Silver Spike Investment Corp (SSIC) 2022 Q4 法說會逐字稿

Good day and welcome to the Silver Spike Investment Corp. fiscal year-end 2022 earnings conference call. (Operator instructions) As a reminder, this call may be recorded. I would now like to turn the call over to Umesh Mahajan, CFO. You may begin.

Good morning. Hello, everyone, this is Umesh Mahajan, CFO of Silver Spike Investment Corp. With me here today is Scott Gordon, CEO of Silver Spike Investment Corp. Welcome, everyone, to the Silver Spike's earnings conference call and live webcast for the fiscal year 2022. Silver Spike's fourth quarter fiscal 2022 financial results were released yesterday and can be accessed from our website at ssic.silverspikecap.com. A replay of the call will also be available on our 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 related to financial guidance, may be deemed forward-looking statements under the federal securities laws, 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 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, March 31, 2023; therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay or transcript reading.

So with that, good morning again and thank you all for joining. We released our results yesterday and filed an 8-K this morning with the presentation deck attached to it. Those of you who have joined us on this webcast should have the presentation live; else, please find a link to the deck in the 8-K that was filed. We may refer to the slides by numbers for your reference as we go through it.

So turning to page 3 of the presentation, financial highlights for the quarter ended December 31, 2022. Gross investment income of $2 million versus $1.2 million the previous quarter; expenses of approximately $0.6 million, same as last quarter; net investment income of $1.4 million versus $0.6 million last quarter; net investment income per share of $0.23 this quarter versus $0.09 last quarter; net assets of $86.5 million versus $85.3 million; and net asset value per share of $13.91 versus $13.73 last quarter.

The increase in the gross investment income that you see here reflects the steady ramp-up in our investment portfolio. We made three investments this quarter and the gross investment income reflects the interest we earn on those investments this quarter. We'll discuss the portfolio in more detail in subsequent slides but note that one of the large investments this quarter happened at the end of October. And so the interest income is for the partial period that we held as investment for.

Turning to page 4, financial highlights for the fiscal year ended December 31, 2022. Now, our Board of Directors approved a change in our fiscal year from March 31 to December 31. So the financials on this slide and also in our 10-K that you'll see today are for the period from April 1 to December 31. So for this period of nine months, our gross investment income was $4 million, expenses of approximately $1.8 million, net investment income of $2.2 million, net investment income for a share of $0.35, net assets of $86.5 million, and net asset value per share of $13.91.

To expand more on the Silver Spike story and the market opportunity, I will turn it over to Scott Gordon, our CEO.

Thanks, Umesh. I'll briefly touch upon our story, our investment process and philosophy, and the outlook for our business. And if you turn to -- slide 6, you can see we are a business development corp. registered under the 1940 Act. We are the first and the only BDC, publicly traded, that's focused on direct lending in the cannabis industry. We believe that our structure is ideally suited for the evolving landscape and the capital needs in the sector. Other lenders such as REIT are required to put up a substantial portion of their portfolio as real estate collateral on 75% in the case of REIT.

On the other hand, we are cash flow lenders and can lend against every type of collateral that's available. We believe that offers a more flexible source of capital for operators in the industry and expands the opportunity set for us, which we believe will expand even further as the industry continues to grow and mature. We believe our team has the appropriate mix of background experience and track record, both within the cannabis industry and the capital markets and credit, businesses to execute on this plan.

Turning to slide 7. Just briefly, in terms of the market opportunity, I think everybody knows that the cannabis market for public equities has been under continued pressure for close to two years now. But we think it's important to revisit why lending to the cannabis sector presents what we believe is a truly unique opportunity. Cannabis is a secular growth story, rapid growth of the long tail. You can see the bar chart on the top right of that slide. And there's a clear need for capital for these businesses to invest and grow; and at the same time, at the sources of capital, due to all of the complexities and regulatory limitations and constraints in the industry, are quite limited.

