SLR Investment Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 26, 2025
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Operator

Good day, everyone, and welcome to the Q4 twenty twenty four SLR Investment Corp. Earnings Call. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session. Please note this call may be recorded.

Operator

I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Michael Gross, Chairman and Co CEO.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Thank you very much, and good morning. Welcome to SLR Investment Corp. Earnings call for the year ended 12/31/2024. I'm joined today by my long term partner, Bruce Spohler, Co Chief Executive Officer for our sixtieth quarter of SLRC results along with Officer, Shiraz Kaji and the Solar Investor Relations team. Shiraz, before we begin, would you please start by covering the webcast and forward looking statements?

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

Thank you, Michael. Good morning, everyone. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of SLR Investment Corp and that any unauthorized broadcast in any form is strictly prohibited. This conference call is also being webcast from the Events Calendar in the Investors section on our website at www.sclinvestmentcorp.com.

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

Audio replays of this call will be made available later today as disclosed now February 25 on each press release. Also, I'd like to call your attention to the customary disclosures in our press release regarding forward looking statements. Today's conference call and webcast may include forward looking statements and projections. These statements are not guarantees of our future performance or financial results and involve a number of risks and uncertainties. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC.

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

We do not undertake the update of any forward looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at (213) 993-1670. At this time, I'd like to turn

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

the call back over to

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

our Chairman and Co CEO, Michael Persson. Thank you

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

very much, Shiraz, and thank you to everyone for joining our earnings call this morning. Before I discuss our fourth quarter earnings and the drivers of our results, I'd like to briefly reflect on a milestone of the company and its investment advisor, SLR Capital Partners. This month marks the fifteen year anniversary of trading since our IPO on February 1030, and more than eighteen year of operating history as a private credit fund and alternative investment manager. Since the company's IPO, we have deployed over $7,500,000,000 of investments, including five platforms closely financed acquisitions and four related tuck in acquisitions with an average loss rate of less than 11 basis points. We are very proud of the SLR team's investment track record and longstanding history of successfully managing SLR through periods of significant economic distress, including the Great Financial Crisis, the dramatic drop in the oil price in 2015, COVID-nineteen and the current elevated interest rate environment.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Cumulative effects from our team's experience has informed our disciplined approach to private credit underwriting is creating our multi strategy platform. Over thirteen years ago, we began our initiative to generate diversification achieved with a combination of sponsor finance and complementary specialty finance strategies. Our asset based specialty finance strategies provide greater downside protection of principal from underlying liquid collateral and the more cyclical nature of enterprise value that secures cash flow loans, while simultaneously offering attractive and offering higher yields extraction of complexity premiums. Today, we see market conditions that include very tight illiquidity risk premiums within sponsor backed direct lending, concurrent and burgeoning global economic uncertainties from a combination of rising geopolitical tensions, recent executive actions from U. S.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Presidents to administration and expectations for a rate environment that is higher for longer. Consequently, we think our company's long standing history, investment track record and multi strategy approach to private credit investing is as relevant now as it was during past economic challenges. We believe we can continue to achieve a durable and stable recurring income by pivoting across our commercial finance strategies to capture the best risk reward investment opportunities as current economic conditions unfold. In particular, we are seeing a significant increase in our ABL pipeline. For the fourth quarter of twenty twenty four, SLRC generated net investment income was flat year over year, but down $0.01 for the third quarter.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Net investment income continued to cover the quarterly dividend of $0.41 Despite the meaningful decline in base rates in the second half of twenty twenty four, in competitive conditions in the sponsored finance market, our solid finish to the year contributed to full year NII per share of $1.77 representing a 5% increase over 2023 net investment income per share. The company's net asset value at year end increased to $18.2 from $18.09 a year ago, which we view as a testament to the overall credit card portfolio. The profitability of our portfolio yields and our strong credit profile are the direct result of our conservative underwriting and multi strategy approach to private credit investing. In response to the currently more attractive conditions in our specialty finance strategies, our comprehensive asset portfolio is compensated at $12.31 dollars included a 79% allocation to specialty finance investments. The remainder of the portfolio primarily consists of cash flow loans to borrowers that operate in recession resistant industries and that have low CapEx requirements.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

