhelmingly approved the reduction in the asset coverage requirements, thereby accelerated timing of the modification, which had initially been approved by the respective company's board of directors in early August.

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

We've increased the target leverage ratio of Solar to a range of 0.9x to 1.25x debt to equity.

This new target range allows for a meaningful and substantial cushion to the net -- new net asset ratio requirement and credit facility covenant.

In addition, during the fourth quarter, we amended our credit facility to accommodate increase to the new regulatory leverage.

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

It will, however, enhance Solar Capital's ability to further expand our specialty finance lending platform.

The consolidation of the SSLPs in the third quarter, made possible by the new asset coverage ratio, freed up 30% capacity.

When combined with our new leverage target, SLRC had significant non-qualified investment capacity, giving us the flexibility to expand our existing platform, lend to commercial finance companies and make acquisitions.

Our team is actively targeting new verticals.

Though during 2018, we were cautious as specialty finance company valuations became overheated.

It appears the volatility in the fourth quarter has tempered some of these high valuations and we are carefully rebuilding an acquisition pipeline.

The second issue in 2018 involves increasing the scale of Solar's investment advisor Solar Capital Partners, to enhance SCP's role as a solutions provider with the ability to speak for up to $200 million in a given transactions, while maintaining conservatively diversified portfolio.

Scale is particularly important given our focus on cash flow lending to upper-middle-market sponsor owned companies who we believe are better resourced to withstand an economic decline in the smaller peers.

But it is also important, in our Life Sciences and asset-based lending businesses.

During 2018, Solar -- SCP closed an approximately $2.3 billion of incremental investable capital, including leverage, across 2 private credit funds and separately managed accounts that are now co-investing alongside SLRC and our sister BDC Solar Senior Capital.

This brings investable capital across the Solar Capital platform to approximately $5.4 billion.

More importantly, SLRC is already benefiting from SCP's enhanced scale in the form of both new investments.

There are only possible by having larger hold sizes and the additional 30% capacity.

As a result, we are seeing a wider opportunity set in both our cash flow and asset base specialty finance verticals.

Bruce will provide additional details on this important development.

Finally, in November, Solar Capital Ltd.

received an investment grade corporate rating from Moody's Investment Services, which is further testimony to SCP's conservative investment and management philosophy and strong underwriting track record.

The investment grade ratings from both Moody's and Fitch provide important flexibility and efficiency and finance the company's balance sheet.

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

Thank you, Michael.

Solar Capital Ltd.

net asset value at December 31, 2018 was $919.2 million or $21.75 per share.

This compared to $927.6 million or $21.95 per share at September 30, 2018.

At December 31, 2018, Solar Capital's on balance sheet investment portfolio had a fair market value of approximately $1.46 billion in 117 portfolio companies across 30 industries, compared to fair market value of $1.41 billion in 110 portfolio companies across 30 industries at September 30, 2018.

At 12/31, Solar Capital had $476.2 million of debt outstanding, and leverage of 0.51x net debt to equity.

When considering available capacity from the company's credit facilities, combined with available capital from the non-recourse credit facilities at Crystal and NEF, Solar Capital has approximately $700 million to fund portfolio growth, subject to borrowing base limits.

Going to the P&L.

For the 3 months ended December 31, 2018, gross investment income totaled $38.2 million versus $37.1 million for the 3 months ended September 30.

Expenses totaled $19.8 million for the 3 months ended December 31.

This compared to $18.7 million for the 3 months ended September 30.

Accordingly, the company's net investment income for the 3 months ended December 31, 2018, totaled $18.5 million or $0.44 per average share compared to $18.4 million or $0.44 per average share for the 3 months ended September 30, 2018.

Below the line, the company had net realized and unrealized losses for the fourth quarter totaling $9.5 million versus net realized and unrealized losses of $0.3 million for the third quarter.

Ultimately, the company had a net increase in net assets resulting from operations of $8.9 million or $0.21 per average share for the 3 months ended December 31, 2018.

This compares to an increase of $18.1 million or $0.43 per average share for the 3 months ended September 30, 2018.

Finally, our board of directors recently declared a Q1 distribution of $0.41 per share, payable on April 3, 2019 to shareholders of record on March 21, 2019.

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

Thank you, Rich.

