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spk02: Good afternoon. My name is Bobby, and I will be your conference operator today. At this time, I would like to welcome everyone to Silver Spike Investment Corp's first quarter fiscal 2023 earnings conference call. Our hosts for today's call are Greg Gentile, Chief Financial Officer, Chief Compliance Officer and Secretary, Frank Cotson, Head of Credit at Silver Spike Capital LLC, the company's investment advisor, and Bill Healy, Head of Capital Formation at Silver Spike Capital. Scott Gordon, CEO, and the investment team from Silver Spike Capital are also present. Today's call is being recorded and will be made available for replay at 6 p.m. Eastern Time. Details can be found on the press release. A replay of the call will also be available on the SSIC website. At this time, all participants have been placed in a listen-only mode, and the floor will open for your questions following the presentation. You may register to ask a question at any time by pressing star and one on your touchtone phone. You may withdraw yourself from the queue by pressing star two. It is now my pleasure to turn the conference over to Bill Healy.
spk07: Thank you, operator, and welcome everyone to Silver Spike Investment Corps, or I'll refer to them as SSIC, or Earnings Conference Call for the First Quarter of Fiscal 2023. SSIC's first quarter fiscal 2023 financial results were released last Friday and can be accessed from the website at SSIC.SilverSpikeCap.com. Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements under federal securities laws. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. We encourage you to refer to our most recent SEC filings for information on some of these risk factors. Silver spike. assumes no obligation or responsibility to update any forward-looking statements. So please note that the information reported on this call speaks only as of today, August 18, 2022. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay or transcript reading. Now allow me to introduce SSIC CFO Greg Gentile. Greg?
spk05: Thank you, Bill. I think what we'll do is just give a quick summary of quarterly results, and then I'll turn it over to Frank Cotsen, who will elaborate more on the activity for the quarter and our investment program. So for the previous quarter, we achieved total investment income of $809,591. This was comprised of two components, approximately $400,000 of interest income as well as $410,000 of fee-based income related to loans closed during the quarter. Our total expenses were approximately $588,000, of which $222,000 were ordinary course legal expenses. But this being our first quarter really up and running, we expect this to be materially lower in future quarters. A lot of those legal expenses related to startup issues and general ramping up of things like compliance programs, policies and procedures, etc. This resulted in an increase in net assets of approximately $211,000, which translates to an increase in NAV from $13,000 spot 6-1 in the previous quarter to 13 spot 6-4 in the most recent quarter. Just to give you some color around the NAV number, as of the close of the quarter on June 30th, SSIC common stock was trading at 9 spot 78. So this equates to a discount of approximately 28.3% of NAV. So just to give you an overview, a little bit of history, we completed our IPO in February, which was a blind pool offering. So we launched essentially with a pool of cash. And we're very excited to have just begun our ramp-up period and having just made two investments this quarter, which Frank will elaborate upon shortly. So it's very important to note that our first loan position was entered into on May 26th, which was more than halfway through the quarter. So while only on the books for approximately 36 days, the interest income from this position alone was able to overcome expenses and surpass break-even from an operational standpoint. Our second loan position was entered into the last day of the quarter, June 30th, and thus did not materially affect results. So with almost 30% invested as of June 30th, we expect this full coming quarter of interest income to easily surpass this prior quarter's results. And with that, I'll turn it over to Frank for color on the portfolio.
