SLR Investment Corp (SLRC) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Solar Capital Earnings call. (Operator Instructions) Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Michael Gross, Chairman and Co-CEO. Please go ahead, sir.

Thank you very much, and good morning. Welcome to Solar Capital Limited's earnings call for the fiscal year ended December 31, 2020. As we discuss on this call, last night, we announced a rebranding of the Solar Capital Partners platform to SLR. Effective today, with SLRC changed its name to SLR Investment Corp., SLRC Advisor changed its name to SLR Capital Partners, the company, ticker will remain SLRC.

I'm joined here today by Bruce Spohler, our Co-Chief Executive Officer; and Rich Peteka, our Chief Financial Officer. Rich, before we begin, could you please start off by covering the webcast and forward-looking statements?

Of course. Thank you, 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 performance 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, as 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 return the call back to our Chairman and Co-Chief Executive Officer, Michael Gross.

Thank you very much, Rich. Good morning, everyone, and thank you for joining us today. A year ago when we reported our fourth quarter and full year results 2019, none of us could imagine that we are on the eve of a global pandemic that would result in a tragic loss of so many lives, a severe economic contraction and a complete disruption to our daily lives and routine business and social interactions. In spite of an extraordinarily challenging year that negatively impacted the functioning of literally every government, business and community organization across our country, SLRC performed well, reflecting our long-standing disciplined approach to managing the company's assets and liabilities.

We are grateful to our employees, clients, lenders and service providers for their tireless efforts despite the stress and personal hardship this pandemic has caused. At December 31, 2020, 100% of our portfolio is performing. The credit quality supports our investment thesis that asset-based loans in niche markets and first lien cash flow loans to upper middle market companies operating primarily in noncyclical segments provide meaningful downside protection during challenging economic periods.

Our portfolio company's resilient business models and assets and liquidity have enabled them to successfully weather the economic crisis. At December 31, 2020, our net asset value per share was $20.16, up from $20.14 at the end of the third quarter. Importantly, we anticipate that our existing investments will ultimately deliver their underwritten returns.

As long-term investors know, we embarked on an initiative 8 years ago with the acquisition of Crystal Financial to broaden and diversify our investment capabilities via niche ABL strategies that are complementary to our cash flow lending business. In Q4, we furthered the strategy through the acquisition of Kingsbridge Holdings, a leading independent lessor of essential use equipment to a diverse set of primarily investment-grade customers. During our 2-year loan investment in Kingsbridge, we gained a deeper understanding of the business and developed a strong relationship with its successful management team. Kingsbridge expands our direct origination capabilities and provides differentiated sources of growth for the company. With the acquisition of Kingsbridge, we are truly a diversified commercial finance business.

During the fourth quarter 2020, SLRC's comprehensive portfolio grew to just over $2 billion, up 37% from September 30, driven primarily by the acquisition of Kingsbridge. At December 31, over 99% of our comprehensive investment portfolio at fair value was invested in senior secured loans. And approximately 86% of the total fair value consisted of loans in our specialty finance verticals. These businesses have historically exhibited low default and loss rates throughout business cycles. Notably, these specialty finance teams have each managed through multiple cycles of a career spanning 20 to 30 years.

During 2020, 76% of the company's gross investment income was generated from our commercial finance businesses. Investment income in Q4 2020 was up approximately 9% compared to the third quarter given the income from our investment, Kingsbridge, which closed in early November.

In the fourth quarter, SLRC produced $0.35 per share of net investment income, up $0.01 per share from the third quarter. We have a clearly defined path for SLRC to generate pre-COVID levels of NII over the next few quarters as we approach our target leverage. Importantly, we are confident the company's earnings power continues to reflect the benefits of SLRC's multi-strategy commercial finance platform that combines cash flow and our specialty finance businesses.

We expect portfolio growth in 2021 from a growing pipeline of both senior secured cash flow as well as specialty finance investment opportunities. With the improving economic climate and stabilization of markets, M&A activity has picked up, and our investment pipeline is growing. Our diversified investment platform, spanning cash flow lending, ABL, equipment finance, corporate leasing, lender finance and life science venture lending positions SLRC as a solutions provider to borrowers with scale. We are fortunate to be in a unique position to allocate capital across our investment strategy to the most attractive risk-adjusted opportunities.

