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spk02: Good day and thank you for standing by. Welcome to the Q1 2022 SLR Investment Corp Earnings Conference Call. At this time, participants are only in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require assistance during the conference, please press star zero. I would now like to hand the conference over to your speaker today, Michael Gross, Chairman and Co-CEO.
spk01: Thank you very much and good morning. Welcome to SLR Investment Corp's earnings call for the first quarter ended March 31st, 2022. I'm joined today by Bruce Fuller, our Co-Chief Executive Officer, and Richard Petica, our Chief Financial Officer. Chris, before we begin, would you please start by covering the webcast and forward-looking statements? Of course. Thanks, Michael.
spk06: 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 are 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 events or our future performance or financial conditions. These statements are not guarantees of our future performance, financial condition, or results and involve a number of risks and uncertainties, including impacts from COVID-19. 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. 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. Comments on today's call include forward-looking statements reflecting our current views with respect to the April 1, 2022, close of Sons' murder with and into SLRC. any expected synergies and savings associated with the merger, the ability to realize the anticipated benefits of the merger, our future operating results and financial performance, and the payment of dividends going forward. Please specifically note that the amount and timing of past dividends and distributions are not a guarantee of any future dividends and distributions or the amount thereof, the payment, timing, and amount of which will be determined by SLR Investment Corp's Board of Directors. With that said, I would like to turn the call back for our chairman and co-CEO, Michael Gross.
spk01: Thank you very much, Rich. I'd like to remind everyone today that on today's call, we'll be reporting Q1 2022 operating and financial results of SLRC on a pre-merger basis only. Given the April closing of the SLRC-SUNS merger, our Q2 2022 earnings report for SLRC will be the first quarterly report of the combined entities. However, on this call, we will provide some pro forma guidance of what the combined portfolio would have been at the end of the first quarter. Last night, we reported net investment income of $0.32 per share for the first quarter of 2022. Excluding merger-related expenses, the company's net investment income would have been $0.35 per share, consistent with the prior quarter. Net asset value at March 31, 2022, was $19.56 per share. The unfolding geopolitical events, continued supply chain issues and labor shortages, and a far more aggressive tone from the Fed in reaction to accelerating inflation in the U.S. has injected a dose of uncertainty and volatility into global equity and credit markets. Syndicated spreads widen in Q1, particularly in longer-duration fixed-income securities. At the margin, we are seeing some spread widening in middle-market floating-rate leveraged loans but it is too soon to call it a trend. Due to our focus on upper middle market U.S. companies operating in defensive sectors, the effect of rising inflation and supply chain disruptions on our portfolio has thus far been immaterial, but of course we are closely monitoring the situation. Following a record year of $1.2 trillion of U.S. private equity investments in 2021, sponsor activity slowed in Q1. Against this backdrop, SLRC platform originations totaled $174 million against $205 million repayments. Sponsor activities picking up thus far in Q2 and our pipeline remains healthy across all of our business verticals. Most importantly, with the closing of the Sun's acquisition on April 1st, our comprehensive portfolio has grown by over $600 million and over $2.6 billion, and we expect solid net origination over the course of 2022. At March 31st, over 99% of our comprehensive investment portfolio was invested in senior secured loans, and 81% of the portfolio's fair value was allocated to specialty finance investments. Kingsbridge, which we acquired in Q4 2020, continues to perform above our expectations. We continue to actively evaluate commercial, finance investment opportunities that can enhance and further diversify SLRC's portfolio. In January of 2022, we issued $135 million of 3.33% senior unsecured notes due January 2027 in a private placement. Combined with the $50 million of 2.95% senior unsecured notes issued in Q3 2021, we have lowered the company's long-term average unsecured financing rate. The aggregate $185 million of senior unsecured notes due 2022 have a weighted average annual interest rate of 3.2%, a significant reduction from the 4.5% weighted average annual interest rate in the $150 million of senior unsecured notes that mature next week on May 8th. At March 31st, our leverage was 0.98 times net debt to equity. compared to its low point during the pandemic of 0.56 times net debt to equity at September 30, 2020. On April 1, 2022, SLRC completed its previously announced acquisition of SLR Investment Corp., or SONS. In accordance with the terms of the merger agreement at the time of the merger, SONS common stock was converted into 0.7796 shares of SLRC common stock, resulting in the issuance of approximately 12.5 million shares of SLRC to former Sun shareholders. In conjunction with the merger, SLR Capital Partners, the investment advisor to SLRC, permanently reduced