SLR Investment Corp (SLRC) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q1 2022 SLR Investment Corp Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Michael Gross, Chairman and co-CEO.

Thank you very much, and good morning. Welcome to SLR Investment Corp’s Earnings Call for the First Quarter ending March 31, 2022. I am joined today by Bruce Spohler, our Chief co -- our co-Chief Executive Officer; and Rich Peteka, our Chief Financial Officer. Rich, before we begin would you please start by coming the webcast and forward-looking statements?

Of course. Thanks, Michael. I would like to remind everyone that today's calls and webcasts are being recorded. Please note that they are the property of SLR Investment Corp and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast from the investor’s tab on our website@www.slrinvestmentcorp.com. Audio replays of this call will be made available later today as disclosed in our earnings press release.

I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute overlooking statements, which relate to future events or our future performance or financial conditions. These statements are not guarantees of our future performance, financial condition, or results, and involve a number of risks and uncertainties including impacts from COVID 19. Past performance is not indicated 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 FDC. SLR Investment Corp undertakes no duty to update any forward-looking statements unless require to do so by law.

To obtain copies of our latest SEC filings, please visit our website or call us at (212) 993-1670. Comments and on today's call include overlooking statements, reflecting our current views with respect to the April 1, 2022 close of SUNS merger within to SRC. Any expected synergies and savings associated with the merger, the ability to realize the anticipated benefits of the merger, our future operating results, and financial performance, and the payment of dividends going forward. Please specifically note that the amount and timing of past dividends of distributions are not a guarantee of any future dividends of distributions or the amount thereof, the payment, timing, and amount of which will be determined by SLR Investment’s Corp board of directors.

With that said, would like to turn the call back for our chairman and co-CEO, Michael Gross.

Thank you very much, Rich. I'd like to remind everyone that on today's call, we are reporting Q1 2022 operating and financial results of SLRC on a pre-merger basis only. Given the April closing of the SLRC SUNS merger, our Q2 2022 earnings report for SLRC will be the first quarter report of the combined entity. However, on this call, we will provide some pro former guidance of what the combined portfolio would've been at the end of the first quarter. Last night we reported net investment income of $0.32 per share for the first quarter of 2022. Excluding merger-related expenses, the companies that investment income would've been $0.35 per share consistent with the prior quarter. Net asset value at March 31, 2022 was $19.56 per share.

The unfolding geopolitical events continued supply chain issues and labor shortages, and a far more aggressive tone from the fed in reaction to accelerating inflation in the U.S. has injected a dose of uncertainty and volatility into global equity and credit markets. Syndicated spreads wide in Q1, particularly in longer duration, fixed income securities. At the margin, we are seeing some spread widening in middle-market floating rate leverage loans but is too soon to call it a trend. Due to our focus on upper-middle market U.S. companies operating in defensive sectors, the effect of rising inflation and supply chain disruptions on our portfolio have thus far been immaterial, but of course, we are closely monitoring the situation.

Following a record year of 1.2 trillion of U.S. private equity investments in 2021, sponsor activities flowed in Q1. Against this backdrop, SLRC platform originations totaled $174 million against $205 million repayments. Sponsor activities picking up thus far in Q2 and our pipeline remains healthy across all of our business verticals. Most importantly, with the closing of the SUNS acquisition on April 1, our comprehensive portfolio Has grown by over $600 million, over $2.6 billion, and we expect solid net origination over the course of 2022. At March 31, over 99% of our comprehensive investment portfolio was invested in senior secured loans and 81% of the portfolio's fair value was allocated to special finance investments. Kingsbridge, which required Q4 2020 continues to form above our expectations. We continue to actively evaluate commercial finance investment opportunities that could enhance and further diversify SLRC's portfolio.

In January of 2022, we issued $135 million of 3.33% senior unsecured notes, due January 2027 in a private placement. Combined with the $50 million of 2.95% senior to unsecured notes issued in Q3 2021, we have lowered the company's long-term average unsecured financing rate. The average $105 million of senior unsecured notes due 2022 have a weighted average and or interest rate of 3.2% a significant reduction from the 4.5% weighted average and or interest rate in the $150 million of senior unsecured notes that mature next week on May 8. At March 31, our leverage was 0.98x net debts to equity compared to its low point to the pandemic of 0.56x net debts equity at September 30, 2020. On April 1, 2022 SLRC completed its previously announced acquisition of SLR Investment Corp or SUNS. In accordance with terms of the merger agreement at the time of the merger, SUNS common stock was converted into 0.7796 shares of SLRC common stock, resulting in the issuance of approximately 12.5 million shares of SLRC to former SUNS shareholders.