spk08: Thanks, Greg. My name is Frank Cotsen. I'm the head of credit at Silver Spike Capital. So first, I'd like to start by discussing the activity in the quarter. As Greg mentioned, we executed two transactions in the quarter, the details of which are in the 10Q, which was filed on August 12th. So during the quarter, we deployed approximately $24.4 million of cash across these two investments. Both of these are first lien senior secured term loans. One loan was to the Shrine Group and one was to PharmaCan. We believe that both of these loans have, from the lender's perspective, the following, favorable asset coverage, favorable loan to values, and attractive interest rates, which fairly compensate the lender for the credit risks. We're particularly excited that we were able to successfully co-lead the Shrine Group loan, which, along with another co-lender, we structured and syndicated to other lenders, in which we believe we were compensated not only by favorable loan characteristics, to us as a lender, but we were also compensated with considerable fee income for our efforts as a co-lender. The loan across all of these lenders, all the lenders that it was syndicated to, can be drawn up to $170 million, of course, subject to certain requirements. And we believe this to be one of the largest loans ever executed for a private cannabis company. Next, I'll talk just for a moment about market conditions. So as I'm sure everyone knows, the global debt and equity markets sold off meaningfully throughout the first half of the year. As of the end of the quarter, June 30th, globally, interest rates had ended considerably higher than where they started at the beginning of the year. High yield and leverage loan spreads ended the first half of the year several hundred basis points wider. And most global equity indices experienced meaningful sell-offs throughout the first two quarters of the year. The cannabis sector was not immune to this sell-off, and existing observable cannabis loans and bonds, many of which were executed last year, also experienced considerable sell-offs from their highs in the first half of the year. Fortunately, we closed the SSIC IPO in February of this year, and our first deployment was not until May, and that was the Shrine loan, and our second was in June, Pharmacamp. At the time these loans were executed, the bulk of the first half of 2022's debt and equity market sell-offs had already occurred, and we believe that the spreads we were able to achieve in these loans reflected existing market conditions in the quarter, and also believe we're in a fortunate position of having, as Greg mentioned, as of the end of the quarter, over 70% of our assets in cash. Our strategy is to take advantage of these higher interest rates, wider spreads, and favorable lending market conditions as we make more loans going forward. Lastly, I'd like to discuss our underwriting pipeline and opportunities. So as I mentioned, we are fortunate to have over 70% of our assets in cash as of the end of the quarter. Our underwriting process is a robust one, and we spend considerable time with management management of our borrowers and potential borrowers understanding their competitive positions the competitive dynamics of the markets in which they operate and compete and their ability to create value and as well as their funding needs we are incredibly demanding with our borrowers and potential borrowers regarding diligence loan structuring and reporting requirements and we continue to experience a very robust pipeline we're in active conversations active conversations with many potential borrowers, and we believe we're well-positioned to pursue our strategy of both capturing the yields the market has to offer, as well as structuring our loans and loan documents to meet our standards. At this point, that concludes our prepared remarks, and I'll pass it over to the moderator, and we'll open up the line for questions. Thank you.
spk02: And at this time, if you would like to ask a question, please press the star and one on your touch-tone phone. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question, and we'll pause for a moment to allow questions to queue.
spk06: We'll take our first question from Andrew Carter with Stifel.
spk01: Hey, thanks. Good afternoon. First question I wanted to ask, you did say that the legal expenses were going to come down. I guess I could go at this one or two ways. You underwrote a pretty significant loan this quarter and got $410,000 of fees from it. So how many expenses were related to that? And can you tell us where you think the OpEx will kind of land over the next two or three quarters? Thanks.
spk05: Sure. Andrew, this is Greg. the uh i think it's important to note that none of those legal expenses were directly related to the closing of the shrine loan in fact we we typically require our borrowers to pay for the legal expenses uh surrounding the closing of the loans so most of those really related to silver silver spike investment corp uh as a corporate structure itself given that it was our first quarter really going full steam with operations. You know, we just had a lot of general corporate overhead to take care of things like compliance manuals, policies, procedures, various SEC filing, et cetera. So none of that was loan specific. It's really corporate expense.
spk01: Okay, gotcha. So just in terms of kind of where it kind of shakes out as a run rate,
spk05: Yeah, I don't want to commit to an exact figure, but I can tell you that there were a lot of expenses also related to the 10K. So given that that's the heavy lift in terms of filing, the queues are a lot less expensive. So again, without quoting a figure, I think you should expect something significantly less than what you saw last quarter.
