SLR Investment Corp (SLRC) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Solar Capital 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, Michael Gross, Chairman and CEO. Thank you, and please go ahead.

Thank you very much, and good morning. Welcome to Solar Capital Ltd.'s earnings call for the quarter ended June 30, 2020. I'm joined here today by Bruce Spohler, our Co-CEO; and Richard Peteka, Solar Capital's Chief Financial Officer.

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

Of course. Thanks, Michael. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Limited and that any unauthorized broadcasts in any form are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replays of this call will be made available later today as disclosed in our earnings press release.

I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties, including the impact of COVID-19 and related changes in base interest rates and significant market volatility on our business, our portfolio companies and the global economy.

Additionally, past performance is not indicative of future results. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. Solar Capital Ltd. undertakes no duty to update any forward-looking statements unless required to do so by law.

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

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. Good morning, and thank you for joining us today. We hope this finds you and your family, friends and colleagues healthy and safe. Our thoughts continue to remain with all of our stakeholders, including the dedicated employees across Solar Capital and the company's investment adviser, Solar Capital Partners.

We would also like to express our gratitude to all the health care and other frontline and essential workers and our sincere condolences to those families who have lost loved ones.

Before turning to our second quarter results, I'd like to take a moment to reflect back on the initial months of this public health care and economic crisis, which have tested us as a nation and the global community.

(technical difficulty) Solar Capital and its borrowers, management teams and financial sponsors. On a human level, the collaboration and dedication of our employees and counterparty in support of our portfolio companies through a crisis that previously (technical difficulty) nothing short of breathtaking.

While investors, professionals and the sponsors and management teams (technical difficulty) multiple economic cycles, the added emotional toil of this health crisis has been the first for everyone.

Yet, despite the added stress associated with contagion itself, working from home and caring for young ones, suddenly homebound, our colleagues, internal and external, across our portfolio, are working tirelessly to ensure the potential soundness of our borrowers.

The quick constructive actions of our portfolio companies took at the beginning of this crisis to preserve liquidity and shore up their balance sheet are a testament to the high-quality of their management teams and sponsors. Their efforts coupled with employee dedication speak to the resilience of the human spirit.

In the year that's been dominated by negative news, we believe it's important to recognize we have collected teams (technical difficulty) and how that progress has positioned us to successfully weather the remainder of the storm.

Solar Capital's performance to the crisis thus far has supported our long-term investment thesis that asset-based loans in niche markets, the first lien capital to the upper middle-market companies provide meaningful downturn protection during challenging economic periods.

Solar Capital's primary objective is to consistently deliver income throughout the Solar Capital. So the Solar Capital portfolio is 100% performing at June 30, 2020.

Overall, our portfolio companies are proving to have resilient business models and access to liquidity that should enable them to successfully navigate this crisis.

Solar Capital's healthy portfolio is a result of our strategic efforts to expand its niche ABL verticals as well as our long-standing investment discipline centering the philosophy that we always invest as if we are late in the credit cycle.

Importantly, we remain patient and intentionally unlevered in order to preserve liquidity for a market dislocation when risk-adjusted returns are generally more attractive.

As a result of improving credit market technicals on the heels of massive fiscal and monetary policies as well as proactive steps taken by our management teams and sponsors, Solar Capital's June 30 fair value represents a 40% recovery of (technical difficulty).

The company reported net asset value of $20.11 per share at June 30, a 4.5% increase or $0.87 per share in net asset value quarter-over-quarter.

At June 30, 92% of our $1.6 billion comprehensive investment portfolio at fair value was comprised of first lien loans. Over 80% of that [total fair value consisted of loans] and the specialty finance strategies. These businesses have historically exhibited lower default and loss rates throughout business cycles compared to traditional capital lending. Importantly, the ABL, equipment finance and life science teams have each managed through multiple cycles of their career spending 20 to 35-plus years.

In the second quarter, Solar Capital originated investments of approximately $103 million, and we had $118 million of repayment across our (technical difficulty) investment strategies. Bruce will provide additional details for portfolio activity during the quarter.

Our sponsor-backed cash flow loan portfolio essentially stayed flat quarter-over-quarter. For many years of frothy current market conditions, we've espoused the expected benefit of maintaining adequate dry powder in the event of a market dislocation.

In spring when the U.S. initially went into lockdown, we expected financing opportunities to abound. However, the unprecedented level of government support created a sudden overheating of the market, translating into an underpricing of risk given uncertainties and the steep contraction of economic activity.

