SLR Investment Corp. Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Solar Capital Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. And please be advised that today's conference is being recorded. I'd now like to turn the conference over to Michael Gross, Chairman and Co-Chief Executive Officer of Solar Capital Limited. Please go ahead.

Thank you very much and good morning. Welcome to Solar Capital Limited's earnings call for the quarter ended March 31, 2020. I'm joined here today by Bruce Spohler, our Co-CEO; and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you please start by covering the webcast and forward-looking statements?

Of course. Thanks, Michael. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Limited and that any unauthorized broadcasts in any form are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replays of this call will be made available later today as disclosed in our earnings press release. I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition, or results and involve a number of risks and uncertainties, including the impact of COVID-19 and related changes in base interest rates and significant market volatility on our business, our portfolio companies, and the global economy. Additionally, past performance is not indicative of future results. Actual results may differ materially as a result of a number of factors including those described from time-to-time in our filings with the SEC. Solar Capital Limited undertakes no duty to update any forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer Michael Gross.

Thank you very much, Rich. Good morning and thank you for joining us today. First and foremost, we hope that you and your family, friends, and colleagues remain healthy and safe during this pandemic. Our thoughts are all with our stakeholders, including the dedicated employees across Solar Capital and our investment adviser, Solar Capital Partners, who continue to work from home while ensuring business continuity. We also want to express our heartfelt gratitude to all healthcare and other frontline workers and extend our sincere condolences to families who have lost loved ones. The global spread of COVID-19 resulted in unprecedented market volatility and dislocation in March. The shutdown response plunged the world into recession and led to a significant sell-off in financial markets. The resulting Federal Reserve rate cuts, a sharp drop in inflation expectations, and a flight to safety caused the U.S. Treasury 10-year yield to drop below 1% for the first time in more than 150 years. While some near-term liquidity issues have been alleviated by rapid U.S. monetary and fiscal policy responses, uncertainty and volatility are likely to persist due to the unclear timeline for economic recovery. To best support our stakeholders during this evolving crisis, we are providing details on our first quarter results as well as an update as of April 30th. As mentioned in our stakeholder letter issued on April 1st, our conservative management of assets and liabilities has led to a defensive portfolio, stable funding, low leverage, strong liquidity, and favorable positioning for new investments. As of March 31st, our net asset value per share was $19.24, reflecting a 10.3% decline from year-end. This includes a mark-to-market gain on our $150 million of unsecured notes, which are valued using fair value accounting. Excluding this gain, our net asset value would have been $18.97 per share, representing an 11.5% decline. The majority of this decline is attributed to unrealized depreciation, primarily driven by mark-to-market losses due to spread widening impacting our portfolio valuation. Although our portfolio has not escaped the severe economic disruptions caused by the COVID-19 pandemic, we anticipate recovering a significant portion of this unrealized depreciation as market conditions and the economy improve. Overall, our portfolio companies are demonstrating resilient business models and access to liquidity that will help them weather this crisis. We credit the strong positioning of our portfolio to our enduring investment discipline, which is based on the philosophy that we invest as if we are always late in the credit cycle. Additionally, we have invested for several years to build niche asset-based lending businesses that historically show lower default and loss rates during business cycles compared to cash flow lending. Importantly, our asset-based lending business, Crystal Financial, provides countercyclical capabilities to our platform. The team brings over 25 years of experience in lending to distressed companies and has consistently achieved above-average returns during economic downturns. They have expertise in consumer and retail lending sectors, which we expect will seek their structured solutions over the next 12 to 18 months. Furthermore, in recent years, we have transitioned our portfolio to focus predominantly on first lien senior loans. We remain patient and deliberately under-levered to maintain liquidity for market dislocations when risk-adjusted returns are generally more favorable. As of March 31, 2020, 92% of our $1.6 billion comprehensive investment portfolio fair value consisted of first lien loans, with 80% of the total fair value made up of loans in our specialty finance strategies. The $172 million reduction in our portfolio fair value during the quarter was primarily due to net prepayments. In Q1, we experienced $256 million in repayments at par or higher, stemming from early refinancing activity, as borrowers seized the opportunity in a strong market to issue new debt, leading us to pass on participation. None of the repayment activity in Q1 came from secondary market sales. During the first quarter, all our borrowers, except one non-accrual loan as of December 31, made interest payments. As of March 31, 2020, we had one loan, comprising 1.3% of fair value, with a partial payment-in-kind (PIK) component with an interest rate. Cash interest and cash dividends accounted for over 99% of our gross investment income in the first quarter of 2020. Additionally, as of March 31, 100% and 98.2% of our portfolio was performing on a fair value and cost basis, respectively. For the first quarter, Solar Capital's net investment income per share amounted to $0.38. The modest decrease in our NII per share compared to the previous quarter was due to negative portfolio activity and yield compression in Q1, which reduced the size of the income-generating portfolio. With our net leverage at just 0.56 times as of March 31 and our estimated net leverage at 0.58 times as of April 30, we are significantly under-levered in absolute terms and relative to our BDC peers. Consequently, our current portfolio is meaningfully below its full earnings potential. Our decision to operate with under-leverage was based on conservatism and the belief that markets were overheated. Only once this economic crisis fully runs its course will we be able to assess the benefits of this conservatism for our shareholders, but we are confident that our low leverage will lead to better preservation of net asset value. As the market has shifted, the new investment opportunities available to us present higher expected returns and better structural protections. This is an ideal time to expand our income-generating portfolio. The investment landscape in our cash flow lending business is the most attractive we've encountered in many years. Solar Capital has broadened its investment team to offer borrowers senior secured liquidity facilities and refinancing solutions for stronger, more resilient businesses. This contrasts with many of our peers who are reducing leverage and selling assets to stay compliant with financial covenants or regulatory restrictions. Currently, Solar Capital has approximately $700 million in available capital for investment. When combined with the available capital at our sister BDC, Solar Senior Capital, and the private funds managed by Solar Capital Partners, we possess over $3 billion in available capital to support existing investments. However, we do not anticipate a significant need to provide liquidity and capital solutions to U.S. middle-market companies that maintain viable business models. While many lenders face challenges from portfolio concentrations in struggling industries and/or limited liquidity, we are well-positioned to deploy capital to assist our valued sponsors and management teams. In assessing new opportunities, our underwriting teams are collaborating to develop a comprehensive understanding of collateral and risk that gives us additional competitive advantages. Yesterday, consistent with the past eight quarters, our Board of Directors declared a $0.41 per share dividend payable in Q3. Given our low leverage in earnings, however, we expect to maintain a stable dividend for the foreseeable future. While we expect the Q1 decline in our net investment income per share as a result of being under-levered to be a dynamic that persists for a few quarters as we maintain our patient investment approach during such uncertainty, we believe we will grow our NII. Specifically, we expect to fully cover our distributions as we grow the portfolio. Based on the current assessment of the opportunity set and the solid fundamentals of our existing portfolio, we believe as we approach target leverage, our NII per share will reach the mid- to upper $0.40 per share. Earlier this week, we announced the addition of four professionals to the Solar Capital Partners' team. The expansion of both our investment and business development teams speaks to our confidence and strength of the platform and conviction in the investment opportunity set. On a final note, our investment advisers' alignment of interest with the company stakeholders has always been one of our guiding principles. Through significant SLRC share purchases since inception including recent purchases by all of our executive officers, our senior management team now owns approximately 7% of our outstanding common stock. Additionally, all members of the senior investment team have a significant percentage of annual compensation invested in our stock. We believe our management and investment teams' recent share purchases in the face of this crisis demonstrate our confidence in the company's defensive portfolio, stable funding, strong liquidity, and a favorable position to make new investments. At this time, I'll turn the call back over to our Chief Financial Officer, Rich Peteka, to take you through the financial highlights with a specific emphasis on our liquidity and funding profile.