In conjunction with the merger, SLR capital partner, the investment advisor SLRC, permanently reduced the annual base management fee by 25 basis points from 1.75% to 1.5% on gross assets effective upon the successful close of the merger. The contractual step down to the base management fee to 1% on gross assets above one-to-one leverage remains in place. We believe the transaction with SUNS make strategic sense to the company will create long-term value and growth opportunities for SLRC shareholders for a number of reasons. A few of which I'll highlight now. The greater scale of the combined company should provide important benefits.

As of March 31, the combined company would have had just under $2.7 billion of comprehensive portfolio assets, and $1.1 billion of net assets. With a larger market capitalization that is expected to provide greater training liquidity, gather additional institutional investor interest and research coverage, and enhance the company's access to the equity and debt markets. Additionally, the greater scaling will increase portfolio diversification as well as expand the opportunity set for additional commercial finance opportunities, including tuck-ins, platform acquisitions, and asset purchases. The combined company will have more broadly diversified portfolio, it will be enhanced in addition of SUNS 2 commercial finance affiliates, SLR healthcare ABL, and SLR business credit, which specializes in making senior secured asset-based loans and back arrangements to small and medium-sized companies. Based on SLRC's balance sheet at March 31, the proforma net leverage to the acquisition of SUNS concerns would've been 0.9x, opening up additional capacity of fund portfolio growth over the remainder of 2022.

Over time, we expect that a combination of expected cost energies, reduced management fees, and interest savings resulting from the more efficient debt financing should drive net investment income growth. Importantly, it has anticipated that the larger scale and capital base should allow the combined company grow NII faster than either solar or SUNS would've been able to achieve on a standalone basis and to potentially generate higher NII for share.

Finally, on March 3, our board of directors authorized the company's adoption of a $50 million, our re-repurchase program of our outstanding common stock. Given the recent market volatility and economic uncertainty, the repurchase plan provides us with an additional tool for enhancing shareholder value.

At this time, will turn over the call to our CFO, Richard Peteka to take you through the Q1 financial highlights.

Thank you, Michael. That's for our investment court's net asset value at March 31, 2022 was 826.4 million, or $19.56 per share compared to 842.3 million or $19.93 per share at December 31, 2021. At March 31, 2022, SRCs on balance sheet investment portfolio had a fair market value of 1.63 billion in 101 portfolio companies across 33 industries, compared to a fair market value of 1.67 billion in 106 portfolio companies across 34 industries at December 31, 2021. At March 31, 2022, we had 2 investments on nonaccrual, representing 4% of the portfolio at cost and 1.7% of fair market value. At March 31, the company had 815 million of debt outstanding, with leverage of 0.98x net debt [back]. When considering available capacity from the company's credit facilities, together with available capital from the nonrecourse credit facilities at SLR credit solutions, SLR solution finance, and King's Bridge, Investment Corp had significant available capitals upon future portfolio growth.

Moving to the P&L, for the 3 months ended March 31, 2022, gross investment income, totaled 33 million versus 35.7 million for the 3-month end in December 31, 2021. Expenses totaled 19.5 million for the 3 month ended March 31, 2022. This compares to 20.8 million, for the 3 months ended December 31, 2021. Included in this quarter's expenses were 1.52 million, of one-time cost associated with the merger, with SLR senior Investment corp. Across the fourth quarter of 2021, and the first quarter of 2022, SLRC recognized the total of 2.4 million of merger expenses, which includes additional reserves, which we currently expect will cover all remaining merger-related expenses. Importantly, given where the company is with regard to its incentive fee calculation (inaudible), the investment manager ultimately covered 1.14 million of the 2.4 million of merger costs. In addition, the investment manager has committed to not include in its incentive calculation any purchased discount creation created by the company's asset acquisition accounting under ASC 805-50.