Simply put, prices did not adequately reflect the risk inherent in poorly structured loans to borrowers suddenly facing stress. Consistent with our conservative investment philosophy, we remain patient to avoid catching falling knives.

Additionally, (technical difficulty) time and capital to support their portfolio companies via negotiating amendments to existing facilities and contributing additional equity in the hopes to avoid dilution and ownership terms with rescue financing.

With a focus on existing portfolio companies, there was very light M&A activity during the quarter.

Our patients coupled with a flack of news activity resulted in modest ancillary cash flow investments during the quarter.

As the country had transitioned from a near universal quarantine to pockets of escalating COVID cases and the companies stopped business activity, we have seen investment opportunities set across our cash flow and ABL lines increase.

While many underwriting processes have been somewhat slowed by the limitations of the virtual business landscape, we expect to see our portfolio expand meaningfully as we head into the second half of the year.

As of now, lenders are cautious, and the new investment opportunities we're seeing carry higher expected returns and better structured protections, creating a more attractive environment to grow our income-earning portfolio.

That said, uncertainty and volatility will likely remain elevated for the foreseeable future. We believe remaining disciplined and maintaining a senior secured and a well-diversified portfolio across cash flow, asset base and specialty finance asset classes is as important as ever.

For the second quarter, Solar Capital's net investment income per share totaled $0.34. The decrease in net investment income quarter-over-quarter resulted from a combination of yield compression, lower fee income and a smaller income-producing portfolio.

Since year-end 2019, 1- and 3-month LIBOR declined by 160 and 161 basis points, respectively, triggering a number of LIBOR floors across our floating rate portfolio, and we experienced over $300 million of repayments to date.

We intend to grow our portfolio only when new investment opportunities meet our strict underwriting criteria, even if it means operating the portfolio at a size where the manager is not (technical difficulty) in the second quarter. We believe it's the right decision and is in the best interest of our long-term fellow shareholders.

Yesterday, our Board of Directors declared a $0.41 per share distribution payable in the third quarter. The net investment (technical difficulty) dividend is a direct result of the significantly and purposely under-levered and not due to the underperformance of our portfolio. We view this as a temporary condition that will continue for a few more quarters, but will not necessitate a dividend cut. We remain -- we will maintain our disciplined and patient investment approach during this period of economic uncertainty and remain confident for (technical difficulty) growing the investment income.

At quarter end, our leverage was just 0.59x net debt-to-equity. Our decision to run the business under-levered was founded in our conservative approach and believe that markets were (technical difficulty) for a period of time.

Only when this economic crisis has run its course, we'll be able to quantify the benefit to our shareholders of that conservatism. But we are confident that the credit quality of our current portfolio and our low leverage will translate into net asset value preservation, and ultimately, lead to higher net investment income.

As the economic recovery continues and markets stabilize, our investment pipeline has increased across our investment businesses, including an active pipeline of platform and portfolio acquisition opportunities in specialty finance.

We expect the next 12 to 18 months to present an abundance of compelling investment opportunities at higher expected returns and better structured protections and is an ideal time to grow both our specialty finance platform and increase our income-producing portfolio.

Our diversified investment platform positions Solar Capital as a solutions provider to borrowers. It also enables us to originate attractive risk that is unavailable to firms, which are only positioned to underwrite cash flow loans.

We expect portfolio growth in the coming quarters to come with higher-yielding assets with more friendly lender terms, which will ultimately drive net investment income higher in future quarters.

Finally, our investment adviser's alignment of interest with the company's stakeholders has been one of our guiding principles. Through significant SLRC share purchases since inception and including recent purchases by all of our executive officers, our senior management and investment team now own approximately 7% of our outstanding common stock. Additionally, all members of the senior investment team have a significant percentage of their annual compensation invested in our stock.

We believe our management and investment team's recent share purchase in the face of this crisis demonstrates our confidence in the company's defensive portfolio, stable funding, strong liquidity and a favorable position to make new investments.

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

Thank you, Michael. Solar Capital Ltd.'s net asset value at June 30, 2020, was $849.8 million or $20.11 per share compared to $813.1 million or $19.24 per share at March 31, 2020.

At June 30, 2020, Solar Capital's on-balance sheet investment portfolio had a fair market value of $1.36 billion in 108 portfolio companies across 27 industries compared to a fair market value of $1.28 billion in 105 portfolio companies across 26 industries as of March 31, 2020.

At June 30, the company had nothing drawn on its $545 million and $50 million revolving credit facilities and had $18 million of cash on hand. The company has full access to this undrawn capital.