Thank you, Michael. Solar Capital Limited's net asset value at March 31st, 2020 was $813.1 million or $19.24 per share compared to $905.9 million or $21.44 per share at December 31st, 2019. At March 31st, 2020, Solar Capital's on-balance sheet investment portfolio had a fair market value of $1.3 billion in 105 portfolio companies across 26 industries compared to a fair market value of $1.5 billion in 108 portfolio companies across 28 industries at December 31st. Turning to our funding profile and leverage, at March 31st, 2020, the company had no borrowings under its $620 million and $50 million revolving credit facilities and had approximately $60 million of cash on hand. As previously announced, in February 2020, Solar Capital secured an additional $75 million commitment to the company's primary credit facility. A month into the second quarter the company continued to have zero borrowings under these facilities and had $39 million of cash on hand at that time. Currently, our borrowing base far exceeds the capacity of our primary credit facility which provides us with full access to this capital. As of March 31st, 2020, Solar Capital had $446 million of fixed-rate unsecured notes including the issuance in December 2019 of $200 million of unsecured notes consisting of $125 million of five-year notes and $75 million of seven-year notes. At March 31st, 2020, approximately 86% of the company's funded debt was comprised of unsecured term notes which gives the company significant unencumbered assets and provides meaningful over-collateralization of its combined $670 million secured credit facilities. Solar has used the same delivery construction with our liabilities as with our portfolio. As a reminder, the company has no near-term debt maturities having termed out its primary credit facility to 2024. In addition, it has staggered maturities of its unsecured fixed-rate notes from 2022 through 2026 with a weighted average maturity of mid-2023. Since inception, Solar Capital has taken a conservative approach to leverage and has consistently operated well below its stated target range. On March 31st, 2020, the company's net leverage was 0.56 times. As of April 30th, 2020, the company's estimated net leverage is 0.58 times based on quarter-to-date portfolio activity and assuming no change to Solar Capital's March 31st fair values. Solar Capital's current leverage provides significant cushion to covenant levels and the regulatory limit of 2:1 total debt to equity. During April, both Moody's Investor Service and Fitch Ratings affirmed their investment-grade ratings of Solar Capital Limited, which we believe is a testimony to our conservative balance sheet and our portfolio's early resilience to the crisis. Importantly, these investment-grade ratings provide the company with access to the investment-grade term note markets. Solar Capital liquidity remains strong with approximately $700 million of available capital today. As of April 30th, 2020, Solar Capital had unfunded commitments of approximately $118.5 million which included $44 million designated as potential growth capital to Crystal Financial, a portfolio company that the company controls. At this point, less than $12 million of the company's $118.5 million of unfunded commitments are for revolvers that can be fully drawn by the borrowers. Moving to the P&L, for the three months ended March 31st, 2020, gross investment income totaled $32.9 million versus $37.1 million for the three months ended December 31st, 2019. Expenses totaled $17.1 million for the three months ended March 31st, 2020. This compares to $19.9 million for the three months ended December 31st, 2019. Accordingly, the company's net investment income for the three months ended March 31st, 2020 totaled $15.9 million or $0.38 per average share compared to $17.1 million or $0.41 per average share for the three months ended December 31st. Below the line, the company had net realized and unrealized losses for the first quarter totaling $91.3 million versus net realized and unrealized losses of $19.3 million for the fourth quarter of 2019. Ultimately, the company had a net decrease in net assets resulting from operations of $75.5 million or $1.79 per average share for the three months ended March 31st, 2020. This compares to a net decrease of $2.2 million or $0.05 per average share for the three months ended December 31st, 2019. Now, I'll turn the call over to Bruce Spohler, who will provide you with an update on our portfolio.