This approach has safeguarded our performance with the prolonged highest rate and inflationary environment, while other portfolios that are more susceptible to fixed charge coverage decline have seen the increased non accruals and similar signs of distress, such as elevated pick income. SLRC originated $338,000,000 of new investments across the comprehensive portfolio and received repayments of $442,000,000 in the fourth quarter, resulting in a total portfolio of $3,100,000,000 at year end. The yield of the portfolio was 12.1%, a slight increase to prior year quarter yield 11.8%. Due to the more favorable conditions in our specialty finance markets, the company's investments in the fourth quarter were once again more heavily weighted to those asset classes, which we believe currently provide a more attractive risk adjusted relative return to sponsor finance loans, which are currently offering spreads in the 400 basis points and some instances for unitron structures to upper middle market for borrowers. 94 of Q4 originations were in stock refinance.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

We passed the refinancings of several cash flow investments within our portfolio, allowing sponsored finance portfolio to shrink. While yields in our cash flow portfolio declined in the fourth quarter, our yields within our sponsored finance strategies remain more insulated and even increased in some instances providing higher returns than cash flow loans. We remain pleased with the composition quality and performance of our portfolio. At quarter end, '90 '6 point '4 percent of our comprehensive investment portfolio was comprised of first lien senior secured loans. SLR's longstanding focus on first first lien loans has resulted in a portfolio which we believe is more conservative position than BDC peers with less first lien exposure and better equipped to withstand persistent inflationary pressures and high interest rates in portfolios with second lien loans and broader secured exposure.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

As of December 31, we had only one investment in non accrual, representing just 0.60.4% in the investment portfolio on a cost and fair value basis, respectively. We believe our low rated non accruals is a result of our multi strategy investment approach as well below the peer BDC average. December 31, including available credit facility capacity at SSLP and a such advanced portfolio companies, SSLP had over $900,000,000 of available capital to deploy. This puts the company in a favorable position to take advantage of either durable economic conditions or softening of the economy. I'll now turn the call back over to Shiraz, our CFO to take you through his Q4 financial highlights.

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

Thank you, Mike. SLR Investment Corp. Net asset value at 12/31/2024, was $993,000,000 or $18.2 per share, consistent with the quarter ended 09/30/2024. At quarter end, SRC's on balance sheet investment portfolio had a fair market value of approximately $2,000,000,000 and 122 portfolio companies across 32 industries compared to a fair market value of 2,100,000,000 in 131 portfolio companies across 34 industries at September 30. At December 31, the company had approximately $1,000,000,000 of debt outstanding with a net debt to equity ratio of 1.03x.

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

We expect our net debt to equity ratio to migrate towards the middle of our target range of 0.9 to 1.25 times. During the quarter, the company closed a $49,000,000 private three year unsecured note offering at a fixed interest rate of 6.24%. Subsequent to year end, the company issued $50,000,000 of three year unsecured notes at a fixed interest rate of 6.14%, representing a spread to the three year treasury of 190 basis points. We believe these note issuances were executed on both a cost effective and attractive basis and addressed the company's efforts to refinance maturing unsecured notes. As of 12/31/2024, pro form a for the issuances, SLRC had $444,000,000 of unsecured debt, representing approximately 41% of funded debt.

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

Moving to the P and L. For the three months ended December 31, gross investment income totaled $55,600,000 versus $59,800,000 for the three months ended September 30. Net expenses totaled $31,800,000 for the three months ended December 31. This compares to $35,400,000 for the prior quarter. Accordingly, the company's net three months ended 12/31/2024, totaled $23,800,000 or $0.44 per average share compared with $24,300,000 or $0.45 per average share for the prior quarter and covered our $0.41 per share distribution during the period.

