SLR Investment Corp (SLRC) 2024 Q3 法說會逐字稿

Good day everyone and welcome to today's third quarter 2024 SLR Investment Corp earnings call at this time all participants are in a listen-only mode later.

You will have the opportunity to ask questions during the question and answer session.

You may register to ask a question at any time by pressing the star and one on your telephone keypad.

Please note this call is being recorded and I will be standing to turn the conference over to Michael Gross Chairman and co CEO.

Thank you very much and good morning.

Welcome to SLR Investment Corp earnings call the quarter ended September 30th 2024.

I'm joined here today by my long term partner of 18 years Bruce Spohler Co-Chief Executive Officer, our Chief Finance officer Shiraz Kajee and the SLR Investor relations team, Shiraz before you begin.

Would you please start by covering the webcast and forward-looking statements?

Thank you Michael, Good morning everyone.

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 is strictly prohibited.

This conference call is also being webcast on the events calendar in the investors section on our website www.slrinvestmentcorp.com.your replays of this call will be made available later today as disclosed in November 6th earnings press release.

I would also like to call your attention to the customary disclosures in our press release regarding forward-looking statement.

Today's conference call and webcast may include forward-looking statements and projections.

These statements are not guarantees of our future performance or financial results and involve a number of risks and uncertainties.

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.

We do not undertake to update any forward-looking statements unless required to do so by law to paint copies of our latest sec filings.

Please visit our website or call us at 2129931670.

At this time, I'd like to turn the call back to Board Chairman and CEO Michael Gross.

Thank you Shiraz and again, thank you for everyone for joining our call this morning after the market closed yesterday.

SLRC reported net investment income of 45¢ per share for the third quarter of 2024 consistent with the prior quarter and representing distribution coverage of approximately 110% given the base rates decline for the first time in four years and conditions of the sponsor finance market remain fiercely competitive in the third quarter.

We are pleased with the stability of our quarterly net investment income.

Additionally, as a testament to the overall credit quality portfolio, our net value remained at $18.20 per share.

We believe our stability is a direct result of our underwriting philosophy and multi strategy approach to private credit investing with approximately 78% of our loan portfolio derived from special finance investments supported by collateral and the remainder in cash for loans to borrowers in recession, resilient industries as of September 30th due to the more favorable conditions and especially finance markets.

Our investments in the third quarter were once again more heavily weighted in those asset classes which we believe currently provide a more attractive risk adjusted return relative to sponsor finance loans. 96% of our third quarter originations were especially financed much higher than our historical mix.

We believe our ability to pivot to the best risk adjusted return across our private credit strategies is a hallmark of SLR's multi strategy allocation approach.

Increasingly private credit investors are looking for proprietary investment strategies and less correlated portfolios across their BDC investments, which we believe is clearly visible in our results.

Our portfolio composition and momentum we have achieved here today, seeing a combination of an increase in organic and strategic opportunities to expand our portfolio and product offering across our ABL strategies on go show banks to exit noncore business lines and consider strategic partnerships resulting in increase in investment pipelines for our ABL teams at the end of the third quarter, SLRC portfolio company SLR Business credit capitalizes on this dynamic by acquiring an asset based factoring portfolio and operations from Western banks included a seasoned portfolio and a small team of professionals.

It is diversified with loans to long which is based in New York, specializes in providing financing, the low to mid teen returns and cumulative low loss rate experience for this factoring business makes the asset class an attractive addition to our ABL portfolio.

Additionally the acquisition of the team enhances our suite of ABL financing capabilities expands our expertise in lending to new industry verticals and deepens our extensive geographic coverage.

This transaction represents SLR business credit's fourth tuck in acquisition under our ownership.

Importantly, it is indicative of the opportunities that we are seeing from regional banks retreat in certain direct lending asset classes.

We have a strong pipeline of potential additional acquisitions that our team is currently evaluating.

Given that our ABL businesses have not experienced a degree of increased competition and sponsor finance.

We are able to remain highly selective in cash lending.

We achieved this by focusing on recession, resilient, committing to loans and refinancing that no longer meet our underwriting thresholds.

All set said with the election, uncertainty behind us, we believe that the supply demand dynamic in the sponsored finance market has the potential to improve from accelerating merger and acquisition activity and new capital formation.

Our flexible pros when market conditions improve as an example, fully weighted towards cash flow loans.

SLRC's Comprehensive Portfolio had originations of $397 million and repayments of $328 million in the third quarter resulting in net portfolio growth of $68 million. 96% of originations were from SLRC's Special Finance verticals said another way, only 4% of our third quarter originations were in sponsor finance.