Thank you, Rich. Solar Capital's portfolio has benefited greatly from Solar's initiative to expand its origination platform through the development and acquisition of specialty finance businesses. At quarter end, only 19% of our total portfolio exposure was in senior secured cash flow loans with the remaining 81% of our portfolio invested in our specialty finance strategies. At March 31, our $1.6 billion portfolio is highly diversified, encompassing over 190 borrowers across 80 different industries. Our largest industry exposures are health care providers and services, diversified financial services, which are predominantly insurance brokerage platforms and pharmaceuticals. The average investment per issuer was $8 million or 0.5% of the portfolio. At March 31, 99% of our portfolio at fair value consisted of senior secured loans. This was comprised of approximately 92% first lien assets and 7% second lien assets. Of our second lien loans, 3.7% were cash flow loans and 3.5% were asset-based loans which were subject to borrowing bases. We believe that our portfolio of predominantly first lien loans again 92%, which carry less risk than second lien and mezzanine loans will result in greater capital preservation during this crisis. At quarter end, our weighted average asset level yield was 10.6%. By focusing on our commercial finance verticals, we've been able to maintain our asset-level yields above 10%, despite the sharp drop in LIBOR resulting from the Federal Reserve's efforts to stimulate the economy. Approximately 77% of our portfolio is floating rate-based, of these 80% have a LIBOR floor with a weighted average LIBOR floor of 1.1%. The 23% of our portfolio, which are fixed-rate loans, are primarily in our equipment financing vertical. Today, Solar has $446 million of fixed-rate term debt and its $620 million of floating-rate credit facilities as well as our $50 million floating-rate credit facility do not have LIBOR floors. At quarter end, 14% of our funded liabilities were floating rate with no LIBOR floor. The company's net interest margin declined by approximately 40 basis points during the quarter, which compares favorably to an approximately 80 basis point drop in one-month LIBOR during this quarter. At March 31, the weighted average investment risk rating on our portfolio was 1.9 times based on our one to four risk rating scale with one representing the least amount of risk. As further indication of the current resiliency of our portfolio, 100% of the on-balance sheet portfolio was performing at quarter end. Including activity across our four business lines originations for the first quarter totaled $84 million while repayments were $256 million. Originations for the quarter were a mix of new deals as well as upsizing to existing borrowers. New investment activity was a combination of cash flow deals, weighted towards the health care and business service sectors as well as Life Science investments. Our outsized realizations during the quarter were repayments at or above par and were primarily the result of refinancings that we have the opportunity to participate in, but opted not to due to the frothy market conditions that continued in January and February. We now have the opportunity to recycle this capital into investments with higher yields and better structures. Now, I'll provide an update on each of our four investment verticals including details around our valuation process. Let me start with our cash flow segment. While the disruption to the economy as a result of the COVID pandemic has been unprecedented, we believe that our cash flow portfolio is well positioned to withstand a prolonged recession. Our cash flow portfolio does not have direct exposure to cyclical industries such as energy, commodities, travel, retail, leisure, heavy manufacturing, or consumer discretionary sectors. We have been in active dialogue with our management teams and sponsors of our portfolio companies regarding business prospects as a result of COVID. We're encouraged by the steps taken by our portfolio companies to preserve liquidity as well as their continued strong sponsor support. Our predominantly first lien portfolio, with relatively modest first lien leverage of approximately five times, as well as significant junior capital beneath our investment tranche and strong sponsor support positions us well to withstand a prolonged economic headwind. We view our portfolio companies as generally providing essential services in non-cyclical sectors that will continue to be required as the stay-in-place restrictions are eased. Solar conducted a rigorous COVID stress test across our cash flow portfolio as part of our first quarter valuation process. Our valuation framework incorporated sector-specific market spread movements during the quarter adjusting for the existence of LIBOR floors, the expected weighted average life of our investments existence of covenants and other issuer-specific factors such as industry, liquidity profile, sponsor support of the business and our position in the company's capital structure. The vast majority of the decline in our cash flow portfolio mark is reflective of market spread movements that we expect to reverse over time. To provide further context, market spreads for the LCD first lien single B index widened out approximately 400 basis points during the first quarter. Since quarter end, that has tightened back approximately 150 basis points or a 35% recovery as of April 30. At March 31, our cash flow loan portfolio was $291 million or approximately 19% of our total portfolio. It's invested across 18 borrowers with an average investment size of $16 million. These companies had a weighted average EBITDA of $57 million which highlights our long-standing commitment to finance larger businesses, which we believe are better positioned to withstand a downturn. The weighted average yield of our cash flow portfolio was 10%. For the first quarter, our cash flow segment contributed $9.6 million to gross income, representing 29% of our total gross income. During the first quarter, we wrote down HIS, a second lien investment, to zero. We had placed this investment on non-accrual back in the third quarter of last year. It represents 1.8% of the cost of our balance sheet at $331 million. During the first quarter, we originated $32 million of first lien senior secured cash flow loans and experienced repayments of approximately $160 million, as we continue to allow our cash flow portfolio to organically run off. Our investments during the first quarter included loans in the healthcare and business services industry as well as upsizing to existing credits. We're very encouraged by our available liquidity at SLRC to take advantage of the current market dislocation that we expect to persist. Over the last few years, we opted to shrink our cash flow portfolio owing to frothy market conditions, which resulted in highly levered capital structures and loose documentation structures. We've begun to see opportunities to finance large upper mid-market companies at lower leverage with better covenant protections and at wider spreads. We will continue to maintain our discipline of investing in non-cyclical sectors focused on the upper end of the middle market. Now let me turn to our asset-based segment. Overall, our portfolio companies in this asset class continue to perform according to expectations at the time of our initial underwriting. At quarter end, all issuers were current on their interest payments. As Michael mentioned, our ABL business, Crystal Financial, specializes in financing companies that are in transition and who have reduced access to traditional financing options. Our ABL loans are underwritten at a discount to the net liquidation value of the underlying collateral. As a result, they've historically been very active in challenged sectors with significant working capital assets, such as retail and consumer goods industries. Accordingly, we believe their business is exceptionally well positioned in the current environment. The senior management team of Crystal has worked together for over 20 years and has experience managing through several economic cycles. We believe the opportunity set for this strategy will only grow over the next 12 months. At quarter end, our asset-based loan portfolio totaled approximately $620 million, representing approximately 40% of our total portfolio. It's invested in 35 borrowers with an average loan size of approximately $18 million. The weighted average asset level yield for this portfolio was 10.6%. And for the first quarter, our ABL segment contributed approximately $9 million to the gross income, representing 20% of the total. The portfolio statistics I just outlined are on