Earnings Call Transcript - SLRC Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Q4 2020 Solar Capital Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Michael Gross, Chairman and Co-CEO. Please go ahead, sir.

Michael Gross, Chairman and Co-CEO

Thank you very much, and good morning. Welcome to Solar Capital Limited's earnings call for the fiscal year ended December 31, 2020. As we'll discuss on this call, last night we announced a rebranding of the Solar Capital Partners platform to SLR. Effective today, SLRC changed its name to SLR Investment Corp. SRC's adviser changed its name to SLR Capital Partners, and the company ticker will remain SLRC. I'm joined here today by Bruce Spohler, our Co-Chief Executive Officer; and Rich Peteka, our Chief Financial Officer. Rich, before we begin, could you please start off by covering the webcast and forward-looking statements?

Rich Peteka, CFO

Of course. Thank you, Michael. 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 being webcast from the Investors tab on our website at www.slrinvestmentcorp.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 performance 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. Additionally, as 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. SLR Investment Corp. 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 or call us at 212-993-1670. At this time, I'd like to return the call back to our Chairman and Co-Chief Executive Officer, Michael Gross.

Michael Gross, Chairman and Co-CEO

Thank you very much, Rich. Good morning, everyone, and thank you for joining us today. A year ago, when we reported our fourth quarter and full year results for 2019, none of us could imagine that we were on the eve of a global pandemic that would result in a tragic loss of so many lives, a severe economic contraction, and a complete disruption to our daily lives and routine business and social interactions. In spite of an extraordinarily challenging year that negatively impacted the functioning of literally every government, business, and community organization across our country, SLRC performed well, reflecting our long-standing disciplined approach to managing the company's assets and liabilities. We are grateful to our employees, clients, lenders, and service providers for their tireless efforts despite the stress and personal hardship this pandemic has caused. At December 31, 2020, 100% of our portfolio is performing. The credit quality supports our investment thesis that asset-based loans in niche markets and first lien cash flow loans to upper middle market companies operating primarily in non-cyclical segments provide meaningful downside protection during challenging economic periods. Our portfolio company's resilient business models and assets and liquidity have enabled them to successfully weather the economic crisis. At December 31, 2020, our net asset value per share was $20.16, up from $20.14 at the end of the third quarter. Importantly, we anticipate that our existing investments will ultimately deliver their underwritten returns. As long-term investors know, we embarked on an initiative eight years ago with the acquisition of Crystal Financial to broaden and diversify our investment capabilities via niche ABL strategies that are complementary to our cash flow lending business. In Q4, we furthered the strategy through the acquisition of Kingsbridge Holdings, a leading independent lessor of essential-use equipment to a diverse set of primarily investment-grade customers. During our two-year loan investment in Kingsbridge, we gained a deeper understanding of the business and developed a strong relationship with its successful management team. Kingsbridge expands our direct origination capabilities and provides differentiated sources of growth for the company. With the acquisition of Kingsbridge, we are truly a diversified commercial finance business. During the fourth quarter of 2020, SLRC's comprehensive portfolio grew to just over $2 billion, up 37% from September 30, driven primarily by the acquisition of Kingsbridge. At December 31, over 99% of our comprehensive investment portfolio at fair value was invested in senior secured loans, and approximately 86% of the total fair value consisted of loans in our specialty finance verticals. These businesses have historically exhibited low default and loss rates throughout business cycles. Notably, these specialty finance teams have each managed through multiple cycles of a career spanning 20 to 30 years. During 2020, 76% of the company's gross investment income was generated from our commercial finance businesses. Investment income in Q4 2020 was up approximately 9% compared to the third quarter, given the income from our investment in Kingsbridge, which closed in early November. In the fourth quarter, SLRC produced $0.35 per share of net investment income, up $0.01 per share from the third quarter. We have a clearly defined path for SLRC to generate pre-COVID levels of NII over the next few quarters as we approach our target leverage. Importantly, we are confident the company's earnings power continues to reflect the benefits of SLRC's multi-strategy commercial finance platform that combines cash flow and our specialty finance businesses. We expect portfolio growth in 2021 from a growing pipeline of both senior secured cash flow, as well as specialty finance investment opportunities. With the improving economic climate and stabilization of markets, M&A activity has picked up, and our investment pipeline is growing. Our diversified investment platform spanning cash flow lending, ABL, equipment finance, corporate leasing, lender finance, and life science venture lending positions SLRC as a solutions provider to borrowers with scale. We are fortunate to be in a unique position to allocate capital across our investment strategy to the most attractive risk-adjusted opportunities. We have significant available capital to support the growth of our portfolio. At December 31, SLRC remained low leveraged at approximately 0.8x debt-to-equity relative to our target range of 0.9 to 1.25x. When including available liquidity at Crystal Financial, NEF Holdings, and Kingsbridge, the company had over $730 million of available capital subject to borrowing base limits. Finally, let me touch on the rationale and benefits of our platform rebranding, which was announced last night. Since our acquisition of Crystal Financial in 2012, we have focused on building a diversified commercial finance platform with multiple investment verticals that can provide our investors with exposure to private debt asset classes that carry attractive pricing and terms with strong protection in the form of covenants and collateral coverage. This initiative included the development of our lender and life science businesses and the acquisitions of Nations Equipment Finance and Kingsbridge. We will continue to expand our suite of lending strategies. As a result of our success across the SLR platform, we have become a health of brands rather than a branded house. To fully reflect our unified platform and holistic approach to providing our borrower clients with financing solutions across the capital structure, and our shareholders with attractive investments, we have rebranded Solar as SLR, with each of our entities changing its name as an extension of the SLR brand. At this time, I'll turn the call over to Rich Peteka, our CFO, to take you through the Q4 financial highlights.