A continued reversal from last year when originations were concentrated in sponsor finance.

We remain pleased with the composition quality comprised of first lien senior secured loans resulted in a portfolio which we believe is more conservatively positioned and better equipped to withstand persistent inflationary pressures and high interest rates and portfolios with second lean and broader cyclical exposure.

As of September 30th, we only have one investment in non-accrual representing 0.6% and 0.4% of the investment portfolio on a cost and fair value basis respectively.

We believe our low rate of non-accruals is a result of a multi strategy approach and it is well below the pier BDC average at September 30th including available credit facility capacity at SSLP and our special finance portfolio companies SLRC had over $750 million of available capital to deploy from our seats.

We believe SLRC is in a favorable position to take advantage of either durable economic conditions or a softening of the economy.

I'll now turn the call back over to Shiraz our CFO to take you through the Q3 financial highlights.

Thank you, Mich.

SLR 2024 a quarter end SLRC's on balance sheet investment portfolio at fair market value of approximately $2.1 billion and 131 point market value of $2.1 million 100 approximately $1.1 billion of debt outstanding with a net debt to equity ratio of 1.1 times.

We expect our net debt to equity ratio to remain in the middle of our target range of 0.9 to 1 and 42% of fixed rate unsecured notes could end during the quarter the company amended both its senior secured credit facility and sons SPB credit facility agreements extending out maturities and increasing commitments companies and expect to opportunistically access the investment grade market to address near term maturities.

Moving to the P&L for the three months ended September 30th gross investment income total of 59.8 million versus 59 million for the three months ended June 30th and expenses totaled $34.35 million for the three months ended supply quarter accordingly.

The company's net investment income for the three months ended September 30th 2024 totaled $24.3 million or 45¢ in the period below the line, the company had a net realized and unrealized loss for the third quarter $2.3 million for the second quarter of 2024.

As the company had net increase in net assets resulting from operations of 22 million for the three months and 3.2 million for the three months ended June 30th 2024 quarterly distribution of 41¢ per share payable on December 27th, 2024 to hold us a record as of December 13th, 2024.

With that, we'll turn the call over to our core.

Thank you Shiraz.

Given the current competitive sponsor finance cash flow market, the flexibility offered by our commercial finance strategies enables us to source attractive investment opportunities.

A way to take a fundamental bottom up approach or portfolio construction based on the relative risk adjusted return profile across our investment verticals.

At quarter end on a fair value basis.

The comprehensive investment portfolio consisted of approximately 3.2 billion of senior secured loans to over 850 borrowers.

The average exposure per borrower is 3.7 million measured at fair value over 98% of our portfolio consisted of senior secured loans with just under 97% invested in first lien loans including investments in the SSLP attributable to the company and only 0.2% was invested in second lien cash flow loans.

With the remaining 1.2% of the portfolio invested in second lien asset based loans.

Our specialty finance investments account for approximately 78% of the comprehensive portfolio with just over 22% invested in first lien cash flow loans to upper mid market.

Sponsor backed companies.

We believe this defensive portfolio construction positions us well and provides a different portfolio was 11.8% wrong at quarter end, the weighted average investment risk rating was just under two based on our 1 to 4 risk rating scale with one representing the least amount of risk.

Over 98% of the portfolio is rated two or higher at quarter end.

Additionally 99.4% of the portfolio on a cost basis and 99.6% on a fair value basis was performing with only one investment on non accrual.

Now let me touch on each of our four investment verticals, sponsor finance or cash flow lending in this business.

We originate first lien senior secured loans to upper mid market companies in noncyclical industries such as health care, business services and financial services.

This has helped to mitigate the impact on the portfolio from cyclical economic factors.

At quarter end, our sponsor finance cash flow portfolio was 740 SSLP representing 22.4% of the Comprehensive Portfolio it was invested across 45 borrowers with approximately 99% of the portfolio invested in first lien loans.

Our borrowers have a weighted average EBITA of approximately 132 million median EBITA of 65 million and carry low LTV of just over 42%.

Sponsor finance the average EBITA and revenue growth continues to be positive across our portfolio companies.

Overall, our borrowers have successfully managed the transition to an environment with higher cost of capital as well as inflationary premiums.

The weighted average interest coverage for a sponsor only 1.7% of our third quarter.

Gross income is in the form of these healthy credit metrics are the result of the diversity of our investment portfolio across private credit strategies and our focus in sponsor finance on recession, resilient industries with high recurring free cash flow.

