SLR Investment Corp (SLRC) 2019 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q2 2019 Solar Capital Ltd.

Earnings Conference Call.

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

I would now like to turn the call over to your host, Mr. Michael Gross, Chairman and Co-CEO.

Sir, please go ahead.

Thank you very much, and good morning.

Welcome to Solar Capital's earnings call for the quarter ended June 30, 2019.

I'm joined here today by Bruce Spohler, my -- our Co-CEO and Chief Operating Officer; and Rich Peteka, Solar Capital's Chief Financial Officer.

Rich, before we begin, would you please start off by covering the webcast and forward-looking statements.

Of course.

Thanks, Michael.

I would like to remind everyone that today's call and webcast are being recorded.

Please note that they are the property of Solar Capital Limited and that any unauthorized broadcasts in any form are strictly prohibited.

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

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

I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information.

Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition.

These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties.

Additionally, past performance is not indicative of future results.

Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC.

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

To obtain copies of our latest SEC filings, please visit our website or call us at (212) 993-1670.

At this time, I'd like to turn the call back to our Chairman and Co-CEO, Michael Gross.

Thank you, Rich.

Solar Capital delivered solid operating results in the second quarter, continued our long-running history of strong credit quality, NAV preservation and solid earnings power.

At June 30, our portfolio is 100% performing, and our net asset value of $21.98 per share increased by $0.05 per share for the -- from the prior quarter.

During the quarter, Solar Capital generated $0.44 of net investment income per share and paid a distribution of $0.41 per share.

Fundamental credit performance remained solid, supported by continued corporate earnings growth, albeit at a lower level than prior quarters.

Middle market cash flow lending remains extremely competitive due to sustained inflows of capital to private credit funds, and the lower volume of middle market transactions in the first half of 2019 compared to the prior year.

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

While facing frothy market conditions in cash flow lending, our specialty finance businesses, namely Crystal Financial, Nations Equipment Finance and Life Science lending provide us with investments having collateral coverage and strong structural protections.

These niche businesses have generated double-digit IRRs and continue to originate investments that are highly attractive on both an absolute and relative value basis.

During the second quarter, on a comprehensive basis, we originated $120 million of new investments, over 95% of which were in specialty finance.

Our repayments of $162 million were distributed across our lending strategies, resulting in $42 million of net portfolio repayments.

At June 30, over 75% of our comprehensive portfolio was in commercial finance investments, reflecting our successful transition to a diversified specialty finance platform focused on senior secured lending across a number of middle-market niches.

Not only do our specialty finance loans carry strong credit protections and yields superior to those available in today's cash flow market, but the higher income received in these loans enabled us to be highly selective in underwriting to middle-market cash flow transactions.

In the face of continued spread compression in cash flow lending, our approach to portfolio construction has allowed Solar Capital to achieve a weighted average comprehensive portfolio yield of approximately 10.8% at fair value without having to take additional risk by investing in second lien cash flow loans or in more volatile sectors such as cyclicals or energy.

Notably, second lien cash flow loans now represent less than 6% of our comprehensive portfolio, reflecting our preference for dollar-one risk in a borrowers' capital structure.

At June 30, Solar Capital had over $460 million of unused borrowing capital under its credit facilities, which included Crystal -- when including Crystal Financial and NEF Holdings, the company had a current total of approximately $600 million of unused borrowing capacity under its revolving credit facilities, subject to borrowing base limits.

We intend to move closer to our target leverage range of 0.9x to 1.25x by growing our portfolio, but only as the market opportunity presents itself with investments that meet our strict underwriting criteria.

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

We view the increased leverage flexibility as simply another investment and risk management tool to provide significant capacity to expand our specialty finance platforms as well as enhance our ability to invest opportunistically when primary and secondary cash flow loans offer more compelling risk rewards.

In the current environment, we will continue to invest in first lien senior secured loans with a current emphasis on specialty finance loans.

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

Thank you, Michael.

Solar Capital Limited net asset value at June 30, 2019, was $929 million or $21.98 per share compared to $926.7 million or $21.93 per share at March 31, 2019.

At June 30, 2019, Solar Capital's on-balance sheet investment portfolio had a fair market value of $1.5 billion in 109 portfolio companies across 28 industries compared to a fair market value of $1.5 billion in 120 portfolio companies across 28 industries at March 31.