the annual base management fee by 25 basis points from 1.75 percent to 1.5 percent on gross assets, effective upon the successful close of the merger. The contractual step down of the base management fee to 1 percent on gross assets above one-to-one leverage remains in place. We believe the transaction with Suns makes strategic sense to the company and will create long-term value and growth opportunities for SLRC shareholders for a number of reasons, a few of which I'll highlight now. The greater scale of the combined company should provide important benefits. As of March 31st, the combined company would have had just under $2.7 billion of comprehensive portfolio assets and $1.1 billion of net assets. with a larger market capitalization that is expected to provide greater training liquidity, garner additional institutional investor interest and research coverage, and enhance the company's access to the equity and debt markets. Additionally, the greater scaling will increase portfolio diversification as well as expand the opportunity set for additional commercial finance opportunities, including tuck-ins, platform acquisitions, and asset purchases. The combined company will have a more broadly diversified portfolio and will be enhanced with an addition of Sun's two commercial finance affiliates, SLR Healthcare ABL, and SLR Business Credit, which specializes in making senior secured asset-based loans and fact arrangements to small and medium-sized companies. Based on SLRC's balance sheet at March 31st, the pro forma net leverage for the acquisition of Sun's would have been 0.9 times, opening up additional capacity to fund portfolio growth over the remainder of 2022. Over time, we expect that a combination of expected cost synergies, reduced management fees, and interest savings resulting from the more efficient debt financing should drive net investment income growth. Importantly, it is anticipated that the larger scale and capital base should allow the combined company to grow NII faster than either solar or suns would have been able to achieve on a standalone basis and potentially generate higher NII per share. Finally, on March 3rd, our Board of Directors authorized the company's adoption of a $50 million share repurchase program of our outstanding common stock. Given the recent market volatility and economic uncertainties, the repurchase plan provides us with an additional tool for enhancing shareholder value. At this time, I'll turn over the call to our CFO, Rich Pitica, to take you through the Q1 financial highlights. Thank you, Michael.
spk06: SLR Investment Corp's net asset value at March 31st, 2022 was $826.4 million, or $19.56 per share, compared to $842.3 million, or $19.93 per share, at December 31st, 2021. On March 31, 2022, SLRT's on-balance sheet investment portfolio had a fair market value of $1.63 billion in 101 portfolio companies across 33 industries compared to a fair market value of $1.67 billion in 106 portfolio companies across 34 industries at December 31, 2021. At March 31st, 2022, we had two investments on non-accrual representing 4% of the portfolio at cost and 1.7% of fair market value. At March 31st, the company had $815 million of debt outstanding with leverage of 0.98 times net debt to equity. When considering available capacity from the company's credit facilities, Together with available capital from the non-recourse credit facilities at SLR Credit Solutions, SLR Climate Finance, and Cambridge, SLR Investment Corp. has significant available capital to fund future portfolio growth. Moving to the P&L, for the three months ended March 31, 2022, gross investment income totaled $33 million. versus $35.7 million for the three months ended December 31st, 2021. Expenses totaled $19.5 million for the three months ended March 31st, 2022. This compares to $20.8 million for the three months ended December 31st, 2021. Included in this quarter's expenses were $1.52 million of one-time costs associated with the merger with SOR Senior Investment Corp. Across the fourth quarter of 2021 and the first quarter of 2022, SRC recognized a total of $2.4 million of merger expenses, which includes additional reserves, which we currently expect will cover all remaining merger-related expenses. Importantly, given where the company is with regard to its incentive fee calculation and catch-up, the investment manager ultimately covered $1.14 million of the $2.4 million of merger costs. In addition, the investment manager has committed to not include in its incentive fee calculation any purchase discount accretion created by the company's asset acquisition accounting under AST 805 . Back to the P&L. Accordingly, the company's net investment income for the three months ended March 31, 2022, totaled $13.5 million, or $0.32 per average share. compared to $14.9 million, or $0.35 per average share for the three months ended December 31, 2021. Below the line, the company in net realized and unrealized losses for the first fiscal quarter totaling $12.0 million, compared to a realized and unrealized loss of $8.8 million for the fourth quarter of 2021. Ultimately, the company had a net increase in net assets resulting from operations, of $1.5 million or $0.04 per average share for the three months ended March 31, 2022. This compares to a net increase of $6.1 million or $0.14 per average share for the three months ended December 31, 2021. Finally, on May 3, 2022, the Board of Directors declared its new monthly distribution of 13.6667 cents per share, payable on June 2nd, 2022, the holders of record as of May 19th, 2022. And with that, I'll turn the call over to our co-CEO, Bruce Bowler.