spk01: Understood. Second question I wanted to ask, in terms of the Pharmacan loan, correct me if I'm wrong, it looks like you purchased a portion of that loan from another group because those terms were identical to a loan that was underwritten earlier this year. A couple questions to that. First, did you get it at a discount at what the original loan was? And would you, in this environment, kind of think a little differently about opportunistically looking to get exposure elsewhere, given there's a lot of loan portfolios out there that have kind of deployed and conditions have changed quite a bit for the worse?
spk08: Yeah, Andrew, thanks. That's a great question. It's Frank. I'll answer that. We actually did not buy that in the secondary market. That was actually a tack-on to an existing – but you're right. It has the same characteristics of the existing loans. Um, so it was an attack on, um, and it was done in conjunction with another, uh, another lender. Um, and it was done at a discount, um, and the details of which are, are in the, um, are in the queue. Um, and, and I think it's a, I think it's a really, really good question. It's something that, that we talk about. Um, we are, you know, we're primarily going to be deploying assets in loans, um, that we structure. And that'll be our strategy. You know, that's our strategy going forward, at least for the time being, but they don't proceed to change in the near term. We are looking at the public markets. And as I mentioned earlier, we have noticed that some of them have sold off considerably. We use the public markets, you know, in this industry is a good benchmark and a good understanding of where we think credit risk should price for the private companies we're looking at it. but we are opening to doing secondary transactions we don't think it will ever be you know the bulk of the portfolio um and we are cognizant of you know um you know we're cognizant of tactical pressures uh many of us spent you know decades in the capital markets businesses so we're going to be cautious about those types of things but we are you know we are looking we're noticing um even you know even as recently as the last couple weeks um some selling pressure in some of the public names if anything from the private side it helps justify, you know, that we get generous credit spreads, generous overall yields, generous, you know, loan documentation that's favorable to us as a lender, and due diligence as well. Thank you.
spk01: That's a great question. Yeah, last question I'll ask, just any kind of update on the kind of deployment? And if I understand it correctly from looking at what the kind of minimum interest interest income you're going to get from the two loans on hand plus your plus your organization expenses going down it sounds like from here there's not going to be a nav drag but with that respect is like a or there's no no nav drag going forward just want to make sure i understand that and number two just any kind of update on your kind of deployment uh target how that shifted and i'm assuming also loans from here would be in the two to four million dollar range thanks
spk08: Sure, I'll talk about the deployment for a sec. So given BDC rules, we can do up to two loans, up to 25%. The rest will be smaller positions, as you mentioned, and so we would expect that going forward. And yeah, our strategy is still to deploy the majority of assets in the next couple of quarters. I can't talk about specifically what we're working on or what we may or may not have done this quarter and on a go-forward basis, but I would say mentioned before the pipeline is incredibly robust. Um, we're seeing, you know, new opportunities, you know, uh, you know, weekly, if not daily. Um, so we're very optimistic about, um, the opportunities that lie ahead. Um, and you know, that is our strategy to try to deploy the bulk of our, you know, the majority, let me say the majority of our assets, uh, you know, over the next couple of quarters.
spk01: And then I'm also right to assume that from now it's, I mean, it looks like with the income you have in hand, and the organizational expenses, it looks like that covered. So there's really, there's not a risk net here of NAV drag against a slower deployment. That's kind of what I was kind of also kind of getting at there.
spk06: Yeah, Greg, do you want to comment on that? Yeah, I apologize.
spk05: I think I'm disconnected. Andrew, can you repeat the question? I apologize.
spk01: Yeah, sure. What I'm ultimately getting at, you kind of, just to make sure, just looking at the minimum interest income that's going to be coming in from the two loans, plus your kind of guidance, soft guidance around organizational expenses. It looks like from here there's not going to be NAV drag, and so it's only going to go positive. So it is a little – you don't bear as much risk of having to get your portfolio out there. Is that correct? Am I reading that right, kind of the modeling?
