SLR Investment Corp (SLRC) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q2 2021 SLR Investment Corp. Earnings 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, Michael Gross, Chairman and CEO. Please go ahead.

Thank you very much, and good morning. Welcome to SLR Investment Corp.'s earnings call for the second fiscal quarter ended June 30, 2021. I'm joined today by Bruce Spohler, our Co-Chief Executive Officer; and Rich 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 SLR Investment Corp. and that any unauthorized broadcasts in any form are expressly 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 described 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. Good morning, and thank you all for joining us. For the second quarter of 2021, SLRC earned net investment income of $0.37 per share, consistent with the first quarter of 2021. Net asset value per share for the quarter ended June 30 was $20.29, representing a modest increase over the prior quarter.

We attribute the resiliency of our portfolio to our conservative underwriting, our focus on first-lien senior secured loans to large upper-middle-market businesses in our cash flow segment and our specialty finance investment verticals, which offer attractive structural protections and yields. At June 30, over 99% of our comprehensive investment portfolio was invested in senior secured loans and 82% of the portfolio's fair value was allocated to specialty finance investments.

Against the backdrop of the continued economic rebound, the U.S. middle market has reflected a more favorable economic climate, punctuated by a resurgence in sponsor activity and a robust pickup in M&A activity. We expect supportive financing markets, record amounts of private equity dry powder and potential future changes to the U.S. tax structure to drive record levels of deal activity in the second half of 2021. We are correspondingly seeing a significant increase in our investment commitments post quarter end. We remain modestly levered at 0.73x net debt-to-equity as of June 30. Looking forward, we expect to deploy much of our $740 million of low-cost available capital toward new investments across our lending strategies.

In our cash flow lending business, we are seeing an increase in the size of companies seeking direct financing, which we attribute to financial sponsor desire for speed and certainty of execution. The scale of SLRC's investment advisor and its ability to hold up to $200 million of a given investment enables us to participate in these upper-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 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 strategy means that we only need to see modest growth from each vertical to drive meaningful portfolio and earnings growth. Given our sizable third quarter pipeline, we expect portfolio growth in the third quarter to bring SLRC's net leverage within our target range of 0.9x to 1.25x.

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

Thank you, Michael. SLR Investment Corp.'s net asset value at June 30, 2021, was $857.4 million, or $20.29 per share, compared to $856.2 million, or $20.26 per share, at March 31, 2021.

At June 30, 2021, SLRC's on-balance-sheet investment portfolio had a fair market value of $1.5 billion in 101 portfolio companies across 27 industries. This compares to a fair market value of $1.57 billion in 105 portfolio companies across 27 industries at March 31, 2021.

At June 30, the company had $670 million of debt outstanding, with leverage of 0.73x net debt-to-equity. When considering available capacity from the company's credit facilities, together with available capital from nonrecourse credit facilities at SLR Credit Solutions, SLR Equipment Finance and Kingsbridge, SLR Investment Corp. has over $740 million to fund future earnings growth.

Moving to the P&L. For the 3 months ending June 30, 2021, gross investment income totaled $35.6 million, versus $35.9 million for the 3 months ended March 31. Expenses totaled $20.1 million for the 3 months ended June 30, compared to $20.4 million for the 3 months ended March 31, 2021. Accordingly, the company's net investment income for the 3 months ended June 30, 2021, totaled $15.5 million, or $0.37 per average share, compared to $15.5 million, or $0.37 per average share, for the 3 months ended March 31, 2021.

Below the line, the company had net realized and unrealized gains for the second fiscal quarter totaling $3 million, versus net realized and unrealized gains of $6 million for the first quarter of 2021. Ultimately, the company had a net increase in net assets resulting from operations of $18.6 million, or $0.44 per average share, for the 3 months ended June 30, 2021. This compares to a net increase of $21.5 million, or $0.51 per average share, for the 3 months ended March 31, 2021.