spk07: Thank you, Rich. At quarter end, SLRC's comprehensive portfolio was approximately $2 billion and remained highly diversified. encompassing 600 different borrowers across 80 industries, with average exposure of 3.3 million, or 0.2% of the total portfolio. Our largest industry exposures were diversified financials, healthcare providers, life sciences, and software. At quarter end, over 99% of the comprehensive portfolio consisted of senior secured loans. 95% of the portfolio was invested in first lien assets, and only 4.3% was invested in second lien assets. Of the second lien loans, 1.4% were cash flow and 2.9% were underwritten on an asset-based basis. At 331, our weighted average asset level yield was 10%. By focusing on our niche commercial finance verticals, we've been able to maintain asset level yields around 10% while actively reducing our exposure the second lien cash flow investments. At March 31st, the weighted average investment risk rating of SLRC's portfolio was just under 2, based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. At quarter end, the weighted average LTV of our first lien income-producing portfolio was approximately 45% loan-to-value. indicative of significant junior capital and equity cushions supporting the investments in our portfolio. Total originations for the first quarter were just over $170 million, and repayments were just over $200 million. Essentially, we were able to run in place during the first quarter, despite a backdrop of a seasonal slowdown in sponsor activity, as well as a more uncertain and volatile environment. Importantly, SLRC had approximately $180 million of unfunded commitments outstanding at quarter end, which we expect to fund in future quarters. Now let me turn to each of our investment verticals. Sponsored finance. At 331, our cash flow loan portfolio was just over $370 million, or just over 18% of the total portfolio, and was invested in 21 different borrowers. the average EBITDA of our cash flow investments was 82 million, consistent with our focus on larger upper mid-market borrowers. The weighted average leverage in this portfolio has hovered around five and a half times consistently, and the average interest coverage remains above three times. As Michael mentioned, sponsor activity in the first quarter has slowed from last year's TORIC pace. During the quarter, we originated two and a half million and experience repayments of over $50 million. Unfunded commitments total over $40 million. These transactions, which are issued by borrowers to fund future acquisitions, offer a prudent opportunity for us to grow our investment and establish credit with existing structures. At quarter end, the weighted average yield on the cash flow portfolio was 8.2%. Now let me touch on asset-based lending. At quarter end, the combined asset base portfolio was just under 470 million, representing 23% of our total portfolio, and it was invested in 24 borrowers. The weighted average yield on this portfolio was just under 11%. During the first quarter, we originated approximately 38 million of new loans and had repayments of 10 million. Our ability to assess and monitor collateral makes us an attractive financing partner during periods of economic uncertainty when banks tend to retreat from lending. Therefore, this business line provides some counter-cyclicality to our origination platform. Now let me touch on leasing. Credit quality of Kingsbridge portfolio remains strong and originations were essentially flat during the first quarter. At quarter end, their highly diversified portfolio of leases expands across three major equipment sectors, including technology, industrial borrowers, and healthcare, and totaled approximately $573 million, with an average exposure of $1.3 million per borrower. This lease portfolio was 100% performing, with the majority of the assets invested in leases with investment-grade borrowers. For the quarter, Kingsbridge paid a $3.5 million dividend consistent with the prior quarter, which equates to a 10.2% annualized yield on costs. Including interest on our $80 million senior secured loan into Kingsbridge, gross total income generated by the investments in Kingsbridge through the debt and equity was $5.1 million for the quarter. While Kingsbridge continues to have a strong pipeline of new investment opportunities, Supply chain disruptions are likely to limit portfolio growth in the near term, but also will extend attractive residual leasing activity. Now let me turn to equipment finance. As a reminder, included in our equipment finance business are financings held on our balance sheet as well as in our SLR equipment finance subsidiary. During the first quarter, equipment finance invested $20 million and had repayments of $45 million. At quarter end, the portfolio totaled just over $316 million. It was invested across 94 borrowers with an average exposure of approximately $3.5 million. This asset class represents approximately 15% of our total portfolio. 100% of their loans are in first lien assets. And the weighted average asset level yield is just over 9%. In Q1, comprehensive investment income from the entire equipment finance business totaled $3.3 million. The rebound in economic activity that started in the fourth quarter of 2020 and continued through last year has been supportive of the performance of our equipment finance portfolio. we are seeing valuations on equipment return to pre-COVID levels and credit quality improving at the borrower level. Our team expects to grow this portfolio during this year. At quarter end, we announced the appointment of a new CEO for Equipment Finance. He brings over 30 years of experience in the equipment finance industry, including 25 years of vendor finance-focused experience, where he brings deep knowledge and relationships with both vendors and end users that will help the company develop and engage with new and existing clients. It's been early days, but we are thrilled to have Tom on the platform, and he is taking us to new opportunities in the marketplace. Now