At June 30, Solar Capital had $563.2 million of debt outstanding and leverage of 0.59x net debt-to-equity compared to $595.8 million and 0.63x net debt-to-equity at March 31.

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 had approximately $600 million to fund future portfolio growth, subject to borrowing base limits.

Turning to the P&L.

For the 3 months ended June 30, 2019, gross investment income totaled $38.7 million versus $39.3 million for the 3 months ended March 31.

Expenses totaled $20.3 million for the 3 months ended June 30 compared to $20.8 million for the 3 months ended March 31.

Accordingly, the company's net investment income for the 3 months ended June 30, 2019, totaled $18.4 million or $0.44 per average share compared to $18.5 million or $0.44 per average share for the 3 months ended March 31, 2019.

Below the line, the company had net realized and unrealized gains for the second quarter totaling $1.2 million versus net realized and unrealized gains of $6.4 million for the first quarter.

Ultimately, the company had a net increase in net assets resulting from operations of $19.6 million or $0.46 per average share for the 3 months ended June 30, 2019.

This compares to an increase of $24.8 million or $0.59 per average share for the 3 months ended March 31, 2019.

Finally, our Board of Directors recently declared a Q3 2019 distribution of $0.41 per share payable on October 2, 2019, to shareholders of record on September 19, 2019.

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

Thank you, Rich.

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

At June 30, the weighted average investment risk rating of 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 underlying fundamentals of our portfolio, our investments were 100% performing at the end of the second quarter.

Our $1.75 billion comprehensive portfolio is highly diversified, encompassing 226 issuers across 97 industries.

The average investment per issuer was [$7.7 million] or 0.4%.

98.3% of our portfolio consisted of senior secured loans comprised of 88% first lien and 9.9% second lien secured loans.

Just under 6% of our second lien exposure is in cash flow loans with 4% being in second lien asset-based loans.

We continue to prioritize reducing our exposure to second lien cash flow loans, which generally carry more risk than we believe is prudent in today's environment.

At quarter end, our weighted average yield was 10.8%.

By focusing on our niche commercial finance verticals, we've been able to maintain asset level yields around 11%, despite a decrease in LIBOR and spread compression in cash flow lending.

Notably, we've been able to maintain these double-digit yields while actively decreasing our exposure to second lien cash flow investments, which generally offer higher yields.

Including activity across our 4 business lines, originations totaled $120 million and repayments were $162 million, resulting in a net portfolio repayment of $42 million.

Now let me provide an update on each of our investment verticals.

Our cash flow business invests in senior secured loans, which are predominantly first lien and stretch first lien investments to upper middle-market companies with an average EBITDA of approximately $60 million.

During the second quarter, we originated $5 million in first lien loans, which were primarily add-ons to existing credits, and we experienced repayments of $24 million.

Of note, we were repaid at par on our $15 million second lien investment in AmeriLife Group generating an IRR of over 11% for this investment.

At June 30, our cash flow portfolio was just over $400 million, representing 23% of our $1.75 billion portfolio.

The reduction in our cash flow loan exposure reflects our decision to not participate in the refinancings of several of our existing investments, due primarily to pricing and compromised structures.

We expect to see a continued reduction in our second lien cash flow investment book over the remaining of the -- remainder of this year.

At June 30, the weighted average 12-month revenue and EBITDA of our issuers grew in the low single digits, which reflects a slowing of the growth rate that we've seen over the last couple of years.

For the portfolio companies in our cash flow segment, leverage to [our] investment was 4.95x, down slightly from 5.1x in the first quarter, and interest coverage was consistent at 2.25x.

In addition, the weighted average yield on our cash flow portfolio was 9.8%, down 10 basis points from the first quarter, which is primarily related to the reduction in LIBOR.

Now let me turn to our asset-based lending Crystal Financial segment.

In the second quarter, we funded $47 million of new asset-based investments and had repayments of $93 million.

The senior secured asset-based portfolio was $595 million, representing approximately 34% of our total portfolio and had an average yield of 11.5%.

Our ABL platform paid Solar Capital a dividend during the second quarter of $7.5 million equating to a 10.7% yield on cost, consistent with the first quarter.

Now turning to Nations Equipment.

During the second quarter, NEF invested $37 million and had repayments of $39 million.

At June 30, NEF's portfolio totaled over $396 million.

The portfolio is invested across 140 borrowers with an average investment of $2.8 million.

