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Operator
Good day, everyone, and welcome to the Q3 2022 SLR Investment Corp earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your touch-tone phone. You may withdraw yourself from the queue by pressing star 2. Please note this call is being recorded. I will be standing by if you should need any assistance. I would now like to turn the conference over to Mr. Michael Gross, Chairman and Co-CEO. Please go ahead.
Michael Gross
Thank you very much, and good morning. Welcome to SLR Investment Corp's earnings call for the third fiscal quarter ended September 30th, 2022. I'm joined today by Bruce Bowler, our Co-Chief CEO, and Rich Pitica, our Chief Financial Officer. Rich, before we begin, would you please start by covering the webcast and forward-looking statements?
Bruce Bowler
Sure. Thanks, Michael. I would like to remind everyone that today's call and webcasts are being recorded. Please note that they are the property of SLR Investment Corp and that any unauthorized broadcasts in any form are strictly prohibited. This conference call is being webcast from the events calendar in the investors section of 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 condition. 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. As for our 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 SLRC's acquisition of funds, 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 or distributions or the amount thereof, the payment, the timing, and the amount of which will be determined by S4 Investment Corp's Board of Directors. With that, I would like to turn the call back to our Chairman and Co-CEO, Michael Gross. Thank you, Rich.
Michael Gross
Good morning, and thank you for joining us. Last night, SLRC reported net investment income of $0.37 per share for the third quarter of 2022. Importantly, we are expecting to cover our $0.41 per share distribution in the fourth quarter of this year. In our communications outline of the proposed merger of SLRC and Suns, we projected that we'd reach $0.41 per share of NII in the second year following the acquisition close. Due to the realization of synergies, portfolio growth, rising interest rates, and stable portfolio quality, we are now expecting to achieve that target sooner than originally projected. As expectations for recessions continue to build, we are pleased to share that our portfolio companies are well positioned to withstand a downturn. The margins have impacted some of our borrowers from a combination of higher labor and input costs, as well as continued chain disruptions, we have not seen evidence of financial stress amongst our borrowers. On September 30, 2022, SLRC's net asset value per share was $18.37, a slight decline from the second quarter, largely driven by unrealized losses from mark-to-market changes in our specialty finance subsidiaries, resulting from lower comparable company valuations. These unrealized losses are due to market technicals and are not indicative of the financial health of our commercial finance businesses, all of which have had a solid third quarter and are trending positively. Overall, our portfolio is performing well and credit quality is stable. As a reminder, our cash flow senior secured loans are to companies in non-cyclical sectors and especially finance loans have significant collateral coverage. Enhanced by SLRC's acquisition of SONS, our portfolio is highly diversified across cash flow loans and non-cyclical industries and in asset-based loans. As of September 30th, 97.6% of our comprehensive investment portfolio was comprised of first lien senior security floating rate loans, which provide greater downside protection during a recession. Our second lien exposure remains de minimis. Our investment focus on first-ling loans should enable us to perform well in an increasing rate environment. The current market conditions for new investments are the most attractive we have seen in several years. Against the volatile market backdrop in the third quarter, the company originated $394 million of new investments and had repayments of $159 million. Terms on sponsored finance loans become more attractive and our specialty finance businesses, which flourish during turbulent market conditions, are also seeing an attractive opportunity set and importantly have available capital to take advantage of the investing climate. The inflation and economic concerns that have plagued 2022 led to further disruption in the syndicated loan and high-yield markets in the third quarter. We continue to benefit from banks' retreat from leveraged lending. Pricing volatility and deep-trained discounts in these markets reflect the increased credit risk from tight pricing and loose structures of broadly syndicated loans that were underwritten prior to the second quarter of 2022. With banks on the sidelines, lenders who can hold investments of $200 million or more, such as the SLR platform, are even in more demand and have greater pricing power and influence