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

Below

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

the line, the company had

Shiraz Kajee
Shiraz Kajee
CFO, Treasurer & Secretary at SLR Investment

a net realized and unrealized loss for the fourth quarter totaling $1,200,000 versus a net realized and unrealized loss of $2,300,000 for the prior quarter. As a result, the company had a net increase in net assets resulting from operations of $22,600,000 for the three months ended December 31 compared to a net increase of $22,000,000 for the three months ended September 30. On February 25, the Board of SLRC declared a Q1 twenty twenty five quarterly distribution of $0.41 per share payable on 03/28/2025, to hold us a record as of 03/14/2025. With that, I'll turn the call over to our Co CEO, Bruce Boler.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Thank you, Shiraz. At quarter end and on a fair value basis, the comprehensive portfolio consisted of approximately $3,100,000,000 of senior secured loans to over eight eighty distinct borrowers. The average exposure is $3,500,000 Measured at fair value, 98.2% of our comprehensive portfolio consisted of senior secured loans with 96.4% invested in first lien loans, including our investments in the SSLP attributable to the company, and only 0.3% was invested in second lien cash flow loans, with the remaining 1.5% invested in second lien asset based loans. Michael mentioned earlier, our specialty finance investments account for over 79% of the total portfolio with the remaining portfolio comprised of senior secured cash flow loans to mid market sponsor owned companies. We believe this defensive portfolio construction positions us well and provides a differentiated risk return profile relative to sponsor finance only portfolios.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

At year end, our weighted average yield on the portfolio was 12.1% compared to 11.8% the prior quarter. Based on our quantitative risk assessment scale, our portfolio currently has one of the strongest credit profiles in our history. At year end, the weighted average investment risk rating was under two based on our one to four risk rating scale with one representing the least amount of risk. Over 99% of the portfolio is rated two or higher. Moreover, 99.4% of the portfolio on a cost basis and 99.6% at fair value was performing with only one investment on non accrual.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

With the recent levies of tariffs, the looming threat of trade wars, our investment team completed a thorough review of our entire portfolio to assess the impact of current tariffs in place and prospective tariffs that could impact countries such as China, India and others. We are pleased to share that we believe the potential direct impact of tariffs is minimal. Now let me touch on our four investment verticals, starting with sponsor or cash flow lending.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

In our sponsor finance business,

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

we originate first lien senior secured loans from mid market companies in non cyclical industries such as healthcare, business and financial services. This has helped to mitigate the impact on the portfolio from cyclical economic factors. At year end, our cash flow portfolio was $634,000,000 across 37 borrowers, including our senior secured loans in the SSLP. With approximately 99% of our cash flow loan portfolio invested in first lien loans, we believe that we are well positioned to withstand any pressures that our borrowers may face. Our borrowers have a weighted average EBITDA of over $135,000,000 and median EBITDA of $73,000,000 and carry low loan to values of approximately 46%.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

In sponsor finance, the weighted average EBITDA and revenue growth continues to be in the mid single digits for our portfolio companies. Overall, they have successfully managed the transition to an environment with higher cost of capital as well as inflationary premiums. Weighted average interest coverage on our sponsor finance loans has been stable at approximately 1.8 times. Additionally, only 1.6% of our fourth quarter gross income is in the form of PIK income from cash flow borrowers resulting from amendments. We believe these healthy credit metrics are the result of the diversity of our portfolio, cross private credit strategies and our focus within sponsor finance on recession resilient industries with high recurring free cash flow.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

During the quarter, we made investments of just over $20,000,000 and experienced repayments of just over $100,000,000 As Michael mentioned, sponsor finance deal flow continues to be muted due to lower M and A volume, and we are selectively letting investments go in connection with refinancings if the new risk return profiles do not meet our criteria. Credit investors focused on downside protection, our ability to say no and pass on investment opportunities that don't meet our high hurdle can often be measured by the deals we don't do. For the year, we invested in $113,000,000 of cash flow loans and had repayments of over 190,000,000 At year end, weighted average yield on this portfolio was 10.6%, down from 11.1% the prior quarter. Thus far, in 2025, there has not been a significant uptick in M and A. With spreads at tight levels and incremental weaker protections creeping into structures, we remain highly selective.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

