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Operator
Good day, everyone, and welcome to today's SLR Investment Corporation second quarter 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 period. You may register to ask a question at any time by pressing star 1 on your telephone keypad. Please note this call will be recorded. I will be standing by should you need assistance. It is now my pleasure to turn today's call over to Mr. Michael Gross, Chairman and Co-Chief Executive Officer of SLR Investment Corp. Mr. Gross, you may begin the conference.
Michael Gross
Thank you very much and good morning. Welcome to SLR Investment Corp's earnings call for the second quarter ended June 30, 2023. I'm joined today by Bruce Bowler, our Co-Chief Executive Officer, and our Chief Financial Officer, Shiraz Khaji. Shiraz, before we begin, would you please start by covering the webcast and forward-looking statements?
Bruce Bowler
Thanks, Michael. Good morning, everyone. 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 Calls and that any unauthorized broadcast in any form are strictly prohibited. This conference call is also being webcast from the Friends Calendar in the Investor section on our website at www.slrinvestmentcall.com. Audio replays of this call will be made available later today as disclosed in our August eight 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 on today's conference call and webcast may constitute forward-looking statements which relate to the future events or 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, 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. does not undertake 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 would like to turn the call back over to our chairman and co-CEO, Michael Rose. Thank you, Shiraz.
Michael Gross
We're pleased to report that for the second quarter of 2023, SLRC generated net investment income of $0.42 per share, over-earning the quarterly distribution, continuing the steady growth in net investment income over the past several quarters as we rebuild the portfolio post our COVID area deleveraging, and importantly, during a very attractive investment environment. The improved NII performance resulted from the combination of a larger portfolio and the increase in index rates for a predominantly floating rate portfolio. At June 30th, our net asset value per share was $17.98 compared to $18.04 at March 31st. Before digging into our performance, I'll touch on the market conditions and investment climate. As the Federal Reserve has continued to fight to curb inflation, Labor statistics and consumer spending have remained relatively stable. Based on both the recent economic data and our portfolio company's success in navigating higher interest rates as well as input expenses, we view recession as less inevitable. As the full impact of higher rates reverberates to the economy, we believe our defensively positioned portfolio should weather those conditions. As conservative credit investors, we have always managed our portfolio as if we are heading into a downturn, and we will continue to do so despite signs that the U.S. government's fiscal policy may result in a soft landing for this cycle. The overall health of our portfolio remains solid, and we did not place any assets on non-accrual during the second quarter. Our weighted average interest coverage on our sponsored finance loans remains at comfortable levels at approximately two times. We believe that this is the result of our investment focus in sponsored finance on recession-resilient industries with high recurring free cash flow, such as healthcare and business services, as well as our emphasis on specialty finance investments with borrowing bases supporting our loans. Additionally, we are monitoring near-term maturities and have not identified any loans with a material risk of non-repayment. At June 30th, Approximately 98% of our comprehensive investment portfolio was comprised of first lien senior secured loans. Our longstanding investment focus on first lien loans has resulted in a portfolio better equipped to withstand continued inflationary and interest rate pressures than portfolios with second lien loans or equity exposure. Additionally, with 76% of our comprehensive investment portfolio invested in specialty finance assets, which have borrowing basis supporting and full covenant structures, we are defensively positioned should the economy prove unable to withstand the continued higher interest rate environment. Our unique investment approach of coupling cash flow loans, especially finance loans, provides us with greater diversification and additional downside protection. Although direct lending new issuer activity picked up in the second quarter, total new issuance volume remained lighter than prior years. Much of the second quarter activity was relating to add-on acquisition financings. We're beginning to see more M&A processes as the bid-ask spread for assets narrows. Additionally, access to the broadly syndicated loan market remains extremely limited for all but the largest and highest-rated issuers in our market, and the retrenchment by regional banks continues to benefit our specialty finance strategies. In the second quarter, SLRC originated $394 million of new investments across the platform. With repayments of $265 million during the second quarter, we had net portfolio growth in each of our four lending strategies, totaling $129 million. Looking forward, the current investment environment remains as favorable as we've seen in several years. We currently have a sizable pipeline in which