over terms. As a result, private direct lending deals continue to be heavily negotiated with tight structures. With economic headwinds and continued rising rates, middle market private credit is a source of relative stability and potentially higher returns. SLRC is unique positioned to capitalize on this opportunity. We are seeing investment opportunities of less leverage and higher yields than the loans that were structured during the recent period of COVID-related government stimulus. The recession-resistant sectors in which SLR specializes continue to perform well, with financial sponsors focused on deploying their dry powder into existing portfolio companies via add-on acquisitions. During uncertain economic times, borrowers increasingly turn to asset-based lending strategies for working capital and liquidity management, which provide our investors with greater downside protection across economic cycles. Our ABL businesses have historically outperformed during challenging market conditions when asset-rich companies' access to traditional lending sources is constrained. We have ample dry powder to take advantage of investment opportunities with terms more attractive than were available a year ago. Our funding profile is in a strong position to weather a rising rate environment with $566 million of our $1.2 billion of funded debt comprised of senior unsecured fixed rate notes at a weighted average annual interest rate of 3.9%. At September 30th, our leverage was 1.14 times net debt to equity, comfortably within our target leverage range of 0.9 times to 1.25 times. At September 30th, including available credit facility capacity under specialty finance companies and subject to borrowing base limits, SOMC had ample available capital to take advantage of the current attractive investment environment. In October, we announced the formation of the SLR Senior Lending Program with a strategic partner who knows their business and investment philosophy well, including through other investment initiatives. SLRC and the investor have each made initial equity commitments of $50 million, and we are currently in the process of selecting a financing provider. We expect to contribute to the J visa of SLR's lower yielding, first lien, cash flow loans that were acquired through our merger with Sons. Lastly, we plan to reduce our overall cost of capital from share repurchases under our $50 million share repurchase program authorized by our board of directors. And while we have not yet been active with this dieback plan, we are committed to utilizing it and believe that our patience will translate into the ability to invest in a portfolio at attractive discounts. I will now turn the call back over to our CFO, Rich Pitica, to take you through the third quarter financial highlights.
Bruce Bowler
Thank you, Michael. SLR Investment Corp's net asset value at September 30, 2022 was $1.01 billion, or $18.37 per share, compared to $1.02 billion, or $18.53 per share, at June 30, 2022. At September 30, 2022, SLRC's on-balance sheet investment portfolio had a fair market value of approximately $2.2 billion, in 135 portfolio companies across 44 industries, compared to a fair market value of $2.0 billion in 127 portfolio companies across 40 industries at June 30th. At September 30th, the company had approximately $1.16 billion of debt outstanding with leverage of 1.14 times net debt to equity. When considering the available capacity from the company's combined credit facilities, together with available capital from the company's significant subsidiaries, XLR Investment Corp. has significant available capital to fund future comprehensive portfolio growth. Moving to the P&L, for the three months ended September 30th, 2022, gross investment income totaled $47.6 million, versus 42.8 million for the three months ended June 30th. Net expenses totaled 27.5 million for the three months ended September 30th, 2022. This compares to 22.5 million for the three months ended June 30th, 2022. Accordingly, the company's net investment income for the three months ended September 30th, 2022 totaled 20.1 million or 37 cents per average share compared to $20.3 million, or $0.37 per average share, for the three-month end of June 30th. Below the line, the company had net realized and unrealized losses for the third fiscal quarter, totaling $6.5 million, versus realized and unrealized losses of $35.9 million for the second quarter of 2022. Ultimately, The company had a net increase in net assets resulting from operations of $13.5 million with $0.25 per average share for the three months ended September 30th. This compared to a net decrease of $15.6 million or $0.29 per average share for the three months ended June 30th, 2022. Finally, on November 2nd, 2022, The Board of Directors declared a monthly distribution of 13.6667 cents per average share payable on December 1st, 2022 to hold as a record on November 17th, 2022. And with that, I'll turn the call over to our co-CEO, Bruce Fuller. Thank you, Rich.