spk05: Yeah, that's exactly right. So I think the highlight of this quarter, although the NAV increase was only $0.03 a share – If you think about it, if I frame it such that less than 30% of the portfolio was invested, and really only for a fraction of the quarter, and we were still able to surpass expenses and break even. So next quarter, you're going to see, I mentioned the shrine loan was on the books for 36 days. So barring any change in fair value, so I'm going to ignore any mark-to-market that may occur at the end of next quarter, but you're going to see the interest income on that loan more than double, just simple arithmetic. And then none of the interest from Pharmacan, save for one day, June 30th, showed up in June. in the results. So you'll see that next quarter, combined with decreased expenses, should give us quite the opposite of a drag on NAV, but a consistent quarterly boost.
spk01: Got you. Thanks. I'll pass it on.
spk02: And our next question comes from Michael Lavery with Piper Sandler.
spk04: Thank you. Good afternoon. Just was curious, following up on the question about the pipeline, how have you seen that evolve? And you've mentioned that it's robust. I understand you can't get too specific or really specific much at all. Have you seen it evolve as the market has kind of turned or, you know, evolved? And do you expect maybe more sort of secondaries or, you know, things that you don't structure yourself than you might have initially? Just any of that color might be helpful. And partly would love to understand, along with that, how, you know, you've had the one-time fee income here. That's going to be erratic or, you know, unpredictable. But as you look ahead at what's in the pipeline, would you expect more to be coming or is it different types of deals? Any of that color would be helpful.
spk08: Sure, I can take that. Thanks for the question, Mike. Yeah, I would say the market's evolved quite a bit. You know, since last fall, a lot of several deals got done And as I mentioned earlier in my commentary, some of those deals have traded off. Some of them had traded up actually quite a bit, you know, five to seven points. It just depends on the name. Those are loans and bonds in this space. They've sold off with the rest of the market. And, you know, there was some institutional money that was raised at the end of the last year and the beginning of this year. It feels to us, given the dynamics that we're seeing, that a lot of that money has been spent because we are seeing a We've seen, in many cases, deals come back a second or third time. We've seen a lot of companies that were interested in much tighter yields come back to us. We're in conversation daily with many, many companies. And I think the market, not just similar to the kind of high yield and the credit markets, have really repriced considerably. And I think, as I mentioned before, that's definitely to our advantage as a lender and as a lender that has a lot of cash. So we are seeing some companies that are back for the second or third try. And we're seeing some other companies that have successfully executed their strategy and need growth capital. And we're thinking of funding it maybe with equity. And the equity markets have been challenging. And so some of the folks who thought, you know, three to six to nine months ago, they were going to fund themselves with equity, have come into the debt market as potential borrowers. I would say that, you know, for those folks, and there are many of them that haven't borrowed, haven't had an institutional, you know, borrowing before, it's a bit of a learning process. We have a very detailed, you know, due diligence process, very rigorous. And it does take a while to get the deals done. It takes a while to do the due diligence, you know, the financial process. modeling understanding the sources and uses and all that so it is a incredibly you know uh complex process um but we think it's it's it's a good one and it's uh something that uh we have a good competitive advantage and so i would say yeah the pipeline has evolved quite a bit it's it's um gotten more interesting and i think more and more borrowers are realizing that the cost of that where we're we're getting deals priced and where prices are talking In many cases, mid to high teens is just, you know, it's just the proper cost of debt in this space at this point in time. In terms of your secondaries, I mentioned when Andrew asked the question, we definitely, you know, would consider it, but we also want to be cognizant of, you know, technicals. So, something we would look at, but we think, you know, the bulk of our portfolio, our strategy is to execute in private loans. you know, I think attack on like we, like, you know, like we did one of which, you know, we did in the quarter is something that we consider to be a little bit different because there can be some conversations and pricing, et cetera, because it depends on what price gets done. So that, that we view a little bit different, but you know, then just a secondary, just buying from, from someone else. And then in terms of, you know, you know, you're, you're, you're exactly right on the fee income. It's just hard to model, and it's hard to judge. Our goal is, as this space continues to evolve, our goal and our strategy is to be a premier lender in this space and to be able to help companies achieve their financial goals and to help them with understanding what they can borrow and at what levels and under what conditions, and that we get paid for that. So it is our hope that... you know, that we can generate more fee income over time, but it's very hard to predict. And, of course, it'll be somewhat a function of, you know, new loans and deployment and the size of the loans. When we do bigger loans and we help structure them and originate them and all that, I think we'll, you know, I think we'll have the opportunity for more fee income. If it's, you know, a TACON, it's really more about, you know, what price are we executing the TACON at. And if it's just a smaller private, you know, we'll do whatever is fair and we expect to have some fee income. The Shrine loan was particularly exciting because of the size of the loan, you know, and given the amount, obviously the finite amount of capital we have, but to be able to co-lead such a big loan was exciting for us.
