Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Solar Senior Capital Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference, Mr. Michael Gross, Chairman and Chief Executive Officer. Sir, please go ahead..

Thank you, good morning. Welcome to Solar Senior Capital Limited’s earnings call for the quarter ended June 30, 2017. I am joined here by Bruce Spohler, our Chief Operating Officer; and Rich Peteka, our Chief Financial Officer.

Rich, would you please start off by covering the webcast and forward-looking statements?.

Of course. Thanks, Michael. I would like to remind everyone that today’s call and webcast are being recorded. Please note that they are the property of Solar Senior Capital Ltd. and that any unauthorized broadcast, in any form, are strictly prohibited. This conference call is being webcast on our website, www.solarseniorcap.com.

Audio replays of this call will be made available later today as disclosed in our press release. I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking information.

Statements made in today’s conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial conditions. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties.

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. Solar Senior Capital Limited 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. At this time, I would like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross..

Thank you, Rich. The second quarter of 2017 marked another solid quarter of operating performance for Solar Senior Capital. Our diversified portfolio of senior secured floating rate loans continues to perform well and is 100% performing at June 30, 2017.

Net asset value was steady at $16.79 per share, and GAAP net investment income of $0.35 per share fully covered our distributions. The second quarter saw a continuation of recent trends with the leverage loan market driven by capital inflows, low interest rates and stable issuer fundamentals.

The lack of new money opportunities combined with below average default rates and slow but steady economic growth, have extended issuer friendly underwriting environment.

Against this backdrop, we were able to essentially maintain our portfolio size by reinvestment of proceeds and repayments into senior secured first lien loan that met our stringent underwriting criteria.

Our investment in the second quarter represents a combination of new portfolio companies, incremental first lien term loans to existing portfolio companies, and select participation in refinancing transactions where we are comfortable with the risk of return profile.

As a result of our selectivity, we were able to avoid yield compression, and the risk in our portfolio as measured by the weighted average leverage and issuance coverage for portfolio companies remain constant with the prior quarter. Bruce will provide additional details of our portfolio activity.

As mentioned in our last earnings call, we finalized a new Life Science Lending joint venture. This JV is expected to invest majority of its assets in first lien loans to publicly traded companies in the life science industry. And we will be incremental to existing Life Science loan strategy.

SUNS has committed $75 million of the total $300 million of equity committed to the JV. Our life science team has developed the pipe line of attractive investment opportunities for strategy, and we expect to close the first transactions either late this quarter or early in the fourth quarter.

At quarter end, our strategic initiative including the First Lien Loan Program of FLLP and Gemino Healthcare Finance represented approximately one-third of our comprehensive portfolio.

The distributions from FLLP and Gemino have helped to sustain SUNS attractive weighted average portfolio yield in the face of recent spread compression in the new issue market. Additionally, as a Life Science initiative ramps, it should provide a differentiated growth opportunity in a niche asset class with attractive risk reward profile.

As a reminder at the end of 2016, our advisor Solar Capital Partners formed a joint venture with PIMCO. This initiative should provide significant long-term benefits to SUNS.

Through an expected larger investible capital base across the Solar platform, SUNS would be more of a full solution provider which should results in greater deal flow for Solar senior and our first lien loan program.

Furthermore, the partnership with PIMCO provides SUNS with assets to resources of a world-class credit manager, which has invested $300 billion in corporate credit and currently employed over 50 credit research analysts with extensive industry experience.

At June 30, 2017, when considering the unused debt capacity of our on balance sheet and off balance sheet strategic initiatives including FLLP and Gemino, SUNS had over $150 million of available capital subject to borrowing base limitations.

As we invest through our diverse middle-market lending verticals, we anticipate growth in net investment income over the coming quarters. Lastly, our Board of Directors declared a monthly distribution for August 2017 of $0.1175 per share payable on August 31, 2017 to stockholders of record on August 17, 2017.

At this time, I would like to turn the call over to our Chief Financial Officer, Rich Peteka..

Thank you, Michael. Solar Senior Capital Limited’s net asset value at June 30th was $269.1 million or $16.79 per share. This compares to a net asset value of $269.5 million, or $16.81 per share at March 31st.

Solar Senior’s investment portfolio at June 30, 2017 had a fair market value of $375.3 million in 48 portfolio companies operating in 21 industries compared to a fair market value of $373.1 million in 49 portfolio companies also operating in 21 industries at March 31st.