Michael
Let me begin by providing an overview of the combined portfolio. A quarter end on a fair value basis The comprehensive portfolio consisted of approximately 2.9 billion of senior secured loans to approximately 780 distinct borrowers across over 100 industries with an average exposure of 3.7 million. At quarter end, 99.8% of our portfolio consisted of senior secured loans with 97.6% in first lien loans and only 0.2% in second lien cash flow loans and 2% in second lien asset-based loans. Our specialty finance investments account for approximately 76% of the fair value of the portfolio, with the remaining 24% in senior secured cash flow loans to upper mid-market sponsor-backed companies. At quarter end, our weighted average asset level yield was 11.3%, up from 9.6% at the end of the second quarter. The weighted average investment risk rating was under two based on our one to four risk rating scale, with one representing the least amount of risk. Turning to our investment strategies. As a reminder, we have segmented the portfolio into four distinct asset classes. The first is cash flow loans to upper mid-market companies, which we refer to as sponsor finance. The second is asset-based loans. The third is life science loans. which are made to venture capital-backed late-stage drug and medical device development companies. And the fourth strategy is equipment finance. Now let me turn to each of these strategies. Sponsor finance. In our sponsor business, we originate first lien secured loans to upper mid-market companies in non-cyclical industries, with our largest industry exposures being healthcare and diversified financials. Our sponsor finance vertical is currently benefiting from banks' retrenchment from private financings and sponsors and management teams increasing preference to partner with direct lenders during a time when financial sponsors have record dry powder and a desire to put it to work in buyouts and add-on acquisitions. The recent market turmoil caused by the Fed tightening and indicators of a recession have resulted in a widening of yields in the syndicated bank loan market and a sharp reduction in banks' willingness to assume syndication risk. As a result of the diminished supply of capital available to borrowers and the sell-off in the liquid credit markets, we're seeing a 200 to 300 basis point increase in the yields on our private debt portfolio compared to a year ago. With over 99% of our cash flow portfolio in first lien loans and a weighted average interest coverage ratio that exceeds two and a half times, our investments are well positioned to withstand any liquidity pressures that our borrowers are facing from rising interest rates. At quarter end, our sponsor cash flow portfolio was just over $700 million, equaling 24 percent of our combined portfolio and was invested across 45 companies the average ebitda of our cash flow portfolio was 113 million increased from 82 million at the beginning of this year private equity transaction volume while down from last year's record-setting levels remains healthy and we believe that this 22 23 vintage will be an extremely attractive period to deploy capital. During the quarter, we originated just over $100 million of cash flow loans and experienced repayments of $34 million. At quarter end, the weighted average yield on the cash flow portfolio was 9.6% up from just over 8% at the second quarter. Now let me turn to our ABL segment. SLR Credit Solutions. the first of our three ABL segments, provides collateral-backed loans to asset-rich companies. The asset class requires expertise in valuing and monitoring our underlying collateral that supports our loans. Historically, this business has outperformed during periods of market volatility and economic contraction. Borrowers who are asset rich but have cash flows that are pressured by rising rates and slowing demand are forced to raise capital backed by their liquid assets. Our team's deep over 20 plus years of average experience in valuing collateral gives us an advantage in underwriting investments that are backed by strict borrowing bases against the collateral of the underlying borrowers. Pipeline today is very attractive, and we are optimistic about the business over the coming quarters. Now let me turn to SLR Business Credit. This division provides asset-based loans collateralized predominantly by receivables, as well as factoring of receivable facilities in order to finance a borrower's working capital needs. Similar to the Credit Solutions team, Business Credit has expertise in valuing and monitoring the underlying receivable collateral. Business Credit subsidiary, previously called Fast Pay and now SLR Digital Finance, has continued to outperform our acquisitions at the time of our acquisition in 2021 and has contributed to the growth of this division's portfolio. which once again is at an all-time high at the end of the third quarter. The last division in the ABL segment, SLR Healthcare ABL, is very similar to business credit in that it lends against accounts receivable, but here we only lend to healthcare companies. The portfolio size has recovered from its COVID-19 lows when the government's massive capital infusion caused many of our borrowers to pay down our credit lines. And finally, our lender finance business makes asset-based loans to other commercial lenders, with the issuers' underlying loans as our collateral. We're seeing a slowdown in the securitization and