let me touch on life sciences. At quarter end, the portfolio totaled approximately $300 million. It consisted of 16 different borrowers. All of our companies in this asset class are meeting or exceeding their expectations at the time of underwriting. With the weighted average cash runway now standing at over a year, life science loans represent just over 14% of our comprehensive portfolio for the first quarter and contributed over 23% of our gross investment income. During the first quarter, the team committed to $60 million of new investments, of which $36 million were funded. repayments totaled $16 million. At quarter end, SLRC had $112 million of unfunded life science commitments outstanding, which are available to our borrowers upon reaching certain milestones. Additionally, the life science team currently has a robust pipeline of new investment opportunities, which we expect to fuel portfolio growth during the course of 2022. At quarter end, The weighted average yield on this portfolio was approximately 11%, excluding success fees and warrants. Now let me talk to the combined portfolio with a snapshot of what it would look like had Sons been acquired at quarter end. The combined entity on a pro forma basis would have had a portfolio of $2.66 billion, with over $600 million, or 23% of the total, allocated to sponsor finance and $2 billion, or 77% of the total portfolio, allocated to specialty finance. The specialty finance verticals would have had an $810 million portfolio in asset-based lending and an $890 million portfolio in equipment leasing and equipment finance. And lastly, over a $335 million portfolio dedicated to life science investments. As Michael indicated, The combined portfolio will be more broadly diversified with multiple opportunities for growth, including directly underwritten investments, tuck-in or new platform acquisitions, as well as potential portfolio purchases. Importantly, the combined entity has approximately $215 million of unfunded investment commitments that we expect to fund in future quarters. In addition, leverage of the combined entity at quarter end would have been 0.9 times leverage, creating additional investment capacity going forward to fund portfolio growth. In conclusion, we see a continuation of the investment themes that have been driving our portfolio over the last few years, focusing our new origination activity on first lien, cash flow loans to portfolio companies in defensive sectors in the upper mid-market, increasing our investments in specialty finance assets, where we generally get tighter structures and more attractive risk-adjusted returns, and growing our investments alongside portfolio companies by committing to unfunded acquisition lines, which will be funded over the future quarters. The keys to driving an increase in net investment income per share over the remainder of this year will be a combination of capturing anticipated cost certificates from the merger, growing our balance sheet and specialty finance portfolios, continuing to take advantage of our scale, and employing a $50 million share repurchase program. Across our asset classes, we're seeing a number of attractive investment opportunities. Given the uncertainties and market volatility, it is also important that we remain disciplined, opportunistic, and highly selective in our investments. Now let me turn the call back to Michael.
spk01: Thank you, Bruce. In closing, we are optimistic about our earnings growth potential and the opportunities set across each of our investment verticals. With the overall SLAC portfolio on solid footing, we are focused on remaining disciplined and highly selective in deploying our capital into attractive investment opportunities. Financial sponsors continue to have record amounts of dry powder that is expected to support future deployment in 2022 and beyond. The larger middle market businesses we prefer to lend to continue to choose direct financings over the syndicated debt markets. These industry tailwinds combined with the scale of our investment advisor should benefit SLRC shareholders through greater access to upper middle market cash flow investment opportunities. With the pandemic has proven our better position to protect capital than most smaller companies. Additionally, we are reaping the benefits of our scale advantage in our cash flow, life science, and ABL verticals. As I mentioned in my opening remarks, Bruce and I, as co-CEOs and our independent directors, believe that the merger of SLRC and Sons, which closed April 1st, creates a larger, more diversified portfolio with incremental capacity to fund portfolio growth. We believe the merger and resulting scale potentially makes us a better acquirer and strategic buyer of specialty finance businesses. We will continue to be disciplined and selective in our new investments with a focus on capital preservation. As we deploy our available capital and reach the midpoint of our 0.9 times to 1.25 times target debt-to-equity range, we believe that we can drive increased net investment income per share. Importantly, we believe SLRC to make – we expect SLRC – to make progress moving NII closer to covering its distribution through the remainder of this year as cost synergies are realized and we deploy our available capital. Finally, with the Board's authorization for SLRC's adoption of a $50 million share repurchase program, we have additional flexibility to deliver shareholder value. Our investment of buyers' alignment of interest with the company's shareholders continues to be one of our guiding principles. The SLR team owns approximately 8% of the combined entity and a significant percentage of the annual incentive compensation invested in SLRC stock. The team's investment alongside fellow SLRC shareholders demonstrates our confidence in the company's defensive portfolio, stable funding, and favorable position to reap the expected benefits of the merger. We thank you very much for your time today. Operator, at this time, will you please open the line for questions?
