SUNS - NASDAQ

Ladies and gentlemen, welcome to the Quarter 1, 2021 SLR Senior Investment Corp. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Thank you. I'd now like to turn the conference over to your host, Chairman and Co-CEO, Mr. Michael Gross. Sir, please go ahead.

Thank you, operator. Good morning. Welcome to SLR Senior Investment Corp's earnings call for the first quarter ended March 31, 2021. I'm joined today by Bruce Spohler, our Co-Chief Executive Officer, and Richard Peteka, our Chief Financial Officer. Rich, would you please start off by covering the webcast and forward-looking statements.

Of course. Thank you, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note, that they are the property of SLR Senior Investment Corp, and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast on our website at www.slrseniorinvestmentcorp.com. Audio replays of this call will be made available later today as disclosed in our 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. SLR Senior Investment Corp undertakes no duty to update any forward-looking information unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website, or call us at (212) 993-1670. At this time, I'd like to turn the call back to our chairman and co-CEO, Michael Gross.

Thank you very much, Rich. I'm pleased to report that SLR Senior Investment Corp's, or SUNS, portfolio continues to be 100% performing for Q1 2021, which continues to support our investment thesis at a diversified portfolio across asset-based loans in niche markets, in first lien cash flow loans to upper middle-market companies provides meaningful downside protection during challenging economic periods. SUNS portfolio companies have proven that resilient business models and assets and liquidity that we believe enable them to manage successfully through the pandemic induce depths of the economic contraction and perform well in the current expansionary environment. We attribute our healthy portfolio foundation to our conservative underwriting, the deep experience of investment team, and SUNS diversified origination platform across cash flow, asset-based lending, and life science verticals. After the close yesterday we reported a net asset value of $15.91 per share at March 31, consistent with the reported nab at December 31, 2020. Credit quality portfolio continues to be strong, and our watch list remains at historic lows. Year-to-date, the US middle-market has reflected a more favorable economic backdrop punctuated by resurgence and sponsor-led M&A and refinancing transactions. The government's fiscal and monetary stimulus programs combined with the vaccination program have turbocharged recovery and removed a number of the uncertainties. Given this stable backdrop, SUNS originated investments of approximately $50 million in the first quarter. The majority of our portfolio growth came from cash flow investments in large upper middle-market companies that highlight the scale of the SLR platform and allows SUNS the opportunity to participate in transactions that are available only to managers who can hold up to $200 million in a given position. A number of these transactions are a combination of funded loans and delayed draw term loans, or DDTLs, that provides certainty of capital to facilitate acquisitions and further grow the portfolio companies with established credits. Bruce will talk about the favorable trends in more detail. At March 31, over 99.9% of our comprehensive investment portfolio at fair value was invested in first lien loans, and approximately 51% of those consisted of loans in specialty financed verticals. These businesses have historically exhibited lower default and loss rate throughout business cycles. Notably, the ABL and life science teams have each managed through multiple cycles over careers spanning 20 to over 30 years. In the first quarter, SUNS produced net investment income of $0.20 per share. The shortfall for the $0.30 per share earned in the prior quarter is a direct result of SUNS being under-invested. At March 31, SUNS significantly under levered at 0.4x net debt to equity relative to our target range of 1.25x to 1.5x. Importantly, the economic climate has improved considerably, and our pipeline across all 4 business verticals is very attractive. We expect portfolio growth in the coming quarters from both first link cash flow and asset-based loan investment opportunities. In addition, we continue to actively pursue acquisition opportunities of specialty lenders operating in niche markets as well as opportunistic ABL portfolio acquisitions. Our priority in 2021 is to take advantage of the strong and the economic rebound and attractive opportunity set to deploy our considerable available capital and drive growth or net investment income. SUNS is in a unique position to allocate capital across all of our strategies to the most favorable risk adjusted return investments. It also enables us to originate attractive risks as unavailable to firms that only underwrite cash flow loans. We are confident in our ability to grow the portfolio while remaining disciplined. We currently have over $450 million of available capital to support the expansion of our portfolio. At March 31, over 76% of our funded debt was comprised of unsecured term notes. As our long-term investors know, we have managed the company in anticipation of an economic downturn. Now that it has arrived and the recovery has begun, we are fortunate to have a solid portfolio foundation and are poised to deploy capital support our valued sponsors and management teams. Finally, our investment advisor's alignment of interest with the company stakeholders continuously one of our guiding principles. To significant share purchases since inception, the SLR team now owns approximately 6% of our outstanding common stock. Additionally, all members of the investment team have a significant percentage of their annual compensation invested in SUNS stock. Management and investment alongside fellow SUNS shareholders demonstrates our confidence in the company's defensive portfolio, stable funding, strong liquidity, and favorable position to make new investments. This time I'll turn the call back over to our CFO, Rich Peteka, to take you to the Q1 financial highlights.