We have significant available capital to support the growth of our portfolio. At December 31, SLRC remained low levered at approximately 0.8x debt-to-equity relative to our target range of 0.9 to 1.25x. When including available liquidity at Crystal Financial, NEF Holdings and Kingsbridge, the company had over $730 million of available capital subject to borrowing base limits.

Finally, let me touch on the rationale and benefits of our platform rebranding, which was announced last night. Since our acquisition of Crystal Financial in 2012, we have focused on building a diversified commercial finance platform with multiple investment verticals that can provide our investors with exposure to private debt asset classes that carry attractive pricing and terms with strong protection in the form of covenants and collateral coverage. This initiative included the development of our lender and life science businesses and the acquisitions of Nations Equipment Finance and Kingsbridge. We will continue to expand our suite of lending strategies.

As a result of our success across the SLR platform, we have become a house of brands rather than a branded house. To fully reflect our unified platform and holistic approach to providing our borrower clients with financing solutions across the capital structure and our shareholders with attractive investments, we have rebranded Solar as SLR, with each of our entities changing its name to an extension of the SLR brand.

At this time, I'll turn the call over to Rich Peteka, our CFO, to take you through the Q4 financial highlights.

Thank you, Michael. SLR Investment Corp.'s net asset value at December 31, 2020, was $852.0 million or $20.16 per share compared to $851.1 million or $20.14 per share at September 30, 2020.

At December 31, 2020, SLRC's on-balance sheet investment portfolio had a fair market value of $1.53 billion in 105 portfolio companies across 25 industries compared to a fair market value of $1.35 billion in 105 portfolio companies across 26 industries at September 30, 2020.

At December 31, SLRC had $677 million of debt outstanding and a leverage ratio of 0.78x net debt to equity. When considering cash on hand and available capacity from the company's credit facilities, combined with available capital from our non-request credit facilities at Crystal, NEF and Kings Bridge, SLR Investment Corp. had more than $700 million to fund portfolio growth subject to borrowing base limits.

Moving to the P&L. For the 3 months ended December 31, 2020, gross investment income totaled $31.4 million versus $28.9 million for the 3 months ended September 30, 2020. Expenses totaled $16.5 million for the 3 months ended December 31, 2020. This compares to $14.6 million for the 3 months ended September 31 -- I'm sorry, September 30, 2020. Accordingly, the company's net investment income for the 3 months ended December 31, 2020, totaled $14.9 million, or $0.35 per average share compared to $14.3 million or $0.34 per average share for the 3 months ended September 30.

Below the line, the company had net realized and unrealized gains for the fourth quarter of 2020, totaling $3.4 million versus net realized and unrealized gains of $4.4 million for the third quarter of 2020. Ultimately, the company had a net increase in net assets resulting from operations of $18.3 million or $0.43 per average share for the 3 months ended December 31, 2020. This compares to a net increase of $18.6 million, or $0.44 per average share for the 3 months ended September 30.

In addition, post year-end, SLRC's investment-grade corporate rating was affirmed by Fitch Ratings, which is further testimony to SLRC's conservative investment in management philosophies and strong underwriting track record. The investment-grade ratings from both Moody's and Fitch provide important flexibility and efficiency to manage the company's growing balance sheet.

Finally, our Board of Directors recently declared a Q1 2021 distribution of $0.41 per share payable on April 2, 2021, to shareholders of record on March 18, 2021.

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

Thank you, Rich. Good morning, everybody. First and foremost, SLRC's portfolio is 100% performing and has shown remarkable durability throughout the economic slowdown and the current stages of recovery.

Our performance is a tremendous complement to the financial sponsors and portfolio of companies that we have invested in. In addition, SLRC's performance supports our thesis of minimizing the risk of loss by investing at the top of the capital structure in first lien cash flow loans to noncyclical industries and allocating a significant proportion of our exposure to collateralized loans through our specialty finance lending verticals.

At year-end, the weighted average investment risk rating of our portfolio was under 2 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. As a further indication of the resiliency of our investments, 100% of the portfolio was performing at year-end. And on watch list, was less than 3% of the entire portfolio which had peaked at 7.5% back in the second quarter of 2020.