At June 30, 2017, the weighted average yield on our income producing portfolio was 8.2% measured at fair value, up from 8.0% from the prior quarter. And 100% of our portfolio of investments was performing.

At June 30, 2017, net leverage increased to 0.39 times from 0.28 times at March 31st, and Solar Senior’s target leverage continues to be 0.80 times. From a P&L perspective, gross investment income for the three months ended June 30, 2017 totaled $7.7 million versus $7.5 million for the three months ended March 31, 2017.

Net expenses for the three months ended June 30th were $2 million compared to $1.8 million for the three months ended March. In our second quarter 2017, the Investment Advisor again waived 0.8 million of management and performance-based incentive fees. This is compared to the first quarter of 2017 where they waived 0.9 million.

On a cumulative basis, since SUNS’ IPO in 2011, the Investment Advisor has raised the management and performance-based incentive fees and covered equity offering costs totaling 8.8 million.

Net investment income for the quarter ended June 30, 2017 was $5.7 million or $0.35 per average share versus $5.6 million or $0.35 per average share for the prior quarter.

Below the line, Solar Senior had net realized and unrealized losses for the second fiscal quarter totaling 0.4 million compared to 0.3 million of realized and unrealized gain for the quarter ended March.

Ultimately, Solar Senior had a net increase in net assets resulting from operations of 5.2 million or $0.33 per average share for the three months ended June 30. This compares to a net increase and net assets resulting from operations of 5.9 million or $0.37 per average share for the three months ended March 31.

At June 30th, Solar Senior had approximately 90.7 million of unused capacity under its 200 million revolving credit facility. At this time, I would like to turn the call over to our Chief Operating Officer, Bruce Spohler..

Thank you, Rich. Let me begin by providing portfolio update. We are extremely pleased with the credit quality of our portfolio. We have always been focused on keeping risk to a low level and our portfolio credit metrics as June 30 support our success with our objectives.

The weighted average EBITDA of our first lien investments, including our ownership in FLLP, was over $80 million. Additionally, leverage to our security was just over 4 times and interest coverage ratio averaged 2.6 times, both consistent with the prior quarter.

Latest 12 months revenue and EBITDA for our portfolio of companies grew 6% and 9% respectively. As evidenced by these portfolio metrics, our portfolio continues to have a lower risk profile than the broad liquid leverage loan market. As further evidence of the success of our conservative approach, our portfolio was a 100% performing at quarter end.

We continue to have no direct exposure to the oil and gas or commodity sectors. Our internal risk assessments remained at approximately two measured at the fair market value and based on our one to four risk rating scale with one representing the least amount of risk. Additionally, our watch list continues to be minimal at roughly 5% of the portfolio.

Also at quarter end, the weighted average yield of our portfolio was 8.2%, up from 8% from prior quarter. The average yield on our first quarter originations was over 7% which is consistent with the prior quarter.

Against the backdrop of spread compression in the broader credit markets, we maintain our asset selector mentality which enabled us to originate loans with attractive yields without sacrificing credit quality.

At quarter’s end, our portfolio of over $440 million included the loans held in FLLP, have investments in 54 borrowers across 22 industry groups with an average investment of just over $8 million, and just under 2% of the portfolio.

Virtually, a 100% of portfolio is invested in senior secured loans including our investment in Gemino whose portfolio consists entirely of senior secured loans. Including Gemino 97% of our income producing portfolio is floating rate.

The senior secured and floating rate loan competition of portfolio is defensively positioned to protect our capital in a rising rate environment. Before I give an overview of our second quarter investment activity, let me give a brief update on our strategic investments.

As a reminder, Gemino focuses on providing senior secured asset based loans to small-and mid-sized companies in the healthcare industry. Gemino’s healthcare expertise and asset-based lending platform creates a unique risk return profile which has a low correlation to SUNS’ traditional underwriting of senior secured cash flow loans.

At quarter’s end, Gemino’s portfolio totaled just over $120 million of funded loans across 36 borrowers, with an average outstanding balance of $3.5 million. All of Gemino’s commitments are floating rate senior secured cash-pay loans and their portfolio is a 100% performing.

For the second quarter, Gemino paid distribution of roughly $924,000 up to SUNS, which equates to an 11.25% annualized distribution yield, on the average cost of our investment. This is consistent with the prior quarter. We continue to believe that there is additional upside in this yield from Gemino with further portfolio growth.

Now, let me give a brief update on FLLP. At quarter’s end, FLLP had approximately a $120 million of first lien senior secured floating rate loans across 25 borrowers, with an average balance of just under $5 million. FLLP’s portfolio is 100% performing. The return on average equity for the second quarter was approximately 11%.