private placement markets, which is driving increased demand for our capital. With our increased deal flow resulting from this market disruption, we are continuing to take a conservative approach As always, we evaluate the runoff value of a portfolio to ensure that it will fully cover the value of our investment. At quarter end, the combined senior secured asset-based loan portfolio totaled over $965 million, representing 33% of our total portfolio, and was invested in over 170 borrowers. The weighted average asset level yield of this portfolio was just over 12.25%. During the third quarter, we originated $132 million of new asset-based loans and had repayments of just under $20 million. Now let me touch on equipment finance. This division consists of both Kingsbridge Holdings and SLR Equipment Finance. Kingsbridge provides leases for essential use equipment to a diverse set of investment-grade customers. Customers have been continuing to extend their existing leases to lengthen the useful life of their existing equipment, which has had a positive impact on our portfolio. Due to the attractiveness and size of the opportunity set, Kingsbridge has been continuing to add originators to its team. SLR Equipment Finance provides senior secured financings that are collateralized by mission control equipment across a variety of industries. As a result of our focus on reducing the risk in the portfolio, it is extremely well positioned to weather a potential recession. Additionally, the portfolio is benefiting from rising asset valuations due to inflation. We are already seeing the benefits of our new CEO in this division. He brings new energy and has brought in additional resources to enhance both originations and risk management. The business has had strong originations towards the end of third quarter, which is continuing into the fourth quarter. We feel that they are very well positioned for growth next year. At quarter end, the combined equipment finance portfolio totaled just over $900 million, representing 31% of our total portfolio, and was invested across 500 borrowers. The weighted average asset level yield of this portfolio was 11.4%. During the third quarter, we originated approximately $111 million of new equipment finance loans and had repayments of just under $101 million. Finally, let me provide an update on our life science segment. For life sciences, the current economic conditions have not impacted the need for new drugs and medical devices, which in recent years has bolstered venture capital activity and ultimately reinforces the need for leverage provided by our life science team. The asset class has traditionally been uncorrelated to economic disruptions. These bars have significant equity cushions with strong venture capital equity markets. Our low loan-to-values, which are typically less than 25%, provide significant downside protection for our investments. Record amounts of venture capital equity continue to drive the opportunity set here. At quarter end, our portfolio totaled over $350 million across 15 borrowers. Over 90% of our life science portfolio is in loans in which borrowers have over 12 months of cash runway. Life science loans represent approximately 12% of our total portfolio and contributed approximately 20% of our gross investment income for the third quarter. During the quarter, the team committed $47 million of new investments and had repayments totaling $4.7 billion. At quarter end, we had $88 million of unfunded future commitments for life science loans. Additionally, the team currently has a robust pipeline for new investment opportunities, which we expect to fund over the next couple of quarters. At quarter end, the weighted average yield of life science portfolio was approximately 11.3%, excluding success fees and warrants. In conclusion, across our asset classes, we are seeing an improved investment opportunity set and expect the current negative market sentiment to continue to translate into better terms across each of our asset classes. Given the current uncertainties in market volatility, it is important that we remain disciplined, opportunistic, and highly selective in our capital deployment. Now let me turn the call back to Michael. Thank you, Bruce.
Michael Gross
In closing, we believe that our time-tested conservative underwriting approach, resulting in a defensively constructed portfolio comprised of both first-ling cash flow loans to borrowers and non-cyclical industries and asset-based loans with significant collateral coverage, positions us well for recession and any continued market disruption. As I mentioned in my opening remarks, we are expecting to cover distribution this current fourth quarter and beyond. This revised forecast is an acceleration of our net investment income projections at the time of our merger announcement last December. Separately, if interest rates were to move another 100 basis points higher, we would expect the portfolio at September 30th, 2022 to generate incremental net investment income of 12 cents per share on an annualized basis. Our investment advisor's alignment of interest with the company's shareholders continues to be one of our guiding principles. The SLR team owns approximately 8% of the company's stock, including a significant percentage of the annual incentive comp 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. We thank you for your time today. Operator, will you please open the line for questions?