spk02: Yes, and as a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Ryan Lynch with KBW. Ryan, your line is now open.
spk11: Hey, good morning. Good morning, Ryan. Good morning, Ryan. First question I had, you guys implemented a share repurchase agreement. This is the first one I can remember in quite a bit of time, and I know you guys haven't been active with share repurchases in the past, so I would just love to get a little more color on why you implemented the share repurchase now, what are your guys' views on how active you will be in it at the current at the current stock price? And was it implemented more as kind of a capital allocation mechanism as we go going forward? Or is it more put in there for any dislocations you guys see, you know, in the stock price? Or at these levels, do you envision it being just part of the normal capital allocation process?
spk01: Thank you for your question. I think if you think back It's going way back in history. We implemented a stock buyback program back in 2014, which we fully used. Substantially used. We did that at that time because in one particular quarter, we had literally a third of our portfolio repaid, and so we were under levered and thought that was a great capital allocation opportunity for us. In this instance, we waited for the merger to close. Part of the result of the merger is our leverage went down from 0.97 to 0.91. So at a $50 million buyback, it would roughly take us back to 0.97 again were it fully used. We thought that was a good capital allocation policy. It was also in response to the fact that there has been volatility in the BDC space, including ours, and we expect that to continue with all the uncertainty regarding rising interest rates, inflation, and the war that's going on. So we do expect to use it. We think our stock is very attractive at these levels. It's subject to our window period being open. We intend to use it.
spk11: Okay. That's helpful, Keller. And then can you just give us any updates? You guys had a new not-a-cool in the quarter that was also written down pretty immediately by Fed. I would just love if you can give an update on what's going on with that business, what drove that markdown in that investment.
spk07: Sure. So as you probably know, this is one of our last remaining second lien cash flow positions. We've been actively exiting that portfolio rather successfully until we hit a speed bump with this one, which is one of the last ones we have. just for context. So the business is an outsourced anesthesia business, and they have faced some headwinds in the market that they operate in, potential reimbursement headwinds, as well as some operating headwinds, as well as some expense issues, given, you know, increased wage inflation across our country, including in healthcare service companies. So it's been a a bit of a perfect storm for them. You know, again, as a second lien investor, we do take some of the brunt of that after the equity does. They're in the process of evaluating strategic alternatives, so there's not a lot we can say, but we'll keep you updated as we move through the next quarter. Okay, understood.
spk11: That's helpful background context on that investment. And then just the last one that I had, and I just want to make sure I'm understanding this correctly, is You talked about in your corporate leasing portfolio, supply chain issues being somewhat of a headwind as far as being able to fund new investments. Not that the pipeline's not there, but the ability to fund those investments, you know, supply chain presents an issue. I didn't hear you mention that or maybe I missed it regarding the equipment financing portfolio. It didn't sound like there was the supply chain issues were and funding in that book. One, am I correct in that assessment? And two, can you just break down why supply chain would affect one and not the other, if I am understanding that correctly?
spk07: Sure. So it does affect equipment finance, but less so. Equipment finance is, to bifurcate the two businesses, Kingsbridge is lending to predominantly investment-grade companies, large companies, large purchases. new purchases, so a lot of assets coming in from overseas. Our equipment finance vertical, as you may recall, is lending to small companies, mission-critical equipment, very often used equipment, so it's already landed and being employed somewhere else and then being redeployed. So just different demand drivers on the two segments.
spk11: Okay. Thanks for the explanation. That's all from me. I appreciate the time today.
spk07: Thanks, Ryan. Thanks.
spk02: Our next question comes from Price Rowe with Hoved. Price, you have the floor.
spk10: Thanks. Thanks. Good morning. Maybe wanted to start on rates and rate sensitivity. Could you guys speak to the sensitivity of your balance sheet, especially considering, you know, this pretty drastic move higher in base rates that we've seen? or that we saw and continue to see here in Met?
spk06: Sure, sure. We do disclose 100 basis point moves in our 10Q. where we would see a 4% to 5% per annum pop based on the 331 portfolio and the floating rate that we have as well, so assets and liabilities, and what would happen with a 100 basis point move up. It would create 4 to 5 cents in NII for the year. With a 200 basis point pop, you're up in the 16% to 18% range And this is all on a look-through basis, so looking at all five of the thin posts that we have in the portfolio post-merger. So that's on a fully look-through basis. So very positive. Okay.
