SLR Investment Corp (SLRC) 2023 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Q4 2023 SLR Investment Corp. earnings call.

(Operator Instructions) Please note this call is being recorded

(Operator Instructions)

It is now my pleasure to turn the conference over to Chairman and Co-CEO, Michael Gross.

Please go ahead.

Thank you.

Very much and good morning.

Welcome to SLR Investment Corp's earnings call for the fiscal year ended December 31, 2023.

I'm joined here today by Bruce Spohler, our Co-Chief Executive Officer, and our Chief Financial Officer, Shiraz Kajee.

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

Thank you, Mike.

Good morning, everyone.

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

Please note that they are the property of SLR Investment Corp. Fin and any unauthorized broadcast in any form is strictly prohibited.

This conference call is also being webcast from the events calendar in the investor section on our website at www.slrinvestment.com. Audio replays of this call will be made available later today as disclosed in our February 27 earnings press release.

I would also like to call your attention to the customary disclosures in our press release regarding forward-looking statements in today's conference call and webcast may include forward-looking statements and projections and these statements are not guarantees of future performance or financial results and involve a number of risks and uncertainties 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.

We do not undertake to update any forward-looking statements unless required to do so by law.

To take copies of our latest SEC filings, please visit our website or call us at 2129 931 670.

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

Thank you, Shiraz.

We are pleased to report that for the fourth quarter of 2023, SLRC generated net investment income of $0.44 per share representing growth of 7% year over year and a 26% increase over our net investment income immediately following our merger with SLR Senior Corp. Q1 2022.

Our fourth quarter NII per share equates to a 7% surplus of our distributions paid during the quarter.

The increase of NI over the past two years has been driven by meaningful, comprehensive portfolio growth as well as increases in reference rates and asset yields.

We believe this will be an attractive vintage to have grown our portfolio.

Also contributing to our strong quarter, SLRC earned $1.1 million from SLR Senior Lending Program, or SSLP, as we call it, represented 10.2% annualized yield compared to earnings of $300,000 in Q3.

At year-end, investment commitments totaled $200 million and we expect commitments to reach approximately $240 million to $200 million by the end of Q1.

Once fully ramped based on current rates, we anticipate that this vehicle will generate an annualized yield in the low double digits.

At December 31, our net asset value per share was $18.09, up from $18.06 per share at September 30, reflecting stable credits and the over-earning of our distribution.

We continue to be pleased with the credit quality our portfolio with no new nonaccruals during the quarter, our December 31 non-accrual rate based off was just over 0.6% and 0.4% on fair value, which remains significantly below the BDC industry average.

In finance, the average EBITDA and revenue growth continues to be positive for our portfolio companies.

Overall, they have successfully managed to transition to an environment with higher cost of capital and inflation.

The weighted average interest coverage on our sponsor finance loans is 1.0 times.

We believe these healthy metrics are the result of our focus in sponsor finance and recession-resilient industries with high recurring free cash flow such as healthcare and business services.

As a reminder, our comprehensive portfolio to significant diversification through our specialty finance investments, allowing us to be highly selective in sponsor finance.

Our specialty finance allocations provide the portfolio with countercyclical and less correlated investment opportunities to cash flow credit.

Credit quality for specialty finance investments continues to be solid with attractive LTVs that have meaningful collateral support.

At quarter end, approximately 98% of our comprehensive investment portfolio was comprised of first lien senior secured loans.

Our longstanding focus on first lien loans has resulted in a portfolio which we believe is better equipped to withstand persistent inflationary pressures in high interest rates in portfolios with second lien loans.

Additionally, with approximately 76% of our comprehensive investment portfolio invested in specialty finance assets, we have borrowing bases and covenant structures, which we believe are defensively positioned.

In 2023, SLRC had record originations of approximately $1.5 billion for sponsor finance business, in particular, capitalizing on investment environment with better pricing and lower risk profiles than the historical average.

Repayments for the year totaled over $1.3 billion, representing approximately 45% of our beginning 2023 portfolio.

Although LBO volume was down in 2023, approximately 61% sponsor finance investments supported tuck-in acquisitions for new and existing portfolio companies, with remaining activity financing new LBO investment opportunities.

Buyers and sellers continue to engage in price discovery, with increased pressure on sponsors to transact as LPs seek a return of capital before making new commitments.