Competition in the cannabis lending space is also limited. We believe we're among a handful of dedicated lenders to the space, reach or otherwise, that has dry powder and capital, currently offering loan capital to operators in the space. We believe that this demand and supply imbalance of capital needed and capital available, reflected on the chart in the bottom right, is interesting compared to traditional markets of leverage loans, direct lending, or even high yield.

We're getting substantially higher yields than our comparable credit markets. The credit metrics for our portfolio companies are far better with senior secured debt, lower leverage metrics than what is typically shown in the markets that are reflected in the chart. We believe that this imbalance of supply and demand will continue for a while. We've not felt that regulatory changes, whether it's the SAFE Act or other things, are going to compel traditional sources of banks or other types of lenders to step into the space. And so we think we've got substantial runway to continue to execute on our plan.

I'm not going to talk too much about slide 8, but you can see that I just wanted to highlight here. We have a very robust underwriting process and a very deliberate approach to our investments and a very elaborate process, both for sourcing, originating, structuring and underwriting, as well as monitoring.

On slide 9, we show some metrics here with respect to our sourcing and origination. I think it's important to note before I hand this back over to Umesh, that our extensive industry network has been built through our operating experience in the space. My partners and I have substantial connections and experience across the sector. We think that that ability is seen in our transactions where we think we're punching above our weight, in terms of lending to some of the largest marquee names in the sector based on that network and those relationships across the industry. At this point, I'll hand it back to Umesh.

Thanks, Scott. Yes. We're definitely very pleased with the pipeline of opportunities that we have. In fact, since our inception, as you see on the slide, since our inception, we have seen over $6.8 billion in transactions. And as of December 31, we have an active pipeline of over $840 million where we are actively engaged with these potential borrowers. So we feel really good about the opportunity set that's in front of us today.

Moving to page 10, shows our portfolio summary as of end of February. We have all the investments listed here. Companies A and B are Shryne and PharmaCann, which were the investments we had made earlier during the fiscal year. We made three new investments in this quarter: and company C shows AYR's 12.5% secured bonds due December 2024, and company D shows Curaleaf's 8% secured bonds due December 2026.

And as we have discussed in our previous earnings call, these two were made at a significant discount to their par values. And company E is one of our large investments in Verano for its lien term loan, a transaction that was completed in late October. And as you can see for that loan, with prime rate currently at 8% and a spread of 6.5% on this loan, we believe this loan really offers a very attractive return, considering the credit metrics for one of the top cannabis operators in the country.

Subsequent to the end of the quarter, so after 12/31, we made another investment in MariMed shown as company F. It's a three-year first-lien secured term loan at prime plus 5.75% cash and 1.4% PIK. Combine that couponed with the upfront fees, we believe this loan also offers a very attractive yield to maturity. So overall, if you look at the top of the page, the banner at the top, we have approximately $54.5 million invested, with an average yield to maturity of over -- 17.25%.

So we believe our portfolio has companies that are very well positioned in the industry for the longer term, and at the same time, offer an attractive yield to maturity. This combination of credit quality and attractive return profile has been made possible for a couple of reasons in our view. First, we have benefited from a timing perspective. We began our deployment in the latter part of 2022. As we all know, the sector has undergone a few changes in the year 2022. And as we ramped up our deployment in the latter part of the year, we've been better positioned to choose cannabis credits that have shown resiliency and to lend to companies that have continued to perform despite some of the challenges many operators have faced in the sector.

And second, we also benefited from the fact that almost 89% of the portfolio is floating rate, as you can see here on this chart. And so as the fed funds rate and other benchmark rates moved up rapidly late last year, so have the coupons on our loans, and that has improved our portfolio yields. We haven't closed any additional investments in the month of March, but we've been very busy working on a number of very interesting transactions.

So overall, we are really excited with the pipeline we're currently working on, and we hope to have more updates for you as we continue to deploy our capital and build a high-quality portfolio. With that, I'll pass it back to the operator. Michelle?

Thank you. (Operator instructions) Andrew Carter, Stifel.