As Michael mentioned, our comprehensive portfolio grew 37% in the fourth quarter, driven largely by the acquisition of Kingsbridge. At year-end, our portfolio was just over $2 billion and was highly diversified, encompassing 600 distinct issuers across 80 industries. Our largest industry exposures were health care providers and services, diversified financials, pharmaceuticals and retail ABL loans.

The average investment per issuer was just over $3 million or 0.2%. At year-end, over 99% of the portfolio consisted of senior secured loans. The senior secured loan portfolio was comprised of approximately 94% first lien and 5% second lien loans. Of the second lien loans, only 2% were cash flow with the remaining being asset-based second lien loans.

At year-end, our weighted average asset level yield was 10% compared to 10.1% the prior quarter. By focusing on our niche commercial finance verticals as well as cash flow lending, we have been able to maintain asset-level yields close to 10% despite the decrease in LIBOR, and the continued spread compression in the marketplace.

Notably, we've been able to maintain this yield of 10% while actively reducing our exposure to second lien cash flow investments. Originations for 2020 totaled just under $1 billion and repayments were $680 million, resulting in net portfolio growth of approximately $300 million. Portfolio growth was heavily weighted towards the fourth quarter, coinciding with when the markets reopened as well as the acquisition of Kingsbridge.

Now let me provide an update on each of our investment verticals. At year-end, our sponsor cash flow portfolio was just over $280 million or approximately 14% of the total portfolio was invested across 16 issuers with an average investment of just under $20 million. These companies had a weighted average EBITDA of over $50 million, which highlights our commitment to finance upper mid-market businesses, which we believe are better positioned to withstand the downturn.

During last year, we originated commitments of over $65 million of first lien cash flow loans and experienced repayments of $225 million. Our cash flow investments came from a mixture of delayed draws and incremental investments in existing credits. Additionally, during the fourth quarter, we committed to unfunded acquisition lines that we expect will provide a boost to fundings in our portfolio during this year.

Of note, our second lien cash flow loan exposure was further reduced with the repayment of our loan to Bishop Lifting. We earned over a 10% IRR on this investment.

Across the rest of our portfolio, we're continuing to see healthy operating performance. Substantially, all of our cash flow companies are outperforming their post-COVID revised budgets as a rebound in revenues as well as cost cuts have had a positive impact on their financial performance. We view the majority of our portfolio of companies as providing essential services in noncyclical sectors.

During the fourth quarter, none of the borrowers in this portfolio experienced defaults. The weighted average yield of the cash flow portfolio was 8.7%, up from 8.5% in the prior quarter.

Now let me turn to our ABL business. As a reminder, this vertical is a combination of senior secured loans at Crystal Financial as well as senior secured loans originated directly on to our balance sheet. At year-end, the portfolio totaled approximately $530 million, representing 26% of our total portfolio. It was invested in 33 borrowers with an average loan size of $17 million. The weighted average asset level yield was 10.7% compared to 11% the prior quarter.

During last year, we funded approximately $225 million of new ABL investments and had repayments of just over $300 million. During the fourth quarter, we had one of our strongest periods with the ABL team with originations of over $125 million and repayments of just under $100 million. This division paid SLRC a cash dividend for 2020 of $24 million, equating to an 8.5% yield on cost.

Now let me turn to Kingsbridge. As a reminder, in November, we invested $136 million of equity and $80 million of debt to acquire 87.5% of Kingsbridge, in partnership with the management team. Kingsbridge is an Illinois-based leading independent lessor of essential-use equipment to primarily investment-grade customers. We have the benefit of being a lender to Kingsbridge over the prior 2 years, giving us unique insight into their business, underwriting and credit disciplines and strength of the management team.

The acquisition highlights the benefits of our lender finance business, which gives our portfolio team an opportunity to get to know management and their niche businesses through being a lender, then potentially becoming an equity investor. Kingsbridge was founded in 2006 by the current management team and has underwritten over $1 billion of leases since inception.

At year-end, Kingsbridge highly diversified Portfolio totaled approximately $570 million, with an average funded exposure of approximately $1.2 million per obligor and was 100% performing. Over 70% of their portfolio is invested in assets leased by investment-grade borrowers.