we believe will prove to be a strong vintage for private credit. Our specialty finance businesses are benefiting from the regional banking turmoil as these banks have historically competed with our commercial finance strategies. Additionally, during uncertain economic times, borrowers increasingly turn to asset-based lending strategies for working capital and liquidity management. We believe the structure and collateral supporting our loans provides 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. And we have the flexibility to allocate more of our capital to these strategies to take advantage of their attractive risk-reward attributes. Firms with significant available capital, such as the SLR platform, are able to fill the void left by regional banks, retreat, and the stalling of the syndicated loan markets. Borrowers value our speed and certainty of execution, flexibility, and ability to invest $150 to $200 million in a given upper middle market financing, which gives us greater pricing power and influence over terms. With $13 billion of total investable capital across the platform, inclusive of anticipated leverage, SLR has a scale necessary to provide full financing solutions, which benefits SLRC through co-investment. Importantly, we have ample dry powder to capitalize on this favorable investment environment. Our funding profile is in a strong position to weather a rising rate environment with our next fixed rate maturity not until the end of 2024. Additionally, our senior unsecured fixed rate notes have a weighted average annual interest rate of 3.8%. With $1.2 billion of funded debt at June 30th, our leverage was 1.23 times net debt to equity. This point-in-time level of leverage doesn't fully reflect the ramp of the SSLP through loan asset contributions from our balance sheet. Since the end of the second quarter, we continue to make progress on ramping the SSLP. Based on transfers from SLRC balance sheet during the third quarter today, as well as new deal activity, we expect a substantially increased investment commitment in SSLP by the end of the third quarter. we believe we are on track to reach $250 million commitments by the end of this year. As a result of our continued efforts to ramp the SSLP, we expect our leverage ratio to once again be in the middle of our target leverage range of 0.9 to 1.25 times. At June 30th, including available credit facility capacity at the SSLP and especially finance portfolio companies, subject to borrowing-based limits, SLRC had approximately $600 million in available capital to take advantage of the current attractive investment environment. I'll now turn the call back over to Shiraz, our CFO, to take you through the second quarter financial highlights.
Bruce Bowler
Thank you, Mike. SLR Investment Corp's net asset value at June 30, 2023, was $981 million, or $17.98 per share. compared to $984 million, or $18.04 per share, at March 31st, 2023. At quarter end, SLRC's unbalanced sheet investment portfolio had a fair market value of approximately $2.2 billion in 156 portfolio companies across 45 industries, compared to a fair market value of $2.1 billion in 145 portfolio companies across 45 industries at March 31st. At June 30th, the company had approximately $1.2 billion of debt outstanding, with leverage of 1.23 times net debt to equity. The increase in leverage is temporarily higher as the company continues to ramp its SSLP. When considering the company's plan to utilize the SSLP's facility, as well as the available capacity from the company's credit facilities, together with available capital from the company's specialty finance subsidiaries, SLRC has ample available capital to fund future portfolio growth by remaining within its target leverage range of 0.9 to 1.25 times net debt to equity. Moving to the P&L, for the three months ended June 30th, 2023, gross investment income totaled $56.3 million versus $53.5 million for the three months ended March 31st, 2023. Net expenses totaled $33.7 million for the three months ended June 30th. This compares to $31.4 million for the three months ended March 31st. As a reminder, at the time of the merger of SLR Senior Investment Corp, or SONS, into the company last year, the investment advisor agreed to waive incentive fees resulting from income earned due to the accretion of purchase discount allocated to investments acquired as part of the merger. During the quarter ended June 30th, the company waived approximately $125,000 of merger-related incentives. Accordingly, the company's net investment income for the three months ended June 30th totaled $22.7 million, or 42 cents per average share, compared to $22.1 million, or 41 cents per average share, for the three months ended March 31st. Below the line, the company had net realized and unrealized loss for the second quarter totaling $3.7 million, versus a net realized and unrealized loss of $15.3 million for the first quarter of 2023. As a result, the company had a net increase in net assets resulting from operations of $19 million, or $0.35 for average share for the three months ended June 30th, 2023. This compares to a net increase of $6.8 million, or $0.13 for average share for the three months ended March 31, 2023. Finally, on August 8th, the board of SLRC declared a monthly distribution of 13.7 cents per share, payable on August 30th, 2023, oldest of record as of August 18th, 2023. Moving forward, the company intends to make its distributions on a quarterly rather than monthly basis. We expect this change to begin in Q4, 2023. With that, I'll turn the call over to our co-CEO, Bruce Fuller.