Rich Peteka, CFO

Thank you, Michael. SLR Investment Corp.'s net asset value at December 31, 2020, was $852.0 million or $20.16 per share compared to $851.1 million or $20.14 per share at September 30, 2020. At December 31, 2020, SLRC's on-balance sheet investment portfolio had a fair market value of $1.53 billion in 105 portfolio companies, across 25 industries, compared to a fair market value of $1.35 billion in 105 portfolio companies across 26 industries at September 30, 2020. At December 31, SLRC had $677 million of debt outstanding and a leverage ratio of 0.78 times net debt to equity. When considering cash on hand and available capacity from the company's credit facilities, combined with available capital from our non-request credit facilities at Crystal, NEF, and Kingsbridge, SLR Investment Corp. had more than $700 million to fund portfolio growth, subject to borrowing base limits. Moving to the P&L, for the three months ended December 31, 2020, gross investment income totaled $31.4 million versus $28.9 million for the three months ended September 30, 2020. Expenses totaled $16.5 million for the three months ended December 31, 2020. This compares to $14.6 million for the three months ended September 30, 2020. Accordingly, the company's net investment income for the three months ended December 31, 2020, totaled $14.9 million or $0.35 per average share compared to $14.3 million or $0.34 per average share for the three months ended September 30. Below the line, the company had net realized and unrealized gains for the fourth quarter of 2020, totaling $3.4 million versus net realized and unrealized gains of $4.4 million for the third quarter of 2020. Ultimately, the company had a net increase in net assets, resulting from operations of $18.3 million or $0.43 per average share for the three months ended December 31, 2020. This compares to a net increase of $18.6 million or $0.44 per average share for the three months ended September 30. In addition, post year-end, SLRC's investment-grade corporate rating was affirmed by Fitch Ratings, which further testifies to SLRC's conservative investment and management philosophies and strong underwriting track record. The investment-grade ratings from both Moody's and Fitch provide important flexibility and efficiency to the company's growing balance sheet. Finally, our Board of Directors recently declared a Q1 2021 distribution of $0.41 per share payable on April 2, 2021, to shareholders of record on March 18, 2021. With that, I'll turn the call over to our Co-Chief Executive Officer, Bruce Spohler.