spk10: And, Rich, we're talking about a shock in the base rate being LIBOR, correct, at the end of the quarter? Correct. Got it. Okay. And then maybe one for Bruce or Michael, just thinking about – you know, a potential upward trajectory of balance sheet leverage as you possibly, you know, fund some of these unfunded commitments. I think we've talked over the last, you know, six months that, you know, there was good visibility into that, and obviously we've thrown some uncertainty into the mix. Just kind of curious how you feel about some of the unheightened or the heightened uncertainty that we're seeing and being able to get to that midpoint of the targeted range? Thanks.
spk07: Sure. Great question. So, as you know, we have a couple levers to get there. So, yeah, obviously, the first step was making a significant acquisition in a portfolio we know well at Suns that did take leverage down a little bit, but not in a meaningful way. But we think that's, you know, a quarter step back for two steps forward. Because it also positions us with additional verticals that SLRC did not have on their own. Clearly, they both participate in cash flow and life science loans, but now we have the working capital line of credit businesses, both business credit as well as the healthcare ABL business, both of which lend against receivables and are less M&A driven or more relationship lending where they act as a local bank for their borrowers. So the driver there is just putting on new relationships and having utilization of the working capital facilities that they extend to their borrowers. So that's a new driver for SLRC. And at business credit in particular, we have been making tuck-in acquisitions and growing that business. So that's a new lever for growth. I think the other thing that we look to is, to your point, the unfunded commitments that go predominantly across our life science business and our cash flow business. Typically in life science, we do see some of that drawn down as they hit additional operating milestones or capital raise milestones. So we think that will be drawn because the drivers are, as you know, in life sciences, it's about new drug and device development, FDA approval process, and then getting into commercialization. So we're in late-stage companies by and large, and so they are moving into that commercialization stage and will need our capital. And I think the other driver in DDTLs is acquisition lines for existing borrowers. As you know, our cash flow business is in defensive sectors, such as health care and insurance brokerage and software, and they continue to make tuck-in acquisitions. These lines, you know, do have a cost to them when they are unused, and have a life to them, a finite life. So we expect to see steady usage of those existing commitments. And then last but not least, we are putting out new capital in new opportunities. And I think the other thing worth noting is given the uncertainty, we are seeing less headwinds in terms of repayments. There will be companies that will be sold and will be repaid. But the whole refinancing dynamic of trying to drive their cost of capital down, I think, has been put on hold for the foreseeable future at the portfolio companies. So that will also mitigate and contribute to net portfolio growth.
spk10: Excellent. Thank you. Thanks for the time this morning. Our pleasure.
spk02: Our next question comes from Casey Alexander with Compass Point. Casey, your line is now open.
spk05: Yeah, hi. First, just one maintenance question. In your discussion of the combined portfolio where you said $890 million of equipment finance, is that the equipment finance and corporate leasing combined there?
spk07: Yes, it is.
spk06: Yes, Casey.
spk07: We are going to increasingly look to make it a little bit easier to understand the collective businesses because the They are similar but slightly different. So the same thing as we start to talk about our ABL business is similar but slightly different. We'll try to simplify it for you as we move forward.
spk05: Okay. Secondly, regarding the new CEO of the equipment finance business, the previous management group was – you know, I believe out of GE's equipment finance, what precipitated the change? Is that business just not growing as fast as you'd like, or why reach out for a new CEO there?
spk07: Sure. So great question. So just by way of background, consistent with all of our Finco platforms, as we call them, these are entrepreneurial founded, and teams have been together for a long period of time. To your point, this team came out of But basically, when we brought this business on, we knew that Bill Carlson, who ran the business and started the business, was going to be looking to transition out over time. He had been with us for a number of years, but he was approaching 70. And so this was a natural time in his life to retire. And so we actually brought in somebody, Casey, who also has GE background. Most recently, he spent the last 10 or 15 years at DLL, Delage Landon, which is a major player in independent leasing. But he also comes by way of GE. So the entire team is in place. We just had a transition from Phil, who was retiring, to a new CEO.
spk05: Okay, that makes perfect sense. Thank you. Last question, in relation to the life science portfolio, and I know that some portion of your NII, not dependent, but benefits from prepayments in the life science area where there's end-of-term payments, accelerated fees, does the volatility of the equity markets increase? actually continue to slow that down? I know that the prepayments haven't come in at the rate that you might have expected, and I'm just wondering if the lack of having an IPO exit for certain companies or lack of not wanting to do down rounds might continue to slow prepayments in that vertical.