Importantly, Kingsbridge's strong track record has continued through the current health and economic crisis. This acquisition expands our direct origination capabilities, provides differentiated sources of growth for SLRC and is our first foray into lending to investment-grade borrowers. We view this transaction as an investment in a permanent asset that is not subject to a 3-year average life of a typical cash flow investment. And it will have the benefit of enhancing the duration of the overall Solar portfolio -- I'm sorry, SLRC.

During the fourth quarter, Kingsbridge paid a dividend of just under $2 million for the partial ownership period, including interest on our $80 million loan. Gross income generated by Kingsbridge during the fourth quarter was $5.4 million. We continue to expect that our debt and equity investments in Kingsbridge will generate approximately $20 million of gross income in 2021 and produce a blended cash yield of approximately 10%, consistent with our other specialty finance assets. While still early, the integration of Kingsbridge is proceeding exceptionally well.

Now let me turn to equipment finance. As a reminder, included in the equipment finance business, our transactions held directly on our balance sheet as well as those held in our subsidiary, NEF Holdings. In 2020, our equipment finance strategy invested over $50 million and had repayments of approximately $120 million. At year-end, portfolio totaled $318 million, was invested across 105 borrowers with an average issuer exposure of approximately $3 million. This asset class represents just over 15% of our total portfolio. 100% of the equipment finance investments are first lien loans and at year-end, carried -- this portfolio carried a weighted average asset level yield of just over 10%.

In 2020, investment income from the equipment finance portfolio totaled just over $18 million. Last year was an unprecedented year, with the pandemic creating the most challenging investment environment in this team's history. However, they have had 40 years of experience in this business. While the majority of their borrowers received government assistance, the prolonged shutdown took a toll, particularly on transportation-related leases to the leisure, educational and entertainment sectors.

Over the last several quarters, we have reduced this portfolio. As we enter 2021, we believe that the equipment finance team has made the most of a challenging situation and are poised to grow this year.

Now let me turn to the Life Science segment. At year-end, the portfolio totaled just over $325 million. It consisted of 16 borrowers with an average investment of approximately $20 million. The life science portfolio represented 16% of the total portfolio and close to 30% of the gross investment income. During last year, the team originated approximately $60 million of new investments and had repayments of just under $30 million. The uncertainties and market impact of the pandemic led many life science borrowers to work closely with existing lenders while focusing on reducing costs and surviving on lower cash budgets. This led to fewer repayments last year than we typically have seen, resulting in greater duration for our life science portfolio.

We had one exit in the fourth quarter, which had a weighted average realized IRR of 13%. The weighted average yield on the existing portfolio is 9.5%. However, that excludes any success fees and warrants that typically accompany these investments.

In conclusion, SLRC's portfolio activity last year represents a continuation of the investment themes that have been driving our investments over the last few years. Reducing our second lien cash flow loan exposure, focusing on new origination activity in first lien loans in defensive sectors, and increasing our investments in specialty finance assets, we are able to get tight structures and attractive risk-adjusted returns.

Across all of our verticals, including our sponsor cash flow lending business, we are seeing a larger volume of higher quality investment opportunities than we have seen in a number of quarters. The uptick is certainly reflective of the economic rebound and increased middle market sponsor activity. In addition, we're seeing a larger pipeline of opportunities from the business development efforts of our origination professionals across the platform.

The current market environment is attractive, and provides a great opportunity for us to grow our portfolio in 2021. Now let me turn the call back to Michael.

Thank you, Bruce. In closing, we're pleased with how our portfolio weathered 2020, and we're confident in our ability to continue to grow our portfolio and net investment income over the coming quarters. We are starting the new year with a strong portfolio foundation that is 100% performing and has allocated over 86% of specialty finance assets that carry attractive pricing and terms with strong protection in the form of covenants and collateral coverage.

The addition of Kingsbridge to SLRC further expands our origination engines. With over $700 million of available capital and low leverage, we believe SLRC is positioned to originate attractive new investments. Our patience and willingness remain underinvested during last year, provides us with the foundation to grow. With over $7.5 billion of investable capital across the platform, SLR's scale has enabled SLRC to participate in the higher volume of large transactions which we believe will accelerate the growth of our portfolio in 2021.