Finally, our Board of Directors declared a Q3 2021 distribution of $0.41 per share payable on October 5, 2021, to shareholders of record on September 23, 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 in first-lien cash flow loans to upper-mid-market borrowers in noncyclical industries as well as allocating a significant portion of our exposure to collateralized loans to our specialty finance verticals.

At quarter end, our portfolio was just under $2 billion and remained highly diversified, encompassing 600 borrowers across 75 industries. Our largest industry exposures were health care, diversified financials, life sciences and retail asset-based loans. The average investment per issuer was approximately $3 million, or 0.2%. Over 99% of the portfolio consisted of senior secured loans. Of those, 95% were first lien and only 4.3% were second lien. Of those second-lien loans, 2.4% were cash flow and 2% were asset-based loans.

At quarter end, our weighted-average asset level yield was 9.8%, consistent with 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 as well as spread compression. Notably, we've been able to maintain these yields while actively reducing our exposure to second-lien cash flow loans.

At June 30, the weighted-average investment risk rating was just under 2 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. Total originations for the second quarter were $173 million and repayments were just over $300 million, resulting in a net portfolio of approximately $2 billion. In addition, we had $82 million of unfunded investment commitments outstanding at quarter end, which we expect to be drawn down in future quarters.

Now let me provide an update on each of our investment verticals. SLR sponsor cash flow finance. At quarter end, our cash flow portfolio was approximately $340 million, or 18% of our total portfolio. It was invested across 18 borrowers with an average investment of approximately $20 million. The average EBITDA of our SLR cash flow portfolio was $80 million, consistent with our focus on upper-mid-market, larger borrowers.

During the second quarter, we made $63 million in new cash flow commitments, of which $48 million was funded into new and existing investments. We experienced repayments of $40 million. As Michael mentioned, we have been able to take advantage of the broader scale of the SLR platform to underwrite larger hold positions in first-lien cash flow loans to upper-mid-market sponsor-owned companies.

Given the sponsor community's preference for partnering with just a few lenders on each transaction, each with large hold sizes, SLRC would not be able to participate in these financings without the broader capacity of the SLR platform. We are increasingly committed to delayed-draw acquisition lines of credit that are used by borrowers to fund future acquisitions. These transactions offer a prudent opportunity for SLRC to grow its investment and establish credits with existing financial covenants.

At quarter end, we had $50 million of unfunded cash flow commitments, which we expect to be drawn down in future quarters. We are also seeing robust new deal activity in our cash flow protocol and expect to meaningfully grow this segment during this third quarter.

Our asset level yield of cash flow loans was 8.4%, slightly below the prior quarter.

Now let me turn to asset-based lending, SLR Credit Solutions. At quarter end, the portfolio for asset-based lending was $390 million, representing approximately 20% of our total portfolio. The weighted-average asset level yield was 10.3%, compared to 10.5% the prior quarter.

During the quarter, we funded approximately $27 million of new loans and had repayments of $100 million. Looking forward, the pipeline in asset-based lending is robust. For example, retailers, a core competency of this team, are actively exploring alternative financing solutions at an active rate following a challenging 2020. For the quarter, Credit Solutions paid SLRC a cash dividend of $5.5 million.

Now let me turn to corporate leasing, our Kingsbridge platform. We are now 9 months into our investment in Kingsbridge and are extremely pleased with the results. Credit quality of the portfolio remained strong, and originations during the second quarter were steady. At quarter end, their highly diversified portfolio of leases totaled approximately $590 million with an average funded exposure of $1.3 million per obligor. The portfolio was 100% performing with a large majority of Kingsbridge portfolio invested in assets that are leased by investment-grade borrowers. For the quarter, Kingsbridge paid a dividend to SLRC of $3.5 million, which is an increase from $2.75 million in the prior quarter. This equated to a 10.2% annualized yield on cost. When we include the interest on our $80-million loan into Kingsbridge, gross income from Kingsbridge for the second quarter was just over $5 million.