Bruce Spohler, Co-Chief Executive Officer

Thank you, Rich. Good morning, everybody. First and foremost, SLRC's portfolio is 100% performing and has shown remarkable durability throughout the economic slowdown and the current stages of recovery. Our performance is a tremendous complement to the financial sponsors and portfolio of companies that we have invested in. In addition, SLRC's performance supports our thesis of minimizing the risk of loss by investing at the top of the capital structure in first lien cash flow loans to non-cyclical industries and allocating a significant proportion of our exposure to collateralized loans through our specialty finance lending verticals. At year-end, the weighted average investment risk rating of our portfolio was under two based on our one to four risk rating scale, with one representing the least amount of risk. As a further indication of the resiliency of our investments, 100% of the portfolio was performing at year-end, and on the watch list was less than 3% of the entire portfolio, which had peaked at 7.5% back in the second quarter of 2020. As Michael mentioned, our comprehensive portfolio grew 37% in the fourth quarter, driven largely by the acquisition of Kingsbridge. At year-end, our portfolio was just over $2 billion and was highly diversified, encompassing 600 distinct issuers across 80 industries. Our largest industry exposures were healthcare providers and services, diversified financials, pharmaceuticals, and retail ABL loans. The average investment per issuer was just over $3 million, or 0.2%. At year-end, over 99% of the portfolio consisted of senior secured loans. The senior secured loan portfolio was comprised of approximately 94% first lien and 5% second lien loans. Of the second lien loans, only 2% were cash flow, with the remaining being asset-based second lien loans. At year-end, our weighted average asset level yield was 10% compared to 10.1% the prior quarter. By focusing on our niche commercial finance verticals, as well as cash flow lending, we have been able to maintain asset level yields close to 10%, despite the decrease in LIBOR and the continued spread compression in the marketplace. Notably, we've been able to maintain this yield of 10% while actively reducing our exposure to second lien cash flow investments. Originations for 2020 totaled just under $1 billion, and repayments were $680 million, resulting in net portfolio growth of approximately $300 million. Portfolio growth was heavily weighted towards the fourth quarter, coinciding with when the markets reopened, as well as the acquisition of Kingsbridge. Now let me provide an update on each of our investment verticals. At year-end, our sponsor cash flow portfolio was just over $280 million, or approximately 14% of the total portfolio, invested across 16 issuers, with an average investment of just under $20 million. These companies had a weighted average EBITDA of over $50 million, which highlights our commitment to finance upper mid-market businesses that we believe are better positioned to withstand the downturn. During last year, we originated commitments of over $65 million of first lien cash flow loans and experienced repayments of $225 million. Our cash flow investments came from a mixture of delayed draws and incremental investments in existing credits. Additionally, during the fourth quarter, we committed to unfunded acquisition lines that we expect will provide a boost to fundings in our portfolio during this year. Of note, our second lien cash flow loan exposure was further reduced with the repayment of our loan to Bishop Lifting. We earned over a 10% IRR on this investment. Across the rest of our portfolio, we're continuing to see healthy operating performance. Substantially, all of our cash flow companies are outperforming their post-COVID revised budgets, as the rebound in revenues, as well as cost cuts, have had a positive impact on their financial performance. We view the majority of our portfolio of companies as providing essential services in non-cyclical sectors. During the fourth quarter, none of the borrowers in this portfolio experienced defaults. The weighted average yield of the cash flow portfolio was 8.7%, up from 8.5% in the prior quarter. Now let me turn to our ABL business. As a reminder, this vertical is a combination of senior secured loans at Crystal Financial, as well as senior secured loans originated directly on to our balance sheet. At year-end, the portfolio totaled approximately $530 million, representing 26% of our total portfolio. It was invested in 33 borrowers with an average loan size of $17 million. The weighted average asset level yield was 10.7% compared to 11% the prior quarter. During last year, we funded approximately $225 million of new ABL investments and had repayments of just over $300 million. During the fourth quarter, we had one of our strongest periods with the ABL team, with originations of over $125 million and repayments of just under $100 million. This division paid SLRC a cash dividend for 2020 of $24 million equating to an 8.5% yield on cost. Now let me turn to Kingsbridge. As a reminder, in November, we invested $136 million of equity and $80 million of debt to acquire 87.5% of Kingsbridge in partnership with the management team. Kingsbridge is an Illinois-based leading independent lessor of essential-use equipment to primarily investment-grade customers. We have the benefit of being a lender to Kingsbridge over the prior two years, giving us unique insight into their business underwriting and credit disciplines and strength of the management team. The acquisition highlights the benefits of our lender finance business, which gives our portfolio team an opportunity to get to know management and their niche businesses through being a lender, then potentially becoming an equity investor. Kingsbridge was founded in 2006 by the current management team and has underwritten over $1 billion of leases since inception. At year-end, Kingsbridge's highly diversified portfolio totaled approximately $570 million, with an average funded exposure of approximately $1.2 million per obligor, and was 100% performing. Over 70% of their portfolio is invested in assets leased by investment-grade borrowers. Importantly, Kingsbridge's strong track record has continued through the current health and economic crisis. This acquisition expands our direct origination capabilities, provides differentiated sources of growth for SLRC, and is our first foray into lending to investment-grade borrowers. We view this transaction as an investment in a permanent asset that is not subject to a three-year average life of a typical cash flow investment. And it will have the benefit of enhancing the duration of the overall Solar portfolio - I'm sorry, SLRC. During the fourth quarter, Kingsbridge paid a dividend of just under $2 million for the partial ownership period, including interest on our $80 million loan. Gross income generated by Kingsbridge during the fourth quarter was $5.4 million. We continue to expect that our debt and equity investments in Kingsbridge will generate approximately $20 million of gross income in 2021 and produce a blended cash yield of approximately 10%, consistent with our other specialty finance assets. While still early, the integration of Kingsbridge is proceeding exceptionally well. Now let me turn to equipment finance. As a reminder, included in this equipment finance business are transactions held directly on our balance sheet as well as those held in our subsidiary NEF Holdings. In 2020, our equipment finance strategy invested over $50 million and had repayments of approximately $120 million. At year-end, the portfolio totaled $318 million and was invested across 105 borrowers with an average issuer exposure of approximately $3 million. This asset class represents just over 15% of our total portfolio. 100% of the equipment finance investments are first lien loans and at year-end carried a weighted average asset level yield of just over 10%. In 2020, investment income from the equipment finance portfolio totaled just over $18 million. Last year was an unprecedented year, with the pandemic creating the most challenging investment environment in this team's history. However, they have had 40 years of experience in this business. While the majority of their borrowers received government assistance, the prolonged shutdown took a toll, particularly on transportation-related leases to the leisure, educational, and entertainment sectors. Over the last several quarters, we have reduced this portfolio. As we enter 2021, we believe that the equipment finance team has made the most of a challenging situation and are poised to grow this year. Now let me turn to the Life Science segment. At year-end, the portfolio totaled just over $325 million. It consisted of 16 borrowers with an average investment of approximately $20 million. The life science portfolio represented 16% of the total portfolio and close to 30% of the gross investment income. During last year, the team originated approximately $60 million of new investments and had repayments of just under $30 million. The uncertainties and market impact of the pandemic led many life science borrowers to work closely with existing lenders while focusing on reducing costs and surviving on lower cash budgets. This led to fewer repayments last year than we typically have seen, resulting in greater duration for our life science portfolio. We had one exit in the fourth quarter which had a weighted average realized IRR of 13%. The weighted average yield on the existing portfolio is 9.5%, however that excludes any success fees and warrants that typically accompany these investments. In conclusion, SLRC's portfolio activity last year represents a continuation of the investment themes that have been driving our investments over the last few years. Reducing our second lien cash flow loan exposure, focusing on new origination activity in first lien loans in defensive sectors, and increasing our investments in specialty finance assets we are able to get tight structures and attractive risk-adjusted returns. Across all of our verticals, including our sponsor cash flow lending business, we are seeing a larger volume of higher quality investment opportunities than we have seen in a number of quarters. The uptick is certainly reflective of the economic rebound and increased middle market sponsor activity. In addition, we're seeing a larger pipeline of opportunities from the business development efforts of our origination professionals across the platform. The current market environment is attractive and provides a great opportunity for us to grow our portfolio in 2021. Now let me turn the call back to Michael.