As a result of the slow M&A environment, sponsors have held onto their performance for longer via maturity extensions and sales continuation vehicles.

While M&A activity has remained muted thus far in 2024 and competition has increased for this limited direct lending deal flow, we remain excited about the opportunity set for direct lending in 2024 for us from an expected acceleration in M&A activity in the second half of the year.

Our Life Science, ABL, and equipment finance strategies continued benefit from being uncorrelated to the broader cash flow market.

The life science market continues to recover from lighter activity in 2023.

Equity valuations for both private and public life science companies have been stabilized with debt opportunities continuing to improve.

The ABL market remains robust with referrals from both money center banks and regional banks accelerating.

In particular, the continued turbulence of regional banks is providing more opportunity for private credit managers such as ourselves.

Firms with significant available capital such as the SLR platform are able to fill the void left as regional points banks retreat.

Borrowers value our speed and certainty of execution, flexibility, and our ability to invest $150 million to $200 million in the up -- in a given upper middle market financing, which gives us inflows were pricing and documentation.

With $13 billion of total investable capital across the platform, inclusive of anticipated leverage, SLR has a scale to provide full financing solutions which benefits SLRC co-investments.

Importantly, we have ample dry powder to capitalize on the favorable investment environment.

At December 31, including available credit facility capacity at the SSLP and especially finance portfolio companies, SLRC had over $0.5 billion of available capital to take advantage of the current attractive investment environment.

I'll now turn over the call back to Shiraz to take you through the Q4 financial highlights.

Thank you, Michael.

For SLR Investment Corp's net asset value at December 31, 2023, was $987 million or $18.09 per share compared to $985 million or $18.06 per share at September 30.

At quarter end, SLRC's unbalanced investment portfolio value of approximately $2.2 billion in 151 portfolio companies across 43 industries, compared to a fair market value of $2.2 billion in 154 portfolio companies across 43 industries at September 30.

Also, at December 31, SSLP had a fair value portfolio of $187 million, firstly in senior secured loans.

Of the initial $100 million joint commitment, SLRC and our JV partner have contributed combined equity in the amount of $85 million.

In Q4, 2023, SLRC earned income of $1.1 million from SSLP, equating to a 10.2% annualized yield.

In the fourth quarter, we also upsized the SSLP credit facility by $50 million to $150 million.

At December 31, SLRC had approximately $1.2 billion of debt outstanding, with leverage of 1.19 times net debt to equity, up from the pandemic low of 0.57 times.

We expect our leverage ratio to remain in the middle of our target leverage range of 0.9 to 1.25 times.

SLRC's funding profile is in a strong position to continue to weather the current interest rate environment.

Just this month, we expanded the list of participants in our primary credit facility.

Furthermore, our existing $470 million of senior unsecured fixed rate notes have a weighted average annual interest rate of only 3.8%, and we expect to opportunistically access the investment-grade debt market.

Moving to the P&L, for the three months ended December 31, gross investment income totaled $59.8 million versus $59.6 million for the three months ended September 30.

Net expenses totaled $35.9 million for the three months ended December 31.

This compares to $36.3 million for the prior quarter.

As a reminder, at the time of the merger of SLRC Senior Investment Corp. with SUNS into the company last year, the investment advisor agreed to waive incentive fees resulting from income due to the accretion of purchase discount allocated to investments acquired as part of the merger.

During the fourth quarter, the company waived approximately $90,000 of incentive fees related to the merger, which now totals approximately $2 million in cumulative waivers by the manager related to the merger.

Accordingly, the company's net investment income for the three months ended December 31, 2023, totaled $23.9 million, or $0.44 per average share, compared to $23.4 million, or $0.40 per average share, for the three months ended September 30.

Below the line, the company had a net realized and unrealized loss for the fourth quarter, totaling $0.3 million versus a net realized and unrealized gain of $3.6 million for the third quarter of 2023.

As a result, the company had a net increase in net assets resulting from operations of $23.6 million for the three months ended December 31, 2023, compared to an increase of $26.9 million for the three months ended September 30.

Mentioned on previous calls, the company has returned to making quarterly rather than monthly distributions, and on February 27, the Board of SLRC declared a Q1 2024 quarterly distribution of $0.41 per share, payable on March 28, 2024, to holders of record as of March 14, 2024.

