SLR Investment Corp (SLRC) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q3 2021 SLR Investment Corp. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Michael Gross, Chairman and Co-CEO. Thank you, and please go ahead.

Thank you, operator, and good morning, everybody. Welcome to SLR Investment Corp.'s earnings call for the third fiscal quarter ended September 30, 2021. I'm joined here today by Bruce Spohler, our Co-Chief Executive Officer; and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you please start off by covering the webcast and forward-looking statements?

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 SLR Investment Corp., and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast from the Investors tab on our website at www.slrinvestmentcorp.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, including impacts from COVID-19. Past performance is not indicative of future results. Actual results may differ materially as a result of a number of factors, including those from time to time in our filings with the SEC. SLR Investment Corp. 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, and again, Good morning, and thank you for joining us. The third quarter and the fourth quarter thus far have been an active period for origination teams, including those at SLRC specialty finance subsidiaries. In particular, our sponsor finance business has had a very strong quarter. Against the backdrop of the continued economic rebound and record levels of private equity and leverage finance activity, our pipeline has been extremely robust. During the quarter, we directly and indirectly originated $358 million of investments, our largest total, excluding platform acquisitions in the past several years. We've been able to remain highly selective while generating portfolio growth.

Net asset value per share for the quarter ended September 30 was $20.20. And for the third quarter of 2021, our net investment income was $0.36 per share. At September 30, over 99% of our comprehensive investment portfolio was invested in senior secured loans, and 77% of the portfolio's fair value was allocated to our specialty finance investments. Our most recent commercial finance acquisition, Kingsbridge is performing well above our expectations. Our other specialty finance subsidiaries continue to rebuild their portfolios following their [trough] utilization levels resulting from government stimulus and other COVID-induced challenges.

SLRC's leverage at September 30 was 0.79x net debt to equity. Elevated levels of investment activity have continued in the fourth quarter based primarily on a few investments funding post-quarter end, our net leverage at November 1 would be 0.9x. We believe that as existing loan commitments are funded and additional investments currently being underwritten are closed over the next couple of months, SLRC will approach the midpoint of its target range of 0.9x to 1.25x net debt to equity. During the third quarter, we issued $50 million of 5-year private unsecured notes at 2.95%. As a result, now 69% of our funded debt is unsecured. We are actively looking to term out additional fundings.

Looking forward, we expect to deploy much of our low-cost available capital towards new investments across our lending strategies. In our cash flow lending business, we're seeing an increase in the size of the company seeking direct financings rather than accessing the syndicated loan market, which we attribute to financial-sponsored desire for speed and certainty of execution. The scale of SLRC's investment adviser and its ability to hold up to $200 million of a given investment enables us to participate in the offer middle market financings, which we continue to believe are better positioned to protect capital in the event of future economic disruptions.

Our specialty finance teams are poised for growth. They are also seeing increased deal flow as more companies look to pledge collateral to obtain working capital to fund growth initiatives. The breadth of our investment strategies means that we only need to see modest growth from a couple of our verticals to drive meaningful portfolio growth and earnings growth. In addition, we have an active pipeline of bolt-on and new specialty finance acquisition opportunities.

At this time, I'll turn the call over to our CFO, Rich Peteka, to take you through the third quarter financial highlights.

Thank you, Michael. SLR Investment Corp.'s net asset value at September 30, 2021, was $853.5 million or $20.20 per share compared to $857.4 million or $20.29 per share at June 30, 2021. At September 30, 2021, SLRC's on-balance sheet investment portfolio had a fair market value of $1.62 billion in 106 portfolio companies across 33 industries. This compared to a fair market value of $1.50 billion in 101 portfolio companies across 27 industries at June 30, 2021. At September 30, the company had $718 million of debt outstanding with leverage of 0.79x net debt to equity. When considering available capital from the company's credit facilities, together with available capital from the non-recourse credit facilities at SLR Credit Solutions, SLR Equipment Finance, and Kingsbridge. SLR Investment Corp. had significant available capital to fund future portfolio growth.

Moving to the P&L. For the 3 months ended September 30, 2021, gross investment income totaled $32.2 million versus $35.6 million for the 3 months ended June 30. Expenses totaled $17.2 million for the 3 months ended September 30, 2021, and this compares to $20.1 million for the 3 months ended June 30, 2021. Accordingly, the Company's net investment income for the 3 months ended September 30, 2021, totaled $15.0 million or $0.36 per average share, compared to $15.5 million or $0.37 per average share for the 3 months ended June 30.