Before providing an update on our fourth quarter activity, I'd like to take a minute and just talk about our approach to portfolio evaluation in light of the selloff in the liquid leverage loan market.

As Michael mentioned, this resulted in a technical markdown of our portfolio's value at year-end.

It's important to remember that Solar Capital is not simply comprised of a portfolio of leveraged middle-market loans.

Relative to most of our BDC peers, we are a unique combination of 75% commercial finance businesses and 25% of portfolio senior secured, middle-market cash flow loans.

Valuation process has been and is a combination of both bottom up fundamental credit analysis with a top down overlay, which is based on the technical metrics from the leverage loan market for our cash flow loans.

And valuations of peer, specialty finance companies for our commercial finance businesses.

We have been consistent in our approach to valuation throughout our history, and we believe the bottoms up fundamental analysis with a top down technical market overlay is the right approach to providing a fair market value for our portfolio.

As of today, approximately 2/3 of the fourth quarter market decline in the leverage loan index has already recovered.

Now let me turn to an overview of our portfolio.

In aggregate, our investments across our 4 business verticals totaled just over $1.7 billion encompassing over 222 distinct borrowers across more than 90 industries.

Solar's investment portfolio is highly diversified with an average investment per borrower of $7.7 million (sic) [$7.8 million] or 0.45% of our Comprehensive Investment Portfolio.

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

Of this amount, roughly 89% was in first lien senior secured loans, and just over a 11% was in senior secured second lien loans.

Year-over-year, our second lien cash flow loan exposure declined by close to 50% as second lien investments were repaid at par or higher, and we refocused our origination efforts on first lien senior secured loans to upper-middle-markets sponsor owned companies as well as investing in our commercial finance platforms.

Given our focus on maintaining a lower risk first lien portfolio, we have not made a second lien cash flow loan investment since 2014.

At year-end, 75% of our portfolio was floating rate.

The fixed rate loan exposure principally comes from Nations Equipment short duration equipment loans, which have an average life of 2.5 years, and have a weighted average market yield of 11% at year-end.

Solar originated $284 million of senior secured loans during the fourth quarter and had repayments of $273 million.

Given our continued preference on a risk reward basis for loans having structural protections, 82% of Solar's originations in the fourth quarter were in -- are specialty finance assets, and 18% of our new investments were in senior secured first lien cash flow loans.

For the full year, Solar originated just under a $1 billion of senior secured loans and had repayments of approximately the same amount.

Consistent with the fourth quarter, our commercial finance loans represented over 80% for the full year 2018.

Now I'd like to 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 2x, and based on our 1 to 4 rating scale, with 1 representing the least amount of risk.

Over 95% of the portfolio was rated 2 or better, reflecting the portfolio's strong credit fundamentals.

And 100% of our portfolio was performing at year-end.

We're very pleased with the performance of our underlying investments, and believe that it validates the conservative investment approach and strategic focus on lower risk cash flow and asset-based loan assets.

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

Cash flow.

Our cash flow portfolio was $444 million or approximately 26% of our comprehensive portfolio.

It is invested across 24 issuers with an average investment size of $24 million.

A year ago, the portfolio of cash flow loans was over $700 million and represented 43% of our portfolio.

This represents a significant change, which is again driven primarily by the reduction in our second lien cash flow loan exposure, and our continued avoidance of covenant light transactions.

We're seeing significantly more opportunities, but are frequently saying no, given the lack of structural protections often found in cash flow loans in today's market.

At year-end, the weighted average trailing 12 month revenue and EBITDA for our cash flow portfolio companies were up the mid-to-high single digits reflecting continued positive trends for our portfolio companies.

On a fair value weighted average basis, leverage to our investment was just under 5x and interest coverage was approximately 2.25x.

Weighted average EBITDA of our borrowers in our cash flow segment was approximately $60 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 cash flow investments of approximately $50 million, and had repayments and amortization of approximately $105 million of which over $80 million was due to the repayment of second lien positions.

The weighted average yield at fair market value for our cash flow portfolio was just under 10%, consistent with the prior quarter.

The year-over-year increase in the yield of our cash flow loan portfolios is primarily due to both the increase in LIBOR, which is partially offset by the roll off of our second lien investment, which carry higher yields.

With the addition of the newly raised private capital that Michael mentioned, SLRC is already benefiting from SCP's increased scale and ability to be a solutions provider.