Back to the P&L. Accordingly, the company's net investment income for the 3 months ended March 31, 2022, totaled 13.5 million or $0.32 per average share. Compared to 14.9 million or $0.35 per average share for the 3 months ended December 31, 2021. Below the line, the company in net realized and unrealized losses for the first fiscal quarter totaling 4.3 million compared to a realized and unrealized loss of 8.8 million for the fourth quarter of 2021. Ultimately, the company had a net increase setting net assets resulting from operations of 1.5 million or $0.04 per average share for the 3 month ended March 31, 2022. This compares to net increases 6.1 million or $0.14 per average share for the 3 month ended December 31, 2021.

Finally, on May 3, 2022, the Board of Directors declared its new monthly distribution of $0.136667 per share payable on June 2, 2022 to holders of record as of May 19, 2022. And with that, I'll return the call over to our Co-CEO, Bruce Spohler.

Thank you, Rich. At quarter end, SLRC's comprehensive portfolio was approximately $2 billion and remained highly diversified encompassing 600 different borrowers across 80 industries with average exposure of 3.3 million or 0.2% of the total portfolio. Our largest industry exposures were diversified financials, healthcare providers, life sciences, and software. At quarter end, over 99% of the comprehensive portfolio consisted of senior secured loans. 95% of the portfolio was invested in first lean assets and only 4.3% was invested in second lean assets. Of the second lean loans, 1.4% were cash flow, and 2.9% were underwritten on an asset-based phases.

At 3 31, our weighted average asset level yield was 10%. By focusing on our niche commercial finance verticals, we've been able to maintain asset level yields around 10% while actively reducing our exposure to second lean cash-flow investment. At March 31, the weighted average investment risk rating of the SLRCs portfolio was just under 2 based on our one to 4 risk rating scale with one representing the least amount of risk. At quarter end, the weighted average LTP of our first lean income-producing portfolio was approximately 45% loan to value. Indicative of significant junior capital and equity cushions supporting the investments in our portfolio. Total originations for the first quarter were just over 170 million and repayments were just over 200 million. Essentially we were able to run in place during the first quarter, despite a backdrop of the season of slowdown in sponsor activity, as well as a more uncertain and volatile environment.

Importantly, SLC had approximately 180 million of unfunded commitment outstanding at quarter end. Which we expect to fund in future quarters. Now let me turn to each of our investment verticals. Sponsor finance: At 3 31, our cashflow loan portfolio was just over 370 million or just over 18% of the total portfolio and was invested in 21 different borrowers. The average EBITDA of our cashflow investments was 82 million consistent with our focus on larger upper mid-market borrowers. The weighted average leverage in this portfolio has hovered around 5½x consistently, and the average interest coverage remains above 3x.

As Michael mentioned, sponsor activity in the first quarter has slowed from last year's toured pace. During the quarter, we originated 2 and a half million and experienced repayments of over 50 million. Unfunded commitments total over 40 million. These transactions, which are issued by borrowers to fund future acquisitions, offer a prudent opportunity for us to grow our investment and establish credits with existing structures. At quarter end, the weighted average yield on the cash portfolio was 8.2%.

Now let me touch on asset-based lending. At quarter end, the combined asset-based portfolio was just under 470 million, representing 23% of our total portfolio. And it was invested in 24 borrowers. The weighted average yield on this portfolio was just under 11%. During the first quarter, we originated approximately 38 million of new loans and had repayments of 10 million. Our ability to assess and monitor collateral makes us an attractive financing partner during periods of economic uncertainty when banks tend to retreat from lending. Therefore, this business line provides some countercyclicality to our origination platform.

Now let me touch on leasing. Credit quality of Kingsbridge portfolio remains strong and originations or essentially flat during the first quarter. At quarter end, their highly diversified portfolio of leases spans across 3 major equipment sectors, including technology, industrial borrowers, and healthcare. In total approximately 573 million with an average exposure of 1.3 million per borrower. This lease portfolio was 100% performing with the majority of the assets invested in leases with investment grade borrowers. For the quarter, Kingsbridge paid the 3 and a half million dollar dividend consistent with the prior quarter, which equates to a 10.2% annualized yield on cost. Including interest on our $80 million senior secured loan into Kingsbridge, gross total income generated by the investments in Kingsbridge through the debt and equity was 5.1 million for the quarter. While Kingsbridge continues to have a strong pipeline of new investment opportunities, supply chain disruptions are likely to limit portfolio growth in the near term, but also will extend, attract the residual leasing activity.