Now let me turn to equipment finance. As a reminder, included in our equipment finance business are financings held both directly on our balance sheet as well as in our subsidiary, SLR Equipment Finance. For the second quarter, the strategy invested $24 million and had repayments of $31 million. At quarter end, the portfolio totaled approximately $314 million. It was invested across 104 borrowers with an average exposure of $3 million. The equipment finance asset class represents 16% of our total portfolio. 100% of their investments are first-lien loans, and for the second quarter, the yield on this portfolio was just under 10%. For the second quarter, investment income from this portfolio totaled $4 million.

The rebound in economic activity that started last year and has continued this year has been supportive of the performance of our equipment finance portfolio. We are seeing equipment valuations return to their pre-COVID levels and credit quality of the borrowers improving. Our team is currently focused on growing the portfolio.

Now let me provide an update on our life science business. At quarter end, this portfolio totaled just over $270 million, consisting of 15 borrowers with an average investment of $18 million. In total, this portfolio represents 14% of our comprehensive portfolio. During the second quarter, the team committed to $11 million of new investments, of which $6 million has been funded. Repayments and amortization totaled $65 million, which included the repayment of one investment of $50 million, which generated over 13% unlevered asset-level IRR.

During the pandemic, our life science portfolio experienced higher -- lighter churn than is typical. As repayments start occurring at a more normal cadence this year, realization fees and other income associated with these loans will become more recurring and consistently benefiting our earnings.

At quarter end, SLRC had $22 million of unfunded life science commitments, which are available to borrowers upon reaching certain milestones. These may be drawn to continue to fund SLRC's life science portfolio growth. The weighted-average yield on this portfolio was just over 10%, which excludes any success fees and warrants.

In conclusion, SLRC's portfolio activity 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 to portfolio companies in defensive industries, increasing our investments in specialty finance assets where we are able to get tighter structures and more attractive risk-adjusted returns, and growing alongside our portfolio companies by committing to acquisition lines which may fund over the next few quarters.

Across all of our asset classes, including cash flow, we are seeing a larger volume of quality investment opportunities than we have seen in a number of quarters. This uptick is reflective of the solid economic rebound and increased middle-market sponsor activity. The current environment is attractive and provides a great opportunity for us to grow our portfolio throughout the remainder of this year. Given our sizable third quarter pipeline, we expect this growth to bring our net leverage within our target range of 0.9x to 1.25x.

Now let me turn the call back to Michael.

Thank you, Bruce. In closing, 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 SLRC's portfolio on solid footing, we're focused on deploying our available capital into attractive investment opportunities. That breadth of our investment strategies will span cash flow, ABL, life science lending, in addition to equipment financing and corporate leasing, means that modest activity in each vertical can aggregate to meaningful overall portfolio growth. We also believe that we're 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 financing 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, as of last year, has proven are better-positioned to protect capital than most smaller companies.

Now that we're through the incentive fee catch up, every incremental dollar of income is highly accretive to shareholder returns. We have access to ample low-cost capital with which to fund portfolio growth. As we continue to grow the portfolio, we believe net investment income will ultimately return to fully covering the dividend.

In July, our adviser announced that it had completed initial closings of over $480 million in equity commitments for its private health care lending fund, capitalizing on our strength and deep experience in the health care lending industry across cash flow, ABL and life science investment strategies. With anticipated leverage, this fund adds over $1 billion of investable capital to our platform. Our pipeline of health care investments is strong. Due to industry and diversification targets, our platform has originated more health care opportunities than SLRC can handle on its balance sheet. The addition of the private health care fund enables the SLR platform to continue providing full capital solutions of $200 million-plus, which benefits SLRC through increased diversification within its health care portfolio and a steady stream of new investments into which we can invest.

At 11 o'clock this morning, we'll be hosting an earnings call for the second quarter results of SLR Senior Investment Corp., 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 our deal flow.

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

(Operator Instructions)

The first question comes from the line of Bryce Rowe with Hovde.

Bruce and Michael, just wanted to try to frame up the projected third quarter activity. And it sounds like a good portion of it will come from the sponsor finance business, but curious how we should think about the mix of third quarter activity in terms of sponsor finance, ABL and possibly the life sciences vertical.