As of June 30, 2020, Solar Capital also had $446 million of unsecured notes. Ultimately, the marginal cost of incremental debt from our revolving credit facilities is currently less than 200 basis points, which should enhance operating leverage as we grow our income-producing portfolio and move towards our target leverage.

As a reminder, the company has no near-term debt maturities and is investment-grade rated, which should provide us with continued access to unsecured debt markets.

Since inception, Solar Capital has taken a conservative approach to leverage and has consistently operated well below its stated target range.

On June 30, 2020, the company's net debt-to-equity ratio, as Michael noted, was 0.59x net debt-to-equity. Solar Capital's liquidity, therefore, remains strong, with over $800 million of available capital, which includes the nonrecourse credit facilities of Crystal and NEF Holdings, subject to their borrowing base availability. So as of June 30, 2020, Solar Capital had limited unfunded revolver commitments of only $17 million that could be fully drawn by borrowers.

Ultimately, moving to the P&L. For the 3 months ended June 30, 2020, gross investment income totaled $28.6 million versus $32.9 million for the 3 months ended March 31. Expenses totaled $14.4 million for the 3 months ended June 30, 2020. This compares to $17.1 million for the 3 months ended March 31, 2020. Accordingly, the company's net investment income for the 3 months ended June 30, 2020, totaled $14.2 million or $0.34 per average share compared to $15.9 million or $0.38 per average share for the 3 months ended March 31, 2020.

Below the line, the company had net realized and unrealized gains for the second quarter totaling $39.8 million versus net realized and unrealized losses of $91.3 million for the first quarter 2020.

Ultimately, the company had a net increase in net assets resulting from operations of $54 million or $1.28 per average share for the 3 months ended June 30, 2020. This compared to the net increase of $75.5 million or $1.79 per share -- average share for the 3 months ended March 31, 2020.

Now with that, I turn the call over to Bruce Spohler for a portfolio update.

Thank you, Rich. First and foremost, we are extremely pleased with how well our portfolio has weathered this crisis so far. This supports our underwriting thesis of minimizing the risk of loss by investing at the top of the capital structure and cash flow loans to noncyclical industries and allocating a majority of our exposure to collateralize loans through our specialty finance lending verticals.

At quarter end, just under 20% of our comprehensive investment portfolio was invested in senior secured cash flow loans, with the remaining 80% invested in our senior secured, asset-based, equipment finance and life science lending strategies.

The weighted average investment risk rating of Solar's portfolio was 1.9 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk.

100% of Solar's portfolio on a cost and fair value basis was performing at quarter end.

At June 30, our $1.6 billion investment portfolio, it's highly diversified, encompassing over 180 borrowers across 80 industries. Our largest industry exposures are health care, pharmaceuticals and diversified financial services, all defensive sectors. The average investment was $8.6 million or 0.5% of the portfolio.

At June 30, 99% of the portfolio comprised of senior secured loans with 92% in first lien and just over 7% in second lien secured loans. Of the 7% second lien investments, approximately half or 4% of our total portfolio were invested in cash flow and the remaining were invested in asset-based second lien loans subject to borrowing bases.

We believe that our portfolio of predominantly first lien loans, which carry less risk than second lien and subordinated investments, will result in greater capital preservation during this crisis.

At quarter end, our weighted average asset level yield was 9.9% compared to 10.6% in the first quarter. By focusing on our commercial finance verticals, we have been able to maintain asset level yields of approximately 10%, and that's despite the 160 basis points drop in LIBOR since the beginning of the year.

Approximately 77% of the company's portfolio is floating rate based, of which 85% of these loans have a LIBOR floor, with a weighted average floor of 1.1%. The 23% of the portfolio invested in fixed rate loans are predominantly equipment financings.

Including activity across our 4 business lines, originations for the second quarter totaled just over $100 million and repayments were approximately $120 million, resulting in a modest net portfolio reduction of $15 million. Originations for the quarter were a mix of new deals and upsizings to existing borrowers, and they were focused on the ABL and life science strategies.

Now let me provide an update on each of our 4 verticals.

Cash flow. We believe our cash flow portfolio is well positioned, given the limited direct exposure to cyclical industries, such as energy, commodities, travel, retail. These are heavy manufacturing or consumer discretionary sectors. We are in a consistent dialogue with the management team and sponsors of our portfolio companies regarding their business prospects during COVID and are extremely encouraged by the steps that they have taken to preserve liquidity as well as the strong sponsor support.