Now let me turn to equipment finance. As a reminder, included in our equipment finance business, our financings held on our balance sheet as well as in our SLR equipment finance subsidiary. During the first quarter, equipment finance invested $20 million and had repayments of $45 million. At quarter end the portfolio totaled just over $316 million. It was invested across 94 borrowers, with an average exposure of approximately $3.5 million. This asset class represents approximately 15% of our total portfolio. 100% of their loans are in first lien assets, and the weighted average asset level yield is just over 9%.

In Q1, comprehensive investment income from the entire equipment finance business totaled $3.3 million. The rebound in economic activity that started in the fourth quarter of 2020 and continued through last year has been supportive of the performance of our equipment finance portfolio. We are seeing valuations on equipment return to pre-COVID levels and credit quality improving at the borrower level. Our team expects to grow this portfolio during this year.

At quarter end, we announced the appointment of a new CEO for equipment finance. He brings over 30 years of experience in the equipment finance industry, including 25 years of vendor finance focus experience, where he brings deep knowledge and relationships with both vendors and end-users that will help the company develop and engage with new and existing clients. It's been early days, but we are thrilled to have Tom on the platform and he's taking us to new opportunities in the marketplace.

Now let me touch on life sciences. At quarter end, the portfolio totaled approximately 300 million. It consisted of 16 different borrowers. All of our companies in this asset class are meeting or exceeding their expectations at the time of underwriting. With the weighted average cash runway now standing at over a year, life science loans represent just over 14% of our comprehensive portfolio for the first quarter and contributed over 23% of our gross investment income. During the first quarter, the team committed to $60 million of new investments, which 36 million were funded. Repayments totaled 16 million. At quarter end, SLRC had 112 million of unfunded life science commitments outstanding, which are available to our borrowers upon reaching certain milestones. Additionally, the life science team, currently has a robust pipeline of new investment opportunities, which we expect to fuel portfolio growth during the course of 2022. At quarter end, the weighted average yield on this portfolio was approximately 11% excluding success fees and warrants.

Now let me talk to the combined portfolio with a snapshot of what it would look like, had SUNS been acquired at quarter end. The combined entity on a proforma basis would've had a portfolio of 2.66 billion with over 600 million or 23% of the total allocated to sponsor finance and 2 billion or 77% of the total portfolio allocated to specialty finance. Specialty finance verticals would've had an $810 million portfolio and asset-based lending and an $890 million portfolio in equipment leasing and equipment finance. And lastly, over a $335 million portfolio dedicated to life science investments.

As Michael indicated, the combined portfolio will be more broadly diversified with multiple opportunities for growth, including directly underwritten investments, tuck in or new platform acquisitions, as well as potential portfolio purchases. Importantly, the combined entity has approximately 215 million of unfunded investment commitments that we expect to fund in future quarters. In addition, leverage of the combined entity of quarter end would have been 0.9x leverage creating additional investment capacity going forward to fund portfolio growth. In conclusion, we see a continuation of the investment themes that have been driving our portfolio over the last few years.

Focusing our new origination activity on first lien cash-flow loans to portfolio companies in defensive sectors in the upper mid-market, increasing our investments in specialty finance assets, where we generally get tighter structures and more attractive risk-adjusted returns and growing our investments alongside portfolio companies by committing to unfunded acquisition lines, which will be funded over the future quarters. The keys to driving an increase in net investment income per share over the remainder of this year will be a combination of capturing anticipated cost significant from the merger, growing our balance sheet and especially finance portfolios, continuing to take advantage of our scale and employing a $50 million share repurchase program. Across our asset classes, we're seeing a number of attractive investment opportunities. Given the uncertainties and market volatility, it is also important that we remain disciplined, opportunistic, and highly selective in our investments. Now let me turn the call back to Michael.

Thank you, Bruce. In closing, we are optimistic about our earnings growth potential and the opportunity set across each of our investment verticals. With the overall SLRC portfolio on solid footing, we are focused on remaining disciplined and highly selective in deploying our capital into attractive investment opportunities. Financial sponsors continue to have record amounts of dry powder that is expected to support future deployment in 2022 and beyond. The larger middle-market businesses we prefer to lend to continue to choose direct financings over the syndicated debt markets. These industry tailwinds combine the scale of our investment advisor should benefit SLRC shareholders through greater access to upper-middle market cashflow investment opportunities which the pandemic has proven our better positioned to protect capital than most smaller companies. Additionally, we are reaping the benefits of our scale advantage in our cashflow life science and ABL verticals.