As a reminder, included in this business are equipment financings that are held both directly on SLRC's balance sheet as well as in our wholly owned subsidiary, NEF Holdings, which we use for tax efficiency purposes.

The equipment financing asset class represented 23% of our comprehensive portfolio at quarter end.

100% of their investments are first lien.

And at June 30, the weighted average yield was 10.4% on that portfolio.

Now finally, let me provide an update on our Life Science business.

At June 30, our portfolio totaled $320 million, representing a 25% increase from the end of last year.

The loan portfolio consisted of 20 borrowers with an average investment of approximately $16 million.

Life Science loans represented just over 18% of our total portfolio.

During the second quarter, the Life Science team originated $30 million of new investments and had repayments of just over $5 million, resulting in $25 million of net Life Science portfolio growth.

The weighted average yield on the Life Science portfolio was approximately 11%, but importantly, this excludes any success fees or warrants.

In conclusion, SLRC's portfolio activity during the second quarter represents a continuation of the investment themes that have been driving our portfolio over the last couple of years, a gradual increase in portfolio leverage, reducing our second lien cash flow loan exposure, increasing our investments in specialty finance assets, where we are able to get both structure as well as more attractive risk adjusted returns and generating NII that more than exceeds our distributions.

Given the current market environment, we intend to remain patient and deploy our substantial capital selectively, preserving our flexibility to capitalize on compelling opportunities that may arise from market dislocations.

Now let me turn the call back to Michael.

Thank you, Bruce.

In closing, we are pleased with second quarter results and we believe Solar Capital is very well positioned.

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

SLRC is firmly established as a diversified commercial finance company with a solid track record of providing solutions across the capital structure to middle-market businesses.

Importantly, our diversified origination engines and enhanced platform scale affords us greater flexibility to allocate capital to the best risk return opportunities for retaining our investment discipline across credit cycles.

We are still seeing interesting origination opportunity but remain highly selective in cash flow investing while maintaining a preference for specialty finance loans in the current environment.

We have been prudent in the face of credit market frothiness and remain disciplined in not compromising credit quality for yield.

Importantly, we have been able to maintain close to 11% weighted average asset level yields through growing our specialty finance verticals while actively reduce exposures to second lien cash flow investments.

The result is a solid portfolio, well positioned for growth.

If the credit cycle does shift, we believe our history of conservatism will enable us to outperform our peer group and will allow us to deliver attractive [all-in] returns for our shareholders.

As a reminder, late last year, Solar's investment adviser, Solar Capital Partners announced the closing of private credit funds with total equity commitments of over $750 million, bringing combined investable capital across all fund mandates to $5.5 billion, including expected leverage.

The increased scale across the platform strategically positions Solar Capital Partners to be a solution provider with an ability to [pick up --] for up to $200 million in a given transaction while maintaining diversified portfolios.

The greater hold capacity across the platform has already resulted in more attractive investment opportunities for SLRC.

At approximately 0.6x net debt-to-equity, we have leveraged capacity in the accompanying dry powder to deploy via our differentiated investment verticals.

We currently believe SLRC has a clear path to a run rate quarterly net investment income per share at target leverage in the high 40s to low 50s.

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

At 11:00 this morning, we'll be hosting an earnings call for the second quarter results of Solar Senior Capital Limited 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 benefits of this value proposition in Solar Capital deal flow.

We appreciate your time.

Operator, could you please open up the line for questions.

(Operator Instructions) Our first question comes from the line of Robert Dodd from Raymond James.

Just -- almost following up to your last comments there, Michael.

On the front page of the press release, you say, you believe Solar is positioned for net income growth over the balance of '19.

I mean are you talking year-over-year, sequential?

I mean can you give us more color?

Obviously, that's contingent on growing the portfolio.

Is the market environment today in a condition where you do believe that's appropriate?

Or is that contingent on the market out there actually improving a little bit?

I think we would bifurcate the response in the following way.

To the extent that the dislocation that we saw yesterday does not continue over an extended period of time, we think, we're positioned for continued growth in our specialty finance vehicles -- verticals.

I think to the extent that we see continued dislocation, you would also see growth in our cash flow segment.

So it's really, I think, some modest growth during the remaining year in a benign environment that we saw over the last couple of quarters, but the chance for accelerated growth if the cash flow market were to pick up.

Got it.

Got it.

And then somewhat unrelated to that.