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

Thank you, Shiraz.

Before I provide an overview of our portfolio, I'd like to touch on our approach to portfolio construction.

Our commercial finance business model provides us with the flexibility and capabilities to capitalize on the most attractive lending opportunities across our four private credit investment strategies.

We take a fundamental bottom-up approach to portfolio construction based on the relative attractiveness or risk-adjusted returns across our investment verticals.

While we were more active in sponsor finance throughout 2023, we did see a pickup in activity in our other verticals during the fourth quarter, which we expect to continue in 2024.

With our flexible mandate and broad capabilities, we are positioned to take advantage of either continued durable economic conditions or softening of the economy.

We believe having the flexibility to play either offense or defense at the right moments across the cycle is critical to long-term consistent performance.

Now, let me turn to the portfolio.

At year-end, on a fair value basis, the comprehensive portfolio consisted of approximately $3.1 billion of senior secured loans to 790 borrowers across over 110 industries, with a $3.9 million or 0.1% position exposure.

Measured at fair value, 99.2% of our portfolio consisted of senior secured loans, with 97.7% invested in first lien loans, including investments through our SSLP attributable to the company, and only 0.3% was invested in second lien cash flow loans, with the remaining 1.2% of the portfolio invested in second lien asset-based loans with full borrowing basis.

Our specialty finance investments account for approximately 76% of the comprehensive portfolio, with the remaining 24% invested in senior secured cash flow loans to upper mid-market private equity owned companies.

We believe that this defensive portfolio composition positions us well for potential economic weakness and provides a differentiated risk return profile for our shareholders compared to sponsor-only portfolios.

Quarter end, our weighted average asset level yield was 11.69. Our credit quality remains strong.

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.

Over 97% of the portfolio is rated a 2 or higher, and 99.4% of the portfolio on a cost basis was performing, with only 1 a non-accrual.

Now let me turn to our four investment verticals.

In our sponsor finance business, we originate first lien senior secured loans to upper mid-market companies in non-cyclical industries, such as healthcare services, business services, and financial services, which we believe has helped to mitigate the impact on our portfolio from cyclical economic factors.

At year end, this portfolio was approximately $730 million, including the senior secured loans in the SSLP attributable to our company.

We were invested across 50 distinct borrowers, with approximately 99% of the cash flow portfolio in first lien loans.

We believe that these investments are well positioned to withstand liquidity pressures that borrowers may be facing in light of higher interest rates.

Additionally, we believe we have a defensively positioned portfolio.

Our borrowers have a weighted average EBITDA of only $120 million, low LTVs of approximately 40%, and interest coverage ratios averaging 1.7 times.

Our portfolio is comprised of businesses that perform essential services with either recurring or reoccurring revenues and generally have low capital intensity.

Overall, our portfolio has exhibited solid credit metrics that have remained steady 2023.

During the quarter, we originated $107 million of cash flow loans and experienced repayments of $185 million.

Our fourth-quarter investments, all of which were first lien, have an average yield to expected maturity of 12.6%, an average leverage through our investment of 4.8 times, with interest coverage of 1.7 times.

We believe these metrics support our thesis that 2023 should be a great vintage for sponsor finance investments.

Importantly, this portfolio carries less leverage than the historical average for new issues.

Michael mentioned sponsor finance deal flow continues to be muted due to lower M&A volume.

However, there are pockets, particularly in our defensive sectors, where we do see opportunities to make loans at attractive risk-adjusted returns.

At quarter end, the weighted average yield across the portfolio was 12%.

Now let me turn to our ABL segment.

In the wake of the US regional banking crisis last year, the opportunity set for all of our ABL businesses improved.

As lending standards tightened at commercial banks, we saw an increase in deal flow.

As a result, we were able to originate several new attractive investments.

As new entrants with less experience have entered the space, we remain committed to our high underwriting standards in which we focus on the quality of the underlying collateral base when determining acceptable advance rates and loan-to-value ratios.

We believe that not adhering to this discipline may result in losses in the ABL asset class.

The increase in deal volume is enabling us to remain active while being extremely selective.

At year end, the senior secured ABL portfolio totaled just under $1 billion, representing 31.5% of our comprehensive portfolio, and it was invested across 160 borrowers.

Weighted average asset level yield was 14.5%, and the average LTV was approximately 60%.