As I mentioned in my opening remarks, Bruce and I as Co-CEOs and our independent directors believe that the merger of SLRC and SUNS which close April 1, creates a larger, more diverse high portfolio with incremental capacity to fund portfolio growth. We believe the merger and resulting scale potentially makes us a better acquirer and strategic buyer of [industry] finance businesses. We will continue to be disciplined and selective in our new investments, with a focus on capital preservation. As we deploy our available capital and reach the midpoint of our 0.9x to 1¼x target debt to equity range, we believe that we can drive increased net investment income per share. Importantly, we expect SLRC to make progress moving NII closer to covering its distributions through the remainder of this year, as cost energies are realized, and we deploy our available capital.

Finally, with the board's authorization for SLRC's adoption of a 50 million share repurchase program, we have additional flexibility to deliver shareholder value. Our investment of our alignment of interest with the company shareholders continues to be one of our guiding principles. The SLR team owns approximately 8% of the combined entity and a significant percentage of the annual incentive compensation invested in SLRC stock. The team's investment alongside fellow SLRC shareholders demonstrates our confidence in the company's defense of portfolio, stable funding in favor position to reap the expected benefits to the merger. We thank you very much for your time today.

Operator, at this time, will you please open the line for questions?

(Operator Instructions) Our first question comes from Ryan Lynch with KBW.

First question I had, you guys implemented a share repurchase agreement. This is the first one I can remember in quite a bit at a time and I know you guys haven't been active with share repurchases in the past. So I would just love to get a little more color on why you implemented the share repurchase now, what are your guys views on how active you will be in it at the current stock price and was it implemented more as kind of a capital allocation? Mechanism as you going forward? Or is it more put in there for any dislocations you guys see in stock price or at these levels? Do you envision it to be just part of the normal capital allocation process?

Thank you for your question. I think when you think back is going way back in history. We implemented a stock back program back in 2014, which we substantially used. We did have that time because in one quarter we had literally a third of our portfolio repaid and so we were under leverage and thought that was a great capital allocation opportunity for us. In this instance, we waited for the merger to close, part of result the merger is our leverage went down from 0.97 to 0.91. So at a 50 million buyback, it would roughly take us back to the 0.97 again, where it's fully used. We thought that was a good capital allocation policy. It was also response to fact that there has been volatility in the BDC space, including ours and we expect us to continue with all the absurdity regarding rising interest rates, inflation and the more that's going on. So we do expect to use it, we think our stock is very tracked with these levels, subject to our window period being open, we intend to use it.

Okay, that's helpful, Gross. And then, can you give us any update you guys had a heavy knew, not a cool in the quarter that was also written down pretty immediately finance. I would just love, you can give an update on what's going on with that business, what drove that mark down in that investment?

Sure. So, as you probably know, this is one of our last remaining second lean cashflow positions. We've been actively exiting that portfolio rather successfully until we hit a speed bump with this one, which is one of the last ones we have, just for contact. So the business is an outsource anesthesia business, and they have faced some headwinds in the market that they operate in potential reimbursement headwinds, as well as some operating headwinds, as well as some issues, given increased wage inflation across our country, including in healthcare service companies. So it's been a bit of a perfect storm for them. Again, as a second lean investor, we do take some of the front of that after the equity does. They're in the process of evaluating strategic alternatives, so there's not a lot we can say, but we'll keep you updated as we move through the next quarter.

Okay. I understood, that's helpful. Background and context on that investment. And then just the last one that I had, and I just want to make sure I'm understanding this correctly. You talked about the corporate leasing portfolio supply chain issues being somewhat of a headwind as far as being able to fund new investments. Not that the pipeline's not there, but the ability to fund those investments supply chain presents an issue. I didn't hear you mention that, or maybe I missed it. Regarding the equipment financing portfolio. It didn't sound like there was the supply chain issues were causes in delay and funding in that book. One, am I correct in that assessment and two, can you just break down why supply chain would affect one and not the other, if I am understanding that question?

Sure. So, it does affect equipment finance, but less so. Equipment finance is to bifurcate the 2 businesses; Kingsbridge is lending to predominantly investment grade companies, large companies, large purchases, new purchases, so a lot of assets coming in from overseas. Our equipment finance vertical as you may recall, is lending to small companies, mission critical equipment, very often used equipment. So it's already landed and being employed somewhere else and then being redeployed. So it's just different demand drivers on the 2 segments.