Michael Gross, Chairman and Co-CEO

Thank you, Bruce. In closing, we're pleased with how our portfolio weathered 2020, and we're confident in our ability to continue to grow our portfolio and net investment income over the coming quarters. We are starting the New Year with a strong portfolio foundation that is 100% performing and has allocated over 86% of specialty finance assets that carry attractive pricing and terms with strong protection in the form of covenants and collateral coverage. The addition of Kingsbridge to SLRC further expands our origination engines. With over $700 million of available capital and low leverage, we believe SLRC is positioned to originate attractive new investments. Our patience and willingness to remain under-invested during last year provides us with the foundation to grow. With over $7.5 billion of investable capital across the platform, SLR scale has enabled SLRC to participate in the higher volume of large transactions, which we believe will accelerate the growth of our portfolio in 2021. We believe that the improved investment opportunity set will persist for a while as companies require financing solutions for liquidity, M&A, and growth initiatives. Sponsor activities on the upswing and the PE industry is armed with significant dry powder. SLRC is in a great position to capitalize on this opportunity, and we fully expect growth in our sponsor finance, cash flow business, as well as across our specialty finance verticals. We look forward to continuing to execute our commercial finance strategy now under one unified brand, which will enable us to further enhance our collaborative origination efforts. We go to market with a comprehensive solution set across the capital structure that can be customized to the needs of each borrower and offer certainty and scale of capital in each investment vertical. 2020 was a challenging year for all of us. We hope that all of you are in good health. We would like to thank you for your time today and your support of our company. At 11 o'clock this morning, we'll be hosting an earnings call for the fourth quarter and 2020 results of SLR Senior Investment Corp. or SUNS, which was previously named Solar Senior Capital. Our ability to provide traditional middle market senior secured financing through this vehicle continues to enhance our origination team's ability to meet our clients' capital needs, and we continue to see benefits of the value proposition and SLRC's deal flow. We appreciate your time this morning. Operator, would you please open the line for questions at this time.

