Silver Spike Investment Corp (SSIC) 2022 Q2 法說會逐字稿

Hello. Thank you for standing by, and welcome to the Silver Spike Investment Corp second-quarter 2023 earnings conference call. (Operator Instructions) Please be advised that today's conference may be recorded.

I would now like to hand the conference over to your speaker today, Greg Gentile, President of Silver Spike Capital. Please go ahead.

Thank you, Josh. This is Greg. Welcome to Silver Spikes earnings conference call and live webcast for the second quarter of fiscal year 2023. Silver Spike's second-quarter fiscal 2023 financial results were released and can be accessed from Silver Spike's website at ssic.silverspikecap.com. A replay of the call will also be available on Silver Spike's website.

Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements under federal securities law. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. We encourage you to refer to our most recent SEC filings for more information on some of these risk factors.

Silver Spike assumes no obligation or responsibility to update any forward-looking statements. Please note that the information reported on this call speaks only as of today, November 10, 2022. Therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay or transcript reading.

Thank you all for joining. As you know, we just released our results, there is a management presentation deck attached to the materials. Those of you on the webcast should see it live. Otherwise, please find the link to the deck in the 8-K that was filed approximately 15 minutes ago. We may refer to some slides by numbers just for reference and for your convenience.

Second quarter of 2023 highlights, which you can find on page 3 of the management presentation, included gross investment income of $1.2 million versus $0.8 million last quarter; expenses of approximately $0.6 million, roughly equal to last quarter; net investment income of $0.6 million versus $0.2 million last quarter; net investment income per share of $0.09 this quarter versus $0.04 last quarter; and net assets of $85.3 million versus $84.8 million last quarter. Our net asset value per share is $13.73 versus $13.64.

The increase in gross investment income is due to the fact that we had our first two investments which were made last quarter on the books for the entirety of the quarter ending September 30. As you may recall, we made those investments late in the previous quarter and did not get a full quarter of interest accrual.

Although we have no new investments to report for the quarter, we've been very busy and have invested in three new assets in October of this year, which Frank will elaborate on further. So it's very important to note that we put over $26 million to work just in the past month, more than doubling the size of the invested portion of the portfolio as of the reporting date, September 30, 2022.

Just to backup, I'd like to discuss a little bit of our story in general. As you know, we are a business development corporation. We're registered under the Investment Company Act of 1940, and we're currently still the first and only BDC that's publicly traded focused on direct lending in the cannabis sector. And we spent a lot of time discussing what structure is best for the market opportunity. And what we're seeing now, I think we're in a fantastic position to take advantage of what you'll hear Frank talk about in just a few minutes.

As a reminder, we did look closely at the REIT structure. REIT, as you may know, are required to have 75% of their portfolio invested in real estate or mortgage assets. That's not the case for Silver Spike. As a BDC, our only material restrictions are that we must invest 70% of the portfolio in US private companies or US public companies with market caps of less than $250 million.

We can lend against cash flows. We can lend against virtually any type of collateral, including real estate, equipment, cash receivables, inventory, equities, and subsidiaries which often own cannabis licenses. And cash flow lending is just a much larger TAM than real estate lending.

So as you see companies evolve, I think we -- Silver Spike is positioned to really build a portfolio of high quality, multi-collateral, multi-security package type instruments, which our competitors cannot necessarily offer.

With that, we'll expand on the market opportunity. I'll turn it over to Frank Kotsen, our Head of Credit, who'll discuss the portfolio in detail and elaborate further on the investments made subsequent to September 30. Frank?

Thank you, Greg. My name is Frank Kotsen; I'm the Head of Credit, as Greg mentioned, at Silver Spike Capital. And thanks to everyone for joining us today. So just for a quick guidepost, I will loosely follow the next four or five slides for those of you who have the slides up; for those who don't, I'll try to be as self-explanatory as possible.