Our next question comes from Bryce Rowe with Hovde.

Maybe wanted to start on rates and rates sensitivity. Could you guys speak to the sensitivity of your balance sheet, especially considering this pretty drastic move higher in base rates that we've seen or that we saw and continue to see here next?

Sure. We do disclose a hundred basis point move in our 10Q where we would see a 4 to 5% per annum top based on the 3 31 portfolio in the rate that we have as well for assets and liabilities and what would happen with a hundred basis point move up. We would create $0.04 to $0.5 in NII for the year. With a 200 basis point top, you are up the 16% to 18% range, and this is a whole on a look through basis. So looking at all 5 of the pin posts that we have in the portfolio post-merger. So that's on a fully look through basis. So very positive.

Okay. And Rich, we're talking about a shock in the base rate being LIBOR, correct? At the end of the quarter.

Correct.

Got it. Okay. And then maybe one for Bruce or Michael. Just thinking about a potential upward trajectory of balance sheet leverage, as you possibly fund some of these unfunded commitments. I think we've talked over the last 6 months that there was good visibility into that, and obviously we've thrown some uncertainty into the mix. Just kind of curious how you feel about some of the unheightened, or the heightened uncertainty that we're seeing and being able to get to that midpoint of the targeted range.

Sure. Great question. So as you know, we have a couple levers to get there. So yes, obviously the first step was making a significant acquisition in a portfolio we know well at SUNS. That did take leverage down a little bit, but not in a meaningful way, but we think that's a quarter step back or 2 steps forward. Because it also positions us with additional verticals that SLRC did not have on their own. Clearly they both participate in cash loans like science loans, but now we have the working capital line of credit businesses, both business credit, as well as the healthcare ABL business, both of which lend against receivables and are less M&A driven or more relationship lending, where they act as the local bank for their borrowers. So the driver there is just putting on new relationships and having utilization of the working capital facilities that they extend to their borrowers. So that's a new driver for SLRC and at business credit in particular, we have been making tuck in acquisitions and growing that business. So that's a new lever for growth.

I think the other thing that we look to your point, the unfunded commitments, go predominantly across our life science business and our cashflow business. Typically, in life science, we do see some of that drawn down as they hit additional operating milestones or capital raise milestones. So we think that will be drawn because the drivers are, as you know in life sciences, it's about new drug and device development, FDA approval process, and then getting into commercialization. So we're in late stage, companies by and large and so they are moving into that commercialization stage and we'll need our capital. And I think the other driver in DDTL's is acquisition lines for existing borrowers. As you know, our cashflow business is in defensive sectors, such as healthcare and insurance brokerage, and software, and they continue to make tuck in acquisitions. These lines do have a cost to them when they are unused and have a life to them, a finite life. So we expect to see steady usage of those existing commitments.

And then last but not least, we are putting out new capital in new opportunities. And I think the other thing worth noting is given the uncertainty, we are seeing less headwinds in terms of repayments. Clearly, there will be companies that will be sold and we’ll be repaid, but the whole refinancing dynamic of trying to drive their cost of capital down, I think has been put on hold for the foreseeable future at the portfolio company. So that'll also mitigate and contribute to net portfolio growth.

Our next question comes from Casey Alexander with Compass Point.

First, just one maintenance question in the discussion of the combined portfolio where you said 890 million of equipment finance. Is that the equipment finance and corporate leasing combined there?

Yes, it is Casey. We are going to increasingly look to make it a little bit easier to understand the collective businesses because they are similar but slightly different. So the same thing as we start to talk about our ABL business is similar, but slightly different. We'll try to simplify it for you as we move forward.

Secondly, regarding the new CEO of the equipment finance business, the previous management group was I believe out of GE's equipment finance. What precipitated the change? Is that business just not growing as fast as you'd like or why reach out for a new CEO there?

Sure. So great question. So just by way background, consistent with all of our FinCo platforms as we call them, these are entrepreneurial founded and teams have been together for a long period of time to your point. This team came out of GB but basically when we brought this business on, we knew that Bill Carlson who ran the business and started the business was going to be looking to transition out over time. He had been with us for a number of years, but he was approaching 70 and so this was a natural time in his life to retire. And so, we actually brought in somebody Casey, who also has GB background, most recently, he spent the last 10 or 15 years at DLL, the Large London, which is a major player in independent leasing. But he also comes by way of GB. So the entire team is in place. We just had a transition from Bill who was retiring to a new CEO.