In fact, many of these portfolio companies are performing ahead of their post-COVID revised budgets as a rebound in revenues as well as cost cuts have had a positive impact on their financial performance.

Our predominantly first lien portfolio, relatively modest first lien leverage at 5.4x and significant junior capital cushion, together with strong sponsor support, positions us well to withstand the prolonged economic headwind.

We view the majority of our cash flow loan portfolio companies as providing essential services in noncyclical sectors that will continue to be essential during periods of stay-in-place mandates.

As a reminder, our valuation framework incorporates sector-specific market spread movements in the quarter, adjusting for the existence of LIBOR floors, expected weighted average life, existence of covenants and other issuer-specific factors such as liquidity profile, sponsor support and our investment position in the capital structure. The majority of the increase in our portfolio marks this quarter are reflective of market spread movements.

To provide further context, market spreads for the LCD first lien single-B index tightened approximately 300 basis points or 68% from March 31 to June 30. Given the fundamental strength of our portfolio, we expect to recoup the remaining unrealized depreciation over the coming quarters.

At quarter end, our cash flow portfolio was just over $300 million or close to 19% of the total portfolio. It's invested across 17 borrowers with an average investment of $18 million. These companies had a weighted average EBITDA of $60 million, which highlights our focus on financing larger businesses, which we believe are better positioned to withstand the downturn.

The weighted average yield of our cash flow portfolio was 8.6%, and our cash flow loan segment contributed just under $7 million to gross income, representing 24% of the total Q2 gross income.

Out of our 17 cash flow borrowers, 2 loans had a short-term covenant waiver during the quarter to support the decline in revenues as a result of stay-at-home orders. We are encouraged with these companies' recent performance, with revenues recovering strongly, greater than 80% in both cases. Overall, we are confident in our portfolio, which has required no capital support from Solar despite the severe disruption caused by the pandemic.

During the second quarter, we originated just over $6 million of first lien cash flow loans and experienced repayments of approximately $7.5 million. Our investments during the second quarter were upsizing to existing cash flow credits.

We are thrilled by our available liquidity at SLRC that will allow us to take advantage of the market dislocation, which we expect to persist for some time.

As Michael mentioned, we opted to shrink our cash flow portfolio over the last several years owing to frothy market conditions that resulted in highly leveraged deals with loose documentation. We have begun to see opportunities to finance larger upper mid-market companies at lower leverage levels and with better covenant protections and at wider spreads. We will continue to maintain our discipline of investing in noncyclical sectors focused on the upper end of middle market.

Now let me turn to asset-based lending. Overall, our portfolio companies in this asset class continue to perform according to our expectations. As a reminder, our ABL platform, Crystal Finance (sic) [Crystal Financial], specializes in financing companies in transition, who have reduced access to traditional financing options. Their ABL loans are underwritten at a discount to net liquidation value. As a result, they have historically been very active in challenged sectors with significant working capital assets, such as retail and consumer goods. Accordingly, we believe their business is exceptionally well positioned for the current environment and believe the opportunity set for this strategy will only grow over the coming months.

At quarter end, the senior secured asset-based portfolio totaled approximately $585 million, representing over 37% of our total portfolio. It's invested in 35 borrowers with an average investment of just under $17 million.

The weighted average asset level yield of this portfolio was 10.2%. And for the second quarter, this segment contributed $9 million to gross income, contributing over 31% of our total gross income.

For GAAP reporting, we list our equity position in Crystal on our schedule of investments and fair value it on a quarterly basis.

At quarter end, the fair value of our investment in Crystal was marked up 5%, recovering approximately 2/3 of the unrealized depreciation from the first quarter and in line with improved valuations of comparable finance companies.

In the second quarter, we funded $56 million of new asset-based investments and had repayments of just under $92 million.

Credit challenges facing several of our ABL peers allowed us to upsize our exposure to existing companies on an opportunistic basis. In addition, we're encouraged that the liquidation market for underlying collateral is reopening after being completely shutdown at the start of the pandemic.

Our ABL capacity through Crystal with its senior team, who has expertise in financing stressed companies over the course of 30 years together, provides us with an extremely valuable capability during the current economic disruption. Not only has their opportunity set increased, but we are able to work with our cash flow clients to create structured solutions for their liquidity-strapped portfolio companies. We are currently focusing our origination efforts on companies that have stable asset values and defensible business models. Conversion of these opportunities into portfolio investments will take longer than normal given the more cumbersome due diligence process in this COVID environment. As a result, we expect to see portfolio growth over the coming quarters.