Mike
Thank you, Shiraz. Let me begin by providing an overview of our portfolio. At June 30th, on a fair value basis, the comprehensive portfolio consisted of approximately 3.1 billion of senior secured loans to approximately 780 distinct borrowers across over 115 industries, with an average exposure of just under 4 million. Measured at fair value, 99.4 percent of our portfolio consisted of senior secured loans, with approximately 98 percent invested in first lien loans, including investments in the SSLP attributable to the company. And only 0.2 percent was invested in second lien cash flow loans, with the remaining 1.2 percent invested in second lien asset-based loans. Our specialty finance investments account for approximately 76 percent of the portfolio, with the remaining 24% invested in senior secured cash flow loans to upper mid-market sponsor-backed companies. We believe that this defensive portfolio composition positions us well for potential economic weakness and provides a differentiated risk-return profile for our shareholders. At quarter end, our weighted average asset level yield was 12.1%, up from 11.9% at Q1. 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. During the second quarter, we restructured our investment in AmeriMark, which we had placed on non-accrual last quarter. While it is still early days, we are pleased with the results of our efforts thus far. To date, we've foreclosed on the business, contributed transition capital, which has since been fully repaid at par, sold certain assets for cash, entered into a partnership with both operating and financial investors with respect to the company's core operations, and expect to exit bankruptcy later this month. As a result, we increased our second quarter mark by 10 percent from the prior quarter. We view the successful restructuring of this investment as evidence of our team's longstanding private equity style approach to invest in. It's in our team's DNA to approach restructuring with an operational mindset, using our expertise and experience to maximize our recovery. Now let me turn to our four investment verticals, sponsor finance or cash flow business. Here we're originating first lien senior secured loans to upper mid-market companies in non-cyclical industries, such as healthcare providers and diversified financials. Our historical focus on these sectors has helped to reduce the impact on the portfolio from rising input costs. As a result of the positive market dynamics Michael highlighted, we're continuing to see new issue yields of 12% to 13% in comparison to the recent historical range of 8% to 10%. Importantly, these investments are carrying less leverage than we had seen historically. Middle market loans continue to be priced at a premium to leverage loans with the added benefit of having these better structural protections and lower leverage levels. Our Q3 pipeline has an average yield of just under 13 percent and a loan-to-value of just under 40 percent, which supports our thesis that this year should be a great vintage for investing in sponsor finance cash flow upper mid-market loans. Given our current pipeline and reduced level of expected repayments, we expect continued portfolio growth during the remainder of this year. At quarter end, our cash flow portfolio was approximately $740 million, or 24% of the total portfolio, invested across 48 borrowers. We have defensively positioned this portfolio with borrowers that have an average EBITDA of over $140 million, and low loan-to-values of approximately 40 percent. Interest coverage ratios have come down from the high of three times a few years ago, but have leveled off at two times. Our portfolio is comprised of businesses that perform essential services with either recurring or reoccurring revenues and have low capital intensity. Overall, the portfolios exhibited solid credit metrics that have remained steady this year. During the quarter, we originated $115 million of new loans and experienced repayments of $55 million. These investments were made on compelling terms. Our second quarter investments were focused on existing borrowers with over 85% of this capital committed to companies that we have exposure to and have strong operating performance. At quarter end, the weighted average cash flow yield was 11.6%. With approximately 98% of this portfolio invested in first lien loans, we believe our investments are well positioned to withstand liquidity pressures that borrowers may face. Now let me turn to our ABL segment. Historically, the ABL segment has performed well during periods of market volatility and economic contraction such as today's environment. Borrowers which are asset rich but have cash flows that are pressured by rising interest rates and slowing demand are forced to raise capital in the ABL market rather than the cash flow market. The rising rate environment and economic challenges have put pressure on these borrowers, particularly those in more cyclical sectors, which has resulted in an increased opportunity set for our ABL teams. We're seeing increased deal volume that we will believe will continue throughout this year. With limited access to capital, As regional banks largely continue to sit on the sidelines, we expect the rate of repayments to slow, translating into additional portfolio growth. Our ABL team has been working to provide full solutions to potential borrowers, including working closely with our life science team. At quarter end, The senior secured ABL portfolio totaled just under $1 billion, or 32% of our total portfolio, and was invested across 165 issuers. The weighted average asset level yield was 14.6% compared to 13.6% in the first quarter, and our average loan-to-value was approximately 74%. For the second quarter, we originated $113 million of new investments and had repayments of just under $100 million. Now let me move to equipment finance. At quarter end, the portfolio totaled just under $1 billion, representing 32 percent of our total portfolio, and was highly diversified, invested across 550 issuers. The credit profile of the portfolio is as strong as it's ever been. The weighted average asset level yield is 9.6 percent. During the second quarter, we originated $150 million of new assets and had repayments of just under $110 million. Our current investment pipeline in equipment finance has increased significantly over the past quarter. Finally, let me turn to our life science segment. Activity is moderated in the wake of the SVB failure. Our life science team continues to be extremely selective as borrowers seek to increase leverage as an alternative to issuing more equity at this time where valuations have come down in the markets. However, due to our strong presence, we are still seeing attractive investment opportunities and attractive pricing. We anticipate that the opportunity set will continue to improve as we move through the second half of this year. At quarter end, our portfolio totaled $340 million across 15 borrowers. The substantial majority of the portfolio is invested in loans to borrowers that have over 12 months of cash runway. Life Science loans represent 11% of our portfolio and contributed just under 23% of our gross investment income for the quarter. During the second quarter, the team committed to $20 million of new investments and had repayments of $2.7 million. We have just under $120 million of unfunded commitments, which may be drawn by borrowers based upon hitting important milestones such as FDA approvals, revenue metrics, liquidity, and other milestones. At quarter end, the weighted average yield on this portfolio was 13.2% compared to 12.8% at Q1. These yields exclude any success fees and warrants. In conclusion, all of our lending verticals inked a strong on the origination front while maintaining consistent credit quality. Given our available capital and ability to provide a wide spectrum of debt financing solutions, we believe we are well-possessioned to take advantage of the attractive investment environment. Now let me turn the call back to Michael.