For the fourth quarter, we had $150 million of new ABL investments and repayments of $166 million.

Now let me touch on equipment finance.

At year end, this portfolio totaled $1 billion, representing 32% of our comprehensive portfolio, and was highly diversified across 550 borrowers.

Credit profile continues to be strong.

The weighted average asset level yield was just over 8%.

During the fourth quarter, we originated approximately $154 million of new equipment loans and had repayments of $106 million.

Our investment pipeline has expanded in conjunction with the disruption caused by the regional bank failures.

Finally, let me touch on life sciences.

At year end, our portfolio was $350 million at fair value.

Approximately 80% of the portfolio at par is invested in loans to borrowers that have over 12 months of cash runway.

Additionally, all of our portfolio companies are generating revenues with at least one product in the commercialization stage, which significantly de-risks our investment exposure.

Life science loans represented 11.6% of our portfolio at year end and contributed just under 22% of our gross income for the quarter.

During the fourth quarter, the team committed to $16 million of new investments and funded $38 million of new investments, while having repayments of $6 million.

We have just under $20 million of unfunded life science commitments, which may be drawn by borrowers based upon reaching important milestones, such as revenue levels or liquidity levels.

At year end, the weighted average yield on this portfolio was 13%.

This excludes any success fees or warrants.

While we expect valuations in the life science segment to stabilize this year, we continue to see several new lending opportunities that will meet our underwriting criteria.

Given our ability to allocate our capital to the best risk reward opportunities, we have the luxury of being highly selective in our capital deployment in life sciences, while yet still generating positive originations and portfolio growth for the company overall.

Now, let me turn the call back to Michael.

Thank you, Bruce.

In conclusion, our portfolio reflects stable fundamentals and benefits from the flexibility to allocate capital to investments across our different lending verticals that we believe offer the most attractive risk-adjusted returns for our shareholders.

Based on last night's closing price, SLRC trades at an 11% yield, which we believe presents an attractive investment opportunity.

We have available capital and an opportunity for continued earnings growth.

While the current market expectations are for rates to stay higher for longer, it's important to remember that specialty finance spreads and returns are not as volatile as cash flow onto finance investments.

As a result, we would not expect yield contraction for specialty finance assets to the same extent as sponsor finance when interest rates begin to move lower.

Looking forward, we expect origination opportunities to be driven by a combination of increased activity, loan maturities, and regulatory credit contraction forces impacting regional banks to the benefit of direct lenders such as ourselves.

In addition, we continue to seek opportunities to expand our specialty finance capabilities through tuck-in acquisitions for our existing commercial finance portfolio companies, portfolio team acquisitions, or acquisitions of specialty finance portfolios.

SLRC's broad foundation of diversified commercial finance businesses has the resources and experience to acquire portfolios and to service the loans on an opportunistic basis.

We continue to believe that a diversified portfolio approach across sponsor and commercial finance assets is the most effective strategy to generate income and manage risk across economic cycles.

In closing, our investment advisors' alignment of interest with the company's shareholders continues to be one of our guiding principles.

The SLRC team owns over 8% of the company's stock, including a significant percentage of their annual incentive compensation invested in SLRC stock.

The team's investment alongside fellow shareholders demonstrates our confidence in the company's defensive portfolio, stable funding, and favorable position.

We appreciate your time today.

Operator, will you please open up the line for questions?

(Operator Instructions) Mickey Schleien, Ladenburg.

I want to start off by asking you about other income reported for the quarter.

Could you give us a sense of what underlies that amount, which was relatively high in comparison to your previous quarters?

I think the major driver there, we had a chunky exit fee in our life science business this quarter.

Those fees, sporadic throughout the year, and so that was the major driver in Q4 versus the prior quarter.

And as you know, Mickey, sometimes we will get the exit fee as a success fee or warrant that comes in a detachable form subsequent to repayment.

So this was actually a life science loan that paid off earlier in the year, but then hit a milestone that triggered a success fee for us in the fourth quarter.

Very nice.

Congratulations on that.

I wanted to also ask about the sponsor finance cash flow segment.

I see that that portfolio shrank during the quarter.

Can you give me a sense of to what extent the normalization of the broadly syndicated loan market and potential prepayment activity in sponsor finance drove that contraction?

Yes.

So great question.