I'll go through the market opportunity. I'll just briefly touch our investment process. I'll talk about sourcing and origination. And then most importantly, probably I'll talk about portfolio summary of where we are as of the end of October, so we'll include the end of previous quarter. And then also just talk a little bit -- just expand on what Greg talked a little bit about what we did in the month of October.

So as you see on slide 6, there's really four key points about the market opportunity. Many people ask why now, why is the right time now. And first of all, cannabis is an emerging market secular growth story and it's a very attractive lending opportunity. This growth story, as you see in the bar chart on the right, shows the US legal cannabis retail sales to grow from an estimated $33 billion this year to up to $72 billion by 2030. So more than doubling over the next eight years.

The second point is really -- lending in this space really presents compelling opportunities to profit from this supply demand imbalance. We talk about this all the time, there really just is -- the debt servicing capacity of these companies goes far beyond the available supply of institutional debt capital. And Greg mentioned there are some cannabis REITs, a few that are publicly traded. There's some private money in this space. The amount of demand that we see far dwarfs the supply of institutional capital that we see for this space, and that's why we're seeing the types of yields we are.

And in fact, if you look at the chart on the lower right-hand corner, cannabis lending really offers a significant premium to traditional -- other forms of leveraged finance. The chart shows US leveraged loan index, and there are various footnotes of the dates and the sources for these. And obviously, the markets have been very volatile, so take this for what it is.

The market, these numbers change every day, particularly on a day like today where the markets were up quite a bit and interest spreads were quite a bit tighter. But some of the sources that we use, and other folks use, show US leveraged loan index yielding about 6.5%, the direct lending index yielding about 8.3%, the US high yield index yielding 8.9%. Now those numbers are -- as of the end of a certain quarter, they actually went probably wider intra-quarter and then they were much tighter today. So just take those numbers.

Let's just say the range for leverage lending is kind of like 7% to 9% plus or minus [risk] to past couple months. And our current SSIC loan yields range from 13.1% to 20.8%. We'll talk about the average of our portfolio yield later. But suffice to say, we're close to double our portfolio -- the portfolio is yielding close to double what traditional leverage lending indices are. And we are lending on a first lien senior secured basis, so it's important to note that.

So we think, in addition, look at the last bullet point, lenders can demand various structural protections and have significant pricing power. So not only do we believe that you're getting -- we know that you're getting yield that's close to double what we see in other kind of traditional -- not other, but traditional kind of lending and leverage lending products. We also think, in many cases, we're able to demand, and borrowers are willing to give us, given the scarcity of debt capital in this space, better structural protections.

And then the -- sorry, it's a little out of sequence, but the third bullet point of the four points is we strongly believe this opportunity is going to exist for many years. People ask all the time, is SAFE Banking going to change this, is SAFE Banking going to bring in banks to compete against you and have spreads go to 200 to 400 basis points tighter, for instance. And no, that's not the case. We do not believe that that is the case, that banks will come into this. When federal legalization happens, which is probably not going to be part of SAFE Banking, then banks over many years will start to look at the space.

But I think that the key point is the private credit market today is $1.3 trillion of lending that is done primarily away from the banks. And that's in other industries, right? And so in general, banks -- because of regulatory capital rules that have happened post Dodd-Frank Volcker after the financial crisis, banks did not do a lot of direct lending for the most part and most of -- in the US. And most of the direct lending comes from alternative asset managers. And so whether it goes, whether SAFE happens or not, this opportunity is going to exist for many years in our belief.

If we go to the next slide, I'm not going to dwell on this, but for your reference, slide 7 talks about our investment and underwriting process. I spent almost 25 years at a major US bank. Some of our -- many of our colleagues supporting capital markets for 20, 25, 35 years. We spent a lot of time developing what we think is kind of best-in-class investment and underwriting process. So you can read that at your leisure.

If you go to the following slide, slide 8, we talk about sourcing and origination. I came from a bank background where we spent a tremendous amount of time looking for opportunities, looking for deals, very structured, knowing what the landscape is, knowing who the borrowers are, making connections with the borrowers. In addition to having that kind of DNA many of us have from our past lives, we also benefit from Silver Spike's network in this space.