a look-through basis to Crystal's underlying loan portfolio. For GAAP reporting, we list our equity position in the Crystal Financial subsidiary on our schedule of investments and we fair value it on a quarterly basis. Our valuation framework incorporates both the comparable company analysis of other ABL finance companies that have recently been sold or are publicly traded, as well as an analysis of Crystal's underlying loans including the company's fundamentals as well as the loans maturity, yield, collateral coverage and structural protection such as covenants. In accordance with this framework, we marked our investment in Crystal Finance down by 7% at quarter end. We expect to recover this unrealized loss as the economy and valuations for comparable asset-based companies improve. During the first quarter, we funded approximately $11.5 million of new ABL investments and had repayments of just under $34 million. Our ABL capability, through Crystal with its senior team, who has expertise in financing stressed companies over the course of 30 years together, provides us with an extremely valuable capability during the current economic disruption. Not only has their opportunity set increased dramatically, but we are able to work with our cash flow clients to create structured solutions for their liquidity-strapped portfolio companies. We are currently focusing our origination efforts on companies that state for asset values in defensible business models. Now let me turn to equipment finance. This vertical is led by a team of seasoned professionals, who have an average of close to 30 years of experience, having managed through several economic cycles. A large portion of our equipment finance portfolio has invested in industries that have been deemed essential businesses, such as construction. Those issuers are showing stability. However, NEF's best-performing segment is transportation. And this sector has been impacted, school, tour and charter bus leasing. Many of our equipment finance borrowers qualify for loans under the CARES Act. It is important to remember, that we provide financing to a borrower, on specific equipment. The financings are at loan to values that are typically in the 70% to 80% of liquidation value and are well within the borrowing base during normal markets. In addition, a large portion of our investments have personal guarantees and other forms of credit protection from the owners. At present, it is not the time to liquidate our collateral, as the market for this type of equipment is limited during the economic shutdown. At quarter end, NEF had a portfolio of over $345 million of equipment, asset-based loans, at fair value. The portfolio was invested across 115 borrowers, with an average exposure of approximately $2.8 million. As a reminder, included in this line of business are equipment finances that are held directly on Solar's balance sheet as well as our wholly-owned subsidiary NEF Holdings, a portfolio company that for tax efficiency purposes holds some of the NEF investments. Our valuation framework for NEF incorporates both the comparable company analysis of other equipment finance companies that have recently been sold or are publicly traded, as well as an analysis of each of NEF's underlying loans, including the company fundamentals as well as the loans' maturity, yield, structural protection, such as covenants and importantly collateral coverage. In accordance with this framework, we have marked our aggregate investments in the equipment finance segment down by 11% from the prior quarter. We expect to recover the majority of this unrealized depreciation, as the economy and valuations for comparable equipment finance companies improve. The equipment finance asset class represents 22% of our portfolio. 100% of these loans are first lien and at quarter end, the weighted average asset-level yield on our equipment loans was just under 11%. Additionally, 99% of the portfolio is fixed rate and thus is not impacted by recent rate reductions. For the first quarter, this segment contributed $5 million to our gross income, representing 15% of the total. During the quarter, we invested in $19 million of new equipment loans and had just under $40 million of repayments. Our equipment finance team remains focused on managing the existing portfolio through this challenging time. Additionally, the team is working with our broader origination team to offer equipment financing solutions to sponsors in their portfolio companies. Now finally let me turn to our Life Science lending business. Overall our Life Science portfolio has been largely insulated from short-term market and economic dislocations, given the long-dated equity investment periods and product development cycles. At the present time, the impact of COVID has had a de minimis impact on the portfolio. 100% of our loans in this segment are performing. And we continue to expect to incur no losses in this segment. As a reminder, we have never realized a loss in our Life Science portfolio, nor has the team in their prior period of time at GE Capital. Currently none of the Life Science portfolio companies have less than three months of cash runway and 85% of our portfolio have more than 12 months of cash runway. This is largely a result of our investment focus on public and venture capital-backed late-stage, multi-product, pharma, and medical device companies that are close to entering or are in commercialization. It's important to remember that our Life Science investments are at low loan to values, 15% to 20% generally, where value is defined as the actual cash that has been invested in the business and not the enterprise value post the most recent round of funding, or the market capitalization if it's a public company. While the FDA may be slowing trials in favor of fast-tracking COVID treatments or vaccines, and patients may be reluctant to participate in trials, given the pandemic, the projected three to nine-month potential delays for some of these companies is small in relation to the 10 to 15-year development process and significant capital invested in these companies prior to us making a loan. In addition, there are some late-stage development companies whose revenues may be delayed as a result of delays in medical procedures or surgeries considered elective or non-essential. The financial viability of many hospitals, doctors, and healthcare providers relies on these sources of revenue and we expect these services to begin to ramp back up over the next few months and into the second half of 2020. At quarter end, our Life Science portfolio totaled just under $285 million. The portfolio consisted of 16 borrowers, with an average investment of just under $18 million. Our Life Science loans represented 18% of our total portfolio and contributed roughly $9.5 million of gross investment income, equating to approximately 29% of Solar's gross investment income for the quarter. The weighted average yield on our Life Science portfolio was just over 10.5%, excluding success fees and warrants. Our valuation framework for the Life Science segment is based on marking each investment close to its amortized costs, including the final fee which is due at repayment. In addition, the cash liquidity of each of these borrowers is a significant valuation input. There is no limit market for private Life Science venture debt. We do not use equity benchmarks for determining the fair value. During the first quarter our Life Science team originated approximately $20 million of investments and had repayments of approximately $24 million. The healthcare sector in general continues to be extremely attractive and we are not seeing any slowdown in new Life Science investment opportunities. Also, the increased scale of the Solar platform enhances the opportunity set for this team, where many medical device companies and public pharma businesses require larger loan sizes. We will, however, continue to be highly disciplined as we make new investments. In conclusion, we believe Solar's portfolio is well positioned to weather the crisis. As we continue to navigate this challenging environment, we remain in close contact with our portfolio companies, their management and sponsor teams to support them, as well as we are working closely with our extensive networks and relationships to source new investment opportunities. Solar's commercial finance platform and significant dry powder enable us to provide structured solutions including both cash flow and asset-based loans for capital-constrained companies in this environment. Solar will be able to participate in these financings while maintaining significant diversification across our portfolio. Now, let me turn the call back to Michael.