In the fourth quarter, Solar Partners platform was approach by ABRY to refinance KORE Wireless Group's capital structure.

This is a great example of where the scale has facilitated increased relevance as a solution provider.

Our ability to commit and hold $100 million plus to this first lien term loan across this Solar platform enhanced our competitive position.

SLRC invested approximately $40 million of that $100 million in this investment, which carries an all-in yield of just under 9%.

Now let me turn to asset-based lending.

At year-end our asset-based portfolio totaled approximately $610 million representing 35% of our total portfolio.

And is invested in 36 borrowers with an average investment size of $17 million.

The weighted average yield at cost of this portfolio was just over 12.25%.

In the fourth quarter, we funded approximately $133 million of new asset-based loans and had repayments of approximately $113 million.

Our asset-based division under the Crystal brand paid Solar Capital a fourth quarter dividend of $7.5 million, consistent with the prior quarter.

Let me turn now to equipment finance.

At year-end, our equipment finance division, NEF, had a total portfolio of over $380 million of funded equipment asset-based loans.

It's funded across 132 distinct borrowers with an average issuer size of just under $3 million per loan.

As a reminder, included in this business, our equipment financings held directly on Solar's balance sheet as well as in our 100% owned subsidiary NEF Holdings, which is a portfolio company that for tax efficiency purposes holds certain of NEF's investments.

The equipment financing asset class represents just over 22% of our comprehensive portfolio.

The weighted average yielded cost at year-end was 11%.

During the fourth quarter, Nations Equipment had new investments of approximately $36 million and had portfolio repayments and amortization of approximate $35 million.

NEF's investments are first lien loans and approximately 95% of their portfolio is fixed rate.

Interest rate risk is mitigated here, however, through the relatively short holding periods with an average life of 2.5 years.

During the fourth quarter, comprehensive investment income from our equipment finance business totaled just under $6 million.

Now turning lastly to Life Sciences.

Our portfolio in Life Sciences totaled approximately $250 million at year-end of first lien senior secured loans across 19 borrowers with an average investment size of approximately $13 million.

Life Science loans represented just under 15% of our comprehensive portfolio at Solar.

During the fourth quarter, the team originated $63 million of senior secured loans and have repayments and amortization of $17.5 million.

I would like to highlight one of these investments that we made during the fourth quarter, which speaks to this increased scale that Michael referenced across the Solar Partners platform.

During the fourth quarter, Solar was the sole investor in a $75 million first lien term loan for Rubius Therapeutics.

Rubius is $1 billion market cap company with over $400 million of cash on its balance sheet, which is a late-stage development biotech company focused on the development of red cell therapeutics for the treatment of severe diseases.

This investment again speaks to how SLRC is directly benefiting from the enhanced scale of Solar Partners and the increase in our nonqualified asset capacity given this was a large public company.

The weighted average yield of our Life Science portfolio was 11.7% at fair value.

This excludes any exit or success fees in warrants.

The blended realized IRR, however, through the year-end, is just under 16%.

Here we do include realized exit fees in warrants.

While we see some improvement on the margin in pricing and structure, following the selloff of leveraged loans in the fourth quarter, it is way too early to confirm a trend.

The middle-market cash flow lending environment continues to remain frothy on both the historical basis given the market technicals.

We do, however, benefit from our diversified origination engines and will continue to be disciplined and prudent in deploying our available capital.

Longer term, we believe that the record amounts of private equity dry powder, the retreat of banks from middle-market leverage lending, and the approaching refinancing wave of existing leveraged cash flow borrowers, does create an attractive supply/demand dynamic for cash flow lending.

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

Thank you, Bruce.

With the inception of Solar Capital nearly 13 years ago, our investment and management decisions have been focused on building long term shareholder value, protecting capital and maintaining alignment with our shareholders.

The Solar Capital Ltd.

had a very strong 2018 highlighted by continued progress on each of its priorities.

Our long term strategy of migrating the portfolio to senior secured cash flow loans and developing diversified specialty financed verticals continue to drive superior results.

SLRC is now firmly established as a diversified commercial financed company, providing solutions across the capital structure to middle-market companies.

Importantly, our diversified origination platform affords us greater flexibility to allocate capital to the best risk returning opportunities, while sticking to our investment discipline across credit cycles.