So Silver Spike is founded by some folks who've invested -- early investors in the cannabis space, so they're a tremendous network. And I think some of the big deals that we either structured, like the Shryne deal in our first full quarter or other deals that we participated in, and just our market presence prior to raising SSIC as an IPO which we raised in February, this kind of market presence, our reputation, the connectivity that we have in the industry, really is an important, important competitive advantage to source and originate because we focus on direct deal sourcing, and that's through our network.

We've looked at -- as the slide shows, we reviewed over $6.5 billion of deals, close to 300 debt transactions that we've reviewed. And we have an active pipeline of over $1 billion across 31 different transactions. That changes regularly because deals come and go, and new information comes up all the time. We're diligencing multiple deals at any given point in time, but that pipeline is ranged from about $1 billion to $1.5 billion, I'd say for most, if not all, of this year.

And the point on the right is that management's experience and deep relationships really do create a differentiated sourcing ability. So we talk to management teams all the time who are interested in working with us, which is exciting.

And then if we just jump ahead to page 9, as Greg mentioned. Slide 9 has our SSIC portfolio summary. And Greg mentioned -- and this is through October of this year, and Greg mentioned that we did no new loans in the quarter, but we were quite busy in the quarter, and we were diligencing many different loans.

As you know, the quarter was pretty volatile in the financial markets and we're pretty picky. We've turned down the vast majority of our deals. So we ended up participating in -- investing in three deals in October. The bulk of the -- and the reason we're talking about them today is the bulk of the work was done on these three names in September and in the full previous quarter.

We bought -- also, I'll point out, we did two secondary transactions. We bought public bonds of AYR Wellness, which have a fixed rate at 12.5%. We also bought a fixed rate 8% bonds of Curaleaf Holdings. The first was a $1.8 million approximate investment value, the AYR; the Curaleaf was approximately a $3.9 million investment value. And lastly, we participated in Verano Holdings, which was -- the bulk of the work of that was done throughout the quarter. It priced at the end of October. Remember, the markets were pretty volatile in September and October. That loan is priced at PRIME plus 6.5%, with a 6.25% PRIME Floor. And that was our second large position of $20.37 million.

So where does that leave us? That leaves us, as of the end of October, with a total invested portfolio of -- and this is coming from the slide 9 -- of $50.73 million, which means that 59.45% of our portfolio -- or funds have been invested. And I think it's important to note that the weighted average yield of the loans is 15.7%. So that's the weighted average gross yield of our portfolio.

And then I just want to emphasize, we spend -- we're very excited to participate in these loans and to work on these transactions and the transactions that are in our pipeline currently. And what's really interesting to us, versus when we contemplated this concept a couple of years back, is that we really are lending to some of the biggest by revenue, by brand, by dispensary count, by state count, many different metrics. These are some of the biggest and we believe some of the highest credit qualities of cannabis companies in the industry.

And there's a tremendous opportunity to lend to smaller companies as well. But I would say, given the dislocation in the markets, we've been very excited to lend to some of the biggest and what we think some of the best credit quality companies are in the industry at yields that are, I would say, on average, as a rough guide, 400 to 600 basis points wider or greater yield than they would have been at approximately a year ago. So mid-teens yields and higher for this quality of company and the size and scale of company, we think, is a very exciting opportunity for our investors.

So that's all I had with the slides at this point. Unless Greg has anything else to add, I'm going to pass it over to Josh, who is going to open it up for questions.

(Operator Instructions) Michael Lavery, Piper Sandler.

Thank you. Good evening. Just was trying to reconcile slide 9 with the 13% to 20.8% yields. And I feel pretty sure it's just the discount to par you might have bought some of the bonds at. But can you just help us understand how to take the breakdown on slide 9 and put it into that bracket?