Below the line, the company had net realized and unrealized losses for the third fiscal quarter totaling $1.6 million versus net realized and unrealized gains of $3.0 million for the second quarter of 2021. Ultimately, the company had a net increase in net assets resulting from operations of $13.4 million or $0.32 per average share for the 3 months ended September 30, 2021. This compares to a net increase of $18.6 million or $0.44 per average share for the 3 months ended June 30, 2021. Finally, our Board of Directors declared a Q4 2021 distribution of $0.41 per share payable on January 5, 2022, to shareholders of record on December 16, 2021.

And with that, I'll turn the call over to our co-CEO, Bruce Spohler.

Thank you, Rich. SLRC's strong portfolio performance supports our underwriting thesis of investing at the top of the capital structure and first lien cash flow loans to upper middle market borrowers in non-cyclical industries, as well as allocating a significant portion of our exposure to collateralized loans through our specialty finance verticals. At quarter end, SLRC's comprehensive portfolio was just over $2 billion and remained highly diversified, encompassing over 600 issuers across 75 industries. Our largest industry exposures where healthcare providers, diversified financials, Life Sciences, and software.

At September 30, over 99% of our total portfolio consisted of senior secured loans. Of those loans, approximately 95.5% were first lien and only 3.8% were second lien. Of the 3.8% second lien loans, 2.3% were cash flow, and 1.5% were asset-based loans benefiting from borrowing basis. At quarter-end, our weighted average asset level yield was 9.9%, up slightly from the prior quarter. By focusing on our niche commercial finance verticals, we've been able to maintain asset-level yields close to 10% despite a decrease in LIBOR and spread compression. Notably, we've been able to maintain these yields while actively reducing our exposure to higher-yielding second lien cash flow investments.

At quarter end, the weighted average investment risk rating of SLR's portfolio was under 2 based on our 1 to 4 risk rating scale, with 1 representing the least of amount of risk. Total originations for the third quarter were $358 million, and repayments were $260 million. In addition, we had approximately $150 million of unfunded investment commitments outstanding at quarter-end, which we expect to fund over the next couple of months.

Now let me provide an update on each of our investment verticals. SLR sponsored finance, our cash flow vertical. At September 30, our sponsor cash flow book was $456 million or approximately 23% of our total portfolio, and it's invested across 24 borrowers with an average position size of just under $20 million. The average EBITDA of these borrowers was approximately $90 million, consistent with our focus on larger upper mid-market borrowers.

During the third quarter, a compelling opportunity set of cash flow investments across health care, software, and financial services, drove over $120 million of portfolio growth. Additionally, origination volume in the fourth quarter should contribute to further growth before year-end. In the third quarter, we made $185 million of new cash flow commitments and funded $140 million. We experienced repayments of only $18 million.

As Michael mentioned, we've been able to take advantage of the broader scale of the SLR platform to underwrite larger investment positions in first lien cash flow loans. Given the sponsor communities preference for partnering with just a few lenders, each with large investment sizes, SLRC would not be able to participate in these investments without the capacity of the broader SLR platform. Recent commitments have grown to over $65 million, demonstrating the benefit of our platform scale. We have increased our delayed draw term loans, which are issued by borrowers to fund future acquisitions. These investments offer a prudent opportunity for SLRC to grow its investment in an established credit with existing financial covenants.

At quarter end, SLRC had close to $90 million of unfunded cash flow commitments, which we expect to contribute to additional portfolio growth. At quarter-end, the weighted average yield in our cash flow investment portfolio was just under 8%.

Now let me turn to asset-based lending, SLR Credit Solutions. At quarter-end, our senior secured asset-based portfolio was just over $400 million, representing 20% of our total portfolio. It was invested across 28 borrowers with an average investment of just under $15 million. The weighted average asset level yield of this portfolio was just over 12% compared to 10% at the end of the second quarter. During the third quarter, we funded approximately $93 million of new asset-based investments and had repayments of $76 million. Credit Solutions has seen a significant increase in its pipeline, which we expect to translate into portfolio growth in the coming quarters. For the quarter, Credit Solutions paid SLRC, a cash dividend of $5.5 million.