spk07: So that's a great question. You know, it is so company-specific in terms of where they are in their development. Because, again, we're dealing with late stage. You will see companies get purchased by big strategics because basically the VC community has become the outsourced R&D for the big strategics. And once they get them to commercialization, strategics step in and buy them. So that's really the driver of the takeout. It's less of a refinancing market than you think of when the typical cash flow sponsor business where they're constantly trying to take down their cost of capital. debt is already cheaper than equity to these borrowers, and so it's not a big refinancing driver. The exit tends to be, as you know, a 28-, 36-month hold because you're just so late in the development of the company's products, be they drugs or devices, that then you're getting set up for a takeout. I think the comment that you make, which is spot on, is the volatility in the equity market means They are less inclined to issue equity to fund their growth before the exit and more looking to supplement with some credit capital that, you know, in our minds is expensive, but relative to issuing equity is cheap. And so we're actually starting to see the volatility allow us to put new assets out as we look forward this year because debt becomes more attractive to fund that marginal dollar that they need before they sell the business in the next year or two.
spk01: But just to your point also, I think, you know, while we do get these on a continuous but not necessarily consistent basis, Q1 was light in that category. We will have some decent fees in Q2.
spk05: All right, great. Thank you for taking my questions.
spk07: Our pleasure. Thank you.
spk02: Our next question comes from Robert Dodd with Raymond James. Robert, your line is open.
spk09: Hi, guys, and thanks for taking my questions. On the combined portfolio, you talked about $2.6 billion combined, $600 at close, at least allocated to sponsor finance, and that's about a quarter. Should we expect that mix, one quarter sponsor finance, three quarter specialty finance, to kind of stay the same going forward as potentially a lever up, or Is that just where it is today and you actually have a different, you know, say three-year target allocation for that capital base?
spk07: Look, I think, as you know, we grew that portfolio both at solar and solar last year. I think right now we would say that it's probably unlikely to outpace the growth of the other segments. So I think 20% to 25% is a fair range. Okay. Appreciate it.
spk09: On the delayed draws, I mean, the market has gotten more choppy. I mean, that's just what we're talking about in the context of the life sciences. I mean, how different are the delayed draw structures that obviously you put in place some time ago for acquisitions that have come? How different are those structures from, say, structures that would be put in place today? either covenant structures, you know, coupon spreads. How much is kind of the market move for what you do today versus when you actually put these things in, put these structures together?
spk07: Great question. I think as Michael mentioned in his remarks, there's always a lag between seeing the volatility and change in terms in the broadly syndicated market and the private market. We've been, to your point, working on deals for months before they actually closed. And so you're not always able to adjust terms. So effectively what's in place today is last year's structure and last year's pricing. But I would tell you today we're really, if we were to book the same investment, it would look very similar. You haven't seen that change. We're hopeful as we get into another quarter or two as this volatility continues. As always, you see the broadly syndicated markets. terms reflected in the private market. But I think we're a quarter or two away, so it's really going to happen in the next quarter or two. Those investments, be they funded or delayed draws, you'll see a bit of a change. But it really today is no different from a year ago yet.
spk09: I appreciate it. Thank you.
spk02: And as a reminder to ask a question, please press star 1 on your telethon. Our next question comes from Melissa Waddell from JP Morgan. Melissa, your line is now open.
spk03: Good morning, everyone. Thanks for taking my questions today. First one is a little bit of a housekeeping item on the combination of the portfolios. I just wanted to follow up. I know you've mentioned a couple of different things as these portfolios are integrated, but is there anything specific that we should be thinking about in the next quarter or two in terms of incremental cost headwinds or frictional expenses or financing or things to think about as financing is consolidated?
spk01: No, the good news is this merger was literally seamless. You know, the credit facility that existed at SUNS, namely the revolving credit facility as well as the secured notes just moved over. We didn't have to make any change to any of our financing agreements at SLRC. You know, we obviously know the portfolio well since we originated it all. So, literally, there will be no friction cost at all. And all the merger expenses were incurred in Q4 and Q1. We don't really expect to see anything more from that. And so Q2 should be a very clean quarter and will reflect, you know, the full results of the merge entity.
spk07: And not merger-related specifically, but next week, We do repay the 4.5 percent notes that we have outstanding. You know, we pre-refinanced those with roughly 3.2 percent notes between the issuance in January and last September. So, we will also see not a full quarter, but kind of a half quarter of that benefit in our interest cost on a combined basis.