Yeah. That's right, Michael. That's exactly right there. The two public bonds that we bought in the secondary market -- and let me just say, too, we watch -- those were our first forays into the public markets for SSIC, but we watch them very closely. Many of us have capital markets backgrounds, so we were watching as these bonds were steadily selling off throughout the course of the year.

And I won't get into exact prices because those numbers will not be in the Q that we're just posting; they will be in the next quarters' Q. But they were all bought in the context of the market. And for a rough guide, public bonds in this space dropped, and public loans as well -- or and private loans, from our observation.

So I would say deals that have gotten -- that were getting done mostly in the last two years, that certain brokers trade or at least quote on average, [one notice on average]. But the range of drop in price was kind of like 10 to 20 points. So that is exactly how you guys can get if you look at an 8% fixed rate or a PRIME -- or a 12.5% fixed rate.

Those bonds we're trading it, and still are, we're trading it decent discounts to par and that's exactly -- we're running that on a yield to maturity. And that's how we get this yield range that you see on the earlier slide, and that's how we get to the weighted yield of 15 points (technical difficulty)

No, that's great. Thanks. That's helpful. And just one more, looking ahead, you've got just a hair shy of 60% invested now. What's your expectations for timing as far as getting to a 100%? And what might come next after that?

Great question. I believe we said in the previous quarter in our kind of range, it was -- we're shooting for approximately getting 70% deployed by the end of the year. So I'd say we're on track for that, but we can't really comment on what we have done or may have done or are doing for this quarter. But with over $1 billion pipeline, there's definitely the opportunity for us to get up to 70% or more by the end of the year. It's all dependent on the market conditions and the due diligence and all.

And then if we kind of think of the pace that we're growing at -- that we're deploying at, that would be just -- move that forward, you can imagine it throughout the course of next year. I mean, it's always hard, as you know, to get to 100% or 98% or whatever, even possibly 96%. But throughout the course of next year, we will be, most likely we plan to be, we intend to be, close to fully invested at some point next year.

So the typical next steps obviously are a lending facility or raising more equity. As you know, we haven't declared a dividend yet. So we believe once the dividend gets declared, hopefully -- well, we don't believe, but we hope that the stock markets will take notice, that the portfolio, as long as it continues to perform, which we believe it will, the markets will take notice.

But to issue equity, we need to be at or above NAV, which we're not now; the whole industry of BDCs are not. Actually, interesting, I think we're in, but we're probably not too dissimilar to other BDCs, but we haven't declared a dividend yet.

In terms of where it's trading, the whole market has been under pressure this year, the whole stock market has. But anyway, most likely a debt facility would come first, that would be traditional. We are, I believe, one of the only, if not the only, BDC that doesn't have a debt facility, that's because we raised the blind pool.

And lenders to us -- potential lenders to us want to see a portfolio, which we now have, which we're excited about. So we hope to get a debt facility in the coming next couple of quarters. We're in discussions with different folks; that may or may not happen, but we hope it does.

And with a debt facility, we could deploy more funds. And then over time, if the stock reflects, the opportunity of getting good dividends, et cetera. And then hopefully, we can issue equity and grow from there. I think (multiple speakers) --

And Michael, if I may add. We feel that, given the amount of cash we've had through the year, it's actually been very fortuitous, right? If we would have deployed much faster after we IPO'd last February, it could have gone two ways. We would have had a portfolio with roughly the same yield and a much lower credit quality, or to get this credit quality, the yield would have been much, much lower.

So I think the timing was somewhat [lowkey], to be perfectly honest. But we were very fortunate to be sitting on a lot of cash during the sell-off and we're able to pick up much higher quality assets at probably the most attractive prices we've seen in quite some time.

That's helpful. Thank you so much. I'll pass it on.

(Operator Instructions) Andrew Carter, Stifel.

Hey, thanks, good evening. What I wanted to ask is, I guess I'm a little confused here, because the thesis here is behind a BDC and behind what you're doing is making loans into smaller companies. And kind of, if you will, aggregating credits at scale, things that are hard. And to date, the money has been put into AYR, Curaleaf, Verano, those are -- investors have easier access to this.