Operator, Operator

Your first question comes from the line of Paul Johnson with KBW.

Paul Johnson, Analyst

Good morning, everyone. Thank you for answering my questions. Congratulations on the rebranding. It seems like this signifies your departure from the solar business. I had to mention that. I was wondering if you could help us understand the factors driving the demand for financing from your Kingsbridge business. I assume this presents a different type of borrower compared to your other sectors. Is there a common economic factor influencing the choice to lease these assets instead of owning them?

Bruce Spohler, Co-Chief Executive Officer

Yes. This is Bruce. Thanks for the question. It's really just the purchasing agents sitting at these large investment-grade companies. As you know, we cover everyone from Cardinal Health to Bank of America, and they're making buy versus lease decisions just as you may with your car. The economic climate might drive that. As Michael mentioned, these are longer duration leases at the opening contract. Very often, what we find, particularly in an environment like this with uncertainty is, they may say, we're going to put off purchasing new equipment. Let's just extend the existing lease that we have with Kingsbridge. So it's really driven by the economic environment and what's going on at the company in terms of how they want to optimize their CapEx dollars between purchases and leases.

Paul Johnson, Analyst

Okay. That makes sense. And then you mentioned that it's an attractive environment today. Could you maybe just talk about what verticals you might see the most favorable risk-adjusted opportunities in the market for your portfolio today?

Bruce Spohler, Co-Chief Executive Officer

Yes. I think that from a high-level perspective, as you know, the life science business has consistently generated the best risk-adjusted returns. That's not just for us; that's just as an asset class. In particular, our team, as you know, has never had a loss, so they still tend to get outsized returns. Having said that, all of our strategies across the platform, consistent with the marketplace broadly, has felt spread compression and also the reduction of LIBOR. So we have felt pressure on pricing across all the strategies relative to their historic returns. But I think that as we look at the portfolio of investment strategies that we have, we're finding that they all are seeing good opportunities for similar reasons coming out of what we hope is coming out of the pandemic here and the economic recovery that we're experiencing is in front of us. And so, companies whether it's Kingsbridge to your prior question, where companies are looking to extend leases or enter into new leases, have been looking to figure out how best to deploy their capital into this economic recovery. We're seeing the same thing in life science lending activities picking up as you're coming out of so many businesses in this segment being tied up with COVID-related products. They're now shifting the focus back to other drugs and devices that were in process and need to be developed in addition to the COVID crisis. And you're then going to the same way as you go across the platform. Our ABL strategy had the best quarter in the fourth quarter in terms of originations. We still see a lot of need for capital against assets for companies that are in transition during this economic period as companies are trying to transition and figure out what projected cash flows look like. They're borrowing more and more against assets, particularly in the retail sector, where that team has had strong, long-standing expertise. And then in the cash flow market, we're seeing activity pick up there. As we mentioned, sponsors in sectors that have been resilient during the crisis that have proven themselves last year and have rebounded quickly are attracting additional private equity dollars, which need lending dollars alongside that to leverage the equity investments. And so we're, as we mentioned, doing delayed draw undrawn acquisition facilities to fund add-on acquisitions. They don't get drawn always day one, but tend to get drawn over six, nine, or twelve months to fund the acquisition pipeline. So there's no one segment. In summary, I would just say that we see opportunity in all of them, and we're obviously blessed and thrilled to have multiple strategies to take advantage of the changing economic climate.

Paul Johnson, Analyst

Thanks for that. It sounds very positive for the BDC. I have one last small question. I know it's a small investment in your portfolio, but it's been there for a long time. I just need to ask why you hold a small common equity position in B. Riley Financial.

Michael Gross, Chairman and Co-CEO

That's actually a fair question. I think it's just sitting there. It's had a little upside, and eventually we'll exit this year.