Operator
Certainly. At this time, if you would like to ask a question, please press star 1 on your touch-tone phone. You may remove yourself from the queue at any time by pressing star two. We will take our first question from Sean Paul Adams with Raymond James. Your line is open. Please go ahead.
Sean Paul Adams
Hey, guys. We understand how interest rate sensitivity affects your debt book, but can you provide some color on how that should flow through the dividend line given your specialty finance businesses having underlying floating rate portfolios?
Michael Gross
I think what we highlighted in terms of the 100 base points move, that impacts from the finance company as well because effectively, with the exception of equipment leasing, all of our specialty finance businesses are floating rate as well. So we would expect the dividends for the finance companies will increase as rates increase.
Bruce Bowler
Yes, and that $0.12 includes that increase from the finance companies. Thank you.
Michael Gross
Thank you.
Operator
Once again, if you would like to ask a question, please press star 1 on your touch-tone phone. We will go next to Melissa Weddle with JPMorgan. Your line is open. Please go ahead.
Melissa Weddle
Good morning. Wanted to first touch on the share repurchase program. You mentioned it during your prepared comments, but have not yet used that authorization. Given the attractiveness of this vintage, as you guys just elaborated on, should we interpret that to mean that you would need to see the current opportunity set become less attractive before you guys would be inclined to repurchase shares?
Michael Gross
No, I think the answer is we're going to do both. I think we think the shares are very attractive today, equally as attractive as new investments. So I think you should expect to see us continue to invest in new investments as well as to use a stock buyback during this quarter.
Melissa Weddle
Okay, got it. Thanks for that clarification. And then on the JV, can you elaborate on how you're expecting that to happen? sort of scale over time? What should that timeframe look like? What kind of yield profile? What level of leverage are you expecting to take that to?
Michael
Yeah, great question. So just to summarize, both SLR and the JV partner each put up $50 million of equity commitment to the JV. The target leverage will be somewhere in the one and a half to two times So in the aggregate, at most 300 of assets. The nice thing is that we can scale it over time, but we do have, through the acquisition of Suns, a portfolio of, you know, call it $240 million or so of cash flow assets that, while very attractive, were put in place and underwritten at a time where rates were lower and spreads were tighter. And so it's a very efficient vehicle to, over time, contribute some of those SONS assets. We're starting to do that this quarter. But also, at the same time, we'll be replacing that investment capacity on balance sheet to deploy, to your earlier comment, into this very attractive market environment. So it's a bit of a rotation, and it'll happen over a few quarters.
Melissa Weddle
Okay, thanks. I will hop back in the queue. Thank you.
Michael Gross
Thank you.
Operator
Our next question comes from Paul Johnson with KBW. Your line is open. Please go ahead.
Paul Johnson
Yeah, good morning. Thanks for taking my questions. Over the last few quarters, I'm just curious. I was looking at the mark on the SLR equipment finance business. I think this last quarter here was around 83% of cost or sell, and I think that's just trended slightly lower over the last few quarters. I was just hoping you can just explain, I guess, what drives the mark on that investment. I was wondering if that had anything to do with just the fixed-rate assets in that investment, but I guess any color on how that investment's marked would be helpful.
Michael
Sure. So similar to all of the FinCo's third-party marks, and they're really as equity finance companies, you know, which SLR has an equity investment in each of them, the third party is looking to the comparable company analysis. And as you can imagine, as we're heading into a recession and rising rates, Most lenders are being marked down regardless of the form of lending capital that they provide. And so most of this is market technicals. I would say that the other FinCos have been growing, as we mentioned in our prepared remarks, whereas over the last couple of years, starting in 2020 with COVID, we have been shrinking that portfolio. So their mark to market is down a bit more than the others. because it's not just the market comparables, it's also shrinking that portfolio. But we do believe that that is now starting to regrow. And so we would expect all of the values at the FinCOS, including equipment finance, to grow over time. But they do face, you know, whatever the market comparable values will be. And that's reflected, you know, on an unrealized basis.