More broadly, as you see across the year, there was growth.

So I don't want to focus too much on one quarter, but I do think it brings up a bigger issue, which is we are beginning to see some pressure where a lot of capital, as you know, has been raised in the cash flow market.

It starts at the upper, upper market, kind of above where we play.

I'll call it the, you know, $400 million, $500 million EBITDA business competing with the broadly syndicated loan business, where you start to see a fair amount of capital come in and start to put pressure in terms of borrowers asking for repricings to take their cost of capital down.

It's creeping a little bit into where we are playing in the, call it 100 to 200 million EBITDA businesses.

And we are opportunistically using that as a chance to exit because, again, we have seen very attractive opportunities to deploy.

You see the originations are still strong, but we also have opportunities, as you know, in our other verticals where we will recycle capital at higher returns.

So it's not so much a lot of sales across portfolio companies, but it's more pricings where certain lenders are opting to stay and we're opting to exit.

And I think that trend will continue as we've seen in the early part of 2024.

But I think importantly, because less than a quarter of our portfolio is in kind of that sector, the other 75% of our business in the specialty finance are not really driven by the technical factors of the financing markets.

To your point, Mickey, you know, as capital returns into the liquid market, I think in general finance portfolios are at risk of being repriced or letting them go, whereas that's just not the case in specialty finance.

You don't have the ebbs and flows of capital into the space that drives pricing and returns.

I understand.

That that's helpful.

My last question relates to your internal investment ratings.

I see there was both migration up to 1s, but there was also migration down to level 3 and 4.

Any color you can provide on the downward migration?

Yeah, I don't think there was much movement on 4.

There was a movement into 3, and that was one investment.

And what I would say, Mickey, is we are fortunate that our watch list is made up of names that are fundamentally performing and strong operations in terms of revenue and EBITDA growth, but maybe are facing some capital structure constraints.

And so we'll move it into a watch list until we resolve the capital structure.

But that was literally just one specific name.

I think if we were to rate it today rather than at December 31, it probably would not be on watch list, which I hope will be the case going forward.

But we're comforted that our fundamentals are strong, and we're just addressing some balance sheet issues here and there.

Okay.

That's helpful.

That's it for me this morning.

Thank you.

Erik Zwick, Hovde Group.

Wanted to start first, we've got $125 million of notes maturing later this year in December.

I'm just curious about your thoughts for the source of funding to redeem those.

And, Shiraz, maybe you kind of alluded to that in some of your comments, indicating that you might opportunistically kind of tap the investment-grade market.

But, yeah, just kind of curious your thoughts on funding the redemption of those notes.

Yeah.

So, as you know, that's our first redemption in quite some time.

We've been very fortunate to have some good luck that we haven't had to go to the market during this rising rate environment of the last couple of years.

We have, as Shiraz mentioned, increased our lender universe, so we have capital such that we don't need to refinance this in the unsecured market in December when the maturity comes up.

But we are going to be opportunistic throughout this year to look to turn that out.

And I think, importantly, given the size of that maturity, it allows us to really pursue multiple options, be nimble, and see what the best opportunities are.

We've had a very strong following in the insurance company private marketplace, and we've had a lot of success doing kind of bespoke financing at the right time.

So, we feel very comfortable about the situation.

Yeah.

I mean, we've had a lot of inbound inquiries.

There's been a fair amount of activity in the IG market year-to-date.

So, for us, it's a matter of when, not if.

That's helpful.

Thank you.

And then you previously mentioned that leverage would decline as the SLP ramps, and that has been the case over the past two quarters.

The leverage has come down, and I think that you've still got room to increase SLP even more.

Should we continue to expect leverage to come down closer to the middle of the range over the next few quarters?

I think it will.

As Shiraz mentioned, it'll move between the 1.1 and the 1.2. What we are doing, as you know, is moving, which we are substantially complete with moving lower-yielding assets that we acquired with the merger with SUNS back in '22 into the SSLP, which frees up balance sheet at the parent company to invest in some of these very attractive vintages across our four strategies.

But we're comfortable, given the vintage and the quality of the assets, to operate between the 1.1 and the 1.2 at this stage of the cycle.

And then last one for me.

You spent a fair amount of time in the prepared remarks talking about the opportunities that have been created in multiple of your kind of lending platforms from the turbulence in the regional bank market.