On the NEF assets, the -- the on -- on NEF's balance sheet, if I look at the return on your equity position at cost for NEF, I mean, first quarter '18, it was generating somewhere over -- a little over 8%.

This quarter, it's a little over 2%.

Obviously, there's tax reasons and things like that.

But is there major investment going on within that business that has resulted in lower dividend payments and lower return on the invested equity?

Or is it a -- again, can you give us some more color on that?

You really have to look at on a blended basis because to your point, the assets go either on our balance sheet or NEF's balance sheet depending on tax characteristics and the -- all the overhead of the NEF business is in the NEF equity, if you will.

So that's where all the costs are.

So if the portfolio on balance -- on that balance sheet goes down, then their ROE goes down.

But the reality is, we look at it on a completely blended basis across the portfolio, and it's been very consistent since we bought it on a blended basis.

That's what's relevant.

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

Rich, what drove the large increase in other income this quarter?

And how much of that income do you consider recurring?

Chris, the other income, we -- they're -- with our specialty finance investments, especially the Life Sci deals, there are all kinds of fees that we get when we negotiate those, depending on the structure and some of the preferences both what we have and also the borrower.

So sometimes, there is just a fee that's really effectively part of the yield, and it's amortized.

Sometimes there are fees that include that plus prepayment penalties.

Sometimes there are fees that are contingent upon a particular event at a portfolio company.

So in Q2 this quarter, there was a fee on a Life Science deal that was contingent upon an event, that event did happen.

These things happen from time to time in the Life Science business.

So I would tell you that this quarter, while there was technically 2 of them, one was significant, the other one is more of the normal day-to-day.

So we did have a life [signing] that had an event that generated some additional other income for us during the quarter, but they seem to happen from time to time, almost on a regular recurring basis.

You just -- as you know that, that asset class doesn't have a long duration.

So these things seem to be hitting on a quite frequent basis.

But that particular event is not going to happen each quarter.

That was a onetime event for that one portfolio company.

But to Richard's point, as this portfolio has become seasoned, we are seeing -- starting to see these fairly regularly, but they do vary in amounts to Richard's point.

So to be clear, were those 2 fees, exit fees?

And then, Bruce, as you touched on the portfolio seasoned, it's large, it's grown.

So should we expect other income, just comparing the go-forward potential versus maybe the last 12 quarters to increase?

I think what it will vary quarter-to-quarter.

But I think over the course of the years' time, it will start to level out at a pretty consistent level, given the seasoning of the portfolio.

And keep in mind, Chris, that these fees if it's considered a part of the company's yield, it's being accreted into earnings on a real-time basis.

So that would be in interest income.

If it's an event-driven contingent fee, then that's something that's going to go into other income.

Got it.

Very helpful.

All right, switching gears.

I know I've talked about this investment with you before, but American Telecom was written down this quarter, and it's still a little bit above other BDC value that own it.

So could you maybe explain to us what inputs drove the write down in the quarter?

And then what other factors may explain your mark relative to other peers?

Yes, I can't address other people's marks, but I can say that we are -- this is effectively a private investment, while it is a large tranche, $600 million or so.

It is -- was clubbed together by a small group of investors holding the vast majority of it.

So we don't look to quotes for this one because it trades by appointment if it trades at all.

And what I would say is that we are in close dialogue with our co-lenders as well as the management team and the sponsor to look at how to best capitalize the company going forward, and we feel that these conversations have been very constructive.

And so the valuation reflects private information that we have.

Got it.

So essentially, maybe a decline in the fundamentals that you [know] as opposed to valuation input?

We're always looking at the fundamentals.

I wouldn't say that there's a necessarily a decline there, but it's definitely at a crossroads and has underperformed on a near-term basis, but we feel very good about the long-term prospects.

Got it.

Helpful, Bruce.

And then net income and dividend income appears at NEF to Solar was low, maybe the lowest on the record since you guys acquired the company.

I know you use that for tax efficiency purposes, but could you explain maybe what's driving that situation?

And whether we should expect the trend to continue?

Sure.

So -- I apologize, it's not easy to model.

But as Michael mentioned a moment ago, the entity that we take the dividend from is where we put assets that are NEF generated for tax efficiency purposes because that's effectively a blocker.

And so what happens is, we're sweeping out all the income effectively.

But more and more of our assets have been, as you look at the NEF SOI on-balance sheet, that has been growing, whereas those held in the subsidiary have been shrinking.