However, we are optimistic that sponsor finance conditions will improve throughout this year as CEO confidence increases and we start to see increased activity in M and A. Now let me turn to our Specialty Finance segments. Across the board, the credit quality of these loans continues to be solid with attractive loan to values, which have meaningful collateral support and borrowing based structures. Let me first touch on our asset based lending portfolio. At year end, the portfolio totaled $1,000,000,000 across two fifty seven issuers.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Regional domestic banks have continued to adjust their business model in a higher rate environment and are retreating from the ABL market, creating an attractive opportunity for SLR's ABL team. Under tighter credit regulations, regional banks, asset based loans to non investment grade grade companies are often

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

ineligible for

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Fed liquidity programs and often require banks to hold more capital against these loans. SLR is positioned to collaborate with these banks who are shifting their ABL strategies in reaction to these market challenges. Our recent acquisition of the loan portfolio and servicing platform from Webster Bank is an example of this. The integration of the platform and the portfolio is going smoothly and is performing in line with expectations.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

For the quarter, we had $128,000,000

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

of new issuance of $2.00 $5,000,000 Weighted average asset level yield was 14.6% compared to 14.4% in the prior quarter. Additionally, we are seeing opportunities to provide ABL structured facilities to traditional cash flow borrowers who are experiencing tight liquidity pressure from declining interest coverage ratios. Some sponsor backed borrowers who had access to the cash flow and BSL market in a lower rate environment are now perceptive to our ABL solutions in order to provide working capital and liquidity. These ABL facilities with us carve out working capital assets to be pledged into a borrowing base, supporting the incremental ABL facility and provides liquidity relief for the borrower. The new business pipeline has expanded as fallen agent credits and other well capitalized businesses seek additional liquidity in light of macroeconomic headwinds.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Access to the larger SLR platform has allowed us to speak for bigger hold sizes and accordingly win more attractive investments. Finally, our ABL teams added new originators in 2024 and continue to do so in 2025. Now let me touch on equipment finance. At quarter end, this portfolio totaled just over $1,000,000,000 representing 37% of our total portfolio. Credit profile continues unchanged from the prior quarter.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

During the fourth quarter, we originated approximately $180,000,000 of new assets, with the majority of this coming from our business that provides leases to investment grade borrowers. We had repayments of just over $101,000,000 Weighted average asset level yield was 10.7% compared to 9.4% the prior quarter. Our investment pipeline has expanded in conjunction with the disruption caused by the regional bank failures. Finally, let me touch on life sciences. At year end, our life science portfolio totaled approximately $240,000,000 Over 87% is invested in portfolio companies that have over twelve months of cash runway.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Additionally, all of our portfolio companies in life sciences have revenues and at least one product in the commercialization stage. This significantly derisks our investment. Life science investments represented just under 8% of the portfolio and contributed 18 of the gross investment income for the fourth quarter. Recent months, we have seen green shoots in our life science pipeline, and we expect that activity will continue to improve during 2025. While we expect to see some industry changes stem from the evolving regulatory environment, our life science team is keenly focused on these developments and benefits from their twenty plus year history of investing in life sciences.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

During the fourth quarter, we funded just over $6,000,000 of an investment to an existing borrower and had $33,000,000 of repayments. At quarter end, the weighted average yield on Life Science portfolio, excluding fees but excluding warrants, was just over 12% compared to just over 12.5% the prior quarter. With early signs of improvement in the life science market, we have seen a modest uptick in the pipeline. Given our ability to allocate capital to the best risk reward opportunities across our investment strategies, we have the luxury of being highly selective in our capital deployment in life sciences, yet still generating positive total originations collectively across the firm. Lastly, I want to touch on the company's SSLP.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