While M&A has picked up in the second half of this year, activity levels are still well below the historic norm.

This has caused much of the private debt activity to remain centered on repricings and dividend recaps with the resulting spread compression and weaker structural protections.

We are remaining highly selective in our cash flow investments to finance conditions will improve next year.

As sponsors seek to return capital to their LPS through exits.

During the quarter, we made investments.

Sponsor finance deal flow continues to be muted due to the lower M&A volume.

However, there are pockets of opportunities in our defensive sectors to invest at attractive risk adjusted returns.

At quarter end, the weighted average yield on our cash flow portfolio was 11.1%.

Now let me turn to our specialty finance segments across the board.

The credit quality of these loans continues to be solid with attractive LTVS supported by meaningful collateral.

I'll first discuss our ABL portfolio at quarter end this portfolio totaled 1 billion representing 35% 262 different borrowers weighted average asset level yield was 14.4%.

We continue to see an increase in the opportunity set for ABL resulting in a strong pipeline heading into year end money Center and regional domestic banks have been pulling back from the ABL market creating an attractive opportunity for our team additional factoring loans as collateral for borrowing with the fed I'm sorry has been reduced SLR is positioned to collaborate with banks who are shifting their ABL strategies in reaction to these challenges.

Our recent acquisition of the loan portfolio and servicing platform from Webster commercial services is an example of this type of opportunity.

We're currently involved in other strategic discussions regarding either purchasing portfolios, joint ventures or referral programs.

Additionally, we'll continue to see opportunities to provide ABL structured facilities to traditional cash flow borrowers who are facing liquidity pressures.

Borrowers who have traditionally accessed the cash flow market are now more receptive to SLRS ABL solutions to provide working capital financing.

These ABL facilities carve out working capital assets from our borrower into a borrowing base that supports an incremental a bl facility ahead of their cash flow facility and provides additional liquidity for our borrowers.

For the third quarter we had 244 million of new ABL investments including the Webster acquisition and repayments of 107 million turning to equipment finance.

At quarter end this portfolio totaled 1 billion representing a third of our comprehensive portfolio with facilities across 540 borrowers.

Credit profile of this portfolio continues to be stable.

Weighted average asset level yield was 9.4%.

During the third quarter, we originated 138 million of new assets.

With the majority of this coming from our business that provides leases to investment grade borrowers for their mission critical equipment.

We had repayments of approximately 104 million.

Our investment pipeline has expanded in conjunction with the disruption caused by last year's regional bank failures as well as the expansion of our vendor finance program.

Now let me turn to Life sciences.

At quarter end, this portfolio totaled 267 million.

Approximately 90% of the portfolio is comprised of investments in borrowers that have over 12 months of cash runway.

Additionally, all of our portfolio companies have revenues with at least one product in commercialization stage which significantly derisks our life science investment these investments represented 8.4% of the total portfolio for the third quarter and contributed over 25% of our gross investment income.

The life science industry continues to be somewhat challenged with 28% of the deals to date being invested in down or flat rounds, which is the highest level in recent history, many small cap and private biotech values have remained significantly lower than their previous VC dry powder has remained mostly on the sidelines, waiting for valuations to reach a better equilibrium, particularly in later stage development companies where we invest well, SLR's portfolio has held up well in part due to our focus on these, there has been an increase in defaults in life science portfolios due to weaker lender protections that prevailed in the market.

Prior to the collapse of Silicon Valley Bank, a forward-looking rate environment should result and we anticipate current conditions to persist for at least another couple of quarters, venture debt financing in health care related it service companies has been active but due to the lack of IP protection and other collateral that we require.

SLR has remained on the sidelines.

In addition to sourcing new opportunities in late stage drug development and device companies, we remain focused on supporting and in some cases expanding our existing portfolio of borrower relationships by keeping healthy life science credits longer and increasing our credit facilities to finance their growth.

We have been able to maintain meaningful exposure to this asset class during a challenging time for the life science industry broadly, while maintaining a comfortable level of diversity dollars of new facilities and had 78 million of repayments.

At quarter end, the weighted average yield on our life science portfolio was 12.6% including potential success fees.

However, excluding any potential warrant gains with early signs of improvement in the life science market.

We've seen a modest uptick in private and public equity valuations as well as in our investment pipeline.

Given our ability to allocate capital to the best risk, reward opportunities across our various private credit asset classes.

We have the luxury of being highly selective as we look to deploy capital in life sciences while still generating positive originations across the entire platform.