We believe that the improved investment opportunity set will persist for a while as companies require financing solutions for liquidity, M&A and growth initiatives. Sponsor activities on the upswing and the PE industry is armed with significant dry powder. SLRC is in a great position to capitalize on this opportunity, and we fully expect growth in our sponsor finance cash flow business as well as across our specialty finance verticals. We look forward to continuing to execute our commercial finance strategy now under one unified brand, which will enable us to further enhance our collaborative origination efforts.

We go to market with a comprehensive solution set across the capital structure that can be customized to the needs of each borrower and offer certainty and scale of capital in each investment vertical.

2020 was a challenging year for all of us. We hope that all of you are in good health. We would like to thank you for your time today and your support of our company. At 11:00 this morning, we'll be hosting an earnings call for the fourth quarter and 2020 results of SLR Senior Investment Corp., or SUNS, which was previously named Solar Senior Capital. 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 the value proposition and SLRC's deal flow.

We appreciate your time this morning. Operator, would you please open the line for questions at this time.

(Operator Instructions) Your first question comes from the line of Paul Johnson with KBW.

Congratulations on the rebranding. I guess, this marks the exit of -- your exit from the solar business. I had to say that. But anyway, I was hoping you could maybe help me understand or help us understand the -- just the fundamentals behind the driver of -- what's the demand for the type of financing that comes from your Kingsbridge business. I know -- I just imagine, that's obviously a very different type of borrower from some of your other verticals. So is there any type of maybe common economic driver for the demand of leasing those assets versus owning?

Yes. This is Bruce. Thanks for the question. It's really just the purchasing agents sitting at these large investment-grade companies. As you know, we cover everyone from a Cardinal Health to a Bank of America, and they're making buy versus lease decisions just as you may with your car. And the economic climate might drive that. We -- as Michael mentioned, these are longer-duration leases at the opening contract. And then very often, what we find, particularly in an environment like this with uncertainty is they may say, we're going to put off purchasing new equipment. Let's just extend the existing lease that we have with Kingsbridge.

So it's really driven by the economic environment and what's going on at the company in terms of how they want to optimize their CapEx dollars between purchases and leases.

Okay. That makes sense. And then you mentioned that it's an attractive environment today. Could you maybe just talk about what verticals you might see the most favorable risk-adjusted opportunities in the market for your portfolio today?

Yes. I think that from a high-level perspective, as you know, the life science business has consistently generated the best risk-adjusted returns. That's not just for us, that's just as an asset class. And in particular, our team, as you know, has never had a loss. So they still tend to get outsized returns. Having said that, all of our strategies across the platform and consistent with the marketplace, broadly, has felt spread compression and also the reduction of LIBOR.

So we have felt pressure on pricing across all of the strategies relative to their historic returns. But I think that we're actually -- and as we look at the portfolio of investment strategies that we have, we're finding that they all are seeing good opportunities for similar reasons coming out of -- what we hope is coming out of the pandemic here and the economic recovery that we're experiencing is in front of us. And so companies, whether it's Kingsbridge to your prior question, where companies are looking to extend leases or enter into new leases, has been looking to figure out how best to deploy their capital into this economic recovery.

We're seeing the same thing in life science lending, activities picking up as you're coming out of so many businesses in this segment being tied up with COVID-related products. They're now shifting the focus back to other drugs and devices that were in process and need to be developed in addition to the COVID crisis. And you're then going to the same way as you go across the platform. Our ABL strategy had the best quarter in the fourth quarter in terms of originations. We still see a lot of need for capital against assets for companies that are in transition during this economic period, as companies are trying to transition and figure out what projected cash flows look like. They're borrowing more and more against assets, particularly in the retail sector where the team has had strong long-standing expertise.

And then in the cash flow market, we're seeing activity pick up there. As we mentioned, sponsors in sectors that have been resilient during the crisis that have proven themselves last year and have rebounded quickly are attracting additional private equity dollars, which needs lending dollars alongside that to leverage the equity investments. And so we're, as we mentioned, doing delayed draw undrawn acquisition facilities to fund add-on acquisitions. They don't get drawn always day 1, but tend to get drawn over 6, 9, 12 months to fund acquisition pipeline.

So there's no one segment. In summary, I would just say that we see opportunity in all of them and are obviously blessed and thrilled to have multiple strategies to take advantage of the changing economic climate.