Thank you, Bruce. In closing, all of us at Solar Capital Partners would like to thank our shareholders for their continued support during this difficult time. We believe our team's expertise and ability to provide financing across cash flow and ABL solutions should enable Solar Capital to continue to support its existing portfolio of companies and importantly make new investments during this period of turmoil. Our ABL team is highly experienced in working with companies under financial stress, including asset liquidations and bankruptcies. Crystal Financial's model of originating asset-based loans for companies in transition has historically thrived during previous economic downturns. Additionally, our senior cash flow loan investment professionals have significant private equity experience and have managed credit portfolio through several economic cycles. As a result of recent fundraising, the Solar Capital Partners platform now has over $6.5 billion of investable capital, including potential leverage, with over $3 billion currently available to make new investments. SCP's private funds maintained a co-investment strategy with Solar Capital, which provides the company access to attractive co-investment opportunities and upper mid-market companies that otherwise would not have been able to make with its capital base alone. Specifically, the collective dry powder enables the platform to speak for large positions and to provide rescue financing, as well as add-on acquisition financing when M&A activity resumes. Now more than ever, SCP's scale should serve as a competitive advantage for Solar Capital. Importantly, for Solar Capital, the scale and flexibility to finance cash flow and asset-based solutions for larger companies is a significant advantage today. Traditionally, the greatest investment opportunities exist during periods of market dislocation when capital is scarce. With approximately $700 million of available capital and a strong foundation, given our current high-quality portfolio and low leverage, we believe the company is positioned to originate attractive new investments, while also supporting our existing portfolio companies as needed. Our patience and willingness to remain underinvested provides us the foundation to be opportunistic. Given the magnitude of the economic disruption, we believe that the improved investment opportunity set will persist for several quarters as companies continue to require financing solutions. In conclusion, the team is confident in Solar Capital's defensively positioned portfolio, stable funding sources, strong liquidity, and potential to make new investments. Despite the markdowns we took in our portfolio at quarter end because of the large amount of repayments we received in January and February, our net leverage actually decreased from year end to the end of Q1. As a result, we have no anticipated need for additional liquidity or capital. And accordingly, we have no plans to issue dilutive equity or expensive unsecured debt. Each year for the past nine years, our shareholders have granted us approval to issue shares below net asset value subject to the Board's approval at that time. We have always viewed this trust in us as a great responsibility and have managed the business accordingly and have never taken advantage of this. Given our belief in the company's ability to successfully navigate the current challenges, we are disappointed in the current share price. We remain confident that the quality of our portfolio will result in a stable net asset value, which will ultimately be reflected in a higher absolute and relative share price. We hope that all of you are in good health and would like to thank the unsung heroes in the health care profession and the essential service workers on the front lines of this crisis. To support their efforts in our homes of New York, currently the center of the epidemic, we Solar Capital Partners, the investment manager of SLRC, have donated $1 million to the Mount Sinai Hospital and Columbia University Irving Medical Center collectively to be used for the procurement of PPE, COVID research, and the mental health of those frontline health care workers and their families. This morning, we’ll be hosting an earnings call for the first quarter 2020 results of Solar Senior Capital or SUNS. Our ability to provide traditional middle-market senior secured financing to this vehicle continues to enhance our origination capability to meet our capital needs for our clients and we continue to see benefits of this value proposition in Solar Capital's deal flow. Thanks for your time this morning. Operator, at this time could you please open the line for questions?