So I want to ask about this, is this something that's temporary? That gives you some scale, both in terms of the management fee to support the organization as well as kind of the [S&A] to your point, to give it -- to make it a little more enamoring? You're going to trade out of this? Just kind of help us understand that a little better.

Sure. Thanks for the question, Andrew. I'll start, and then, Greg, if you want to add anything. But yeah, as you know, the BDCs are allowed to have a certain percentage of the portfolio in public companies that have market caps of $250 million or bigger. So we adhere to those guidelines, but you're exactly right. We worked diligently throughout the quarter, throughout the whole year since we've raised the IPO.

Looking at private companies, working on private company, direct loan transactions, we wanted to follow the public companies. Because, Andrew, in an interesting way, like, a lot of the pricing of the privates was driven off the publics as the entire market got worse. And we saw that a lot, we heard that a lot that. Well, wait a minute, why would this price at X a yield if public companies are now 300 or 500 wider?

We have the cash to deploy. We looked at all the various factors, the risk factors, the size of the company, the management team, et cetera. We thought that these really offer the best value in the market, but we don't have a lot of additional capacity for public bonds. So just really by definition of the rules, we just don't have a lot of capacity to add public bonds or public loans.

The other thing I would add is these -- to Michael's previous question, the two public bonds were done at very deep discounts. Those are just public -- that's public knowledge because they're just public levels on where the bonds are trading. We view that as an opportunistic shot at getting some really good credits, with really good yield, with good convexity. So if the market stabilizes, we can see these trade up. If you issue a loan at $0.95 or par, somewhere in between, a little bit of OID, you don't have the same convexity, so we compare that to loans that we're working on the private side. But just given the rules that we can only do a certain amount of public, I would imagine that the bulk of the additional loans moving forward in the future will be from the private. We haven't really made a determination if we'll trade out of these or not, but we reserve the right to trade out of them, whatever [which is] going to be best for our shareholders.

In particular, AYR has a December '24 maturity, so there's always a chance that that gets refinanced, because, prior to the maturity, which would result in even a better IRR -- and the reason I'm focused on that, Verano was a refinancing. And Verano, some people say that really kind of repriced the market, that was a $350 million refinancing. And so when you're looking at a loan of a company of that scale that has public financials and has been kind of vetted for several years in the marketplace, pricing at a really difficult time in the market to price, that risk reward looked really good compared to the private opportunities that are out there. And that's why it's in the portfolio.

Fair enough. Second thing I would ask in terms of kind of the scale in the organization. Could you give us an update on how many people you have right now supporting the BDC directly, and therefore, kind of what your bandwidth is for diligencing deals right now?

Sure.

Sure.

Greg, do you want to take that?

Yeah, I can handle it. Andrew, we have 10 people right now at Silver Spike Capital, the investment advisor, 4 of which are dedicated to underwriting. For the team -- I would say the team is well suited for a portfolio, multiple of the size of our current vehicle. And we've purposely built this for scale. We believe we have some of the best underwriters on the street, some of the deepest cannabis experience in the street, and have built this thing for scale.

To that question, just to help us, okay. If you got four people dedicated, how many deals then do you think they could -- well, I hate to say execute because you never want to force somebody to, but maybe it's diligence. However, you would think about their bandwidth for the number of deals. Because from here, it's ones and twos that you have to do at this level, won't be like that forever but from here, right now.

When you say ones and twos, I think -- so we can (multiple speakers)

Yeah. I mean like, yeah, the smaller loans. Maybe I'm a little off, but the smaller, it's got to be a chunkier portfolio from here on out. That's kind of what I was saying on the private side.

Yes, exactly. Four to five is the sweet spot for size at this point. But we have plenty of capacity. It's [perfect] to say number of deals. As you know, the size of the deal doesn't matter; it takes the same amount of work to underwrite a $4 million loan as it does a $20 million.