Lastly, let me touch on our SSLP during the quarter, SLRC earned 1.9 million from SSLP representing a 15.7% annualized yield consistent with the prior quarter at quarter end, it had a fair value of 204 million investment at SSLP.

Now let me turn the call back to Michael.

Thank you Bruce.

In conclusion, we remain pleased with the stability achieved in our third quarter results and encouraged by the overall credit quality of our investment portfolio, which is evidenced by another quarter of NAV stability, no changes to a low level of non accrual investments, a low level of watch list investments and minimal payment in kind income with broad diversification.

While concerns about credit quality and private credit portfolios continue to creep into the market strategy approach to private credit investing. as we sit here today and observe the growth in our platform over the last few years that has expanded our diversified commercial finance and vessel capabilities and momentum across our business.

We believe the company is positioned very favorably market expectations for the shape of the forward interest rate curve remain dynamic on the heels of this week's elections but do continue to include declines in base rates throughout 2025.

This situation may present a challenge for some private credit portfolio yields and earnings that are constructed with predominantly floating rate cash flow loans.

Vintage concentrations with proly 35% of our portfolio index to fixed rates.

Investors should come to appreciate that SLRC special finance assets have a lower correlation to base rates and offer a more substantial more absolute return like profile and the company therefore has portfolio yields that are expected to have a lower beta to future changes in so far in closing SLC trades at a 10.7% dividend yield as of yesterday's market close, which we believe presents and attract investment for both income seeking and value investors and offers shareholders portfolio diversification benefits compared to cash flow only strategies.

Our investment advisers alignment of interest with SLRC shareholders continues to be one of our significant Hallmark principles.

The entire investment team and the entire firm own over 8% of the company's stock and includes having a significant percentage of their annual incentive compensation invested reinvested in SLRC stock.

The team's investment alongside fellow institutional and private wealth investors, demonstrates our confidence in the company's portfolio, stable funding and earnings outlook.

We thank you all again for your time today.

As we know, it's a busy time for those that follow the list of BBC marketplace closely operator.

Will you please open up the line for questions?

Thank you.

And at this time, if you would like to ask a question, please press the star and one on your telephone keypad.

You may remove yourself from the queue at any time by pressing star two and we will pause for a moment to allow questions to queue.

Enter into one on your telephone keypad now and we will take our first question from Bryce Rowe with B Riley.

Please go ahead.

Thanks.

Good morning.

Good morning Bryce.

Wanted to, I guess just kind of a quick one here on business credit and you know the the Webster acquisition, you put some equity into that subsidiary, the SLR Business credit subsidiary and, and kind of curious what your thoughts are around.

Maybe the increased dividend or increased earnings from that particular investment.

I mean, again it's really early certainly expecting some level.

Yeah, we did and we did buy, this came with about 14% portfolio.

So, we, we're targeting sort of a, you know, low to middens, ROE on that investment.

So I think if you put that across the 30 million or so of equity that we dropped in, you know, that's a good starting point and we hope there's upside from there.

Okay.

That's helpful Bruce.

And maybe, maybe a couple more here as we think about, you know, the SLR senior credit are you at kind of a level where, you know, where we leverage within that particular portfolio is where you want to be or would you like to operate it with potentially more leverage?

No, I think the leverage is where we want it to be.

We are thematically, as Michael mentioned, you know, rotating out of cash flow loans and the entire strategy at SSLP is cash flow investing. so you'll see it bump around a little bit as we get some repayments and opportunistically add to it. so I don't think there's much more leverage there.

I think you know there's a little bit more upside as we optimize the size of loans go in this repricing environment.

Yeah Okay, and then maybe one more around the repricing environment.

We heard a lot about the potential for M&A to pick up to help.

Maybe, I guess remix the supply and demand within private credit as it relates to cash flow lending.

Do you all sense that there could be you know an opportunity to, you know, to maybe to, reemerge with within that market now that you're pivoting and just kind of trying to get a feel for how long the pivot lasts and you know how opportunistic you all can be with, you know, with the current market environment.

Yeah, I think the first thing that happened portfolio because everybody starts to underwrite new opportunities and that supply dynamic shifts such that it's difficult for borrowers to come in and reprice the existing portfolio down from 26%.

Sponsor finance to 22%.

I'm sorry, 24 down to 22 last year, we peaked at over 26%.

So it will move around for us.

You know, we never see it much more than, you know, high 20s and we don't see it getting down to much lower than, you know, high to middens so we are looking for new opportunities, but the first benefit is definitely taking the pressure off the existing portfolio from a repricing perspective.