Paul Johnson
Got it. Appreciate that. Very helpful. And then I guess just in terms of all of your fin codes, I'd just be helpful to kind of hear where you think you're at, I guess, with the comprehensive portfolio and within your individual finance companies in terms of, I guess, optimal leverage? I know that's been a work in progress at the BDC level, but where are you, I guess, in a comprehensive level basis? Are you still kind of on your way getting there? I mean, more leverage to be taken down within the FinCos, or are we closer, I guess, to that point?
Michael
Yeah, great question. I think that it varies by FinCo. As you mentioned in our comments, you look at business credit, for example, which together with the acquisition of FastPay last year has been regrowing their portfolio. Also, utilization of their facilities has increased as government stimulus has receded. So they're heading towards optimal leverage. The other I would say Kingsbridge is also towards optimal leverage, but there is, you know, some rebuilding that we've been doing at Credit Solutions, you know, I think additionally at Equipment Finance, as well as to some extent at our healthcare division, which is the smallest of the five. So there is some additional borrowing capacity across the FINCOs that we're looking to take advantage of, as well as on balance sheets.
Paul Johnson
Got it. Appreciate that. Last question. Just in the quarter, I was wondering if you guys had it. Do you guys have any estimated amount of potential purchase discount accretion in the quarter?
Bruce Bowler
Probably around a million bucks.
Paul Johnson
Probably about a million dollars. Got it. Okay. Appreciate it. Thanks for taking my questions. That's all for me. Thank you. Thank you.
Operator
And our final reminder, it was star one. If you had a question or comment, we'll move next back to Melissa Weddle with JPMorgan. Your line is open. Please go ahead.
Melissa Weddle
Thanks for taking my follow-up. I wanted to touch on 4Q activity. We've heard some varying comments from different teams about what sort of activity levels and repayment activity they expect with sort of the traditional environments. perhaps being a little less active, but maybe there's an opportunity for more specialized creative-type financing solutions. So curious how you're looking at 4Q and what you expect.
Michael
Yeah, I think that similar to what you're hearing from others, we had a very strong Q3, but we are seeing a slowdown in Q4. It's active, and we benefit from having multiple verticals, but we also are not seeing much in the way of repayments. So I think that, you know, directionally, we've taken our leverage to 1.14. We are looking at your earlier questions to recycle some assets, move them into the JV and the cash flow segment, put some more on balance sheet. We do have some delayed draw facilities that are getting drawn for add-on acquisitions. But, you know, I think net-net, we're not expecting meaningful movement in terms of the portfolio on a net basis this quarter.
Melissa Weddle
Okay, that's helpful. And then my last follow-up question, I'm not sure if I missed it. Did you guys give an update on the non-accrual rates specifically in 3Q?
Bruce Bowler
The non-accrual rate outstanding? Yes. It went down to 2% at cost and 0.4% on fair market value. Got it.
Melissa Weddle
Okay. And is that across two or three companies?
Bruce Bowler
Two companies, American Telecom and .
Melissa Weddle
And was an exit?
Bruce Bowler
Yes.
Melissa Weddle
Got it.
Operator
Thank you. Thank you. Thank you. If you would like to ask a question, please press star 1 on your touch-shown phone. With no further questions holding, I'll now turn the conference back to Michael Gross for any additional or closing remarks.
Michael Gross
No additional comments other than thank you for your support and time. And if you have any follow-on questions, as always, please feel free to follow up with any of us. Take care, everybody. Bye-bye.
Operator
Ladies and gentlemen, that concludes today's conference. You may disconnect at this time and have a wonderful day.
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