Thank you, Michael. SLR Senior Investment Corp's net asset value at March 31 was $255.3 million, or $15.91 per share. This compares to a net asset value of $255.4 million, or $15.91 per share at December 31, 2020. SLR Senior's balance sheet investment portfolio at March 31, 2021 had a fair market value of $367.5 million in 47 portfolio companies, operating in 18 industries. Compared to a fair market value of $340.8 million in 44 portfolio companies, operating in 19 industries at December 31, 2020. In addition, as of March 31, 2021, the company had unfunded commitments of approximately $28.7 million. Turning to our funding profile and leverage, SUNS continues to have a strong balance sheet which served us well through the downturn and will in the current recovery. On March 31, SUNS had only $111.2 million of debt outstanding, with a net debt to equity ratio of 0.4x, up slightly from 0.34x at December 31, 2020. That leaves SUNS with over $415 million available to fund portfolio growth as of March 31. As a reminder, SLR Senior's target leverage ratio is 1.25x to 1.5x net debt/equity under the reduced asset coverage requirement. Importantly, SUNS has no near term debt maturities, having termed out both its primary $225 million credit facility and its secondary $75 million credit facility to 2023 and 2024, respectively. In addition, SUNS has $85 million of unsecured notes with a maturity date of March 31, 2025. From a P&L perspective, gross investment income for the 3 months ended March 31, 2021, total $6.6 million compared to $7.3 million for the 3 months ended December 31, 2020. Net expenses for the 3 months ended March 31, 2021 was $3.5 million, compared to $2.5 million for the 3 months ended December 31, 2020. Net investment income for the quarter ended March 31, 2021 is $3.2 million or $0.20 per average share, compared to $4.8 million or $0.30 per average share for the 3 months ended December 31. Below the line, SLR Senior had a net realized and unrealized gain for the first fiscal quarter of 2021, totaling $1.6 million, compared to net realized and unrealized gains of $2 million for the 3 months ended December 31, 2020. Accordingly, SLR Senior had a net increase in net assets resulting from operations of $4.8 million or $0.30 per average share for the 3 months ended March 31, 2021. This compares to a net increase in net assets resulting from operations of $6.9 million or $0.43 per average share for the 3 months ended December 31, 2020. Lastly, our Board of directors declared a monthly distribution for May 2021 of $0.10 per share, payable on June 2, 2021 to stockholders of record on May 20, 2021. At this time, I'd like to turn the call over to our co-CEO, Bruce Spohler.