Now let me turn to equipment finance. Our equipment finance business is led by a team of seasoned professionals who average close to 30 years of experience, which includes managing through multiple economic cycles. A large portion of our equipment finance portfolio is invested in industries that have been deemed essential businesses, such as construction and machinery, which are our largest exposures. Those issuers are showing stability. However, NEF's best historically performing segment, transportation, has been the sector most impacted, providing buses to schools, tours and charter bus leasing.

While the majority of our equipment finance borrowers have been beneficiaries of PPP stimulus funding and other government assistance programs, the unprecedented decline in economic activity requires us to take a long-term view and patience in working with our borrowers to help them get through this crisis. We are already seeing signs of recovery and encouraged by both the return of the liquidation market and the health of our underlying borrowers improving.

It's important to remember we provide financing on specific equipment. The financings are at low loan to values, typically 70% or so, and well within the borrowing base in normal market conditions. In addition, a large portion of our investments have personal guarantees and other forms of credit support.

At quarter end, Nations Equipment had a total portfolio of approximately $350 million of funded equipment loans. The portfolio was invested across 113 borrowers, with an average exposure of approximately $3.1 million. As a reminder, included in this business are equipment finance facilities held directly on Solar's balance sheet as well as those held in NEF Holdings, a portfolio company that for tax efficiency purposes holds certain NEF investments.

Our valuation framework for NEF incorporates both a comparable company analysis of other equipment finance companies as well as an analysis of NEF's underlying loans, including the company's fundamentals as well as the specific structures around the loan and their covenants and other protections. In accordance with this framework, at quarter end, we marked our aggregate investments in equipment finance upwards, just over 5% from Q1. The equipment finance asset class represents over 22% of our portfolio. 100% of NEF's investments are first lien loans.

At quarter end, the weighted average asset level yield was approximately 10.4%. Additionally, 98.5% of this portfolio is fixed rate and is not impacted by the drop in LIBOR. For the second quarter, the equipment finance segment contributed just over $4.5 million to gross income, representing 16% of the total gross income.

During the second quarter, our equipment finance strategy invested just under $8 million in new investments and had portfolio repayments of just over $17.5 million. Our equipment finance team remains focused on managing the existing portfolio and helping borrowers through this challenging time. As we sit here today, the pipeline has increased, and NEF continues to work with our broader origination teams to offer equipment financing solutions to sponsors and their portfolio companies.

Finally, let me provide an update on our life science business. Overall, our life science portfolio has been largely insulated from short-term market and economic dislocations, given the long-dated equity investment periods and product development cycles of this asset class. The impact of COVID has had a de minimis impact on this portfolio. As a reminder, we have never realized a loss in our life science portfolio. Currently, 96% of our life science portfolio companies have more than 12 months of cash runway, with none of the portfolio investments having less than 3 months of cash runway. This is largely a result of our investment focus on both public and VC-backed late-stage multiproduct pharma and medical device companies that are close to entering or in commercialization.

It's important to remember that our life science investments are made at a very low loan-to-value, typically less than 20%, where value is defined as actual cash invested in the business and not the enterprise value post the most recent round of VC funding or some public market capitalization.

While the FDA may have slowed trials in favor of fast-tracking COVID treatments or vaccines and patients may be reluctant to participate in trials given the pandemic, the projected 3- to 9-month potential delays for some companies is short in relation to the 5- to 15-year development process as well as the significant capital invested in these companies relative to the size of our loan. In addition, there are some late-stage companies whose revenues may be delayed as a result of delays in procedures or elective surgeries. Financial viability of many hospitals, doctors and health care providers rely on these sources of revenues associated with elective surgeries, and we are extremely encouraged by the resumption of these services over the last couple of months.

At quarter end, our life science portfolio totaled just under $320 million. The portfolio consisted of 17 borrowers, with an average investment of approximately $19 million. Life science loans represented 20% of our total portfolio and contributed $8 million of our gross investment income equating to approximately 28% of the total gross investment income. The weighted average yield on our life science portfolio was approximately 9.8%. However, this excludes any success fees or warrants.

Our valuation framework for life science investments is based on making each -- marking each investment close to its amortized cost, including the final fee that is contractually due at repayment. In addition, the cash liquidity of a specific borrower is a significant valuation input. There is no liquid market for private life science venture debt investments, and we do not use equity benchmarks for determining fair value.

During the second quarter, the life science team originated approximately $32 million of new investments and had repayments of $1.5 million.