But I don't know. Maybe Frank, you want to try to put a number on it in terms of --

Sure. I mean, one way to look at is we IPO'd in February. The markets have been fairly dislocated throughout the course of the year, but we're on track to do what we did. We've done five deals through October, so we can clearly handle, but I mean that equates to about one a month, right? We could do more. We could also put a lot more money to work on some of these deals.

We're limited, really, Andrew, at the moment by just our amount of capital. So many of these deals could have been much bigger: Shryne that we co-lead; Verano was a sizable position, could have been much bigger. The secondary is -- like I said, we're not going to be doing necessarily tons of secondary. We don't have the capacity to do a ton. So by definition, we can't, but those could've all been bigger. So yes, so it's hard to put a number on it. Every deal is different.

I would emphasize, and I think this is part of the reason these loans yield where they do. It takes a tremendous amount of time to diligence these. We like to ask for 30 to 45 days -- not like to, we do ask for 30, 45 days exclusivity in our term sheets. That's kind of industry standard, and it can take longer than 45 days to diligence. And frankly, for the benefit of our shareholders, we're okay, we'll take as long as it takes. And if it means that it's going to bleed into the next month or the next quarter, that's okay, because we'd rather pass on a deal.

And when we do the term sheets, these are non-binding. These are effectively best efforts. We don't intend to ever walk away from a customer, a borrower if everything checks out. But remember, (technical difficulty) offering to do these deals based on the information we have before the extensive due diligence is done.

And so many things come up through the process, as they do in the normal direct lending space, and you never know where that's going to go. So we have capacity, we could scale this thing much bigger. And if we get to the point where we need more resources, we will get them. I came from an organization where I had a tremendous number of desk analysts working for me, we built a lending business, et cetera. So we and many of the other partners have done the same in terms of working at large-scale -- building large-scale organizations.

So for the time being, we have more than enough resources for the amount of capital, right? We're about 60% invested. We're working on active deals now. Like I said, our goal is to get to about 70% by the end of the year. It's achievable whether or not it happens, just depends on the market and the diligence process.

And then into next year, we should be able to deploy about the majority of the funds into next year. So yeah, that's easily handled by the group -- the folks that we have and then we'll just see as we raise more capital over time.

Next thing I would ask is just kind of looking at your year-to-date EPS, if I have this right, I think, $0.12. I know there's a little bit of flexibility around the dividend, about -- it's a 97.5% payout.

How much would you expect to pay out because, yeah, I think you said it well, once you put a dividend out there that will put a support level in the stock. So help us understand where you -- what you could be targeting.

Yeah. Without going into specific targets, what we don't want to do is declare a small dividend, invest more of the portfolio, bump it up a little bit, and play that game. So we're waiting until we're nearly fully invested and then we'll declare a dividend that we believe we can support for the long term. So once you give us another quarter and with next quarter's results, it will be a much different picture and maybe we'll be able to give an accurate estimate of what we forecast that to be.

Fair enough. Last question on the operating costs at the BDC level. How should we think about those kind of growing forward? Like, from the run rate you had in the quarter, I think $470,000, does that grow with the assets from here, does that stay the same? Just anything you can give us on that number.

Yes, those are (technical difficulty) for the most part, fixed. So we have tremendous amount of scalability. The operating expenses we're a little bit mixed. We spent less money on legal fees this quarter, but there was slightly higher management fees because the invested portion of the portfolio was higher.

But other than the management fees scaling linearly, obviously, with assets, the rest of our expenses, we are much closer to fixed than variable. So we expect to get -- as we increase the size and raise AUM and/or debt, that that should give us a quite a lot of operating skill.

That's all I got. I'll pass on. Thank you.

Thanks, Andrew.

Thanks a lot, Andrew.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Greg Gentile for any closing remarks.

Thank you, Josh. I just want to thank you all for joining. Thanks for your time, and we look forward to seeing you again next quarter. And enjoy the weekend.

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