Okay. It sounds very positive for the BDC. And then just one last small question. I realize it's a very small investment in your portfolio, but it's been there for a long time. I just have to ask why do you guys hold a -- it's a small, I guess, equity position, common equity position in B. Riley Financial?

That's a fair question. I think it's just sitting there. It's had a little upside and eventually, we'll exit this year.

And your next question comes from Mickey Schleien with Ladenburg.

Bruce and Michael, I wanted to follow-up with a question on the competitive landscape. We're sort of in this strange world where there's a lot of capital in the market chasing yield. And at the same time, we have the federal government already having provided a lot of support last year and looking to provide a lot more support this year, both to individuals and to businesses. Can you help us understand how that may impact the demand for loans and investments in all of your segments?

Sure. I'll take a first shot at that, Mickey. I think that it's a great question. It's a bit of a high-class problem to have your borrowers have, to your point, so much liquidity available to them. So in terms of the existing portfolio of companies, that obviously is a benefit. It's obviously part of why our portfolios have performed so well. I think as we look at the opportunity set, it does -- you do have to look at it sector by sector or strategy by strategy.

In general, the investment-grade companies that Kingsbridge is financing, really, are not benefiting from that. They are high-quality bars, and they're just going through their ordinary CapEx plans. So it doesn't really have an impact at Kingsbridge. It does have an impact at our equipment finance vertical. These are smaller businesses. As you know, where we're lending against a critical use equipment for those businesses. Many of them are not private equity owned, the vast majority. And so they are eligible. And so that has helped our portfolio, but it is definitely a bit of a headwind for growth.

Having said that, we consciously tried to downsize that portfolio and take it down from its peak of $400 million down to just under $320 million last year because that is a portfolio that can see some susceptibility to cyclicality. So we purposely shrunk it. The team is actively looking to grow with slightly higher quality borrowers that may benefit a little bit less from the government stimulus. So we see an opportunity there to grow. The budget that the team has put forth for this year is not quite back to the $400 million, but it's meaningfully above the $318 million it ended the year with.

So we do see an opportunity to grow, albeit will take a little bit of spread compression because we'll go to higher-quality borrowers there to stay away from the issue that you're raising. And I think in the ABL businesses, on the margin, it will help and create a headwind for that team. But again, that team has always been looking for companies in transition, not all of which have access to government's stimulus money. It has helped some of our portfolio there, but we do see good opportunities, particularly given some of the structural headwinds that the retail sector faces. And again, that's a strong suit for that team. Our portfolio churns quickly, but at the moment, roughly 1/3 of it is across retail ABL, where we have very liquid working capital assets.

So we still see good opportunity there. And clearly, in both lender -- life science and cash flow lending, whether these are venture capital or private equity owned businesses, they generally do not qualify for government stimulus to date, and we have seen increased activity in both segments.

That's -- I appreciate the detail, and that's really, really helpful. Bruce, it sounds like you're not very concerned about liquidity on your borrowers' balance sheets, given all the programs that have been in place and the ability of private equity to write checks. But that started about a year ago. Looking out into this year, do you have any concerns about borrower liquidity?

We don't because, particularly in our cash flow business, these businesses have, in many cases, because of the sectors we're lending to, health care, financial services, recurring software, we've seen real operating performance rebound as we got into really the summer, particularly in health care as people were able to get back into elective surgeries and other deferred health care visits, and definitely into Q4, where we actually saw businesses where we were getting repaid on our loans at par or better, we had seen 0 revenues earlier in the year as we were all locked down.

So for our segments, think about it, if you're the owner, you're not going to put good money after bad, but you're sure as heck going to support your quality investments. We have seen very little need for liquidity at our portfolio of companies. But sponsors are quick to put it up. And the same is true in our life science business. The VC community has been very supportive of those investments, if anything, paying down our loans to make sure that they have substantial liquidity because those are still burning cash as they get to commercial adoption.

I understand. Bruce, my last question is about the right-hand side of your balance sheet. You have a variety of unsecured notes. Some of them are due next year, and there's been tremendous demand for that kind of paper. Are you looking to refinance some of your unsecured debt and potentially also reduce the credit facility balance that you have outstanding?