Yes. I think we expect it to be more heavily weighted this quarter towards both cash flow as well as ABL. Life science is active, but as you know, it's a smaller strategy. So I just think magnitude-wise, it will be driven more by cash flow and ABL in terms of the current pipeline, but the activity level is there across actually all of the strategies.

Okay. That's helpful. And then I wanted to -- maybe a follow-up to some of the prepared remarks around the ABL strategy. You talked about, obviously, a robust pipeline. The portfolio from a comprehensive perspective was down here in the quarter, and you noted a dividend of $5.5 million on the equity investment in that vertical. So as we think about that pipeline being robust and maybe converting to fundings, how should we think about that dividend coming into the BDC, the $5.5 million versus what had been, I guess, $6 million previously?

That's a great question. As you know, this vertical tends to be a little bit variable quarter-to-quarter. Over the course of the year, it's been pretty consistent, but quarter-to-quarter can vary based upon the short duration of the assets, what you're booking, when you're generating prepayments. So we try to smooth this out. I think this is a good level to assume for the moment based upon what we're seeing.

Okay. And then maybe one more for me on the cash flow side of things. You've noted larger companies that you're lending to, average investment of $20 million. Do you expect hold sizes to go up within that vertical given the increased scale within the platform and maybe the private equity sponsors being more active and looking at more M&A opportunities?

Yes. I mean the hold sizes historically were small because, as you know, we had been deemphasizing cash flow, not really liking what we saw given the frothiness in the market pre-COVID. Coming out of COVID -- maybe it's helpful to step back for a moment. What we do in cash flow, like our other strategies, it's a niche for us. We're not a broad-based sponsor-backed cash flow lender. We tend to focus on industries that have been very stable, high free cash flow generative, staying away from capital-intensive sectors. Between health care, financial services, software, business services, that's 90% of our portfolio. So we're not in every sector within cash flow. And those sectors have been performing incredibly well and have proved themselves to be resilient during COVID. And so we're seeing a lot more investment activity there, both on the PE side as well as, therefore, on the credit side.

So that's really what's driving our investment activity. And yes, holds are increasing because we want to take our exposure up, and we have the increased scale of the platform to be able to do so not only within SLR, but to make the platform relevant to the borrowers taking down $150-million, $200-million holds. So we expect holds will go up, to your point, and an increase in our exposure to the sector within those core industry groups that have proven themselves to be resilient and where we've been investing for years.

(Operator Instructions)

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

I just have one question today. Over the last several years, you guys have really done a great job of building out your lending business to include different lending verticals, which have provided a lot of diversification on the asset side. And that portfolio has served really well during COVID. You guys have also raised additional funds outside of the BDC, which has allowed you to increase your commitment size and relevance while keeping diversification at SLRC. But all of that really hasn't translated, all that building out of the platform really hasn't translated into much portfolio growth at SLRC. There's been about 3% total growth, a net portfolio growth of the portfolio in the 2 years prior to COVID. And there's been no organic quarterly growth post-COVID, obviously outside of the Kingsbridge acquisition. So there just hasn't been any net growth post-COVID across your portfolio.

So I know you said there's a strong pipeline for the third quarter, and you expect to get within your targeted leverage range, but my question is, as a platform, can you generate significant consistent organic net portfolio growth going forward? And I assume the answer to that is going to be yes. And if that is the case, why and what would have to change versus what we've seen in the data in the past?

So I think you hit the nail on the head, and to some extent, answered your own question. We have grown by adding verticals. They, in and of themselves, bring capital to the table that we have invested in these verticals. And importantly, as you appreciate, Ryan, having followed us for many years, many of these verticals are very stable, less transactional. And so we don't face that headwind of some of the asset classes such as cash flow that are very transactional, short-duration assets driven by M&A exits. Once the business tends to perform, you get repaid on your loan.