I do think though that there's been so much money raised for just sponsor finance that it's not going to change the yields that we're seeing dramatically at all.

What it does do for us though.

Given how picky we are in Castalie, it gives us more opportunities to choose amongst and find things that fit our type box.

But I would not sit here today and assume that you know, spreads are going to widen dramatically just because there's more M&A supply coming.

Yeah Okay.

All right, I appreciate your perspective.

Thanks for your questions.

Thank you. and we will take our next question from Melissa Wedel JP Morgan.

Please go ahead.

Good morning.

Thanks for taking my questions today.

I was hoping you could elaborate a little bit more on the assets that were acquired in that factoring portfolio.

Can you just talk a little bit about how those maybe provide, you know, some or do they diversify the rest of that existing portfolio?

And then are they sort of fixed rate or floating rate assets?

Appreciate it.

So good question, Melissa, they're all floating rate and they're consistent with our existing platform that is already both either factoring or in an ABL structure lending against receivables.

So that the collateral is something that we're incredibly familiar with.

What it does for us is.

Yes, it adds an element of diversity.

We had approximately 94 different borrowers across 124 million of funded assets.

So it's a very diverse portfolio with an average investment of about 1.3 million per borrower yields are in the low to middens and losses are de minimis because effectively in factoring your buying or lending against a high quality, low Amazon and yet our customers are clearly not of the same credit quality.

And so therefore we get to charge higher returns, but our underlying risk really is close to investment grade.

What we like about the portfolio is it is longstanding, long tenured relationships.

This is not an M&A sponsor finance portfolio that churns every couple of years as sponsors come in and out of investments here.

So the average relationship in the web support people assets, but the underlying collateral turns every 30 60 90 days.

So we have the ability to unwind our investment rather quickly if we want out.

Obviously, that's not what we're seeking to do with relationships that have lasted nine.

The ability to unwind quickly against duration and high returns on these assets is, you know, extremely attractive.

It's also I would say unique to our platform in that you need to be in this business to be able to make an acquisition like this.

We acquired a business game with the team, not all of the team that Webster had, we were able to, you know, find some synergies and bring it on platform.

And it also adds diversity to the industry in digital media.

ABL where our acquisition a couple of years back.

And this is very as Michael mentioned, focused on, you know, traditional factoring industries such as apparel, textile, jewelry.

So it expands a region and an industry focus for the team there.

So we think it's extremely attractive and would love to do more.

I appreciate all that context.

Speaking of doing more leading right into my next question.

Are are you constrained?

Are you getting constrained by the 30% cap?

I mean, how much capacity do you have to do additional deals like this?

Thank you.

So just as a quick reminder the 30% catches some of our fincos because of the structure of owning the fin current company's balance sheet and it doesn't utilize the 30 and as we see large portfolios, the BBC, as you know, benefits from the affiliation with the broader platform with over 14 billion of investable capital, we can take assets both into the BDC and alongside our private funds as well.

So we feel we bring a lot of flexibility and don't feel constrained by this.

I appreciate that.

Thank you.

Thank you.

And we will take our next question from Sean Paul Adams with Raymond James.

Please go ahead.

Hey guys, good morning on rug doctors.

I know it's been on nonaccrual for a couple of years now.

It's also held by a number of other BBC S but it looks like the portfolio markdowns really haven't shifted in the last couple of quarters.

Has there been any any change or any pathway for resolution on that on that accrual.

Yeah.

So it's a great question as you know, you know while we care about every investment, it's rather de minimis in size across the portfolio.

The big thing that happened with the rug doctor is a couple of years back.

We entered into a JV, with Isell who is a major player in the vacuum business, but not so much so in the rental vacuum business.

And so this will actually run this JV.

And so what you're seeing is our ownership and our peers BDC ownership in the JV.

The only reason it's on nonaccrual is because we have not been collecting interest.

We've been keeping it in the business, really haven't restructured, you know, our investment.

We do think resolution there with our JV partner long term, they obviously would probably prefer to own all of it and part of it.

But that's really, I think going to be the catalyst down the road is this was a likely acquire of the remaining interest from ourselves and our pure BBC.

Perfect.

Thank you for the clarity.

I appreciate it.

Thank you.

And it appears that we have no further questions at this time.

I will now turn the program back to our presenters for any additional or closing remarks.

No additional remarks other than thank you for your time and attention on this particular busy season of quarter earnings.

And again, as always, if you have any other false questions.

Please feel free to follow up with any of the of our team.

Have a great day.

Thank you.

This does conclude today's presentation.

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