Now let me turn to Corporate Leasing, Kingsbridge. We are a year into the investment in Kingsbridge, and are very pleased with the results. The credit quality of the portfolio remains strong, and originations have been steady. At quarter-end, Kingsbridge highly diversified portfolio of leases, totaled approximately $578 million with an average funded exposure of approximately $1.3 million per obligor. The portfolio was 100% performing with the majority of Kingsbridge portfolio invested in assets that are leased by investment-grade borrowers. For the third quarter, Kingsbridge paid a dividend of $3.5 million to SLR, consistent with the prior quarter, which equates to just over 10% annualized yield on cost. Including the interest on our $80 million loan into Kingsbridge, gross income generated by Kingsbridge for the third quarter was $5.2 million. We expect to see Kingsbridge portfolio continue to expand in the coming quarters.

Now let me turn to Equipment Finance. As a reminder, included in our Equipment Finance business, our financings held both directly on our balance sheet as well as those held in SLR Equipment Finance, which is a subsidiary that for tax efficiency purposes holds certain investments. During the third quarter, Equipment Finance invested $48 million and had repayments of $42 million. The portfolio totaled $322 million, it's invested across 100 different borrowers with an average exposure of $3.25 million. The Equipment Finance asset class represents approximately 16% of our total portfolio. 100% of their investments are first lien, and at quarter end, the weighted average asset level yield was 9.7%.

During the third quarter, investment income from the Equipment Finance business, including the assets held on the balance sheet, totaled $4.3 million. The rebound in economic activity that started about a year ago has continued through the third quarter and has been supportive of the performance of this Equipment Finance portfolio. We are seeing valuations return to their pre-COVID levels in underlying equipment and the credit quality of our borrowers improve. The team expects to grow this portfolio as we head into next year.

Finally, let me provide an update on our Life Science lending business. At quarter end, its portfolio totaled $235 million, consisted of 13 borrowers with an average investment of approximately $18 million. Life Science loans represented 12% of our total portfolio and contributed 27% of our gross investment income during the quarter. For the third quarter, the team committed to $43 million of new opportunities, over $20 million of which was funded. Repayments and amortization totaled $54 million. During the pandemic, our Life Science portfolio experienced lighter churn than is typical as repayments start to occur at a more normal cadence, the realization fees and other income associated with these loans will become more consistent.

At quarter end, SLR had over $44 million of unfunded life science commitments outstanding, which are available to borrowers upon reaching certain milestones. We expect that these may be drawn to fund continued growth in our Life Science portfolio over the coming quarters. Additionally, the Life Science Finance team currently has a robust pipeline of new opportunities. The weighted average yield on this portfolio was 9.6%, which excludes success fees and warrants.

In conclusion, SLRC's portfolio activity for the third quarter represents a continuation of the investment themes that have been driving our portfolio over the last few years, focusing new origination activity on first lien cash flow loans in defensive sectors, increasing our investments in specialty finance assets, where we generally get tighter structures and more attractive risk-adjusted returns, and growing our investments alongside our portfolio companies by committing to delay draw acquisition financings. Across all asset classes, including cash flow lending, we are seeing a large number of quality investment opportunities. This increase is reflective of the solid economic rebound and increased middle-market sponsor activity. The current environment is attractive and provides a great opportunity for SLRC to grow its portfolio over the coming quarters.

Now let me turn the call back to Michael.

Thank you, Bruce. In closing, the third quarter on the heels of a strong first half represented a robust origination period for SLRC, with several of these investments funding in the fourth quarter. In particular, our sponsor finance team capitalized on a strong opportunity set in our core industries. We are optimistic about our earnings growth potential and the opportunity set across each of our investment verticals. With the economic recovery in full swing, and our portfolio on solid footing, we are focused on deploying our available capital into attractive investment opportunities.

Across our investment strategies, which span cash flow, ABL, Life Sciences in addition to Equipment Financing and Corporate Leasing, we are seeing robust origination activity, which would translate into continued portfolio growth in the coming quarters. We believe we are still in the early innings with substantial runway as financial sponsors deploy record amounts of dry powder and more of the larger businesses we prefer to lend to choose direct financings over syndicated debt markets. These industry tailwinds, combined with the scale of our investment adviser, should benefit SLRC investors through greater access to upper-middle market cash flow investment opportunities, which last year has proven, are better-positioned to protect capital than most smaller companies.