So it's just reflecting what the assets and interest income in -- are is in that entity.

But the total mix has been rather consistent.

So the real -- we disclosed in our press release, we showed the contribution for each of the business units.

And that's really the way to look at it.

So it shows that in Q2, our contribution from NEF was $5.5 million.

So that takes into account both the dividends from the equity that we own as well the assets we have on-balance sheet, and that number has been pretty consistent quarter-to-quarter.

Right.

So the dividend went from $1.2 million down to $1 million, but the consolidated number at 5.5% for the NEF business was rather consistent.

Got it.

Okay.

So there's some mix shift in the accounting for some of that income from that business.

So is that $1 million...

Yes.

It goes to where the assets are held, whether they're in that subsidiary or on the balance sheet.

So that's what we -- but again, on a consolidated combined basis, it's been consistent.

Okay.

And then -- I mean so if I look at dividend income, it's declined a little bit here sequentially and then year-over-year.

So is that $1 million run rate reasonable to expect it to continue?

Or obviously, there's things that we can't see with that, but just trying to understand maybe for modeling.

Again, I think you need to look -- I think the run rate that's consistent to continue is the $5.5 million of kind of earnings from it, which is the combination of interest income on the loans we hold on our balance sheet and the dividends from the entity itself.

And that's the way to kind of model it, look at the blended basis, not isolated in terms of the dividends and the interest earnings.

Okay.

And last question is kind of on strategy and about the advisers.

So Michael, you touched on the adviser [raising] capital late last year looks great.

So in light of that, can you maybe update us on how many investment professionals exist at the manager today?

And then secondarily, Michael or Bruce, could you update us on your view of the opportunities in the market for acquiring other complementary commercial finance companies?

Sure.

So today, across the platform, we've got 150 people.

And that includes our commercial finance businesses that are housed at Solar, housed at SUNS as well as at the manager.

In terms of the opportunity set at the moment for potential acquisitions, it seems to be pretty active out there.

As you know, we like to look at everything and actually acquire very few, but we have been successful in both incubating businesses as we did with the Life Science team as well as acquiring platform.

So we are more active, I would say, today than we had been in some time.

And too early to say, how that's going to unfold.

But we do see some nice opportunities in terms of quality platforms and teams to add to the existing platforms.

For example, and we'll talk about it in the upcoming call at 11:00, but we just completed an add-on acquisition within SUNS for our North Mill subsidiary.

And what's been interesting is that in these processes and things we look at, we're more of a strategic buyer today, but we have synergies to bring to bear, which allow us to be pretty competitive and to buy things on a relatively attractive basis.

Great.

Yes, that's very helpful.

And then kind of following up on just investment professionals.

Given that cash flow that the business there, maybe on a portfolio basis is declining.

Does that present any challenges to retain professionals?

I think there's kind of a war for talent among direct lenders occurring.

And just curious if that does present any challenges to your business?

I think, actually, we've been adding some people on a net basis.

And what I think our professionals find is the opportunity to invest across these asset classes.

A number of the team members are underwriting or originating across verticals.

And so that creates, we think, a distinct career opportunity for an individual as opposed to being at a dedicated cash flow shop.

So we'd like to believe that's actually been a bit of a differentiator.

Great.

That's it for me.

And Bruce, congratulations on the recognition.

Thanks for the support.

Our next question comes from the line of Casey Alexander from Compass Point.

I have a couple of questions.

I think investors appreciate your conservative investing philosophy and the high-quality standards that you've kept for the portfolio.

But it does become a fair question, the significant additional capacity across the Solar Capital platform that you've opened up that, is that making it more difficult to push Solar Capital towards its target leverage ratio?

Yes.

I think it's an interesting question.

I think if we were raising capital, hand over fist, and just taking capital that was available, that's something that we could be challenged on.

But I think there's a method to our madness in sizing, the aggregate capital between the BDCs and the private capital that we've raised.

And I think that the focus really there, Casey, has been to make sure that we have enough capital so that we can, across the platform, be a solutions provider in each of our investment verticals and have the hold sizes that is required, but still be diversified in each of the portfolios in this case in SLRC.

So you've seen our average hold size come down at SLRC.

We think that's a good thing.

But to give you a real-time example, if you were to look at our Life Science vertical at Solar at June 30, we have a portfolio of about $320 million.