Thank you, Rich. First and foremost, SUNS portfolio has remained 100% performing throughout the current economic slowdown and early stages of recovery. The performance is a tremendous compliment to the financial sponsors and portfolio companies that we have invested alongside. In addition, SUNS defensive portfolio and performance supports our underwriting thesis of minimizing the risk of loss by investing senior in the capital structure in first lien cash flow loans to non-cyclical companies, and allocating a significant portion of our exposure to collateralize loans to our specialty finance verticals. At quarter end, the weighted average investment risk rating of SUNS portfolio remained below 2 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. SUNS comprehensive portfolio totaled just under $500 million at quarter end, and was highly diversified, encompassing over 200 borrowers across 115 industries. Approximately 50% of our portfolio was invested in our specialty lending strategies, with the remaining 50% invested in first lien cash flow loans. Our largest industry exposures are insurance, health care providers and services, and software. The average investment per borrower was $2.4 million, or less than 0.5 of 1% of the total portfolio. At quarter end, approximately 100% of our portfolio consisted of senior secured first lien loans. At 3/31, a weighted average asset level yield on the comprehensive portfolio was 9.5%. By having 50% of the total portfolio allocated to our specialty finance strategies, we've been able to maintain yields near 10%, despite the low LIBOR rate as well as spread compression. Including activity across our 4 business lines, originations for the first quarter total just under $50 million, and repayments were just over $15 million, resulting in net portfolio growth of just over $30 million. Now let me provide an update on each of these verticals. Start with cash flow. We believe our cash flow portfolio is well positioned to perform during this economic recovery. Substantially, all of our cash flow portfolio companies are outperforming their post-COVID revised budgets, as a rebound in revenues as well as cost cuts have had a positive impact on their financial performance. We view the majority of our portfolio companies as providing essential services and operating in non-cyclical industries. In particular, our health care cash flow loans are performing extremely well. We attribute this both to the recession resilient and essential services nature of the industry as well as our underwriting edge. We have an experienced health care cash flow team as well as access to proprietary insights through our life science team and our health care ABL investment team. These together inform our investment decisions in the health care sector. At quarter end, our cash flow portfolio was just under $240 million, or approximately 50% of the total portfolio. Cash flow portfolio had a weighted average EBITDA of over $100 million, reflecting our preference to finance larger companies in the upper mid-market. The weighted average yield was 6.7%. During the first quarter, we originated $32 million of first lien cash flow loans, and had repayments of approximately $13 million. As Michael mentioned, we've been able to take advantage of the broader scale of the SLR platform to underwrite larger hold positions in first lien cash flow loans to upper mid-market sponsor-owned companies. Sponsors seek incremental capital from scaled lenders who offer speed and certainty of capital, and the ability to commit to a combination of both funded and delayed draw term loan commitments to finance the portfolio company's growth. We believe these transactions offer prudent opportunity for SUNS to grow its investment in established credits with existing financial covenants. By stepping into an existing loan facility with shorter duration and upfront fees, the yield to maturity is enhanced. We are encouraged that sponsor activities picked up in 2021 with higher volumes of M&A and refinancings compared to last year. We expect the sponsor led momentum to continue throughout the remainder of this year, which we believe will provide opportunities to invest in attractive non-cyclical upper mid-market companies. Now let me turn to our asset-based businesses. As a reminder, we own 2 commercial finance portfolio companies that specialize in making asset-based loans secured by accounts receivable. These companies lend to small and midsize US businesses who typically have limited access to more traditional bank financing. SLR health care ABL is focused on providing accounts receivable facilities to health care providers, including hospitals, skilled nursing facilities, home medicine, and medical laboratories. Collateral here includes Medicare, Medicaid, and private insurance receivables. SLR business credit finances companies operating in the distribution, business services, and manufacturing industries. SLR business credit is typically the sole lender to its borrowers, and is financing predominantly accounts receivable and factoring arrangements. In addition, all factoring agreements have recourse to the underlying borrower. Both of these businesses are led by teams of seasoned professionals who have been in ABL lending for over 25 years. The management teams are experienced risk underwriters across multiple investment cycles. The business models are highly resilient, relationship driven, and serve as a lifeline of working capital to small companies across the US. In addition, the collaboration across SLR health care and SLR business credit business development efforts, together with business credits acquisition of summit financial resources last year in the factoring sector, has broadened and deepened our coverage across the states. During prior economic downturns, ABL loans have generally provided higher recovery rates than those supported only by cash flows. Let me now provide an update on each of these. At quarter end, business credits portfolio was approximately $155 million, representing just over 30% of our total portfolio. Consisted of 120 borrowers, with an average investment of $1.3 million. Nearly all borrowers are deemed essential businesses, and there has been limited impact on our accounts receivable during COVID. The portfolio is defensively positioned with its largest exposures in food distribution, IP staffing, and manufacturing industries. During the pandemic, PPP loans have significantly improved our borrowers liquidity position, and economic conditions continue to normalize. We expect throughout 2021, they will continue to redraw under our existing credit lines. Business credit has not had a payment default during the pandemic, and continues to be 100% performing at quarter end. During the first quarter, we funded just over $7 million of new ABL loans, and had repayments of just $1 million. Business credit continues to evaluate potential strategic add-on acquisitions. For the quarter, the company paid a cash dividend of $1.26 million, consistent with the prior quarter. Now let me turn to health care ABL. At quarter end, their portfolio was $65 million, representing 13% of our total portfolio. We believe the funded portfolio is now in a position to rebuild after experiencing significant repayment activity last year, resulting from borrowers choosing to pay down our lines of credit with proceeds from the Advanced Payment Program, HHS grants, and the payroll protection program. The total number of our borrowers has remained remarkably consistent, and is comprised of loans to 37 borrowers with an average funded loan of $1.8 million. Portfolio remains 100% performing, and has not had a default since the beginning of COVID. Impairment risk remains very low, given health care ABL's disciplined underwriting and focus on financing health care service providers who have government and high quality insurance company accounts receivable collateral supporting our lines of credit. Cash collections typically go directly into our lockboxes, and fees and interest payments are debited automatically. The weighted average asset level yield of their portfolio is just under 15%. This was elevated by a large termination fee during the first quarter. During the quarter, health care ABL funded $2.8 million of new investments, and had repayments of approximately $2.7 million. We expect this portfolio to grow during 2021 as borrower's stimulus dollars are depleted and our working capital lines of credit are utilized by our borrowers. For the quarter, health care ABL paid us a cash dividend of just under $1 million, consistent with the prior year quarter. Now let me turn to life science lending. Overall our life science portfolio is largely insulated from short-term market and economic dislocations, given the long dated equity investment periods and product development cycles. The impact of COVID has been de minimis on this portfolio. 100% of our loans are performing, and we continue to incur no losses in the life sciences segment. Currently, 100% of this portfolio has more than 12 months of cash runway. At quarter end, the portfolio totaled just under $34 million across 9 borrowers, with an average investment of $3.7 million. For the first quarter, we funded $5 million of new investments and had no repayments. The weighted average yield on this portfolio was approximately 9.7% at cost, which excludes success fees and warrants. Overall, we believe that SUNS is extremely well positioned to take advantage of an improving economy and a more robust opportunity set across each of our investment verticals. SLR capital partners, commercial finance platform, and significant dry powder enables us to provide structured solutions, including both cash flow and asset-based loans for capital constrained companies. We're working closely with our extensive network of relationships to source new investment opportunities. In addition, we continue to actively pursue acquisition opportunities in asset-based lending companies that can further diversify our specialized lending capabilities, and provide an expanded solution set for middle-market companies. Now let me turn the call back to Michael.