Okay. That makes perfect sense. Last question. In relation to the life science portfolio, and I know that some portion of your NII not dependent, but benefits from prepayments in the life science area where there's end of term payments, accelerated fees. Does the volatility of the equity markets actually continue to slow that down? I know that the prepayments haven't come in at the rate that you might have expected. And I'm just wondering if the lack of having an IPO exit for certain companies or lack of not wanting to do down rounds, might continue to slow prepayments in that vertical.

So that's a great question. It is so company specific in terms of where they are in their development. Because again, we're dealing with late stage. You will see companies get purchased by big strategics, because basically, the VC community has become the outsourced R&D for the big strategics. And once they get them to commercialization, strategics step in and buy them. So that's really the driver of the takeout. It's less of a refinancing market then you think of when the typical cashflow, sponsor business where they're constantly trying to take down their cost of capital. The debt is already cheaper than equity to these borrowers and so it's not a big refinancing driver. The exit tends to be as you know a 28/36 month old because you're just so late in the development of the company's products, be they drugs or devices that then you're getting set up for a takeout.

I think the comment that you make, which is right spot on is the volatility in the equity market means they are less inclined to issue equity to fund their growth before the exit and more looking to supplement with some credit capital that in our minds is expensive, but relative to issuing equity is cheap. And so we're actually starting to see the volatility allow us to put new assets out as we look forward this year because debt becomes more attractive to fund that marginal dollar that they need before they sell business in the next year or 2. But just to your point, also, I think what we do get these on a continuous, but not necessarily consistent basis, Q1 was light, in that category we will have some decent fees in Q2.

Our next question comes from Robert Dodd with Raymond James.

On the combined portfolio, you guys, you talk about 2.6 billion combined, 600 at close at least allocated to sponsor finance and that's about a quarter. Should we expect that mix? One quarter sponsor finance 3 quarter, especially financed to kind of stay the same going forward as potentially you lever up? Or is that just where it is today and you actually have a different say 3 year target allocation for that capital base?

Look, I think as you know, we grew that portfolio both at solar and SUNS last year. I think right now we would say that it's probably unlikely to outpace the growth of the other segment. So I think 20% to 25% is good as a fair range.

Okay. Appreciate it. On the delayed draws. I mean, the market has gotten more choppy. That's just what we're talking about in the context of the life scientist. How different are the delayed draw structures that obviously you put in place some time ago for acquisitions that come? How different are those structures from say structures that would be put in place today? Either covenant structures, coupon spreads, how much is it as kind of the market move for what you do today versus when you actually put these things in? Put these structures together?

Great question. I think as Michael mentioned in his remarks, there's always a lag between seeing the volatility and change in terms in the broadly syndicated market and the private market. And we've been to your point working on deals for months before they actually close and so you're not always able to adjust terms. So, effectively what's in place today is last year's structure and last year's pricing, but I would tell you today, if we were to book the same investment, it would look very similar. You haven't seen that change. We're hopeful as we get into another quarter or 2 as this volatility continues, as always you see the broadly syndicated market terms reflected in the private market. But I think we're a quarter or 2 away so it's really going to happen in the next quarter or 2. Those investments be they funded or delayed draws, you'll see a bit of a change. But it really, today is no different from a year ago yet.

(Operator Instructions) Our next question comes from Melissa Wedel from JPMorgan.

First one is a little bit of a housekeeping item on the combination of the portfolios. I just wanted to follow up, I know you've mentioned a couple of different things, as these portfolios are integrated. But is there anything specific that we should be thinking about in the next quarter or 2 in terms of incremental cost headwinds or frictional expenses or financing or things to think about as financing is consolidated?

No, the good news is, this merger was literally seamless, the credit facility that existed at SQNS, name of the revolving credit facility, as well as the secured just moved over. We didn't have to make any change, any of our finance agreements at SLRC. We obviously know the portfolio well, since we originated it all. So literally there will be no friction costs at all and all the merger expenses were incurred in Q4 and Q1, we don't really expect to be anything more from that. And so Q2 should be a very clean quarter and we'll reflect the full results of the merger entity. And not merger related specifically, but next week we do repay the 4 and a half percent notes that we have outstanding. We pre-refinanced those with roughly 3.2% notes between the issuance in January and last September. So we will also see not a full quarter kind of a half quarter of that benefit in our interest cost on a combined basis. And just to be a little more direct regarding your question, we do expect that NI in Q2 will be higher than NI in Q1.