Michael Gross
Thank you, Bruce. In closing, we are pleased with our progress in re-ramping our portfolio since our COVID era lows into investments that have more attractive turns than we've seen in many years. Our specialty finance businesses, which were particularly impacted by borrowers having access to government stimulus during the pandemic, have either reached or are near nearing pre-COVID portfolio balances. Importantly, the available capital cost of platform provides us with the capacity for additional earnings growth. With our investment strategies benefiting from the reduced competition from regional banks and the BSL market, we currently have a sizable investment pipeline. Importantly, we believe that it's one of the most attractive we've ever had. In closing, our investment advisors' alignment of interest with the company's shareholders continues to be one of our guiding principles. The SLR team owns over 8% of the company's stock, including have a significant percentage of the annual incentive compensation invested in its stock. The team's investment alongside fellow SLRC shareholders demonstrates our confidence in the company's defensive portfolio, stable funding, and favorable position. Thank you for your time today. Operator, will you please open up the line for questions?
Operator
Certainly. At this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may withdraw yourself in the queue by pressing star 2. Once again, that is star 1 for your questions. We'll pause a moment to allow questions to queue.
Michael Gross
we'll take our first question from sean paul adams with raymond james please go ahead all right sean paul your line is open please check your mute function hey guys good morning um i was hoping you guys were able to share some commentary on whether you plan to amend your credit facility to extend their maturities since both mature in 2026 and provide some insight whether the revolving period for the secured credit facilities are the same as maturity?
Mike
We have some time on our primary corporate revolver. I think that maturity, if I'm not mistaken, is in 25 in terms of the investing period. And then we have the smaller SONS facility that came with the merger with SONS, which matures next spring, and we're already in conversations to both upsize it and extend it.
Michael Gross
Okay, perfect. Thank you. And as a follow on, can you provide and just any details on the impact of the bank banking Martin market tightening?
Mike
I'm sorry, can you just grade in terms of specifically what you would like us to address on that front?
Michael Gross
Yeah, of course. So in regards to the like, just Generally, you know, the banking market tightening and, you know, just issuance and, I guess, general flows. Can you provide some just general targets for the next couple quarters?
Mike
Sure. I would just say high level. The cash flow market has been impacted by the tightening on the money center banks, who are the biggest players there, the BSL market. is really only open for the largest of issuers. And so on the cash flow side, as you can see in our origination numbers year to date, we've seen great opportunity in the upper mid-market there. I think on the – especially finance businesses, they're most impacted and benefit from the tightening in the regional banks, whether it's equipment finance all the way through ABL strategies into – like Sciences, where obviously Silicon Valley and to some extent Signature Bank were put on the sidelines. Those teams have resurfaced, but we'll see whether the banks that they landed at will actually put up the capital to support that sector. So we have seen that dislocation create better opportunities for us, not so much in terms of the fundamentals, but as you know, the regional banks were relatively aggressive when they liked investment opportunities. relative to direct lenders such as ourselves. And so having more rationality in those sectors I think has led to higher quality opportunities as well as better pricing. Too soon to know how long that will last, but it has definitely given us a better opportunity set.
Michael Gross
Perfect. Thank you for that insight. Thank you.
Operator
And once again, as a reminder, that is star one for your questions. We will take our next question from Paul Johnson with KBW. Please go ahead.
Paul Johnson
Yeah, good morning, guys. Thanks for taking my questions. On the equipment financing vertical, specifically the SLR equipment, you know, know this year there's obviously been no return out of that investment i know there was no you know dividend return investment last year as well either can you just remind us i guess how um i guess what you intend to do with the return from that investment and if there's anything i guess that's you know you say the portfolio seems to be performing quite well so was there I guess anything that's lumpy in there on timing or is there anything pressuring the return at this moment? Just, you know, any kind of thoughts around that investment would be kind of helpful.