And your first question comes from Ryan Lynch.

Hey. Good morning, and thanks for taking my questions. And I hope you guys all are doing well. I first had a question, a quick one on Crystal this quarter. It looked like Crystal income fell by about $1.5 million quarter-over-quarter. I believe you said all those loans are still on accrual status, but correct me if I'm wrong with that. So can you just talk about what drove the decline in recognizing the same level of income that you have in the past from that entity?

Sure. We did have a little bit of portfolio shrinkage early on, Ryan, which led to less income down there. And I think just in general we're being a little bit more conservative as you know, velocity really drives in certain assets with Crystal a fair bit of prepayment fees. We weren't seeing that and we don't know that we're going to see that in this environment. So we sort of rightsize the dividend to reflect the current run rate until we begin to ramp that portfolio.

Okay. Makes sense. You guys are obviously sitting in a very advantageous position both with the low leverage on your balance sheet as well as the very flexible liability structure with a lot of unsecured debt and a significant amount of capacity on your credit facility. So capital deployment is going to be key for you guys. And again, you guys are in a really good position. But right now, I know, you guys said the cash flow lending market seems like that's becoming a more favorable environment to be deploying capital into. It doesn't seem like there's really much activity going on in that market today. So can you just talk about the level of deal flow you are seeing? And what are your thoughts on kind of knowing that this is a very fluid situation the pace of capital deployment going forward just given that it feels like primary market issuances are pretty locked up right now?

Sure. That's a great question. Over the past few years, we've been reducing our cash flow portfolio to about 19% of our total portfolio. Until the first quarter, when we made significant cuts, we had been mostly stagnant because our specialty finance strategies were very active while we remained on the sidelines with cash flow. In 12 to 18 months, we anticipate seeing growth not only in our specialty finance areas but also in cash flow. You’re correct that it’s not picking up right now. We are noticing some selective opportunities in cash flow, particularly as some peers are selling assets to enhance their liquidity. This presents a chance for us to acquire assets we already appreciate and understand. Additionally, as 2020 progresses, we expect an increase in M&A activity, not primarily for new platforms, but for add-ons. We have been actively investing more capital in growing situations, and we hear from our sponsors that once they stabilize their existing companies, they will seek to leverage market dislocations to invest the substantial private equity capital they’ve raised in recent years for add-on acquisitions at lower multiples. Therefore, we expect to be very active in the cash flow sector over the next year.

Okay. That makes sense. And then just one more. In the past you guys have obviously made several platform acquisitions to grow out different lending verticals across your platform. I would think that there's probably going to be several platforms under pressure just broadly in the market, some of these specialty lending – not in your portfolio, but across the landscape and stress you guys have always been active in engaging and looking for different platforms. Can you just talk about to your guys' willingness and an ability to potentially add-on a different – additional specialty lending platforms given the dislocation that's oncoming?

Yeah. That's a great question. As you know, we have a team that is dedicated 100% to both looking for acquisitions, but also importantly, lending money to other specialty lenders. We have a fairly diverse portfolio that's performed incredibly well since inception. In fact, we've never had a default or payment default in that asset class. And so, our team right now is actively looking at situations where other specialty lenders may need liquidity. And the nice thing about those is many times, we make those loans, and it gives us a real window into those companies and to figure out whether they are an acquisition opportunity going forward. So yes, we are very active there. And given the breadth of platform today we're affecting strategic buyers now in many of the segments that we're in.

Okay. That makes sense. Those were all my questions. Bruce, I did just want to say, I appreciate the update you gave on all the specialty lending verticals. I thought that provided a lot of detail and insights into how you're thinking about those businesses going forward. So really appreciate that. But those were all my questions, I appreciate the time today. And hope you guys all stay well.

Thank you for your questions.

And your next question comes from Casey Alexander.

Hi, good morning. First of all –

Good morning, Casey.

Let me thank you for your donation to the health care providers as a father of a front-line individual. I can't tell you how much I appreciate your generosity on that front. And with that, Ryan asked a couple of my questions, but one of the things that I was wondering about cash flow loan is you know in economic theory there's late cycle defensive investments. And it would seem to me that some of that mentality might shift more towards early cycle recovery type industry targets. How does sort of your especially on the cash flow side your industry target focus change now that you're going on the offensive and arguably because this is happening so quickly, we're likely transitioning to something more early cycle on the way out on the other side over the next couple of quarters? How does that industry target change and create an opportunity? And also in the cash flow side, given some of the distress, would you also consider starting to take some equity slices as a way of helping to assist rebuilding NAV over the cycle?