As we move deeper into the current credit cycle, our portfolio has become more -- much more diversified and more defensive.

Today, only 25% of our portfolio is in cash flow loans, the majority of which are first lien senior secured and 75% is through our asset-based and Life Science lending strategies.

Our specialty finance loans have many structural protections through borrowing bases and covenants, are less correlated to liquid credit markets by greater downside protection and historically provided -- proven to be less volatile than cash flow lending through market cycles.

In addition, we believe our asset-based lending and lender financed platform add an element of counter cyclicality as investment opportunities in those verticals should become more attractive in an economic downturn.

Meanwhile, we have the flexibility to pivot towards cash flow loans when conditions in the sponsor financed market improve.

We believe we are uniquely positioned to take advantage of market dislocation and can outperform across market cycles on a relative and on an absolute basis.

I would like to again, express our appreciation to our shareholders and banks for their overwhelming support to approved adoption of the modified asset coverage ratio.

The greater flexibility does not change our investment strategy.

Rather, meaningfully enhances our ability to grow, build and potentially acquire additional niche specialty finance businesses as we continue to broaden our diversified commercial finance platform.

The stability of our quarterly net investment income in the mid $0.40s per share range is a direct result of the successful execution of our strategy to expand our commercial finance capabilities.

At 0.51x net debt to equity, we are under levered and we have substantial dry power to deploy via differentiated investment verticals.

We expect steady progress in growing our comprehensive investment portfolio in 2019.

As a result, we believe, Solar Capital has a path to achieving a run rate quarterly net investment income per share of approximately $0.50.

As our earnings increase proved sustainable, our board of directors will evaluate further increasing our distribution to shareholders.

At 11 o'clock this morning, we will be hosting earnings call for the fourth quarter and 2018 results of our sister BDC Solar Senior Capital.

Our ability to provide traditional middle-market seniors secured financing through this vehicle continues to enhance our origination team's ability to meet our client's capital needs and we continuously benefits of this value proposition in Solar Capital's deal flow.

We thank for your time.

Operator, would you please open the line for questions?

(Operator Instructions) Our first question comes from the line of Casey Alexander with Compass Point.

You guys did a great job in your presentation, answering most of my questions.

So this one is kind of looking out further to the future.

Bruce, you mentioned the opportunity set that's going to come from a bulge of loans that need to be refinanced out here in the next 1 to 3 years.

Is there also some risk of weaker credits that are due for refinance that might not get money and might cause a little bit of an uptick in defaults in cash flow loan market or is there just too much capital washing around and in your view everything is going to get refied?

Fortunately for us our cash flow portfolio, as you know has strong and -- so there is a not lot going on there for us.

What we are doing, as I mentioned, looking selectively at some of the second liens that we're letting run off and evaluating whether we should be investing in the new first lien at that refinancing.

And the KORE is a great example where we had a second lien investment.

Knew the company well and really where the anchor investor in their new first lien.

So I think you will see some of that as some of our peers look to move up capital structure on re-financings and de-risk their portfolio.

But I think, that the real question will be whether or not these companies perform and can access that re-financing window.

Because as you know, so many of them have covenant light structures that allow them to buy time here.

But the hope, if you are those borrowers, is that you tapped into the market sooner rather than later, just extend out your maturities.

So you long-winded way of saying, not quite sure.

But we've positioned ourselves to take advantage of that rather than to be exposed to it.

And I think you guys have done a good job of that.

I mean, I was looking for more of the general market comment that wasn't a comment related necessarily to Solar's portfolio.

Your pull back on the cash flow portion of the market clearly has been de-risking the portfolio from that standpoint.

So I was looking for more of a general market commentary.

I think to your point, Casey, I think, there obviously has been lot of money raised in private credit dedicated cash for lending and that money will be available for company to refinance.

What will really drive to answer the questions is what happens to the economy if we continue to be in this benign environment we're seeing modest growth and there probably won't be many defaults and there shouldn't be.

But if the economy does goes wrong direction then you will eventually see defaults and those companies will have trouble refinancing.

And our next question comes from the line of Ryan Lynch with KBW.

First question, once I want to kind of focused on the cash flows -- I mean, portfolio.

Over the last several years you guys have intentionally showing that portfolio probably because you guys do not really like the terms of structures in the market and then probably because you wanted to reduce some of your second lien exposure.