spk04: Oh, that's a great color and all makes sense. Just one follow-up. Obviously, you've talked about how spreads have evolved and it's clear what that means for you, but any other components of that in terms of just covenants or, you know, things that have also sort of shifted in terms of, it sounds like it's a little bit more, you know, the pendulum swung back to you, you know, more in your direction in terms of being able to be choosy or just, you know, is that correct? And what does that mean in terms of how you structure loans maybe differently than you might have a few months ago?
spk08: Yeah, I think that's a great question, Michael. We think about that a lot. And I think that's exactly right. It enables us to be choosier. And the things that would factor into our loans would be not only the spread of but also the kind of the loan to value. So the amount of, you know, the size of the loan, you know, the leverage, you know, the amount of, you know, debt to EBITDA, the LTB, the covenants, the reporting requirements, it's all shifted. It's really incredible where the market was last year, because remember last year, towards the end of the year, we actually had in this marketplace, you know, in some cases, Just traditional high-yield accounts and loan accounts that had never been in this lending in this industry before were coming in because yields were so tight. You know, the high-yield market was probably trading at 4.5%, and so the yield got to be almost double that early this year. So those participants largely have left the market. So the supply-demand imbalance has tilted, you know, very much in favor of the lender. And so that's exactly right. So we'll look. So we think it's exciting not just to have higher yields or bigger discounts, bigger OID or higher fees, but also a less risky loan. So less leverage, less LTV, and better covenants, better control. So whereas nine months ago, some people we spoke with said, yeah, being quoted a loan without covenants, we just would typically say pass. We're not interested in doing that. a loan with zero covenants or with high LTV or what have you. Now it's definitely in our favor as a lender to get lower LTVs and just better overall package for the lender.
spk04: Okay, great. Thanks so much.
spk02: Sure. Thank you. And as a reminder, if you would like to ask a question, please dial star 1 on your telephone keypad. We'll take our next question from the line of Pablo Zenik with Cantor Fitzgerald.
spk03: You know, regarding safe banking, I understand what you're saying about more favorable conditions for the lenders and that you are in a much better position than six months ago in terms of that demand-supply dynamic. But are any companies, are there any credits pretty much saying, you know what, I'm going to hold on, I'm going to wait until I have more visibility and save, maybe get better terms, you know, in six months' time? or people just can't afford the luxury of waiting. Can you give some color around that? Is that even part of the discussion when you're talking some of these potential pipeline opportunities?