Sure. That's a great question. Right now, we find ourselves in a transition period where owners are assessing what they have and what sectors they will support, especially with potential near-term pressure. It's unclear which businesses will be affected, aside from essential services. We're also focusing on recovery capital. Currently, we're leveraging our asset-based expertise in sectors we know well and not timing our entries into specific sectors, as that’s not how we operate. We intend to stick with high free cash flow businesses, especially when they are operational, and we don't engage in cyclical timing. Instead, we are partnering our asset-based lending (ABL) expertise with our cash flow teams to engage with larger sponsored companies, providing ABL solutions to establish a foothold in preferred businesses. We plan to lend at rates over 10% against receivables in sizable mid-market companies, helping them carve out collateral for liquidity lines while their BSL credit facilities allow them to access capital from existing term loans. As we gain visibility into cash flows, we will position ourselves for recovery capital infusion. The industry focus will likely remain similar to what we have observed in recent years. There's a significant amount to accomplish in healthcare, which has been beneficial for us, though it's not immune to current challenges. Many nonessential services have been postponed but will resume once medical facilities are operational for non-COVID-related treatments. Therefore, we're committed to our sector focus while preparing for recovery investments through rescue financing using our ABL capabilities.

That's a great answer. Secondly, I mean, of the BDCs that I cover, your liquidity position is likely as strong and your leverage is low, and you've made an argument for maintaining the dividend. I don't recall if ever in the past if the Board has ever considered a share repurchase program. I hear your dissatisfaction with the stock price and perhaps that's another way to accretively build some NAV while you're waiting to get more of your available liquidity to work. Has that ever been a consideration at the Board level?

Looking back several years, there was a quarter when 25% of our portfolio was repaid all at once, with loans from the crisis that had high yields. This had a significant negative impact on our earnings, leading us to cut our dividend by a third because we didn't anticipate a timely way to reinvest. At that time, we were limited to cash flow lending with no other investment options. Consequently, we cut the dividend substantially and also repurchased stock, as we didn't see a way to recover quickly. In contrast, our current situation is different; capital is valuable, and we have a robust investment strategy that allows us to utilize it wisely. We have secured very low-cost financing, and it's clear that if we lose equity through poor investments or by returning funds to shareholders, we risk losing access to critical debt capital that cannot be replaced today.

Okay. Right. I appreciate your answers and look forward to seeing how it develops in the next couple of quarters. Thanks for taking my questions.

Thank you, Casey.

Thanks.

Your next question comes from Chris Kotowski.

Yes. Good morning. Thank you.

Good morning, Chris.

Good morning. Should we expect that most of the growth over the next one to three quarters will come from ABL lending? If that's correct, is it a more labor-intensive process compared to handling cash flow loans, with additional monitoring of the collateral? Are there any volume constraints, or can this be scaled up as needed?

Yes. That's a great question. And Chris, as a supporter of both Solar and our sister BDC Solar Senior you appreciate that we had multiple ABL platforms across the firm. And so actually we are looking at situations where North Mill, our receivables back business over at SUNS is starting to source much larger facilities that we are sharing over at Solar and keeping a small piece of SUNS is appropriately sized for that portfolio. So we have tremendous capacity with 175 people. As you know, most of them actually are dedicated 100% to the blocking and tackling and monitoring and underwriting of collateral in the ABL sectors as opposed to the cash flow business. So we feel very well positioned. And if anything, what we have been doing as we announced earlier this week is beefing up origination. And particularly origination in specialty verticals like Life Sciences, where we've had a tremendous track record with that team but also origination that can source transactions across our sites that's both cash flow and ABL.

Okay. All right. That's if for me. Thank you.

Thank you.

Your next question comes from the line of Robert Dodd.

Hi everyone. Regarding the cash flow lending market, which you haven't focused on for a while, are you noticing specific opportunities to acquire second lien loans? I'm referring to loans from other credit firms that are looking to sell for liquidity, not those from a liquid market. What is your strategy in this area? I understand you might see some upside if these loans are sold at a discount. However, one of your concerns in the cash flow space over the past couple of years has been not only the coupon but also the structure. Is there a point in either the secondary market or for future originations where the price justifies the lack of structural strength? How should we interpret that? Maybe in this early cycle, the structure isn't as crucial?

No. That's a great question. When we discuss the possibility of acquiring secondary pieces from other credit funds, whether those are loans we are currently involved with or loans we have previously considered, we are referring to loans that are structured in a way we find acceptable. We actually made bids on a few pieces being sold by a public BDC, but we were outbid on a company we are already lending to, indicating we were comfortable with the structure. As for your question about purchasing BSLs at a discount, it would be extremely rare for us to do so, because without covenants, we would essentially have to wait for the situation to resolve itself. The only exception might be if we were performing exceptionally well and had a maturity coming up in the next 12 to 18 months, with the knowledge that there might be an opportunity for us to assist in refinancing. However, it is very unlikely that we will participate in the liquid secondary market.

I appreciate that. And then on the forward and you said you're seeing some initial signs and having discussions with obviously sponsors who are looking potentially later this year to do add-ons and things like that. What's the reaction been so far on that in terms of like the pricing talk and to that point, again the structure talk? Because I presume anything you'd be willing to fund on that structures would be a lot tighter again than the sponsors had been able to get, but financing sights. So can you give us any color on how those very preliminary just going?