It sounds like that market dynamics are improving a little bit.

I'm just wondering given the size of where the cash flow lending portfolio is today, would we expect that returning to 2019, that portfolio to further shrink or is that going to maybe stable or actually show some growth?

Yes, I would expected to be stable to growing.

First, though, we are going to have to continue that rotation out of second lien, so that creates a little bit of a headwind as some of those role off.

There is only about $190 million of second lien left in our cash flow book.

So you will see some of that roll off, but we expect to replace it and then grow some.

Obviously, to the extent that the market dislocates or that trend from Q4 continued you could see our investing in cash flow really accelerate.

Congratulations on the investment grade rating from Moody's.

Now that you guys have 2 investment grade ratings, does that change the way you guys are looking to build the liability structure going forward?

I know you guys still have a significant amount of capacity on the credit facility.

But having those 2 investment grade ratings are powerful from the unsecured market.

So with that additional investment grade rating, does that change the kind of way you guys are looking to build that liability structure going forward?

No, as you know, after the couple of month period we've always had 2 investment grade ratings.

And that's allowed us to efficiently and cost effectively tap both the private investment grade market and the public, so that market is still open to us as is the convert market.

And as we start to use more of our revolver, we will look to do more unsecured debt at that time.

Yes, our target of 50-50 secured, unsecured liabilities on a funded basis continues to be the same.

And we benefit from having access to not only the public IG market, but the private IG market as well.

And then one last technical model one, may this is for Rich.

It looked like there was a pretty big increase about $1.7 million in your interest expense in the fourth quarter.

Meanwhile, there was pretty nominal, kind of smallish portfolio growth.

So I was just wondering was there any one-time costs in that line item or what really drove that big increase this quarter?

Yes, thanks Ryan.

Yes, I think what you saw is interest expense increasing due to the SSLP I and SSLP II facilities coming on balance sheet instead of being off balance sheet from the previous quarters.

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

I appreciated the commentary on the private AUM raise to the tune of over $2 billion.

Just wondering if you guys could provide some more detail on, how this is kind of increased and possibly enhance some sponsor and VC out relationships.

Sure.

I think it's not only enhanced the relationships, it's the expanded the product offering.

As you know these both the cash flow Life Science and also our asset base vertical at Solar are club loans.

And what's happening is you're teamed up generally with 2 or 3 others based upon the borrowers' relationships.

And what it's done really is given the borrowers comfort that if somebody else in that club is constrained either from a capital perspective or from credit assessment perspective, it just increases our relevance and expands our opportunity set.

I think, in particularly Life Sciences, what we're seeing is we're not only investing in the same assets that we have been underwriting before in the $20 million to $50 million size.

But now the ability to hold $75 million to $100 million is just expanding it in terms of the opportunity set.

And that's also helped by the fact that we've increased our 30% basket, because as you know, large public companies in any industry are 30% non-qualified assets.

So I think it's just really opened up the opportunity set.

And so historically Life Sciences, for example, we talked about a portfolio of $200 million going to $300 million.

I think we see upside closer to $400 million now that they have an expanded opportunity set.

Got it, that's good color Bruce.

And does that at all impact the size of the borrowers in your cash flow portfolio or should we expect the average EBITDA to remain roughly stable.

Yes, stable.

I mean, that $60 million average EBITDA, it's always been around that sort of $60 million to $70 million.

And when you think about a 4x loan that's the $200 million to $300 million loan size right in our wheelhouse and that's where we get clubbed up with 1 or 2. But they want to know that you are meaningful club member at $100 million-$150 million up to $200 million if needed.

I think showing up for 20s and 50s is just going to make people that much less competitive.

So it is definitely helped us in terms of seeing more opportunities, which is, you know as critical for us given the high filter that we have.

You guys mentioned also that the -- you are seeing some signs of life with better opportunity in terms of cash flow lending given the volatility.

Just wondering if you can provide some detail on just how much more sustained we need to see kind of the liquid market volatility be before it kind of creates a more favorable environment where you guys would be able to grow the cash flow both meaningfully?

It's a tough question to answer, because part of the dynamic that's taking place also is, there's been a significant amount of private capital raise dedicated to just purely cash flow lending.

And that capital was locked up as opposed to the liquid loan market it kind of suffers from the ebbs and flows into those funds.