I know this is a little bit hard to kind of maybe answer or have a strong opinion about, but just curious about what type of sightline you have and how long does that opportunity last at this point?

I guess it's -- Put it this way, at the moment, we don't -- we think it's going to continue to operate -- exist throughout this year.

I don't really -- based on our conversations, we're not hearing a lot of dialogue from banks looking to come back in.

It's more about shedding portfolios and teams.

And so it will really, we think, be a great opportunity for direct lenders, private credit providers such as SLR to step in there if you have these capabilities.

And very often it's a portfolio, so you really need to have the team to be able to acquire that portfolio, underwrite the portfolio, and manage that portfolio.

So these are not always standalone businesses.

They're assets for sale, and we think those are very attractive opportunities.

But I will say, in the past, when we have lost individual investments across some of our specialty financed businesses, including Life Sciences, where SVB was a dominant player, it was typically by several hundred basis points to a regional bank.

And so we're just feeling that the lack of that competition is also helping us in our day-to-day business.

Thanks for taking my questions today.

Bryce Rowe.

B Riley.

Wanted to maybe follow up on some of Erik's questioning there around, the environment that is providing some opportunities from -- within the banking space.

Maybe, Bruce, can you talk a little bit about how widespread the -- maybe the pullback is within that space?

And then, from a geographic perspective, how well suited, the SLR platform is to take advantage?

I mean, is it pockets of the country or pockets of the regional bank space?

Or is it more widespread than that?

That is a great question.

Because, to your point, it is a very regional business.

We think that provides the opportunity and, to some extent, a barrier for other entrants.

It is a difficult thing -- Some of these lines of business are very difficult to grow organically other than on the margin.

And having the opportunity to step into [Nugent's], because you do need feet on the street, as you know, we have 19 offices around the country.

Most of them are dedicated to our specialty financed businesses, both sourcing teams, as well as underwriting teams, as well as management teams.

I think what many people don't appreciate is that these are asset management heavy of the loans.

Once you make the loan, you're monitoring the collateral so that you're comfortable advancing against that collateral throughout your loan investment.

And so you need a big investment in people and, to your point, does need to be regional.

And so we are not seeing the dislocation in any specific region.

But thankfully for us, we are finding opportunities in regions we don't cover or industries we don't cover.

There are industry-dedicated platforms that may just do, factoring for the trucking sector.

There are Canada-based companies, Midwest-based companies, we have a nice presence in Minneapolis and Salt Lake City, on the East Coast and the Southeast, but there are definitely pockets where we would like to have more penetration.

And so this location feels to be widespread.

And I think that we're in the early days of participants making decisions about whether they want to exit where they want to JV.

We've had approaches to JV with people who want to still have attachment and touch points with those customers, with those corporate borrowers, but they don't want to tie up their balance sheets.

So they can partner with somebody like an SLR, where we take on the assets and they maintain the relationship, the cash management, and many of the treasury and fee-based businesses that are so lucrative for the bank.

So the banks are taking a very strategic approach, and it varies across individual institutions rather than regions, but we're open to options in the states.

That's great color.

Appreciate it.

Let's see, maybe just shifting gears a little bit.

Yeah, there's a lot of talk about which way rates are going to move and when.

Wanted to get a sense for your portfolio or your balance sheets, asset sensitivity to lower rates.

How should we how should we be thinking about different rate scenarios over the next quarter or two?

Thanks.

I'll kick it off for a second.

I -- to some extent, we benefit with rates staying elevated, because we do have very defensive portfolio.

And as Michael mentioned, only 24% of it exposed to cash flow lending, rather than more asset-oriented strategies where you do have more cushion during higher-rate environments, and more control over the investment because you have not only covenants, but borrowing basis.

So selfishly speaking, we do benefit by having elevated rates longer.

I think it also keeps more competitors on the sidelines as they deal with some stress in portfolios that people are starting to see, just in terms of covering this debt service on [to] having inflationary pressures across their operating performance.

So to some extent, we benefit, but as Michael touched on, we also benefit, we think in a declining rate environment, just because many of these asset classes are more absolute return products that are less sensitive to both increase and decrease in interest rates.

So we feel like the stability of our earnings is better than it would be had we just been 100% cash flow portfolio.

We also have a chunk of our portfolio in the equipment leasing sector that that is fixed rate.