So Kingsbridge is a great example. As you know, we have been a lender for a number of years, brought that platform on late last year, deployed over $200 million of capital. We view that as permanent deployment that we will then grow as that business grows. Now it's not a high grower, but it's a Steady Eddie, consistent grower, as it's already proven. And importantly, those are long-duration assets that are less transactional. The average duration there is 5 years. And so that's kind of a permanent piece of deployment here that is less facing those headwinds of constant churn as we try to grow the portfolio, to your question.

So I think as we look at it, we have a number of verticals through which to grow. As Michael mentioned, we are seeing growth in all of them coming out of COVID right now given the economic climate. And that's obviously (inaudible). We don't count on all of them growing at the same time. We view ourselves as allocators of capital to the segments that offer the best risk-adjusted returns. But I think on one hand, we feel like they have an incredibly strong, stable foundation, and yet we're telling you we're also seeing growth right now across the portfolios. Again, there's a time to grow and there's a time to get repaid in lending, as you know, based on where you are in the credit cycle, but we feel that we are incredibly well positioned for prudent growth.

The other comment on growth is, which we don't factor in and you can't model in, is we are active acquirers. That's a line of business for us. And we have a team that is dedicated to finding new opportunities. And that's kind of a step function. I mean we have an active pipeline today. We can't predict if and when something will happen, but in all likelihood, given our experience and our desire, we'll be adding other platforms, which, to Bruce's point, adds additional layers of kind of permanent funded capital that will generate attractive returns.

Okay. I mean where would you -- a follow-up on that. I mean where would you guys like to see, given that you guys are viewing early in sort of an economic recovery today as an opportunity to grow, which is what you guys said, I mean, where would you guys like to see those cash flow originations that SLRC holds get to? Because they've been fairly small over the last several quarters, and then prior to COVID, I understand you guys were trying to get out of certain areas and get out of some more sub debt, but now that you guys are seeing that as an area that you guys want to be growing. What can those quarterly origination numbers and the cash flow lending that SLRC specifically holds, what do you think that can get to on a quarterly basis or sort of like an annual basis? Because I know quarter-to-quarter can be lumpy.

Look, again, to your point, it can be lumpy. It's hard to predict repays. Our average hold will go up because the facilities that we're doing are going up. If we do $100 million on our facility, the hold size for SLRC is probably around $22 million. If we do a $200-million facility, it's closer to $50 million. We don't put any constraints or budgets in place on the cash flow originating team. With $740 million dry powder, we'll take whatever opportunities we see that make sense.

So it's really a hard question to answer because we have all these different verticals. We don't sit here and provide budgets and guidelines for each vertical. It's more like, show us -- show the team what the opportunity is and we'll invest in the best risk quarter we can see.

And I think one other point that's worth noting, right, is as you know, our team is agnostic. They're outsourcing from the sponsor community loans. They may go to a particular issuer that's owned by a sponsor, where we think the best solution is an asset-based solution. Increasingly, we're finding PE firms that are in health care migrating into earlier-stage life science businesses that historically were dominated by venture capital firms. So for us, we don't look at it, as Michael mentioned, in terms of how do we grow the cash flow book versus the ABL book versus the life sciences. They're all doing one thing. We lend to middle-market U.S. corporates.

And then what we do is our origination team is well versed across these strategies. The underwriting expertise is definitely specialized within those verticals, but the sourcing network is broad-based. And our head of originations is out there with his team offering all of our products. And it may be owned by a sponsor, it may be owned by a venture capitalist, it may be owned by an entrepreneur, but we don't segment our business that way. We are just looking at the best risk-adjusted return for a given borrower. So it's a different strategy. It obviously has helped us on the risk mitigation side by having multiple ways to underwrite risk for U.S. corporate borrowers.

Yes, and I totally understand that. That's kind of one approach. The reason I was focusing on the cash flow is that seems like an area that was deemphasized in the past and now you guys are starting to emphasize that more given where we are on the economic cycle. So yes, I appreciate the discussion today. That's all from me.

The next question comes from the line of Robert Dodd with Raymond James.