I think we're constantly looking at our balance sheet, and we obviously recognize that the margin is really favorable. So it's something we keep looking at. And I think you should expect at some point during this year, we put in place refinancing for that and potentially adding to our unsecured debt stack. We're big fans of having unsecured debt on our balance sheet.

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

This is really just a maintenance question. Based upon your comments of Crystal and Kingsbridge, and you kind of control the toggle on the dividend that they pay. Am I right in thinking that the go-forward run rate of dividends should be somewhere between $9 million and $10 million a quarter taken together?

So let me just take those into components. I think that -- great question. Kingsbridge, obviously, early days, but we have been a lender for a few years now. Kingsbridge is a very steady-Eddie business. Dividend there should be relatively consistent. We've targeted kind of the $20 million number for this year. It is pretty evenly distributed throughout, although I would tell you, the fourth quarter is closer to 30%, 33% of the year's income, with quarters 1 through 3 being equally distributed. So I think that will be a rather predictable dividend.

As you know, historically, Crystal has had a little bit more volatility quarter-to-quarter because of the nature of their assets being short duration, high churn, generating either origination fees or prepayment fees. For example, in the fourth quarter, we distributed $6 million, although they had earned $8 million. So we try to smooth their dividend out at roughly that $6 million a quarter until we see significant growth or significant traction.

And Bruce, Casey, just one point of clarification. The $20 million a year that we expect out of Kingsbridge is a combination of the dividends and the interest income on the loan we have spent. So it's not just...

Right. That's what I was just going to say, $6.4 million of that is interest income when it comes from the loan.

Correct. Correct.

So you're kind of expecting there a $13.5 million dividend at the cadence that Bruce just suggested.

Correct. Yes.

Quarterly interest, yes.

Your next question comes from Robert Dodd with Raymond James.

Funnily enough, I had the same kind of questions. When I look at Crystal, obviously, I mean, the portfolio looks good. The lease reserves this year grew a lot in the fourth quarter, but I mean the book was down on the on-balance sheet book at Crystal, with about 23% year-over-year, which just obviously cutting -- trimming that dividend back from $7.5 million to kind of $6 million. What are your expectations, I guess, full growth of -- at the loan book at Crystal? Because obviously, if that can get back to where it was a year ago, we could obviously see the dividend increase. But if it stays here, yes, we might stay at $6 million. I mean, so it really goes to the expectations of how much that on balance sheet book can grow and drive net income or cash flow from ops or whatever we want to look at, at Crystal. But what's your optimism there?

So what I would say is -- and this goes across all the strategy, or most of the strategies. We've talked a lot over the last couple of years, Robert, how we've increased the scale of the platform. And that allows each of these strategies to co-invest with private pools of capital and basically, scale up their ability to go to market and take larger hold sizes across the platforms and then take their pro rata share on a diversified basis.

And so Crystal, for example, has been doing loans in the $75 million, $100 million size, bidding on things up to $150 million that they weren't going after a couple of years ago. Most of their book had an average loan size of $20 million to $30 million, $40 million at the high end. So what we're seeing is that, that is a driver for growth for them.

It's same with life science. You've seen that book grow. And leaving COVID aside, we were all on hold for a little bit. But same thing, average loan size at the life science business has also gone up. And importantly, at the cash flow business, where we're routinely taking down $100 million, $150 million in an investment across the platform, with Solar taking the lion's share of that.

But again, the scale has allowed them to speak for that size to the prospective borrowers. So I think that that's a dynamic that creates an opportunity for Crystal to grow its book. In addition, they put some excise -- I'm sorry, some extra on our balance sheet as well up at Solar. So we do have some deals where you see both on their balance sheet as well as on the parent company's balance sheet. So I think that's going to be the opportunity for Crystal to regrow, is to not only stick to their knitting on the 20s and 25s, but to do some of these larger deals that they've been active in, in the last couple of months.

I think you didn't have, but another opportunity. Rob, my -- Robert?

Sorry, my -- I smacked my headphones.

Robert, just one other point I would make is -- you didn't ask it, but I think there's also, as we get deeper into '21, an opportunity for NEF to increase its dividend as well. And so that's another potential driver on that NII growth.