Okay. That's helpful. And my second question is really bigger picture in nature. I think that you've talked about a couple of interesting things in terms of the volatility, potentially impacting some pricing and spreads down the road, but there is a lag in the private markets versus the syndicated. And also the attractiveness of debt to fund incremental growth right now, as opposed to equity, that being said, there's also continues to be a lot of capital formation in this space. And so, I'm curious how you're looking at the landscape longer term, what the opportunity set could look like for you and what you're expecting in terms of pricing, and also given the rather diversified platform that you guys have built. How those things all come together. Appreciate it.

So let me take a shot. I'm sure Bruce interrupt me. Your spot on there has been a tremendous capital formation and private credit. The good news is that the vast majority of it is being created by those who are 20, 30, 40, 50, 100 billion asset managers. And they're the ones who are focused on doing the $1 billion to $3 billion unit launch, we just saw second liens. And so at their scale, it kind of moved the point where we don't really see them in our business, we're looking to put in a given loan across our platform anywhere from 50 million to 250 million in a given loan, not 1 billion. And so, the real capital formation, it really has impacted our market and more specifically, in the 75% of our portfolio especially finance, you have not seen much capital formation in those sectors. So it doesn't really impact that either.

Yes, I would just echo Michael's comment. I think the diversity to your point Melissa, of the platform, the ability to do anything from $100,000 factoring line to 250 million life science investment, is very compelling. The aggregation of these niches adds up to a nice overall diversified platform that serves us well throughout economic and credit cycles. And I think that's really what we're going to do more of. I mean, life science is a great example, even there, yes, there's been a little bit of capital formation, but the market is a $4 billion or $5 billion market. You're not going to see people come in that have large-scale platforms and need to deploy, to Michael's point, $500 million to $1 billion in a transaction. It just doesn't exist. So it's important that we maintain discipline and go to a collection of defensive niches.

Our next call all comes from Gerard Heymann from RBC.

Congratulations again on the merger. I think it's an amazing thing. And I just have a 2 part question for both Bruce and Michael. You guys can take it in turn or whatever, but I just was curious based on the merger now and where we are in the markets. The one thing that you guys are most excited about going forward, and the one thing you guys are most fearful of going forward. If you could possibly answer that, that would be most appreciated it.

Yes, I think the excitement is, follow up on the prior questions from Melissa. The exciting part for us is that we have increased scale, increased simplicity, and our shareholders are together and combined and all can benefit from the different growth engines. As you know, back in the day, when we created 2 different BDCs, they did have distinct investment strategies. Increasingly we also thought back then that there was a different risk-adjusted return with the benefit of 16, 17 years. We feel that the risk has converged and it would be beneficial for everybody to be on one platform as shareholders, as employees and as borrowers. And so we're really excited to have it together and be able to think a little bit more simpler and broader and take advantage of the scale of the platform, not only at the BDC, but we as you know have continued to partner with private capital alongside the BDC that allows the BDC to act as it is an $8 billion fund rather than a $2.6 billion fund proforma for the SUNS merger.

So it really allows it to have the benefit of scale and go to the larger transactions when we want to go large and small transactions, like a factoring deal when we want to go small. So I think we have really looked at the flexibility and are taking advantage of that. I think the biggest challenge is always in credit investing is discipline. And I think we're most concerned about the fact that as Melissa was talking about the amount of capital that has been raised, people need to learn a tough lesson before they get back to their discipline centric. So we will see marginal players come into some of our niches and we need to maintain discipline and know that we're going to let investments go and be patient. And I think that's the real challenge day in day out is to not follow where some of the new players go and take a long term approach. And so that is the challenge, but I think we are up to that challenge.

And I'm sure no further questions at this time. So I'd now like to turn the conference back to Michael Gross, Chairman and co-CEO.

Thank you very much. We have nothing more to add at this point. However, as always, if you have any questions or comments, please feel free to reach out to any of us at any time. We appreciate all your support. We look forward to reporting on our first quarter as a merged entity in early August. Thank you.

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