Additionally, we are reaping the benefits of our scale advantage in our cash flow, Life Science and ABL verticals. We have access to ample low-cost capital with which to fund portfolio growth. As we continue to grow the portfolio, we believe NII will return to covering the dividend. At 11:00 this morning, we will be hosting an earnings call for the Q3 2021 results of SLR Senior Investment Corp. or SUNS. Our ability to provide traditional middle market senior secured financing through this vehicle continues to enhance origination team's ability to meet our clients' capital needs, and we continue to see benefits of this value proposition in our deal flow.

We thank you for your time. Operator, could you please open the line for questions.

(Operator Instructions) Our first question comes from the line of Melissa Wedel of JPMorgan.

I wanted to clarify first. You mentioned $150 million that I believe it's committed, but you expect to fund over the next couple of months. I am taking that as by year-end. Is that a fair assumption?

That's probably a little faster than we would anticipate, Melissa. I think it's more likely over the next the 3 or 4 quarters. It's a little bit unpredictable only because these are generally acquisition lines that we don't get a lot of for warning at the time of draws. It's usually only a couple of weeks in advance. But it's important to note that that's just what's been committed to on an unfunded basis that will be drawn down. We also have additional fundings during the fourth quarter that we do expect to get funded. So it's a combination of these unfunded lines and new funded investments that will be coming on this quarter. So you'll probably get to the same result, but it won't be just from the usage of those unfunded lines this quarter.

And then as a follow-up, I want to think about as that increase in leverage occurs within the portfolio. I'm trying to size the impact on NII because if I’ve done the back-of-the-envelope math, right, it seems like maybe some of those unfunded amounts are skewed a little bit more towards the lower-yielding categories, the cash flow loans and some others. Is that my -- I thinking about that the right way?

So that's a great question. I would say that the -- it's a mixture. It is skewed there, but it is also inclusive of ABL as well as Life Science, which, as you know, are higher yielding. So we generally think it will blend out to the portfolio yield that we carry today when you look across the mix. And to put in perspective, virtually all of our net originations this quarter weren't cash flow. And our portfolio yield went from 9.7% to 9.6%. So it was a 10 basis point move - not significant.

We have a question from Matt Tjaden of Raymond James.

So first one for me on the interest income line. So down quarter-over-quarter even with portfolio growth and sounds like yields were flat. Any noise in that line item we should be aware of this quarter? Or was that purely just a function of origination and repayment timing?

Sure. Yes. I think, first of all, Q2, we did have more repayment income, some of the life science investments in particular. As you know, as those repay generate a lot of fees at repayment, be it OID, prepayment fees, warrants, etc. But also in Q3, as we discussed, most of the activity funded late in the quarter and in fairness in October and the beginning of Q4. So there's definitely a timing element as well.

Second one for me on the cash flow segment. So I've been a couple of theme over the last couple of quarters. Expectations for 2022 in the cash flow segment, do you -- sitting here today, do you expect continued growth in this segment in 2022, or a flattening after growth this quarter and the next?

Well, look, today it's about 23% of the portfolio. To Melissa's questions, there is continued cash flow portfolio growth that will just come from drawing down the acquisition line commitments that we've already made. So we do see some additional growth there. But again, in the context of the overall business, we are seeing volumes pick up across each of our verticals. So I don't think the mix will shift much. We expect growth in cash flow, but I would not call it disproportionate to the broader portfolio, maybe get to 25%, 26%, but not a significant change in the mix, just overall growth across the segments.

And last one for me, just on pipeline and target leverage. Based on fundings quarter-to-date, is it your expectation to achieve the midpoint of the target range in Q4, or is that something more so in early 2022?

So I would say that the following. We had expected to achieve the 0.9 at September, we ended up achieving October. So whether it's going to be late Q4 or early Q1, it's hard for us to say. But I would say, just because, as you know, in the deal business, things get shifted a month here or there. It's a little bit of a dynamic process. But I would say, over the next few months, we do expect to get to that midpoint.

(Operator Instructions)

If you have no other further questions, we thank you for your time this morning. And for those of you who will be on our call for SLR Senior, we'll talk to you in 25 minutes.

This concludes today's conference call. Thank you for participating. You may now disconnect.