So that money is locked up with a 3 to 4 year investment period and it'll all get invested because that's going to be the mentality that managers have.

And so there's a lot of capital, I think, to kind of prop up the private market even if we do see volatility in the public market.

So in other words, as long as there's significant private debt outstanding, despite any volatility in the syndicated market, it's unlikely it's going to impact cash flow lending as much as it happened in recent years?

It will take a period of volatility in the liquid market to really filter down, so that the lenders feel more comfortable going back to the sponsors saying, "Hey, that's what the market is.

And if you want to do it, that's where to do".

I think the game changer, which none of us wished for, is we saw in economic softening, right.

I mean, everyone says the feds' putting the brakes on potentially this year.

The problem is that that's in part due to their concerns about slowing growth here and globally.

And so once you see that happen, you have the effect of increased defaults in people's portfolios, that's a big distraction.

It injects fear into the underwriters and the managers and the banks that we're playing around the periphery in leveraged middle-market lending.

And so that's what creates the opportunity in a large part even if there is capital out there.

But I think that that's obviously nothing that we see in our portfolio, nothing that we're wishing for.

But that's really when you'll see a game change is as people pull back because they get nervous, then you can go in and be very selective and yet demand very attractive structure and terms.

And our next question comes from the line of Richard Shane with JPMorgan.

I'd like to take a sort of a bigger picture approach here.

When we look at the ROAs and ROEs over time, there's been -- there was a pronounced drift down.

It's somewhat stabilized and I think I attribute that primarily to the asset sensitivity of the portfolio.

You're taking along sort of a low 5% ROA on invested assets and a 8% ROE.

As you move to your new strategy, but also consider the fact that you have a lot of competitors who are going to be pursuing these new opportunities in terms of leveraging their capital up and taking advantage of the opportunities that you guys are as well.

What do you think the business model is really going to look like?

And what sort of returns should we expect from Solar over the next couple years?

So that's a mouthful.

I think, when we look at our -- the platform origination engine and available capital, we think we can comfortably get to the mid-9s kind of ROE with kind of our existing strategy from the 8-ish we are today, that's just from building out what we have.

It doesn't count doing additional acquisitions.

In terms of our competitors, it's not that easy for you to flip a switch and say, I'm going to be in Life Science lending, I'm going to be in non-recourse based lending tomorrow.

I mean, it just can't happen.

I mean, you have to go hire a separate dedicated team of 25 to 30 people in each of those verticals as we have in equipment leasing and non-recourse based lending with kind of [20 of] your track records have been done this.

There are real barriers to entry in those businesses.

That's why if you look again at kind of the amount of private capitals being raised, 95% of it’s been for cash flow lending, because the barriers to entry there are frankly less.

Look, I think, it is a very fair observation that you guys have defined niches and that you have expertise there.

I do worry or in concern that we're in an environment with the amount of capital that's available that the difference -- the advantage of being smart versus not smart might not play out for several years.

Well, again I think just echoes Michael's comment.

It's not smart versus not smart, its experience.

And it's not easy to aggregate experience in these niches.

And there's a reason why they are niches.

They don't attract a lot of capital both because they're high barrier strategies, but also because there isn't -- they're not big market opportunities that's going to attract large capital.

We've been fortunate to establish and bring on these phenomenal teams with great track records that in and of themselves operate in very distinct niches that have some cap to the amount of capital they can deploy in their sector.

However, when you aggregate them across the Solar platform, they not only bring diversification, but they bring even higher barriers to entry.

And so I think, that we feel that our strategy is very sustainable over time.

And as you know, we are looking to add other strategies that are in these asset-based lending niches.

And now our next question comes from a line of Chris York with JMP Securities.

So Bruce, you talked a little bit about the Rubius loan, which was a nice win to the platform.

And looking over SOI, I did observe that only $13 million or less than 20% was held on Solar's balance sheet.

So in light of this hold size, could you remind us or tell us how Solar is managing allocations today in Life Sciences or maybe even cash flow given the manager recently closed the private credit income fund and then the private credit income fee?

Sure.

So real quick.

As you may recall, the Life Science loans tend to be funded in trenches that are based on operating as well as financial milestones.

So Rubius is a $75 million commitment that we expect will be fully drawn over the next year or so.

However, the initial tranche that we gave them was only $25 million.