During the fourth quarter, we earned $1,900,000 representing a 15.6% annualized yield, consistent with the prior quarter. As of quarter end, the portfolio had a fair value of just over $178,000,000 Now let me turn the call back to Michael.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Thank you, Bruce. As we close the book on 2024, we are pleased with the stability evidenced in our fourth quarter results and encouraged by the overall credit quality of the investment portfolio. This is evidenced by another quarter of net asset value stability, continued very low level non accruals, a small percentage of watchlist investments, minimal payment and kind income and broad portfolio diversification. While concerns about credit quality and prep credit portfolios continue to creep into the market narrative from high profile defaults and public BDC crusted above the long term average in 2024, we view the consistency of our results achieved throughout the year as a testament to SLR's multi strategy approach in private credit investing. As we reflect in the growth of our platform over the last fifteen years that has created a diversified commercial finance company with bond investment capabilities, we believe that our multi strategy approach, emphasis on preservation of capital and portfolio construction with a specialty finance emphasis differentiates us from majority of our peers.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

The company is positioned favorably with momentum across all of our businesses and a growing pipeline tilted towards specialty finance investment opportunities. Since our IPO fifteen years ago, we have generated a 10.5% IRR for our shareholders. We are grateful to and humbled by the support of our investors, lenders, agencies, portfolio companies and more than 300 employees, including affiliates, across the SLR platforms who have contributed to this milestone. Thank you to all of you who have contributed to SLRC's performance. In closing, SLRC currently trades at a 9.4% dividend yield as of yesterday's market close, which we believe presents an attractive investment for both income seeking and value investors and offers shareholders portfolio diversification benefits compared to cash flow only private credit strategies.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Our investment advisor's alignment of interest with the shareholders continues to be one of our significant Hallmark principles. The SLR team owns over 8% of the company's stock and includes every significant percentage of their annual incentive compensation invested in SLAC stock every year. The team's investment alongside fellow institutional and private wealth investors demonstrates our confidence in the company's portfolio, stable funding and earnings outlook. Thank you all again for your time today. As we know, it's a busy time of the year for those that follow the list of BDC Marketplace closely.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

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

Operator

Certainly. And we'll take our first question from Eric Zwick of Lucid Capital Markets.

Erik Zwick
Managing Director, Equity Research at Lucid Capital Markets LLC

Thank you. Good morning, everyone.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Good morning.

Erik Zwick
Managing Director, Equity Research at Lucid Capital Markets LLC

We spent a fair amount

Erik Zwick
Managing Director, Equity Research at Lucid Capital Markets LLC

of time talking about the opportunities for your specialty finance verticals and how strong the pipeline is there today. I'm curious with respect to potentially acquiring whole portfolios or teams, what that part of the pipeline looks like? And maybe you mentioned that the Web's dropped opportunity last year. Were there any others last year that you looked at and didn't choose to go forward with? And if so, what might those reasons be?

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Yes. Great question. Yes. Starting with last year, we did see some opportunities that we could have transacted on and we decided to pass. I think that generally if we pass, it's because we get in there and begin to see some of the credit underwriting processes and how the portfolio looks relative to the portfolios that we own and generally have passed on that basis where we feel that we can create organically a better something than what we would be buying in the market.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

But we do have a team that is dedicated, as you may recall, to sourcing portfolios and teams. And we have, post the regional banking disruption, seen elevated activity level across specialty finance in terms of bringing on teams and portfolios. So we expect it to be a contributor this year, but you do have to kiss a lot of frogs.

Erik Zwick
Managing Director, Equity Research at Lucid Capital Markets LLC

Sure. Makes sense. I like that analogy. And maybe moving towards sponsor finance, and I know your majority of the capital you put to work last year was on the specialty finance side. You're seeing better risk adjusted returns there.

Erik Zwick
Managing Director, Equity Research at Lucid Capital Markets LLC

You noted that the spreads remain very tight in sponsor finance. I'm curious if you could just maybe address what you're seeing from a structure perspective as well. Are you seeing any actors out there that are starting to bend there? Or is it primarily just the spread pressure that keeps the risk adjusted opportunity not as attractive?