spk08: Yeah, that's a fair question. Some folks are waiting. Some folks feel like the yields are just too wide or the all-in-debt cost is too high. But we always experience that. We even experienced that last year. I think some folks are waiting. Some folks also, frankly, view it as an opportunity to take advantage of the fact. So some of the folks, you know, I believe that are in maybe even stronger financial positions than some of their competitors are viewing, okay, so debt is more expensive, but some of their competitors are having a harder time accessing both the debt markets and the equity markets. So some of them are saying, hey, I think this is actually a good time to borrow, for instance, for growth, you know, for M&A, to buy assets. There's been, there are some assets that have come up for sale. There will be some that continue to come up for sale, we believe. So I actually think that some of the folks that didn't, you know, we're seeing more inquiry from some of the folks who didn't look to fund themselves, you know, as you know, many folks haven't funded themselves with debt in this space. And some of them are saying, hey, now might be an opportunity to kind of continue to build a moat around my business and buy some assets at a good level. So I actually think it's playing, you know, in favor that way. There's always people who are going to say, let's just wait and see what legislation, but it feels like a lot of people have given up on that because people were more, you know, very hopeful the last couple of years and it just hasn't materialized.
spk03: Right. And just to follow up in terms of, you know, the demand, I mean, so you have, of course, Shrine and Pharmac, and I think most of us would think of them as, you know, best quality in the private sector. You know, I can probably think of two or three other names that would fit that bill. But I'm just wondering, now that you only have this ammunition of $4 million size loans after making the two big size loans, it's like those top quality borrowers out there that you could access, you won't be able to. And they may end up going up to, maybe going to someone else. I mean, can you give some context around that? Or the potential for big size loans is still there? If I'm company X, probably more than 4 million. I have a company in mind that I'm not going to mention, but just some color there. Thanks.
spk08: Yeah, no, that's a great question. Look, the Pharmacan is a good example because there was another – actually, both of our first two loans were good examples because they both – we weren't big enough to do either of them. And so it's really exciting to have these companies have the faith and confidence in us as a lender – knowing that we have a finite amount of capital, right? It's in our Qs and Ks. You can see how they can sell, and we tell them what our capital is. I think they really look to us, whether they're big companies or small companies, as professionals in the industry and to help them think about their financing needs. And honestly, the reception's been really positive whether we're going to do, you know, a big loan or just a four or 5 million set type size loan, given our, um, you know, given our, our capital, it feels to me like most of the companies we talk to, you know, are interested. Well, I know there aren't that many institutional lenders out there, so they're mostly seem to be interested in having conversations with us there. We often, many of these companies in our pipeline, we have multiple conversations and, We have great market color for them. I think they're excited about the loans that we've done that have been announced, particularly the first one because there was a press release on that. It was one of the biggest private loans ever done. I don't view that as a barrier. Of course, over time, we'd love to have more capital and write bigger loans and help support the industry because there's a lot of exciting opportunities that meet our strategy, but Yeah, we've had very good reception from companies, big and small, regardless of our ticket size.
spk03: Okay, and then just to follow up, maybe I should know this, but just a reminder, why the focus on private versus public? Just the economics are better there for you, or just a reminder on that?
spk08: Yeah, well, as a BDC, we have limitations. So the bulk of our assets have to be in private companies that are less than a certain market cap size. So that's the main reason.
spk03: Right, okay, and the last one.
spk08: BDC is going into it.
spk03: Yeah, got it. And the last one, just modeling. So in the case of Shrine, they haven't made use of the $170 million facility. I forgot the exact number they borrowed from you and the syndicate. But can you remind us about the mechanics? If they were to go on another, I don't know, $40 million, what's your fee or what's your cut on that, if you can give some code over there?
spk08: Yeah, you know, unfortunately we can't because that hasn't been publicly disclosed. But, you know, like in many loans that have, you know, an ability to grow, they're usually certain metrics that they have to meet in order to draw that down. But we haven't disclosed the, you know, the size or the condition. So given that it's private, I think it's best that I don't discuss that.
spk06: Thank you. Sure. Thank you, Paul. And speakers, there are no further questions at this time. I'll turn the floor back over to you for closing remarks. Well, thank you very much, everyone, for participating.
spk07: We appreciate the interest. Please feel free to reach out to me, Bill Healy, at Bill at SilverSpikeCap.com if you have any questions. Otherwise, we look forward to hearing from you in our next quarterly call. Thank you very much.
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