Just kind of focusing on that pipeline outlook again, I mean, obviously, the cash flow and asset-backed, you both -- you characterized both as robust. For the cash flow, along with, obviously, a health care fund, it sounds like health care may be a good chunk of that robust activity going forward. Obviously, on the asset-based side, health care that (inaudible) used to be, I think, larger; it's been shrinking. You're pointing that maybe retail is where the asset-backed could grow in the near future. I mean has there been any shift in the market away from -- at the margin, away from asset-backed health care towards cash flow health care? And is that kind of dynamic going on? I mean, it would go to why you raised a fund for health care, but is there a dynamic shift there in the market right now?

No, actually, this -- just to clarify, we do -- we are active in health care asset-backed lending, both receivables, back financing, which is over at SUNS, our sister BDC, through our health care ABL segment as well as equipment finance in the health care sector through Kingsbridge. But the asset-based group, I know we have a number of them, but the asset-based groups here at SLRC really is --health care is one sector. They don't do much in. They kind of source those for the rest of the platform. They have always been very focused on retail. And because you have inventory finished goods, very liquid collateral, which is their key underwriting thesis, is what is liquidation value and then how liquid is it if we need to sell the assets in order to get repaid? That's rarely the case, but that is the underwriting thesis.

So retail has been going back to their roots 20-plus years ago, how they got started. And it's been not the only, but always a core segment of their business. And it's been increasingly active coming through COVID, as you can imagine, coupled with -- between lockdowns as well as online headwinds as businesses, retailers figure out how to survive in this less brick-and-mortar environment. So they've been very active there, and that's been pretty consistent.

Got it. Got it. Thank you. And then looking at the other 2, obviously, equipment and Kingsbridge, which you said, on the one side, origination is steady or looking to grow but didn't use "robust," and that's not a word you use very often anyway. But can you give us any color on that? I mean, obviously, we know there are supply chain issues out there when it comes to equipment. Good luck trying to buy a car right now, et cetera. I mean how -- is the -- what sounds to be relatively more moderate expectations for that -- those 2 segments in the near term, is that supply chain related or -- sorry, go ahead.

Yes. No, that's a good question. So just to clarify, equipment finance segment is really mission-critical equipment for small borrowers. And corporate leasing, Kingsbridge, is equipment for larger investment-grade borrowers. The -- both segments have, to your point, been affected by supply chain disruptions. So they're getting orders, but again, our fundings don't occur until the equipment is delivered, and those have been pushed off in some cases till next year. So good pipeline, winning business, but not funding it because the supply chain has delayed those deliveries.

Stepping back from that, what hopefully is a timing issue and will correct itself over time here, stepping back, both of those segments are not sponsor-driven, M&A-driven acquisitions. This is clearly internal borrowers sitting down and thinking out what is their CapEx need? And do they want to buy or lease? And those are smaller transactions and are -- lead itself to kind of a steady drip of growth rather than huge volumes quarter-to-quarter. So that's why our comments are tempered in terms of their growth, not that they're not growing, but the nature of the asset class is different from the M&A-driven asset classes such as cash flow and ABL.

Understood. Understood. So on those 2 areas, maybe taking the robust word out of it, what kind of contrast would you draw between orders right now -- to your point, right, the orders and delivery are different things. But deliveries may be moderated near-term in the supply chain, but how would you qualitatively describe kind of the pipeline outlook, like the interest level coming in there, even if the equipment isn't available yet?

Strong. I would say strong. People are looking to deploy capital coming out of COVID and are -- obviously need equipment to fund their growth at the business level. So it's strong. But the only other thing I would just say real quick on that -- those 2 segments is these are monthly amortization payments asset classes. So you always have a steady -- slow but steady headwind of amortization of those loans. So unlike cash flow, where there's very little amortization until the deal is repaid, here, you always have a steady drip of growth and a steady drip of repayments. That's the nature of corporate leasing.

The next question comes from the line of Mickey Schleien with Ladenburg.