Operator, Operator

And your next question comes from Mickey Schleien with Ladenburg.

Mickey Schleien, Analyst

Good morning, Bruce and Michael. I wanted to follow up with a question on the competitive landscape. We're sort of in this strange world where there's a lot of capital in the market chasing yield. And at the same time, we have the federal government already having provided a lot of support last year and looking to provide a lot more support this year, both to individuals and to businesses. Can you help us understand how that may impact the demand for loans and investments in all of your segments?

Bruce Spohler, Co-Chief Executive Officer

Sure. I'll take a first shot at that, Mickey. I think that it's a great question. It's a bit of a high-class problem to have your borrowers have, to your point, so much liquidity available to them. So in terms of the existing portfolio companies, that obviously is a benefit. It's obviously part of why our portfolios have performed so well. I think as we look at the opportunity set, you do have to look at it sector by sector or strategy by strategy. In general, the investment-grade companies that Kingsbridge is financing really are not benefiting from that. They are high-quality borrowers, and they're just going through their ordinary CapEx plans, so it doesn't really have an impact at Kingsbridge. It does have an impact at our equipment finance vertical. These are smaller businesses, as you know, where we're lending against critical-use equipment for those businesses. Many of them are not private equity owned, the vast majority, and so they are eligible. And so that has helped our portfolio, but it's definitely a bit of a headwind for growth. Having said that, we consciously tried to downsize that portfolio and take it down from its peak of $400 million down to just under $320 million last year, because that is a portfolio that can see some susceptibility to cyclicality. So we purposely shrunk it. The team is actively looking to grow with slightly higher quality borrowers that may benefit a little bit less from the government stimulus. So we see an opportunity there to grow. The budget that the team has put forth for this year is not quite back to the $400 million, but it's meaningfully above the $318 million ended the year with. So we do see an opportunity to grow albeit will take a little bit of spread compression, because we'll go to higher-quality borrowers there to stay away from the issue that you're raising. And I think in the ABL businesses, on the margin, it will help and create a headwind for that team. But again, that team has always been looking for companies in transition, not all of which have access to government stimulus money. It has helped some of our portfolio there, but we do see good opportunities, particularly given some of the structural headwinds that the retail sector faces. And again, that's a strong suit for that team. Our portfolio churns quickly, but at the moment roughly a third of it is across retail ABL, where we have very liquid working capital assets. So we still see good opportunity there. And clearly, in both lender and life science and cash flow lending, where these are venture capital or private equity owned businesses, they generally do not qualify for government stimulus to date, and we have seen increased activity in both segments.

Mickey Schleien, Analyst

Thank you for that, Bruce. I appreciate the detail, and that's really, really helpful. Bruce, it sounds like you're not very concerned about liquidity on your borrowers' balance sheets given all the programs that have been in place and the ability of private equity to write checks. But that started about a year ago. Looking out into this year, do you have any concerns about borrower liquidity?

Bruce Spohler, Co-Chief Executive Officer

We don't because particularly in our cash flow business, these businesses have in many cases because of the sectors we're lending to, health care, financial services, recurring software. We've seen real operating performance rebound as we got into really the summer, particularly in health care as people were able to get back into elective surgeries and other deferred health care visits. And definitely into Q4, where we actually saw businesses where we were getting repaid on our loans at par or better that we had seen zero revenues earlier in the year as we were all locked down. So for our segments, think about it, if you're the owner, you're not going to put good money after bad, but you're sure as heck going to support your quality investments. We have seen very little need for liquidity at our portfolio of companies. But sponsors are quick to put it up. And the same is true in our life science business. The VC community has been very supportive of those investments, if anything paying down our loans to make sure that they have substantial liquidity, because those are still burning cash as they get to commercial adoption.

Mickey Schleien, Analyst

I understand, and thank you for that. Bruce, my last question is about the right-hand side of your balance sheet. You have a variety of unsecured notes. Some of them are due next year, and there's been tremendous demand for that kind of paper. Are you looking to refinance some of your unsecured debt and potentially also reduce the credit facility balance that you have outstanding?

Michael Gross, Chairman and Co-CEO

I think we're constantly looking at our balance sheet, and we obviously recognize that the margin is really favorable. So it's something we keep looking at. And I think you should expect at some point during this year we put in place refinancing for that and potentially adding to our unsecured debt stack. We're big fans of having unsecured debt on our balance sheet.