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

So I would say that both the spread compression and the loosening of terms in the sponsor market feels to have stabilized, albeit at a level that we find relatively unattractive in comparison to our ABL and specialty finance strategies. But there does seem to be a little bit of stability there. I don't know if the influx of new capital relative to the deal flow has kind of found its equilibrium. But at the moment, we're just not liking the absolute returns afforded in the sponsor finance business. New platforms are, if you can find them, are in the 9% to 9.5% all in.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

As you heard, our yield in the sponsor book moved from 11.1% down to 10.6% and that's kind of what we're targeting is 10.5 to 11% returns if we're going to invest in sponsor. But I would say things have stabilized for the moment.

Erik Zwick
Managing Director, Equity Research at Lucid Capital Markets LLC

I appreciate the thoughts. I'll step aside and hop back in the queue. Thank you.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Thank you.

Operator

We'll take our next question from Casey Alexander of Compass Point.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Hi, good morning. My first question is about the equipment finance sector. I mean, if you look at the comprehensive portfolio, it's the largest segment of the portfolio. And because of its sort of unique structure, fixed rate loans, floating rate liabilities, the yield has improved two fifty basis points over the last two quarters, back up to what I think is sort of an acceptable BDC level. Is it are you, it doesn't really feel like you're matching liabilities and assets though.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Is there anything that you can do to change the liability side of the structure to kind of, I don't know, lock it in or reduce the yield volatility? I'm just curious if there's something that you can do now that it's returned to a more acceptable yield.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

So good question. It is reasonably well matched. Look, the equipment finance sector benefits in this environment from a couple of things. On the liability side, the floating rate debt is actually part of our parent company's investment, came in as debt about $150,000,000 as well as the equity. That is floating rate.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

So it's just another way to pull our income out. You could say it benefits us when rates are up. But that's not a real driver. We just look at the total income across our debt and equity investment. So obviously, if the debt's down a little bit, the equity will be up a little bit since we own both 100%.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

I think the big driver here is in this environment, in an inflationary environment, this business does outperform. We have investments that we've been putting on the last two years in a higher rate environment to your point that is helping the business because we did put in fixed rate liabilities a few years back. You also find in this environment that borrowers will keep the asset longer and extend our lease, and that is where we make profit. We want the inflationary environment such that the lease versus buy decision is such that it's in their mind the check that they're writing every month is cheaper to keep the existing equipment. And that's where we're seeing elevated profitability.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

So long winded answer to your question, but we feel well matched. And we do think that in this environment, we will continue to see nice stable returns.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Okay. Thank you for that. My second question is, I just want to make sure that I understand, building the pipeline in ABL, what you're talking about is more transitioning what might have been traditional cash flow opportunities into ABL opportunities as opposed to having a stack up of standalone new specialty finance companies that you would want to buy? That's where the increase

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

in the pipeline is coming from?

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Yes, correct. It's individual ABL loans. I mean, you saw we've taken down our cash flow book from what was a peak of 26% of the portfolio in 3% when we liked that risk down to just about 20%. And my guess is that we'll head lower. I think our trough in the last few years has been closer to 15%.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

And instead, we are doing individual ABL loans. That is separate and apart to your question from any potential portfolios like the one we purchased from Webster, that would accelerate that. But as you see, we have taken down our leverage to 1.03, was up at 1.19 about a year ago. So we do have ample capacity to both buy portfolios and just pursue the individual loans that are making up our pipeline of ABL assets.

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

Okay, great. I appreciate your stance of not seeing enough return from spreads that are 4.75 or wherever. The SSLP was set up to accept lower yielded loans lower yielding loans from Solar Senior. I mean, is there a place for those if the credit is good, is there a place to take a piece of those lower spread loans on and ship them down to the JV? And a follow on to that is, as it stands right now, if you're not going to do that, is the JV kind of at its functional capacity at this point

Casey Alexander
Senior Vice President & Research Analyst at Compass Point Research & Trading LLC

in time?