Michael and Bruce, I just want to follow up. I don't want to beat a dead horse, but on the cash flow lending segment, I appreciate that you're excited about the pipeline, but everything I'm hearing is that terms in general are, if not at least at pre-COVID levels, probably even tighter than pre-COVID levels. So is there something about the Solar platform that's providing you certain opportunities in cash flow lending that are more attractive today as opposed to what was available in a very dislocated market 6 or 9 months ago?

So I'll let Bruce comment on kind of the (inaudible) in the current market. But just to step back, Mickey. So we as a team sat down last year around this time and said, yes, we see spreads widening out and terms a little better. But the big thing that was still missing in cash flow loans back then was there was no call protection. And so we were faced with really asymmetrical risk-reward. If we were right, and the market did pick up and did well, then those loans that were put on at attractive spreads would be called out the minute the markets tightened, which is what happened. Loans that were done last summer at "widening spreads" were taken out in the first and second quarter this past year because spreads tightened.

So we were faced with the choice of, yes, we could put some money to work, make money for 6 months if we're right. But if we were wrong and the market did not recover and COVID continued to be as bad as it was, then we would have really regretted making those loans and we'd be underwater. And so we chose not to be aggressive in the face of being able to make money for 6 months versus potentially losing money.

That's changed. We can see light at the end of the tunnel. We see it -- we've seen it for a few months now. And so that's why, from our perspective, our activity has picked up dramatically. Yes, terms are still not ideal, but we are getting covenants in the things we're doing. We're still incredibly picky. We're not looking to put out $1 billion a quarter. We are focused on industries and sponsors that are willing to accept having some structure in the transactions. So they tend to be more complicated situations, more complicated industries, companies that are kind of evolutionary, meaning that they're acquisitive and are growing and where the owners want lender partners who will grow with them and be flexible.

Yes, I think just to add to that for a moment, Mickey, I guess maybe the best analogy is you look at our life science business; as you know, we are only really funding the late-stage life science companies that are either through Phase III and in commercialization or close to it. There's a whole other business in life science lending earlier stage -- preclinical, Phase I, the drug royalties. There's a lot of ways to play life science investing. But our niche is the late stage where we feel it is less risky, and we still can get an attractive return for our capital.

I think as we approach cash flow, it's very similar. To Michael's point, we play within a niche within cash flow. We are not broad-based cash flow lenders. We're not going to play the economic recovery. We're not going to go into building sectors, anything cyclical. We have 4 industries -- business services, health care, financial services, recurring software. That is 90% of SLRC's cash flow portfolio. So we're very niche within cash flow. And not surprisingly, given our conservative underwriting posture, these are sectors that are high free cash flowing and are very resilient through cycles, and were resilient last year. So if you think about it, given the resiliency of those sectors -- it's part of why our portfolio performed so well last year -- is that they're now attracting equity because people see these as great businesses that now are poised for growth, a lot of tuck-in acquisitions, both in health care as well as we're seeing in insurance brokerage, for example. And so they're attracting new equity capital, which wants credit capital alongside that to fund it. And so that's really what's driving it.

To Michael's point, the terms -- and your point, Mickey -- the terms are no better. But we do get covenants. These are complicated structures. There's a little bit of a complexity premium. There's a little less competition because you actually need industry expertise. The sponsor is less focused on the last turn of leverage or the last 50 bps of price reduction and more focused on having people that understand the industry, the borrower, and can grow with them. These businesses that $100 million of EBITDA can go to the BSL market, as you know, but yet they choose to go to the private market. Why? Because they want certainty of execution and knowledge of the company and the industry from their borrowers.

And so that's really what is driving our ability to grow cash flow right now, is that combination of the industries have proven themselves to be very resilient, they're attracting a lot of private equity, and they're looking for lenders with expertise.

I appreciate that, Bruce. So if I'm understanding correctly, just to make sure we're on the same page, terms in terms of leverage and spreads may be tight at pre-COVID levels, but it's the documents and the covenants that are better today than they were, let's say, a year or 2 ago, and that is what's attracting you within the niches that you operate in.