So we're putting on assets at higher yields today.

And you know, those won't go down when rates go down.

That's great.

Thank you.

(Operator Instructions) Robert Dodd, Raymond James.

Hi, guys.

Congratulations on the quarter.

A couple questions on the cash flow lending book.

I mean, as you said, repricing is starting to creep in a lot of your cash flow book as it stands today with the 2023 vintage, which slightly higher spreads, lower leverage, really attractive vintage.

But what's -- what do you -- what risk do you consider that those assets -- are they going to be sticky?

Or are those at better leverage, better spreads?

Are those the ones that are going to get refinanced if, relatively quickly, if the market activity more broadly accelerates this year?

So I would say that there is a component of our cash flow book, Robert, that is extremely acquisitive in financial services, in healthcare.

And those sponsors are very focused in this environment on making additional tuck-in acquisitions.

I think if they were done with their acquisition program, they might turn to optimizing the pricing of the financing.

But right now, they're more focused on availability of financing.

They may have a $1 billion credit facility and need another $200 million to make an add-on acquisition.

And so they're coming to people like us, who can take down that $200 million add-on, and less focused on saving the 25 basis points.

But I think as that portfolio matures, and the sponsors are getting ready to exit the portfolio company, then you might see them turn more towards repricing.

So I don't think it's going to be a major headwind for us, just because the businesses are still in growth mode.

But once you get into more of a harvesting mode, they will be back around looking to reprice, no doubt about it.

I mean, the other factor that's relevant also is that the biggest source of repricing today is investment banks being back in the syndicated loan market and being able to distribute those loans.

The average unit of our portfolio is 122.

Those aren't, on average, the bigger ones are, but those are not candidates for refinancing in the BSL market.

So I think the people who are truly at risk for immediate repricing are.

Average EBITDA of $300 million, where $1 billion, $2 billion, five, four to five times financing is extremely doable in today's public market.

The public markets never really did the $120 million EBITDA company.

So I think the risk of the repricing of our portfolio is far less than those in the bigger credits.

Yeah, to Michael's point, the one or two names that have come in and asked in the last week or so are larger $300 million EBITDA type names.

Got it.

Thank you.

Very clear.

On the other question, I mean, on the comprehensive portfolio, ABL is about a third, equipment financing is about a third.

To your point, right, there's opportunities for maybe acquisitions, JVs on the asset-based side, maybe acquisitions on the fragmented equipment financing side.

I mean, where are you comfortable in the mix?

I mean, would you be comfortable with having equipment financing at 50% of the comprehensive portfolio?

I mean, do you like diversification by the specialty financed vertical?

So where would you be comfortable?

Yeah, and look, the equipment finance portfolio is one of the most diverse portfolios across the platform.

So to your point, that is comforting.

But I think that we've always said when, we've been blessed that we haven't had to work with a finite capital pool base.

We've always seemed to get repays at the time that we see a nice investment opportunity across different verticals.

But we've always felt that at 15%, 16% life sciences, with zero losses in the team's history, it's a pretty compelling asset class, but it's not unlimited in terms of its need for capital.

So we try to take advantage of life science as much as possible.

I think asset-based lending, where you're lending against working capital assets, receivables, and inventory is another segment that is incredibly scalable, to your point, similar to equipment finance.

And obviously, we have the investment across three different ABL teams here.

So we think we're well positioned there.

So I think the short answer is, as you know, with us, sponsor finance will ebb and flow between 15% and 30% based on where we see the market opportunity.

But I think asset-based lending and life sciences, we'd like to scale up as well as equipment.

But I think we see in the near term, a little bit more growth in ABL, and hopefully life sciences.

Equipment finance, to Michael's point, because it is a fixed-rate asset, we need rates to come down a little bit more.

But we are positioned for growth.

As we look out at '24, having just sat down with the team and gone through the business plan there, there's some strategies where we're going to take that up.

But I think it might be even more accelerated growth on the ABL side.

Got it.

Thank you.

It appears we have no further questions at this time.

I will now turn the program back over to Michael Gross for any additional or closing remarks.

Thank you all for your time this morning.

No additional closing remarks.

But as always, we are here and available if anybody has any follow-up questions.

Thank you.

This does conclude today's program.

Thank you for your participation.

You may disconnect at any time.