Hello, can you hear me?

Hi, Andrew, how are you?

Hey, how you doing? Good morning. So first question I have is you talked about the credit market metrics on your portfolio. Can you give us any sense of what the cash flow coverage is on your private loans? And when I say cash flow, I mean taxes as well? Thanks.

Yeah, sure. I don't have the exact statistics for each of the portfolio companies in front of me, but a couple of things to think about here. First, all of these loans are secured. All of these debt positions are secured debt. And if you think about the leverage, I think the average across the portfolio is around two times in the form of leverage debt to EBITDA.

Now your question is about cash flows and you're right. We do, in our underwriting, pay a lot of attention to not just the EBITDA and the leverage, but we pay a lot of attention to the taxes that need to be paid out, as you are aware of the 280E issues, but also the working capital and the CapEx program, especially the maintenance CapEx that the company has to take care. So I don't have a cash flow coverage, but our fundamental underwriting for mice is on the cash flow profile of these companies, and we feel we feel pretty comfortable with that coverage profile.

Okay. I guess just to step back on that, are Shryne and PharmaCann generating cash?

Yes, they are.

Okay. Next question I'd ask is looking -- at the income, how much of the income this quarter was interest income from the investments and how much was the yield on cash? And then a follow-on question is that, in your calculation of incentive fees, do you include interest earned on your cash account?

Yeah. Andrew, if you look at the previous quarter, the cash burn and the interest income, as you know, the interest rates really started going up on the -- towards the fourth quarter. So the interest income part of the income is really small. I didn't even know its percentage, but it is really, really small. It may be more meaningful going forward, but as of the fourth quarter, it was definitely very small.

Is that counted in our calculations? I think interest income is counted as any other income. And so I believe it will get counted in the gross investment income line.

Okay, I'll pass it on.

Michael Lavery, Piper Sandler.

Good morning. Thank you.

I just wanted to come back to some of the credit metrics. You mentioned in your prepared remarks how the yields are more attractive, but the credit metrics are also better. Can you point to some of the ones you look at when you say you don't have that in mind? And maybe what benchmarks and how it compares. Just unpack that comparison just a little bit for us.

Absolutely. Michael, if you look at the portfolio that we have here and if you look at the company, the first thing that jumps out is most of these companies are established companies with a very good operating profile in the industry, which can be resilient in the backdrop that we are seeing for the industry. That's important to note. And then when it comes to specific cash metrics, I think the leverage is an important one to consider.

The other one is secured leverage and not just total leverage. So we pay close attention to many of these operators. And as you know very well, many of the MSOs have large liabilities outside of their debt. And if we pay close attention, so there's the secured debt leverage across, most of these names is far lower than the total leverage that I just talked about. And in terms of cash flow metrics, it is important to make a distinction between growth CapEx, maintenance CapEx, and we tried to ensure that the cash flow is available before debt service to take care of our debt.

And overall, stepping back, if you look at what Scott was talking about in his chart on page 7, that is comparison with the other fixed income indices or fixed income markets across either leveraged loan, direct lending, high yield, there's a reason why cannabis gets a premium. I think it's because of the supply demand imbalance for the capital. But also, I think the metrics are better in the sense of the leverage, in terms of the cash flow coverage, in terms of the loan to value. Again, we cannot specifically talk about the enterprise valuations that we have for this companies, for the loan to have value, we believe, is far more attractive than what you would get in a US high-yield index for example, where there are unsecured bonds, and the coverage is not as much.

Is that helpful, Michael?

Yeah, that's great color. Yeah, thanks.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Umesh for the closing remarks.

Sure. Thank you, Michelle. Thank you, everyone, for joining in. To end, I would like to say that we are very excited with where we are today with our portfolio and outlook and these stellar opportunities we are seeing right now. And we look forward to getting another call again with you and talk more about our strategy on our next call. Thank you, everyone.

This concludes the program, you may now disconnect. Everyone, have a great day.