So the piece that Solar is holding on the SOI is not the commitment, but their funded portion of the first $25 million.

I think, another example I mentioned to your point on the cash flow side is KORE.

There we committed to $100 million of funding and SLRC obtained a $40 million funded amount across our allocation methodology, which is based on the math of available capital at the individual vehicles across the strategies.

So what you're finding is Solar, SLRC would not have gotten its $40 million of KORE if we couldn't speak for a $100 million.

And $40 million is a great size, as that's kind of around that 2% position that we target on the high end.

I think its same thing as you look at the Rubius loan.

Eventually, when that's fully funded, you should expect Solar to have 30% to 40% plus of its exposure.

And again, SLRC would not be able to even have the Rubius loan if not for the scale across the platform when you add in the private funds.

Very helpful in the clarification of those commitments versus funding.

It makes a lot of sense.

And then the peers that would be about the 50% funded with the similar to the KORE and about 40% for SLRC, so.

Exactly.

Then turning to another portfolio company PGi or American Teleconferencing.

It didn't move in terms of its valuation, but as you probably aware, that it was downgraded and then a couple other BDCs marked their investments meaningfully below your mark.

So could you talk a little bit about the comfort in your valuation today, and maybe the borrower's ability to service debt given the loan size in your portfolio?

Sure.

As you know, I can't really speak to anything non-private -- non-public.

PGi is owned by Siris Capital, somebody we have a very close relationship with.

We have a meaningful investment across the platform, not just at Solar, but other vehicles at Solar Partners and have access to information that the market does not.

This is not a loan that is broadly held, it's concentrated across a couple of people.

But it's led predominantly by 2 or 3 of us that have outsized positions and are active with the sponsor in terms of what's going on in the business.

So I think what I would say is, historically, we obviously look at our marks and look at our eventual realizations.

We provide analysis to that effect to our board and we have an incredible track record of exceeding at or above our mark.

So I think it's -- trust us that we have information here that the market does not.

Last one, Michael, the press release highlighted your 2018 net investment income that covered the dividends rather meaningfully at a 108%.

So given that and then in light of the earnings outlook, especially with your under levered position.

What do you think the board needs to see supporting increase in '19 because we've talked about this for maybe a last couple of quarters, so I would just like to get an update there?

I think the board like to see us be somewhere north of $0.45 on sustainable basis before we kind of revaluate it.

Thank you.

Thank you.

And our next question comes from the line of Jim Young with West Family Investments.

Just a quick question, could you just clarify the negative impact in the fourth quarter from these -- in the kind of delta of the spread widening that you mentioned earlier in the call -- on a per share basis?

Yes.

I think there is a lot of toing and froing for the evaluation.

But I think that's -- roughly that 1% mark down in NAV approximates most of the technicals.

And as we said, you just look at the loan index, which one of the matrix we look to.

It's come back 2/3 already since year-end.

But you should think of the lion's share of that being attributed to the market technicals at 1%.

And our next question comes from the line of Finian O'Shea with Wells Fargo Securities.

I will try to quick.

Even we have another call soon.

Just first on a broader remarks.

I think you said it was widely technical.

Looking here at the cues it looks like mostly from Crystal and RD Holdco, I understand these are both equity and Crystal is a big portfolio, so these could sync up.

But can you give us some color as to whether there is some credit impact here?

So Crystal actually had a phenomenal year and actually outperformed expectations.

But when we value Crystal, the audit committee takes a look at what the comparable companies are to Crystal in the public market, because it's an ongoing concern as a company.

And during the fourth quarter, December, particularly the comps for specialty finance lenders traded down and so we corresponding marked the multiple book down on that company.

The comps have come back since then.

So we are probably back at similar levels, back where it was in September at this point.

And then to your question about Rug.

That is a combination of market technicals as well as some underperformance at the business.

But that's more than offset by some positive development at our investment that holds our aircraft investment, SOAGG, outperformed.

So net-net performance is awash, I would say across the portfolio, and it really speaks of the underlying technical move accounting for most of it.

Thank you.

And I show no further questions at this time, I would like to turn the call back over to you Michael Gross, Chairman and Chief Executive Officer, for closing remarks.

Thank you.

Nothing more at this po0i1nt other than to thank you all for you time and your good questions, appreciate it.

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

This does conclude the program and you may all disconnect.

Everyone have a great day.