Thank you, Bruce. From inception, we've endeavored to make the right decisions to preserve and enhance long-term shareholder value. Our priority has always been to create and maintain a portfolio that can generate steady income for our shareholders and protect our capital. While the recovery is underway, we remain disciplined in the face of a tighter pricing environment, higher leverage, and loose structures. All of which have elevated the risk of principal loss in middle-market leveraged finance over an extended period. As a result, we have positioned SUNS defensively. We have diversified our portfolio across cash flow and specialty finance first lien senior secured loans to manage downside risk. We have operated well under target fund leverage in a preserved liquidity. While leverage in middle-market direct lending remains near all time highs, the economic rebound appears to be on solid footing, and we're seeing a broader set of attractive investment opportunities. With over $415 million of available capital and a strong foundation, given our defensive portfolio and low leverage, we believe the company is positioned to originate attractive new investments. Our patience and willingness to remain under-invested during the height of the pandemic provides us the foundation to be more aggressive today. We believe that the improved investment opportunity set will persist for a number of quarters as companies require financing solutions for working capital and growth initiatives. Sponsored activities, definitely on the upswing, and the PE industry is armed with significant dry powder. SUNS and the rest of the SLR platform is in a great position to capitalize on this opportunity. We hope that all of you are in good health, and we would like to thank you all for your time today and your support of our company. Operator, at this time would you please open the line for questions.

If we have no more questions, we'll conclude. We recognize that today and this whole week is an incredibly busy earnings week. For those of you who listen to this call in replay and have questions, please feel free to reach out to any of us if you have any follow-up questions. Thank you.