spk01: Male Speaker And just to be a little more direct regarding your question, we do expect that NII in Q2 will be higher than NII in Q1.
spk03: Okay, that's helpful. Thank you. My second question is really bigger picture in nature. I think that you've talked about a couple of interesting things in terms of the volatility potentially impacting some pricing and spreads down the road, but there is a lack in the private markets versus the syndicated markets. and also the attractiveness of debt to fund incremental growth right now as opposed to equity. That being said, there's also continued to be a lot of capital formation in this space. And so I'm curious how you're looking at the landscape longer term, what the opportunity set can look like for you and what you're expecting in terms of pricing, and also given the rather diversified platform that you guys have built, how those things all come together. Appreciate it.
spk01: So let me take a shot. I'm sure Bruce interrupted me. You're spot on. There has been a tremendous amount of capital formation in private credit. The good news is that the vast majority of it is being created by those who are, you know, 20, 30, 40, 50, $100 billion asset managers. And they're the ones who are focused on doing the, you know, the $1 to $3 billion, you know, unit tranche. We just saw second liens. And so at their scale, it kind of moved to the point where we don't really see them in our business. You know, we're looking to put in a given loan across our platform anywhere from $50 to $250 million in a given loan, not a billion. And so the real capital formation really hasn't kind of impacted our markets. And more specifically, in the 75% of our portfolio, especially finance, you have not seen much capital formation in those sectors. So it doesn't really impact that either. Yeah, I would just echo Michael's comment.
spk07: I think the diversity, to your point, Melissa, of the platform, the ability to do anything from $100,000 factoring line to $250 million life science investment is very compelling. The aggregation of these niches adds up to a nice overall diversified platform that serves us well throughout economic and credit cycles. And I think that's really what we're going to do more of. I mean, life science is a great example. Even there, yes, there's been a little bit of capital formation, but the market is a $4 or $5 billion market. You're not going to see people come in that have large-scale platforms and need to deploy, to Michael's point, $500 to $1 billion in a transaction. It just doesn't exist. So it's important that we maintain discipline and go to, you know, a collection of defensive niches.
spk03: Thank you, guys.
spk02: Our next call comes from Gerard Heyman from RBC. Gerard, your line is open.
spk04: Hello, gentlemen. Congratulations again on the merger. I think it's an amazing thing. And I just have a two-part question for both Bruce and Michael. You guys can take it in turn or whatever. But I just was curious, based on the merger now and where we are in the markets, the one thing that you guys are most excited about going forward and the one thing you guys are most fearful of going forward. If you could possibly answer that, that would be most appreciated. Thank you.
spk07: Yeah, I think the excitement is, to follow up on the prior questions from Melissa, the exciting part for us is that we have increased scale, increased simplicity, and our shareholders are together and combined and all can benefit from the different growth engines. As you know, back in the day, when we created two different BDCs, they did have distinct investment strategies. Increasingly, we also thought back then that there was a different risk-adjusted return. With the benefit of 16, 17 years, we feel that the risk has converged and it would be beneficial for everybody to be on one platform as shareholders, as shareholders, employees and as borrowers. And so we're really excited to have it together and be able to think a little bit more simpler and broader and take advantage of the scale of the platform, not only at the BDC, but we, as you know, have continued to partner with private capital alongside the BDC that allows the BDC to act as it is an $8 billion fund rather than a $2.6 billion fund pro forma for the Sons merger. So it really allows it to have the benefit of scale and go to the larger transactions when we want to go large and go to the small transactions, like a factoring deal when we want to go small. So I think we have really looked at the flexibility and are taking advantage of that. I think the biggest challenge is always in credit investing is discipline. And I think we're most concerned about the fact that, as Melissa was talking about, the amount of capital that has been raised You know, people need to learn a tough lesson before they get back to their discipline centric. So we will see marginal players come into some of our niches, and we need to maintain discipline and know that we're going to let investments go and be patient. And I think that's the real challenge day in, day out, is to not follow where some of the new players go and take a long-term approach. And so that is the challenge. But I think, you know, we are up to that challenge.
spk04: Great. Thank you very much.
spk07: Thanks, Jerry.
spk02: And I'm showing no further questions at this time, so I'd now like to turn the conference back to Michael Gross, Chairman and Co-CEO.
spk01: Thank you very much. We have nothing more to add at this point. However, as always, if you have any questions or comments, please feel free to reach out to any of us at any time. We appreciate all your support. We look forward to reporting on our first quarter as a merge entity in early August. Thank you.
spk02: This concludes today's conference call. Thank you for participating. You may now disconnect.
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