Operator, Operator

And your next question comes from Casey Alexander with Compass Point.

Casey Alexander, Analyst

Hi. This is really just a maintenance question, based upon your comments of Crystal and Kingsbridge, and you kind of control the toggle on the dividend that they pay. Am I right in thinking that the go-forward run rate of dividends should be somewhere between $9 million and $10 million a quarter taken together?

Bruce Spohler, Co-Chief Executive Officer

So, let me just take those in components. I think that a great question. Kingsbridge, obviously early days, but we have been a lender for a few years now. Kingsbridge is a very steady Eddy business. Dividend there should be relatively consistent. We've targeted kind of the $20 million number for this year. It is pretty evenly distributed throughout although I would tell you the fourth quarter is closer to 30%, 33% of the year's income with quarters one through three being equally distributed. So I think that will be a rather predictable dividend. As you know, historically, Crystal has had a little bit more volatility quarter-to-quarter because of the nature of their assets being short duration. High churn generating either origination fees or prepayment fees. For example in the fourth quarter, we distributed $6 million although they had earned $8 million. So we try to smooth their dividend out at roughly that $6 million a quarter until we see significant growth or significant traction.

Michael Gross, Chairman and Co-CEO

And, Bruce, just one point of clarification, the $20 million a year that we expect out of Kingsbridge is a combination of the dividends and the interest income on the loan we have seen. So it's not just...

Casey Alexander, Analyst

Right. That's what I was just going to say, $6.4 million of that is interest income when it comes from the loan.

Michael Gross, Chairman and Co-CEO

Right. Correct. Correct.

Bruce Spohler, Co-Chief Executive Officer

So you're kind of expecting there a $13.5 million dividend at the cadence that Bruce just suggested.

Michael Gross, Chairman and Co-CEO

Correct. Yes.

Operator, Operator

And your next question comes from Robert Dodd with Raymond James.

Robert Dodd, Analyst

I had similar questions about Crystal. The portfolio appears strong, and the lease reserves grew significantly in the fourth quarter. However, the on-balance sheet book at Crystal declined about 23% year-over-year, which led to trimming the dividend from 7.5 to 6. What are your expectations for the growth of the loan book at Crystal? If it can recover to last year's levels, the dividend could potentially increase. However, if it remains where it is, we might stay at 6. The key consideration is how much the on-balance sheet book can grow and impact net income or cash flow from operations. What is your outlook on this?

Bruce Spohler, Co-Chief Executive Officer

I would say that this applies to most of our strategies. Over the past couple of years, we've significantly increased the scale of our platform. This enables various strategies to co-invest with private pools of capital, enhancing their ability to enter the market and handle larger investments. For instance, Crystal has been making loans in the $75 million to $100 million range and bidding on projects up to $150 million, which is a notable increase from a couple of years ago when their average loan size was only $20 million to $30 million, reaching up to $40 million at the high end. This growth is evident in their operations. Similarly, in life sciences, we've observed an increase in average loan sizes, especially post-COVID, despite a brief period of being on hold. In our cash flow business, we are frequently completing investments of $100 million to $150 million across the platform, with Solar taking a significant portion of that. The increased scale allows them to effectively communicate with prospective borrowers at this level. Therefore, I see this dynamic as an opportunity for Crystal to expand its portfolio. Additionally, we've placed some extra investments on our balance sheet, particularly at Solar, resulting in some deals appearing on both their balance sheet and the parent company's. I believe the opportunity for Crystal to grow lies in not only maintaining their traditional loan sizes of $20 million to $25 million but also engaging in larger transactions that they've pursued in recent months.

Robert Dodd, Analyst

Sorry, I smacked my headphones.

Bruce Spohler, Co-Chief Executive Officer

Robert, I would like to mention that as we move further into 2021, there is potential for NEF to increase its dividend, which could also contribute to the growth in NII.

Robert Dodd, Analyst

Got it. I appreciate that. And another kind of angle. I mean one of your comments earlier in the Q&A obviously is, there has been pressure on LIBOR and spreads which do to a degree make verticals like life sciences, where you can get exit fees or other verticals where there's the potential for fee income which can obviously offset, right? If you can get a 13% IRR on a 9% yield that's because of fees and other sources of income. So what other avenues are there with your various verticals to get that kind of yield enhancement in a spread compressed environment?