Mike
Sure. So just as a reminder, that, you know, we have two equipment finance verticals. One is the Kingswood vertical that provides equipment finance for investment-grade borrowers, and then there's the equipment finance vertical, formerly NEF, that is more focused on non-investment-grade borrowers. And that vertical particularly has been repositioning itself, particularly in this stage of the economic cycle, to take more focus on the fundamental credit of the borrower and a little bit less reliance purely on the liquidation value of the equipment. So it's a short way of saying we've been taking down the risk in that portfolio. Having said it, it has been growing And just as a reminder, that portfolio is housed on balance sheet as well as in that subsidiary. So the expense of the team is in the subsidiary, but the majority of the assets are on balance sheet. So when we report, we report on a consolidated basis rather than just look at that legal subsidiary. So it has been generating nice income. We expect that to grow. but you need to look at it consolidated between the subsidiary as well as the assets on balance sheet.
Paul Johnson
Got it. Thanks. That's pretty helpful. And then just kind of broadly, you know, you've got kind of a lot of growth this quarter. It sounds like you're, you know, you like what you see, you know, in terms of coming up with a pipeline and, you know, expect growth this year. You know, leverage is up to about 1.2 times that growth space this quarter. You know, however, the ROE is obviously, you know, clearly lagged the space, you know, quite a bit to date. I'm just wondering, you know, what are kind of, you know, in your mind the catalysts to get that ROE, you know, up, you know, maybe increase return from some of your verticals? Is there any sort of, you know, repricing catalyst in the portfolio somewhere? You know, your ideas there with what else, you know,
Michael Gross
Sure. There are several levers we can pull in our point to accomplish that across our strategies. The first, as we mentioned, our leverage we quoted was at a point in time. With the actions we have in place to pull more assets into the SSLP, that will bring our leverage back down to kind of the midpoint of the range. It will also have the effect of increasing our ROE because we're putting assets into that leveraged two times just as a refresher we've been selling assets into that with our JV partner at par and these are assets yielding you know L plus 550 so we're able to take that capital we get back from those sales and redeploy it into assets say they're yielding you know anywhere from you know 12 to 15 percent depending on the strategy got it thanks for that that's all the questions for me
Paul Johnson
Thank you.
Operator
Thank you. We'll take our next question from Casey Alexander with Compass Point. Please go ahead.
Casey Alexander
Hi, good morning, and thank you for taking my questions. Can you quantify the capacity that the JV has in terms of how much can you sell down to the JV that then you can replace on balance sheet?
Mike
Sure. So, Casey, at June 30th, we had about $79 million down in the slip, and it's been set up to take $300 million of assets, so roughly another $220 million of assets.
Casey Alexander
Okay. That's helpful. Thank you. My second question is, and this may be an entirely ignorant question, But it seems to me that one of the assets that the JV was designed to take was some of the lower-yielding assets from Solar Senior. But it seems to me that the assets from Solar Senior are now yielding more than the average yield on the equipment finance portfolio. Is there anything that prevents you from downstreaming some of the equipment finance loans so that you can replace those with significantly higher-yielding assets on balance sheets?
Mike
Great question. The JV is set up both from an equity partnership perspective as well as the credit facility to only take cash flow loans. So to your point, it was set up to take the lower-yielding SONS cash flow loans, which, as Michael just shared, are in the L5 handle spread at par versus the new cash flow loans, which are coming at SOFR 650 at 97. So there is a nice yield delta there. But, no, I think on the equipment finance business, As you know, those are fixed-rate assets. They do have a longer life, but they do amortize down monthly. And so we are looking to continue to cycle out of those assets and bring on higher-yielding equipment finance assets, or not. If we are seeing better opportunities elsewhere, we'll deploy the capital into higher-yielding strategies.
Casey Alexander
Okay, thanks. We'll see what happens when you give an analyst a calculator. He'll start trying to get you to do things you're not allowed to do.
Michael Gross
We're going to take the calculator away from you.
Casey Alexander
Thanks for taking my question. Of course. Good talking to you.
Operator
And once again, as a reminder, that is star one for your questions. We'll pause a moment to allow further questions to queue. Thank you. And it does appear that we have no further questions at this time. I'll turn the call back to Mr. Gross for closing remarks.
Michael Gross
Just thank you for your time and have a great summer. And again, as always, if you have any questions, please feel free to reach out to any of us directly. Take care.
Operator
Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
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