SLR Investment NASDAQ: SLRC reported third-quarter net investment income of $17.8 million, or $0.33 per average share, exceeding its quarterly distribution of $0.31 per share. The business development company said its net asset value declined to $17.83 per share as of Sept. 30 from $18.00 at the end of the prior quarter, largely because of a fair-value decline in one non-accrual investment.
Chairman and Co-Chief Executive Officer Michael Gross said the company is maintaining a cautious outlook on private credit, citing elevated default activity, tightening interest coverage and competitive conditions in direct lending. He said SLR is emphasizing specialty finance and collateral-based lending rather than broadly pursuing cash-flow lending opportunities.
Third-Quarter Results and Portfolio Activity
Gross investment income was $49.3 million in the third quarter, compared with $48.8 million in the second quarter. Net expenses rose to $31.5 million from $31.1 million. SLR recorded net realized and unrealized losses of $10.2 million, compared with losses of $9.5 million in the preceding quarter, resulting in a $7.6 million increase in net assets from operations.
Chief Financial Officer Shiraz Kajee said net asset value totaled $972.8 million, or $17.83 per share, at quarter-end. SLR’s on-balance-sheet investment portfolio had a fair value of about $2 billion across 77 portfolio companies, compared with $2.1 billion across 79 companies three months earlier.
The company originated $575 million of new investments across its comprehensive portfolio during the quarter and received $429 million in repayments, producing net originations of approximately $146 million. Gross said 95% of originations by volume were in specialty finance, a record level for the company.
SLR declared a quarterly distribution of $0.31 per share, payable Dec. 28 to shareholders of record as of Dec. 14.
Credit Conditions and Portfolio Positioning
Gross said the private-credit market is entering what he described as the middle stages of a credit cycle, with pressure particularly concentrated among loans originated in 2021 and 2022 at high leverage and during lower-rate conditions. He said SLR has less than 15% of its comprehensive portfolio invested in those vintages.
“We expect defaults and liability management exercises to rise throughout the next year,” Gross said, adding that the company views the environment as “a typical credit cycle downturn,” rather than a repeat of the 2008 financial crisis.
Gross said SLR’s comprehensive portfolio is concentrated in first-lien, collateral-based investments and has limited exposure to software. The company’s software exposure, representing two borrowers, was less than 1% of fair value at quarter-end. Restructured paid-in-kind interest accounted for 2% of gross income.
Co-Chief Executive Officer Bruce Spohler said the comprehensive portfolio totaled approximately $3.4 billion, with an average exposure of $4 million. Senior secured loans represented 97.5% of the portfolio at fair value, while more than 96% was invested in first-lien loans. Specialty finance investments accounted for more than 86% of the portfolio, and the weighted average asset-level yield was 11.2%.
The company had two loans on non-accrual, representing 1.2% of the portfolio at fair value and 2.9% at cost. Spohler identified OmniGuide as the investment responsible for the approximately 90-basis-point quarterly NAV decline. He said the company’s workout team was focused on maximizing recovery on OmniGuide and its other non-performing loan.
Outside of those two investments, approximately 98% of the portfolio was rated one or two on SLR’s four-point risk-rating system, with one representing the lowest risk, Spohler said.
Specialty Finance Expansion
SLR’s asset-based lending platform totaled $1.5 billion across 241 issuers, or more than 43% of the total portfolio. The company originated $277 million of new ABL investments during the quarter and received $238 million of repayments. The ABL portfolio’s weighted average asset-level yield increased to 12.6% from 12% in the prior quarter.
Spohler said the company is seeing increasing demand for ABL solutions from private-equity sponsors seeking liquidity for portfolio companies, acquisitions and turnaround situations. He highlighted healthcare receivables as an area where SLR believes its experience provides an underwriting advantage.
The equipment finance portfolio totaled $1.2 billion across 570 borrowers, representing 35% of the portfolio. SLR originated $263 million of equipment finance investments and received about $176 million in repayments. The segment’s weighted average asset-level yield was 10.2%.
During the quarter, SLR Equipment Finance completed a $250 million asset-backed securitization priced at a fixed rate of 5.6%, which Spohler said lowered the company’s cost of debt capital.
Life sciences investments totaled $176 million across six borrowers, or 5% of the portfolio. SLR originated $5 million in life sciences during the quarter and had no repayments. Its sponsor finance cash-flow portfolio totaled $463 million across 25 borrowers, representing just under 14% of the total portfolio. That portfolio was entirely first lien, with a weighted average loan-to-value ratio just under 40% and weighted average interest coverage of 2.2 times.
Liquidity, Debt and Share Repurchases
At Sept. 30, SLR had approximately $1.1 billion of debt outstanding and a net debt-to-equity ratio of 1.1 times, within its stated target range of 0.9 times to 1.25 times. More than 43% of its debt capital consisted of unsecured debt.
The company had unsecured debt maturities of $75 million in December 2026, $135 million in January 2027 and $50 million in March 2027. On Oct. 28, SLR committed to a private offering of $135 million of unsecured notes carrying a 6.76% fixed interest rate and maturing June 10, 2030. The offering is expected to close and fund Dec. 10.
SLR said it had more than $850 million of available capital, including credit-facility capacity at SSLP and its specialty finance portfolio companies, subject to borrowing-base limits.
After quarter-end, the company repurchased more than 884,000 shares for $10 million at an average price of $11.31 per share, including commissions, under its existing 10b5-1 repurchase plan. Kajee said the purchases are expected to be accretive to fourth-quarter NAV per share. Gross said the company would continue to evaluate further repurchases opportunistically, describing prices in the low-$11 range as attractive relative to investment opportunities.
About SLR Investment (NASDAQ:SLRC)
SLR Investment Corp. NASDAQ: SLRC is a business development company that provides financing to middle-market companies, primarily in the United States. The company seeks to support businesses that may have limited access to traditional bank financing by investing in a range of debt and equity securities.
Its investment activities generally focus on senior secured loans, subordinated debt, mezzanine investments and equity interests. SLR Investment typically partners with private equity sponsors and company management teams, providing capital for acquisitions, recapitalizations, refinancing, growth initiatives and other corporate purposes.
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