I would say the fundamentals of the businesses are more proven and attracting more capital, which drives activity. To your point, we've always had some covenants in these sectors. These are just very active sectors coming out of COVID. And on the margin, you get a little bit better price -- never enough, but our strategy is to underwrite the risk in the fundamentals and then charge what we can, as much as we can. But we get to barbell that with our specialty finance verticals at SLRC that are higher-yielding and blend out to that 10%. So whether a cash flow loan is at 7% or 7.25% or 7.5%, sure, 7.5% is better. But it's not going to drive our portfolio yield on balance because of the weightings of our portfolio to specialty finance alongside the cash flow. But yes, the terms are better, but the fundamentals are strong and the activity is high.

It's also important to keep in mind that because we are -- our liabilities are so much funded today by our fixed rate investment-grade paper, all our incremental borrowings for new loans are coming from our bank facility. Given where LIBOR is today and what our use fee is, our net cost on additional fundings is 1.75%. And so when we're putting on these loans at decent spreads, it's significantly accretive to earnings for us.

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

Just to follow on with the dialogue just then with Mickey, Michael, I think you just outlined that issuers are looking for lending partners that are willing to grow with them and be flexible. Isn't that really sort of the opposite of you guys? I don't say that in a negative way. Obviously, we want you to be credit-disciplined, principal-disciplined, but tying this all together with the hopeful sustainability of the growth of your lending book, it feels like you're only willing to engage in the market for a pretty short window of the credit cycle, which is right now, we're on the rebound post-COVID. Presumably, if things continue, in 6 months, you're not going to like the market. So how do you sort of contend with -- or do you view yourself as someone sponsors view as a lending partner that's always there, given that, for example, you were not over the past year when perhaps they needed you most?

Yes. So that's a great question. But just to get a little bit more granular, we are always there for sponsors in our sectors that we lend into. So if we're in health care, Finian, we're dealing with the top-tier health care PE firms. We are there through thick and thin with them. And we get our diversification by investing across their portfolio companies rather than by being with 50 different sponsors who will be with 10 phenomenal health care sponsors that never lose money for the equity, which is probably a good place to be as a lender.

So we are incredibly consistent, but we're consistent within our core competencies. We're not, to your point, going to try to be the one-off lender on a business that is, again, perhaps it's playing the recovery. We stay away from that. We stay away from capital-intensive businesses. We don't do retail other than on an ABL basis. So we spend time with sponsors who are active in the sectors that we're comfortable with, and they tend to be very resilient through the cycle. So we're not in and out. To your question, it's more about what is the level of activity in that -- in those core sectors? And then obviously, we have the benefit of having other segments beyond cash flow to drive the portfolio growth.

Okay. That's helpful. And then just a small follow-up on the pipeline. You seemed pretty optimistic about the pipeline, which would tell us that it's probably very real and right in front of you, presumably. Can you give us any color on what the spread or yield looks like on your pipeline right in front of you?

Yes. It's consistent with the existing portfolio. We haven't really -- I mean, compression feels like it's kind of floored for the moment. Every time I say that we see more over the last few years. But at the moment, it's pretty consistent with what we're seeing across our existing portfolio.

(Operator Instructions)

The next question comes from the line of Bryce Rowe with Hovde.

Just one quick follow-up here. A lot of discussion about the left side of the balance sheet; just wanted to ask about the right side. You guys have a pretty good chunk of your liability structure tied up in fixed rate unsecured notes, as you noted, Michael. You've got some coming due next year. Just curious kind of what the appetite is to maintain that level or percentage of unsecured notes? And would you be willing to maybe take the revolver higher and reduce the level of unsecured from where it is now?

I think we'd like to take the level of revolver higher. But given that we're growing, we'd also like to refinance fixed rate notes at more attractive terms and bring down our cost of capital that way as well. So you should expect that our cost of capital hopefully comes down between usage of the revolver and terming out some of the notes that come due next year.

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

No closing remarks at this time, but thank you for your time, and we look forward to speaking to those of you who are also engaged in SUNS in 6 minutes. Thanks. Bye-bye.

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