The health care sector, in general, continues to be attractive, and we are not seeing any slowdown in new life science opportunities. Moreover, the increased scale of the Solar platform enhances the opportunity set for investing in later-stage public pharma and medical device companies that often require larger hold positions. We will continue to be highly disciplined in evaluating new investments.

In conclusion, we believe SLRC's portfolio is extremely well positioned to weather this crisis. As we continue to navigate this challenging environment, we remain in close contact with our portfolio companies, their management teams and their sponsor teams who have supported them. We are also working closely with our extensive network of relationships to source new investment opportunities. Solar's commercial finance platform and significant dry powder enables us to provide structured solutions, including both cash flow and asset-based loans for capital constrained companies. SLRC will participate in these financings, alongside the rest of the platform, while maintaining significant diversification.

Now let me turn the call back to Michael.

Thank you, Bruce. In closing, we would like to thank Solar Capital shareholders for their support during this difficult time. From inception, we've endeavored to make the right decisions to preserve and enhance long-term shareholder value. Our priority has been to construct and maintain a portfolio that will generate steady income for our shareholders and protect their capital.

We have remained disciplined in the face of significant spread compression, higher leverage and loose structures, all of which have elevated the risk of principal loss.

Accordingly, we have positioned Solar Capital defensively, diversified our portfolio across cash flow and specialty finance, predominantly in first lien senior secured loans, to manage downside risk, and we have operated well under target fund leverage and have preserved liquidity. We believe we have taken the appropriate steps to navigate through what we anticipate to be a prolonged and uneven recovery. Throughout, we have maintained alignment through our ownership of Solar alongside our fellow shareholders.

Our decisions to prioritize capital preservation rather than leveraging the portfolio and taking on more risk at the wrong time of the cycle have allowed us to enter into this dislocation in a position of relative strength.

Importantly, we have confidence that our team's expertise and ability to provide financing across cash flow and specialty finance solutions should enable Solar Capital to continue to support its existing portfolio companies to make new investments with attractive risk-reward profiles during this period of turmoil.

Earlier this year, we added seasoned professionals to our origination team to broaden and integrate our coverage across asset classes. We are already seeing the benefit of these additional resources in the form of a more robust investment pipeline.

In addition to providing attractive risk-adjusted returns for SLRC, our lender finance team is a growing source of investment opportunities for providing growth capital, making portfolio purchases and evaluating platform acquisitions.

As a provider of capital, the lender finance business provides unique opportunity to get to know and understand different commercial lenders and their niche markets.

We have a long history of lending to and acquiring specialty finance companies, and we believe the current environment is extremely attractive for lender finance transactions given the market dislocation.

Our pipeline is expanded, and we are actively pursuing acquisition opportunities that can enhance and further diversify our specialty finance platform. With approximately $850 million of available capital, a strong portfolio foundation and low leverage, Solar is positioned to originate attractive new investments and grow net investment income. Our patience and willingness to remain underinvested allows us to be opportunistic. We believe that the improved investment opportunity set will persist for some time.

In conclusion, we are confident in our ability -- in our defensively positioned portfolio, stable funding sources, strong liquidity and potential to make new investments. As a result, we have no anticipated need for additional liquidity or capital. And accordingly, we have no plans to issue dilutive equity.

Each year for the past 9 years, our shareholders have granted us approval to issue shares below NAV, subject to Board's approval at the time of issuance. We have always viewed this trust in us as a great responsibility and have managed the business accordingly.

At 11:30 this morning, we'll be hosting an earnings call for the second quarter results for Solar Senior Capital, 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'll continue to see benefits of this value proposition in Solar Capital's deal flow.

We very much appreciate your time this morning. Operator, could you please open the line for questions.

(Operator Instructions) Your first question comes from the line of Finian O'Shea.

First on Crystal, their income is still down. I know you touched on that last quarter, where the income was down related to lower leverage and lower perhaps prepays. Can you give an updated outlook on that? Should we expect a return to sort of previous levels on Crystal Financial for -- of income that is?

Yes. I think the outlook for Crystal is, they're seeing a tremendous amount of activity as we mentioned, Finian. The income, as you may recall, is a little bit lumpy and is sometimes driven by repays. Given the short duration of the loans, together with the fact that we don't recognize upfront fees, we accrue them over time and then accelerate them on repay. So you will see pops in their income, and we try to smooth that out. We feel very good about the prospects, but it's really -- you should assume that this income will be sort of a steady-state for the moment until we get a better sense on what repays look like.