Sure. I think from a high level structure is not even in negotiation. It's just thrown on the table right away. Having lived through cycles for 30-plus years, Mike and I have seen this play out where the first thing that comes back is structure. So there's really not much of a negotiation around the edges of the covenants, but not around the existence of the covenants. So that's an easy dialogue. Where pens down without structure and that's always been the case as you know you've in the more frothy environment. But then the critical factor is, obviously, leverage transactions where they were asking for five times to six times leverage, they're now asking for four times to five times leverage. And again we're talking about upper mid-market companies. And then on pricing, I think it's fair to say that it's very situational but loans that were 7.5% to 8.5% are now no less than 9% opening conversation. With most importantly some call protection, which had been nonexistent, as you know, in cash flow lending particularly for a first lien loan. We're not going to rent out our balance sheet for 12 months and then get refinanced out if the markets should recover. And so we want to make sure we have a little bit of call protection so that we get some duration as well.

Okay. And just one follow-up to that, to your point Mike, the leverage used to be five times to six times adjusted EBITDA. So higher than on a real basis would be...

Yeah, we're not even discussing adjustments.

I appreciate it. Thanks a lot guys and stay healthy everybody. Thank you.

Thank you.

And your next question comes from Finian O'Shea.

Good morning, hi. A couple of questions on NEF that seem to have more cloudy remarks or less optimistic understandably given a lot of these businesses are smaller and cyclical. First question on PPP eligibility, is PPP funding able to support equipment lease obligations. And if that's the case is NEF also generally not an affiliate I guess the question is, is this funding available to those issuers, and is that a line of support?

Yeah, that's a great question. So, yes, on one hand you're right. This is the portfolio that hopefully I made it clear we are watching closest in part because it is cyclical given the underlying borrowers and in part while the team has 30-year experience, they're newer to our platform. And we were not here during the 2008, 2009 crisis. But obviously we had the ability to underwrite that when we were able to partner with them and bring them on the platform. They do to answer your question Finian, have access to government stimulus by and large because these are not private equity owned firms so they avoid the affiliation issue. And our team has worked closely with as many of our borrowers as possible to provide access to that capital and give them a little bit of a lifeline and extend their ability to remain closed. Fortunately a number of them actually are in essential services. And as you know, typically construction is something that is opening up sooner than others when states are phasing through their reopenings. So we're watching it. It is a deal by deal. Fortunately, it's a very diverse portfolio. But this is the nature of that business, where there is a lot of discussions, you're getting monthly interest in principle. You have other pressure points on the borrowers and then you work with them to get through the difficult times. So early days, a lot of hand-to-hand combat, but government funding will definitely be helpful.

Thank you for that. In cases where a borrower in a heavily impacted industry faces financial challenges such as bankruptcy, do they typically continue to pay interest on your ABL, or is there usually a gap in payments?

So are you interested in ABL or are you in equipment?

Equipment, sorry, but if you want to comment on that one as well...

In ABL, it's crucial to recognize that there has been considerable discussion over the past year or two about whether our firms, specifically private credit firms, are equipped to navigate a downturn. This preparedness is not only about the structure of liabilities and portfolio management but also about the skill set of our teams. Our ABL businesses, including the Crystal team, the Nation's team, and our North Mill and Gemino teams over at Solar Senior, have the expertise in managing bankruptcies and stress situations. They focus on ensuring that we handle collateral wisely, often working with companies to avoid liquidating assets when they face challenges. Frequently, companies aim to reorganize and continue operations, collaborating with us so we don't have to foreclose. Our teams are adept at navigating both liquidation and reorganization processes, a critical skill set that, while we hope to use infrequently, is invaluable during these times.

Sure. That's helpful. And then just one final question. On the specialty finance verticals NEF, Crystal et cetera. On any view on the SEC release granted on April 8 would allow you to take your third-party manage funds and invest into these finance companies to expand them, has that been an item of discussion? And have you any view on that?

Actually this is the first time we will have discussed it. I think given the fact that we have $3 billion of available liquidity across the platform and each individual fund clear to liquidity, there's plenty of liquidity themselves. There's no need to do that for us at all.

Very well. That's all for me and thank you so much.

Thanks, Finian. Are there any more questions?

There are no further questions. I would now like to turn the call back over to Michael Gross, Chairman and CEO.

Yes. This is Bruce. Before we turn it back over to Michael, I really just want to take a moment to thank not only the support of our investors in the research community, but Rich, Michael and I you guys get to spend a longer time with us. You can see us on the front lines, but we would not be in this position of strength from a fundamental portfolio perspective and positioned to be in an offensive mindset if it weren't for the 175 people at Solar. The senior team has really stepped up for us in a big, big way. And I think that is a huge credit to the team and the long duration that everybody has working together. There's a good thing that has come through this it is that we have accelerated the integration across the platform of all these different teams that have come together in a common cause, a preservation of our investors' capital and looking for good opportunities. So we can't thank you guys enough. We're incredibly proud to be part of this team.

Thank you and I'll reiterate that. And again, we appreciate everyone's time this morning. We know these are difficult times and we appreciate all of our shareholder support. And as you know, we try to be as transparent as possible. So please feel free to reach out to any of us with any questions you may have now or whenever you want. And we hope everyone remains safe and take care everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.