Across the Solar platform, the Life Science portfolio is about $450 million.

Now to your specific question, we would not feel comfortable taking that additional $130 million of loans and put it all in SLRC because we would not have the diversification that we'd feel comfortable with in SLRC.

So the breadth of the platform has enabled our team at Life Sciences led by Anthony Storino to go out and take much larger hold sizes.

He's competing for $100 million, $125 million Life Science loans and yet still take the $30 million, $40 million, $50 million holds at Solar that we're comfortable with.

I'll put it another way.

The additional capital is giving us the ability for Solar, the BDC to participate in transactions that otherwise would not have been able to because it would not have been [viable] situations because of lack of size.

Okay.

Secondly, just curious, you mentioned the acquisition at North Mill, and North Mill is an ABL lender, Crystal Financial is an ABL lender.

Why was that acquisition more appropriate for North Mill than may be for the Solar Capital platform?

Sure.

Great question.

So -- and we've touched on this before, but North Mill, let's just talk about North Mill versus Crystal.

North Mill is a relationship bank for very small companies.

So they provide typically $1 million working capital line of credit secured by receivables.

So that business is a pretty low-risk and lower return business than what you'd see at Crystal, where as you know, Crystal is more of an ABL lender, lending to companies with cash flows that are in transition, but still have very strong assets to lend against.

And so, it tends to be a higher return, higher risk business.

And thematically, as you look at SLRC versus SUNS, that's how we have structured those portfolios.

SLRC is doing stretched senior on a cash flow basis and some of the more stressed ABL opportunities.

Whereas SUNS is doing traditional lower yield, lower risk, first lien cash flow and lower return, lower risk first lien ABL.

So this acquisition at North Mill was a small factoring business, typical $800,000 lines of credit factoring.

And it fits very well with a low-risk, lower return profile at SUNS.

Our next question comes from the line of Chris Kotowski from Oppenheimer.

It states in the 10-K that you're using about 24% of your 30% bucket, and you indicated that you're still actively pursuing other specialty finance acquisitions.

And I guess, question is, at what point does it become an issue?

And is it -- philosophically, is there a way to move the 30% bucket up and that keeps you going for a while?

Or is it in the longer run, just that the BDC is not the right structure in which to have kind of this platform of specialty finance companies?

Let me make a quick comment, and then I'll turn it over to my colleagues here.

If you remember, one of the uses of the 30% bucket is Life Science loans into large public companies.

They are constantly churning, we love them.

But as you know, they have a very short average life of about 22 months.

So that's a constantly emptying and refilling part of that bucket, which gives us a lot of flexibility.

I think the other point, as we've talked about in the past, is the Crystal platform uses some of that 30% basket.

As you know, the assets at Crystal are not non-qualified.

If we were to consolidate those, that would free up capacity just as when we brought on our SSLPs.

It's the structure of Crystal that uses the basket.

So we have a lot of levers to pull there.

But let me turn it over to my colleagues.

And the other fact, if you think about NEF actually is not a "bad asset." So [leasing] companies did not fill up our capacity.

And lastly, the way the whole (inaudible) test work, it's an occurrence test.

So if we're at 20%, 24%, we can do larger transaction if we wanted to and go over the 30%.

At that point, we'd not be able to do anything more going forward, but it's not a limiting factor at all today.

Okay.

And then just wanted to go back to the kind of the success fees that you mentioned on the Life Science front, is that -- I mean are these typically triggered by a transaction or by a drug approval or by a milestone?

Or what are they triggered by?

All of the above.

It's a combination of all the above.

So basically embedded in our loan document, it's actually a separate loan document.

Even after we get repaid, we tend to have a success fee that goes as long as 7 to 8 years after the repayment of the loan that gives us a success fee if there's, to your point, a drug that gets approved, an IPO, a change of control, a sell of the business.

There's a variety of things that trigger that payment.

Okay.

And is this the kind of thing where, theoretically, over time, we should see a buildup in these success fees, as you've had the portfolio longer on your books and as it ages more and more that you'd kind of have this backlog of companies where you now have this contingent interest?

Yes.

The answer is yes.

You will see a backlog, but we -- from a GAAP perspective, we can't take any credit for the income until it actually happens because it's all contingent.

So there is this theoretical backlog that exists, but it's not something that we quantify.

Right.

Okay.

And so -- and we'll just have to wait and see a couple more quarters and then we can decide what the trend and the volatility around that is.