Okay. That's helpful. And a question for Michael, perhaps on longer-term leverage and portfolio potential. You noted that you expect a very strong pipeline with compelling opportunities. But you've also -- obviously, Solar has disliked the middle market or cash flow market for years. And with the capital still on the sidelines, capital still coming into the market or the asset class, that might mean that the investment opportunity will be short-lived. So do you think Solar might have a really good 2021 and then revert back to being underinvested? Or are you more confident in the outlook to grow your company's place in the market?

I think we're pretty confident about our longer-term outlook. I think some of our businesses kind of away from traditional cash flow lending are a little more sticky. For example, when you put out a lease for Nations Equipment (technical difficulty) don't get called out early, for example. And we expect that we put (technical difficulty) we're going to get better call protection and things of that nature. So -- and lastly, we highlighted a little bit the lender finance business. Those loans tend to be extremely long term. And obviously, any acquisitions we do have to become permanent parts of our platform. So I think we're -- we continue to be confident that we can get to our target leverage some time next year.

Your next question comes from the line of Paul Johnson.

Paul on for Ryan here. I wanted to ask, so as I look at earnings today, about $0.34 for the quarter, and that's with no incentive fee this quarter. And I think you touched on this a few ways with your expectation for possibly some good deal activity in the second half of this year. I'm just curious, I mean, do you see a pathway just with the current environment, tightening spreads, low interest rates, to getting income possibly back above that hurdle rate this year? Or do you think you would need some pretty significant deployment to get there?

See, I think that we expect to approach that $0.41 dividend over the next couple of quarters. Little too soon to say whether it's Q4 or Q1, Q2, but definitely over the next couple of quarters, to Michael's point. I think the combination of the diverse asset classes that we have to originate in, so therefore, we're not dependent on activity in any one strategy, such as cash flow, as well as the very strong pipeline we're seeing in acquisitions of potential specialty finance platforms positions us well. It's hard to pin it down to a specific quarter, as you can imagine.

Sure. That's very helpful insight. And then secondly, just on the interest income line, I'm just curious with just a big drop quarter-over-quarter. I'm guessing interest rates were driving a big part of that. But do you expect the current kind of $22 million or so to be a good sustainable number, sort of all else equal without any kind of -- mainly just minimal growth? Or would you expect that to possibly increase a little bit?

Yes. I mean, and just to clarify, the big drop off from Q1 to Q2 was the fact that we had $200 million of repayments in Q1 and saw the full impact in Q2. So I think it's safe to say that assuming no portfolio growth is shrinking, that's a good run rate for now for where we are and given where interest rates are because they're pretty much in 0 today. But clearly, any portfolio growth will drive that number higher.

Okay. And then I'm just curious I think you mentioned 2 loans during the call that you provided some cash flows, that you provided some amendments or covenant waivers, too. Were those the only 2 loans that you provided any kind of lease for during the quarter?

Those are the only ones in cash flow. We did something similar for just a couple of names in life sciences, where they had short-term amendments to address short-term revenue shortfalls. And then in the equipment finance segment, we do give relief from time to time that's been greater during COVID than historically. That actually has slowed in Q2 versus what we saw at the onset of the pandemic and tends to be very short-term in nature, a month or 2.

Those are all my questions. And I think you guys deserve a lot of credit for slowly growing the portfolio and designing the way it is today.

Your next question comes from the line of Chris Kotowski.

I guess I was wondering you talked about the kind of cumbersome due diligence process, certainly for cash flow loans. I imagine the same is for you when you're looking at other M&A opportunities for specialty finance companies. And I'm wondering, is that right? Or have you been kind of had ongoing due diligence pre-COVID that you can piggyback on so that there are opportunities in the next couple of quarters?

And then I guess also related to that, I think you're at 23% or thereabout utilization of your 30% bucket. And should we think of that 30% of current assets as that kind of the hard cap? Or are there ways to manage the 30% bucket that would enable more significant acquisitions?

Sure. Well, we definitely have the ability to make more specialty finance asset acquisitions in just the 30% would imply because not all assets are 30% assets. As you know, our equipment finance assets, for example, are not using that 30% bucket. So we have flexibility there.

Additionally, to your first question, it is difficult to conduct due diligence remotely, although the specialty finance platforms are effectively asset-based acquisitions who are underwriting pools of loans or various ABL assets. And that is actually easier to do remotely with teams that are used to going in and doing that type of due diligence on a collateral basis as opposed to a pure cash flow loan that is based upon more qualitative factors exclusively.