Michael Gross, Chairman and Co-CEO

So let me answer that a couple of ways. One is, if you look at our different businesses, as you hit a nail on the head, life science really is not impacted by spread compression where LIBOR is. Neither is what used to be called Nations Equipment Leasing, because those are all fixed rate leases. Neither is Kingsbridge, which has really no relation to LIBOR. So a big chunk of our business today truly is not impacted by the concern you've raised. Crystal does have that issue with LIBOR-based loans but there we do make it up on fees as well. And because the duration tends to be 18 to 24 months and the fees get amortized over a quicker period, that's why the returns are consistently above 10%. So it's really the cash flow business that is the most impacted by what you're talking about. And there it is difficult, because the fees are limited to one point to two points, and there's very rarely prepayment penalties on these floating rate loans.

Robert Dodd, Analyst

Got it. Thank you.

Operator, Operator

And your next question comes from the line of Melissa Wedel with JPMorgan.

Melissa Wedel, Analyst

Good morning, guys.

Bruce Spohler, Co-Chief Executive Officer

Hi, Melissa.

Melissa Wedel, Analyst

Thank you for addressing my questions. I have a few follow-ups. Many of my inquiries have already been covered, but I'd like to clarify how you view the yields on new cash flow loans that could arise from increased M&A activity, especially in comparison to the current portfolio yields which are around high 8% to 9%.

Bruce Spohler, Co-Chief Executive Officer

Yes. I think that's a great question, Melissa. We're currently underwriting larger mid-market businesses with EBITDA ranging from $75 million to $150 million, where our loans will be used to fund acquisitions, which further increases EBITDA. Our primary focus is always on risk, and we believe we are seeing improved risk profiles from businesses seeking our capital at this time. In terms of yield, we are targeting a minimum of 8%. However, if these loans perform well, they tend to be repaid early, which can lead to additional fee income, bringing us close to the mid 8s. There has been some minor compression, but it’s not significant.

Melissa Wedel, Analyst

Okay. Got it. I appreciate that context and you actually touched on my next follow-up which was around repayment activity and sort of, what you guys are expecting in terms of repayment environment, I guess, in the near term but also throughout, sort of, the course of the 2021?

Bruce Spohler, Co-Chief Executive Officer

So we're not expecting much in the near-term. But I think thematically, we would expect some as you get deeper into the economic recovery. I'm not sure if that's the late 2021 or into 2022. But clearly as more and more companies right-size their cash flow streams in the life science businesses get to market, you will start to see repays I think accelerate. But we don't see that in the near-term.

Melissa Wedel, Analyst

Great. Thank you so much.

Bruce Spohler, Co-Chief Executive Officer

Thank you, Melissa.

Operator, Operator

And your next question comes from the line of Finian O'Shea with Wells Fargo.

Jordan Lawson, Analyst

Hi. Good morning. This is actually Jordan Lawson calling in for Finian O'Shea. Most of my questions have been asked and answered, but I just wanted to look at maybe a portfolio company that's new to your balance sheet at least this quarter. I see a basic fund was on balance sheet. I think this is also a loan that maybe Crystal will participate in. I was wondering if you could give us some color on the loan you gave there and basically how you're deciding between putting half or part of that loan on Solar's balance sheet versus carrying it into Crystal?

Bruce Spohler, Co-Chief Executive Officer

Yes. As I mentioned, we are very focused on maintaining our diversification in our balance sheet. Typically, we operate with a 2% hold position. Crystal may take a loan and use excess funds in our private funds, but primarily it goes to Solar, our parent company. We will allocate some of the excess funds while ensuring that on a consolidated basis, Crystal maintains a hold level of around 2% to 2.5% for the consolidated Solar. This is primarily about managing our balance sheet from a diversification standpoint. Crystal has its own credit facility with diversification requirements that are separate from those of our parent company.

Jordan Lawson, Analyst

Okay. Cool. That one was just interesting because it looks like it has an unfunded commitment there. So I didn't know what was into it. That's very helpful. Thank you.

Bruce Spohler, Co-Chief Executive Officer

Thank you.

Operator, Operator

I would now like to turn the conference back over to Mr. Michael Gross, Co-CEO for closing remarks.

Michael Gross, Chairman and Co-CEO

We thank you for your time this morning and all of your insightful questions. As always, we're more than willing to follow up one-on-one if there are more questions. For those of you who are participating in what is now called SLR Senior Investment Corp. call, we'll talk to you in a couple of minutes. Thank you. Bye-bye.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.