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

So great question. And yes, 100%, we are continuing to put loans into the cash flow loans into the SSLP. Remember, originally, it was migrating loans that we had acquired in connection with the merger with SUNS back in 'twenty two, many of which back then were priced at the $4.75 type level. So we are doing that, which is why we think that we can continue to run that portfolio at close full optimization.

Operator

We'll move next to Melissa Weddell of JPMorgan.

Melissa Wedel
Melissa Wedel
Vice President, Equity Research at JP Morgan

Thanks for taking my questions this morning. Some of them have actually been asked already, but I thought maybe we could touch back on the ABL opportunities. Given what you described as some funders leaving the space and we see the opportunity there, I was a little bit surprised by just the volume of exits during the quarter. So yields seem to be pretty resilient. And if I'm correct, there was even a quarter over quarter increase in yields.

Melissa Wedel
Melissa Wedel
Vice President, Equity Research at JP Morgan

Just want to understand that dynamic and what's driving both the yield changes in the space, but also some of the repayments that you saw in 4Q? Thank you.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Sure. So the yield is, I think the takeaway there should be more about the stability. Whether it kicks up a couple of basis points quarter over quarter is really not indicative of a systemic trend in ABL. What we like about ABL is that it is a stable return asset across interest rate cycles. So but to your point about repayments, sometimes you get repaid as a lender and that's something that we celebrate as you know at SLR.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

The average duration of the loans that got repaid, we had $2.00 $5,000,000 of ABL repayments in the fourth quarter. The average duration was four years. So if you think about it, that's longer than you typically see in sponsor loans, life science loans. So it just happened to be idiosyncratic that we had a number of loans that were lower cost financing when they can. But again, we kept them on lower cost financing when they can.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

But again, we kept them on SLR's balance sheet for over close to four years. So it was just an odd quarter in that regard. The other point worth noting is in ABL lending, as you think about, for example, the Webster portfolio that we purchased at the end of the quarter, you often structure your loan unlike cash flow where you have a term loan and maybe a small revolving credit facility. The entire facility in ABL is often structured as a revolver. And so what happens is you will have usage of that facility while we mandate economically through fees and minimal utilization of the facility, you will see outstandings go up and down.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

So just to put it in context, we saw $60,000,000 of repayments in that $2.00 $5,000,000 in the fourth quarter were temporary repayments of a facility. They were not loss of a borrowing relationship per se as you think about a typical repayment. So those outstandings will ebb and flow across the ABL credit facilities.

Operator

We'll move next to Paul Johnson of KBW.

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

Thanks. Good morning. Thanks for taking my questions. In terms of just the sponsor backed lending business and you've been allowing that portfolio to run off and that's been the case for quite some time going back several years, give or take a few windows of opportunity for growth in that vertical. But in terms of like the broader SLR platform, can you just tell us how much is still, I guess, investing in cash flow loans?

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

Are there other parts of the platform that are still involved in that business where you can manage your share and relevance with sponsors and maintain those relationships? That's a

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

great question. All of our funds we manage for the most part are multi strategy funds, so they have exposure to all the ABL strategies and the cash flow. So with very few exceptions, any cash flow that we're putting into SLRC is also being invested on behalf of all the high net worth funds, funds of one and co mingled funds. And that allows us to take down anywhere from $50,000,000 to $200,000,000 of a loan and keep diversification across the platform. So we're not treating SLRC different than we are with regards to cash flow loans than we are in our institutional funds.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

But I think a corollary is you may wonder what is our relevance to the borrowing sponsor community if it seems that our commitment to the asset class ebbs and flows across cycles. And the answer is we are very targeted in our sponsor cash flow lending business towards three industries: healthcare, business services, financial services. That probably comprises 75%, eighty % of our cash flow portfolio. And so we have deep relationships in those industries and we will be active as a lender when those sponsors are active. But in those sectors, they tend to be the sponsors much more focused on creating value for the equity over time, less focused on trying to drive the cheapest borrowing costs with the least amount of covenants.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

It's much more of a partnership. So we make sure that we maintain our relevance to these cash flow borrowers to the sponsor community in those industries across the cycle. So our activity closely follows theirs in terms of how they see the investment opportunity just as we do.