Your next question comes from the line of Rick Shane.

This is Melissa on for Rick today. A lot of our questions have been asked and answered. But wondering about your comments about portfolio growth and expecting that to ramp and, I think, you said in the second half of this year. I'm wondering if that's a function of lower expected prepayments, acquisition of another specialty finance vertical or some combination of the 2?

I think, in general, we're not expecting much prepayments at all in this environment. We had a bulk of prepayments in Q1 before COVID hit. We had some repayments this past quarter, about $100 million. We don't expect that much of repayments for the balance of the year. So we expect just pure hopefully net growth, and that will come from a variety of sources. We think that capital market will be a little more active than it's been as we shared that our backlog for Crystal-type ABL deals is extremely strong right now. And as you highlighted, the potential for an acquisition would kind of move the needle fairly dramatically.

Your next question comes from the line of [Matt Jadin].

Just to start off, I guess, on kind of a simple one. It looks like PIK income was up quarter-over-quarter. Could you give any color as to the source of that?

There was not a significant change in PIK. We have been blessed that we have not had to convert cash-paying loans into PIK loans. There are some cases. I mentioned we had 2 covenant waivers. There are some cases where we will, for doing that, take additional yield, and we'll take that in the form of PIK over and above our existing cash coupons. But again, it hasn't been a conversion of cash to PIK, it's been more of a yield enhancer.

Okay. And then, I guess, on the acquisition front, so some great color there. Is there anything if you're willing within the specialty finance vertical, is there any niche vertical that looks more favorable or more interesting than others?

No. I think, look, we are both a strategic buyer in terms of evaluating add-on acquisitions to the existing platforms that we have as well as new platforms that we have been evaluating as an asset class for some time. But as we're coming into this environment, what we're finding, obviously, is that management teams and sponsors are looking for partners to add capital, either on a lending or on an equity basis. And so we're just finding across the specialty finance spectrum, the asset-based lending broadly, leasing, financing, et cetera, just an increase in opportunity and less competition for those opportunities.

Great. I guess -- and then kind of just a last one that's a little more broad. On the general competitive environment, since kind of COVID has started, spread widening, documentation improvement, but with record amounts of capital kind of coming into the direct lending space, do you think both of those are kind of here to stay in the near-to-midterm?

Look, we have seen improvement, but it's been improvement in structure and on the margin price, and it's been on a very small selection, sample size of new deals. So the activity just hasn't been there to call it the norm yet. So I think everything we're hearing from our conversations with sponsored community is increased activity over the next few months heading into the fall and winter, a lot of add-on acquisitions as people are looking to make acquisitions at lower purchase prices than they had pre-COVID, but it's just too soon to be able to say what sustainable structures and pricing looks like. I will say that there is an increased focus on clubbing, both from the sponsor and from the lender community. And so we think that, that also will help the competitive dynamic longer term.

(Operator Instructions) Your next question comes from the line of [Tom Romero].

Congratulations on a solid quarter. My question is, I'd like to focus on the life science sector. Could you give us sort of an overview or a sample of 1 or 2 of the credits that you have there?

And just in general, I'm assuming that you're secured against patents and intellectual property. And how do you look at this sort of the warrant component when you're underwriting it?

And then lastly, same question on life sciences, what's the -- could you give us sort of a competitive matrix of who you're competing against in that space?

Yes, thanks for the questions. That's a mouthful. And what I would suggest is, we'd love to have a follow-up call where we can take you through it in more detail and have the head of the team on it as well to take you through our strategy. But high level, our life science business is focused on very late stage. As I mentioned, that's either pre-commercialization or in commercialization. We're exclusively focused on developmental drugs or devices. And the team has an incredible track record predating their experience at Solar going back to when they founded the business at GE Capital. It's been incredibly consistent because of the discipline in underwriting. It's really a focus on first lien loans, return of principal in all cases.

And to your question, looking at warrants, or in some cases, what we call success fees, which is just a fixed-price warrant as a way to enhance our yield as opposed to some of our peers who are out there going a little bit earlier stage, also having phenomenal track records, but taking a little bit more credit risk and compensating for that with more of an equity-type return. But I think it would be best, and we would greatly appreciate the opportunity to follow up with you and have a more fulsome conversation.

(Operator Instructions) There are no further questions at this time.

We appreciate your time this morning. And for those of you who are participating in the Solar Senior call, we'll speak you in half an hour. Thank you. Bye-bye.

This does conclude today's conference call. You may now disconnect your lines.