Got it. I appreciate that. And just another kind of angle. I mean, one of your comments earlier in the Q&A, obviously, is there has been pressure felt on LIBOR and spreads which does, to a degree, make verticals, like life sciences, where you can get exit fees or other verticals where there's the potential for fee income, which can obviously offset, right? But if you can get a 13% IRR on a 9% yield, that's because of fees and other sources of income. So what other avenues are there with your various verticals to get that kind of yield enhancement in a spread compressed environment?

So let me answer that a couple of ways. One is, if you look at our different businesses, as you hit a nail on the head, life science really is not impacted by spread compression where LIBOR is. Neither is what used to be called Nations Equipment Leasing, because those are all fixed rate leases. Neither is Kingsbridge, which has really no relation to LIBOR. So a big chunk of our business today, truly, is not impacted by the concern you've raised.

Crystal does have that issue with LIBOR-based loans, but they -- there, we do make it up on fees as well. And because the duration tends to be 18 to 24 months and the fees get amortized over a quicker period, that's why the returns are consistently above 10%. So it's really the cash flow business that is the most impacted by what you're talking about. And there, it is difficult because the fees are limited to 1 to 2 points, and there's very rarely prepayment penalties on these floating rate loans.

And your next question comes from the line of Melissa Wedel with JPMorgan.

A couple of follow-ups. I think a lot of my questions have already been addressed. But I guess just to put a finer point on it, when you look at some of the cash flow loan opportunities that might result from higher M&A activity, how are you thinking about yields on new deals comparing to the sort of high 8%, 9-ish percent yield on the investments you currently have in the portfolio?

Yes. I think that it's a great question, Melissa. We're underwriting today -- again, these are generally going to be upper mid market, larger EBITDA businesses where our loan will be drawn to fund an acquisition, which takes EBITDA even larger. So we're looking at $75 million to $150 million EBITDA companies that are adding on to fund additional acquisitions. So the first equation for us, as you know, is always about the risk. We feel like we're seeing better risk in terms of the businesses that are looking for our capital right now.

I think from a spread perspective in a yield. We're targeting a minimum of 8%. As you know, these things get repaid early if they execute well. And so the early repayments of accelerating some fee income, so close to mid 8s. So a little bit of compression, but not material.

Okay. Got it. I appreciate that context. And you actually touched on my next follow-up, which was around repayment activity and sort of what you guys are expecting in terms of repayment environment, I guess, in the near term, but also throughout sort of the course of 2021.

So we're not expecting much in the near term. But I think thematically, we would expect some, as you get deeper into the economic recovery. I'm not sure if that's the late '21 or into '22. But clearly, as more and more companies rightsize their cash flow streams and the life science businesses get to market, you will start to see repays, I think, accelerate. But we don't see that in the near term.

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

This is actually Jordan Lawson calling in for Fin O'Shea. Most of my questions have been asked and answered. But I just wanted to look at maybe a portfolio company that's new to your balance sheet, at least this quarter, I see a basic fund was on balance sheet. I think this is also a loan that maybe Crystal will participated in. I was wondering if you could give us some color on the loan you gave there and, basically, how you're deciding between putting half or part of that loan on Solar's balance sheet versus carrying it to Crystal?

Yes. As I touched on, the Crystal balance sheet -- all of our balance sheet, stepping back, obviously, we're very focused on maintaining our diversification. Typically, we're in a 2% type of hold position. And so Crystal may take a loan on their balance sheet and have excess, either to some of our private funds, but first, up to Solar, the parent company. And so we'll take some of the excess, and still, on a consolidated basis, with what Crystal is holding, keep our whole level in that sort of 2%, 2.5% hold position for the consolidated Solar. It's generally balance sheet management, just from a diversification perspective. They have their own credit facility, which is -- again, has diversification requirements separate -- apart from what we have at our parent company.

Okay. Cool. That one was just interesting because it looks like it has an unfunded commitment there. So I didn't know what was into it. That's all from me today.

I would now like to turn the conference back over to Mr. Michael Gross, Co-CEO, for closing remarks.

We thank you for your time this morning and all of your insightful questions. And as always, we're more than willing to follow-up one-on-one, if there are more questions. And for those of you who are participating in what is now called SLR Senior Investment Corp. call, we'll talk to you in a couple of minutes. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.