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

Got it. I appreciate that. That's helpful. And then last question from me. I apologize if you said this earlier on in the beginning of the call, but just on what looked like higher dividend income this quarter and on the equipment finance investment, obviously been performing well, but what drove that?

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

And I'm looking at basically about $16,000,000 so of dividend income in the fourth quarter. Is that kind of a good run rate going forward? Or is there anything non recurring in there we should be thinking about for next year?

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Sure. So, no, that was what we would like to think of as run rate, hopefully, but you got to hold economic conditions constant. Some of it, to your point, was definitely increased income coming in from the lease portfolio. But the majority of it actually was from the ABL businesses. In large part, the acquisition of the Webster portfolio, we closed that the last day of Q3.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

So you had the full quarter impact for Q4. Those were very attractive returning assets, mid teens returns. So that should be continuing those relationships. Early days have stuck with us. So we'd like to think that's a run rate.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

And I just I can't emphasize enough our commitment to the ABL asset class. It is of collateral if needed as your primary source of repayment. We've been very active, as I mentioned, in adding originators in ABL, both last year and continuing into Q1. So we do see that as a growth area and that is a lot of what you're seeing in terms of the elevated dividend income in Q4. Just to expand for one more second, you may know that our focus in ABL goes beyond just types of collateral, mostly working capital, receivables and inventory, but it also extends into industry expertise.

Bruce Spohler
Bruce Spohler
Co-CEO, COO & Interested Director at SLR Investment

Just as we have healthcare expertise in life sciences and healthcare cash flow lending, we have a dedicated healthcare ABL team that is underwriting healthcare receivables, both commercial pay and government pay. We also have businesses dedicated to digital media industry with the Webster acquisition. We pivoted to some old school industries such as apparel. So there is a lot of white space out there and very often in ABL, regional and industry expertise can be a differentiator.

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

I appreciate that. I mean, one more on the ABL. I mean, you mentioned some new hires there. I mean, what is kind of the requirement for additional headcount in those businesses? I mean, is most of the existing human capital basically kind of in place for those companies?

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

Or would

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

you expect that they need to hire?

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

The good news is, if you look at a lot of portfolio in under the SLRC, they're all built for growth. So the infrastructure is all there. I've noticed the fact that we bought the Webster portfolio into business credit. The prior owner had kind of on 90 people servicing it. We took nine people to service it since we already have the infrastructure in place.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Where we're adding people is really exclusively on the origination side. To Bruce Dillard come, we are committed to the ABL business and we're able to recruit highly talented and experienced people from commercial banks that are looking for a different experience in a different way to grow their personal business.

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

Got it. And when those hires, like that headcount, is that added at the advisor level or is that headcount at the specialty finco level?

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Yes, specialty fincos.

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

Got it.

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

Thank you very much.

Paul Johnson
Vice President at Keefe, Bruyette & Woods (KBW)

That's all for me.

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

Thank you.

Operator

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

Michael Gross
Michael Gross
Chairman, President & Co-CEO at SLR Investment

We thank you all for your attendance today. We recognize it's a busy time of year. So those of you who missed it or just just listened to the recording, please feel free to follow-up for any questions you may have.

Operator

This does conclude today's conference. You may now disconnect your lines and everyone have a great

Operator

day.

Executives
    • Michael Gross
      Michael Gross
      Chairman, President & Co-CEO
    • Shiraz Kajee
      Shiraz Kajee
      CFO, Treasurer & Secretary
    • Bruce Spohler
      Bruce Spohler
      Co-CEO, COO & Interested Director
Analysts
    • Erik Zwick
      Managing Director, Equity Research at Lucid Capital Markets LLC
    • Casey Alexander
      Senior Vice President & Research Analyst at Compass Point Research & Trading LLC
    • Melissa Wedel
      Vice President, Equity Research at JP Morgan
    • Paul Johnson
      Vice President at Keefe, Bruyette & Woods (KBW)
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Earnings Conference Call
SLR Investment Q4 2024
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