Yes.

And just to be clear, these are structured as fixed warrants.

So very often, the Life Science loans either have warrants or they have success fees.

So very often, we structure them as success fees.

Okay.

And then finally, I guess, most of us kind of BDC analysts, we're used to doing our earnings model off the consolidated income that's on Page, like, 6 of your press release.

And if I hear you right, I mean, it sounds to me like you're saying, no, no, don't look at that, look at Page 3 because those are the categories.

I mean that's how we manage the business.

Am I reading you right on that?

Yes.

Yes.

(Operator Instructions) Our next question comes from the line of Rick Shane from JPMorgan.

Two questions this morning.

First, on the equipment financing business, is there any impact from trade tariffs that we should think about?

Is that either a headwind or a tailwind?

Does it impact asset prices and in place equipment?

Well, we really -- to the most recent activity in the trade war, we really have no meaningful exposure in the ag sector.

So -- and as we look across the portfolio, we have not seen any impact.

Okay, great.

Second question, stock is now trading at about a 7% discount to NAV.

You guys have bought back stock in the past.

I don't believe you have a current authorization.

Curious, given your outlook and your confidence in your portfolio, whether it makes sense to at least include an authorization and then to consider buying back stock?

Yes, it's a great question and we talk about it.

I think, we kind of look at it a little differently.

We're sitting here with a great balance sheet.

We're investment-grade rated.

We have access to capital, both on the debt and equity side.

And if you look at kind of where our stock trades today, at our target debt-to-equity expectation, we have a blended cost of capital of under 6%.

It's an extremely low cost of capital that we don't want to lose, and we want to be able to take advantage of that.

And that cost of capital helps us a great deal on looking at potential acquisitions.

And so we want to kind of play out our cards and see where are growth potential is before we make any kind of commitment like that.

Got it.

The 2 pieces of feedback I would give there presumably reducing equity, the equity component and levering up a little bit would impact lower cost of capital.

And doesn't it at least make sense defensively to have it in place -- and again, I understand that 6 months from now, if you have an authorization in place, and you haven't bought any stock back, the risk is that you're on the call, and I'm asking why you didn't buy any stock back given your authorization?

Are you guys laughing there?

No.

No.

Now I am, but I wasn't then.

I think a lot of people -- a lot of other people have put plans in place with maybe didn't have genuine intentions to buy back and to put a [pillar] in place that we had a 1-day [book] yesterday, it drove the discount.

We don't expect that to last.

But we don't know.

But I think we'll take it as it comes and we'll see.

(Operator Instructions) Our next question comes from the line of Finian O'Shea from Wells Fargo Securities.

Just first question on a portfolio company, Southern Auto was refied.

And I think, we saw a little bit of that come on in the Solar private income BDC.

Can you give us some color on as to why Solar didn't participate in the new financing?

Yes.

It really goes to the earlier conversation that someone was talking about in terms of maximum flexibility for the 30% basket.

[SAFCO,] as we call it, uses up the 30% basket.

It's been with us for a number of years.

And we had more attractive opportunities in Life Sciences.

So we felt it more prudent as part of that refinancing to take down the exposure.

That's helpful.

And as to the expansion of specialty finance broadly, understanding Crystal and NEF partially run their own G&A lines.

As you expand into these comprehensively, should we anticipate somewhat of a improved ROE as that G&A can maybe partially run off on the comprehensive fee side?

Definitely.

I think -- one of the -- it's one of our emphasis is internal growth, whether it's at NEF or Crystal clearly drive ROE.

Crystal, for example, we've talked about a lot in the past, is built to be a much bigger portfolio.

And for that business, we hope for volatility because that will drive much more [deal close] to them.

And we could easily, in a [different] environment, see that portfolio double in size, and your SG&A will not go up much relative to that.

So yes, you're absolutely right.

And then just one final question.

Prior to allocation to Solar, the BDC and other funds, does their adviser receive any economics, such as the broker or upfront fees or anything else?

No, never have, never will.

We have no further question at this time.

I will now turn the call over back to Mr. Michael Gross, Chairman and Co-CEO.

Thank you very much for your time today and all of your great questions, and we look forward to talking to you again.

And we'll look forward to talking to those who will participate with us on the 11:00 call for SUNS.

Thank you.

Ladies and gentlemen, thank you for joining us.

This concludes today's conference call.

You may now disconnect.