We have deployed roughly $41 million of our $51 million equity commitment. Once this vehicle is fully ramped, we expect to further increase on ROE. Finally, let me touch briefly on the Solar Life Science JV. As Michael mentioned, the new JV enabled our life science team to include public later-stage companies in their target market.

The team has developed a strong pipeline of investment opportunities, which they are currently evaluating for Q3 and Q4 of this year. In the second quarter including our ownership of FLLP, we made investments of approximately $34 million across 12 portfolio companies and had exits of approximately $36 million.

Our investments in the second quarter primarily represent a combination of incremental loans to existing portfolio companies and very select participation in refinancing transactions where we are comfortable with the credit fundamentals and yields. Now, let me highlight a couple of our second quarter investments.

We committed $12 million to the new first lien term loan of PetVet, a leading consolidator of veterinary hospitals backed by Ontario Teachers, with LTM EBITDA of over $65 million. In conjunction with the Company's refinancing, we repaid on our existing $9 million first lien term loan, which resulted in IRR exceeding 7%.

In this case, the Company has performed well and the risk reward profile of the new first lien term loan meets our standards. Our new investment carries all-in yield of roughly 7.5%. We also committed 10 million to the first lien term loan of MRI Software.

Collectively, across the Solar platform, we committed over $20 million to the loan which carries in all-in yield to 7.3%. Additionally, we invested $8 million in the first lien term loan of Meter Reading, which does business as Aclara Technologies. The Company's a leading supplier of smart solutions to the electric gas and water utility meter space.

Our yield here is over 7.2%. Now to touch on couple of our exits, our $6 million investment in the first lien term loan of Enthrive was redeemed at par in conjunction with the re-pricing of that facility, which we passed on. We realized an IRR close to 10% on this investment.

We were also repaid at par on our $4.8 million first lien term loans as Stratos as part of the refinancing, which we also elected to not participate in. Here, we realized an IRR of just over 7%. And lastly, our 4.9 investment in CIBT's first lien was also repaid at par in conjunction with the refinancing.

Again, we passed on reinvestment in the new facility. The IRR on our investment was just under 8%. As you know, our priorities are to protect capital first and earn a fair return for the risk we are willing to underwrite.

In competitive and frothy credit market environments like today, it is essential that we remain disciplined, opportunistic and patient.

Looking forward, we feel confident that through our multiple origination engines including the addition of the New Life Science JV and our enhanced scale across the platform, we will be able to grow the SUNS portfolio prudently through investments having attractive risk award characteristics.

With our 100% performing and well-diversified portfolio, we believe we have a solid foundation and the available capital to grow our net investment income. Now, I turn it back to Michael..

Thank you, Bruce. In the second quarter, Solar Senior delivered another solid quarter results. With a comprehensive investment portfolio that’s 100% performing, approximately 100% senior secured and 97% floating rate, we believe we are positioned for strong performance as we look ahead.

Importantly, our solid foundation coupled with the earnings potential of our strategic initiatives has enabled us to preserve our net asset value and portfolio yield without increasing our risk profile.

Additionally, it provides us with the clear path to generating incremental investment income as we carefully and opportunistically deploy our available capital.

In what are currently challenging credit market conditions, we feel confident that through our proprietary sourcing channels, we can continue to expand SUNS comprehensive portfolio of floating rate, senior secured cash pay loans.

We are excited about the new Solar Life Science Program JV’s potential to further boost our investment income, as well as the incremental investment opportunities we expect to arise from our advisor’s joint venture with PIMCO.

As we deploy our over $150 million of available capital from existing credit facilities, we expect SUNS investment income to increase.

We are confident that once we invested to our targeted leverage, our portfolio will generate quarterly net investment income that exceeds our current distributions, so we have no intention of raising incremental equity in the forcible future.

In conjunction with our equity offering last fall, the Investment Advisor agreed to waive incentive and management fees through June 30, 2017, as necessary to ensure the GAAP net investment income fully covers our distributions.

During the time period, the management waived a total of $3.1 million of incentive fees and management fees, including covering all our operating expenses, this totaled $7.3 million. We view these waivers as evidence of our continued shareholder friendly management philosophy.

At last night’s close of $17.47, SUNS trades at 8.1% yield, which represents a significant discount to the 4.6% implied yield of the S&P, LSTA Leveraged Loan 100 Index and the 6.1% yield of a representative sample of 14 closed end funds.

Given the credit quality of our diversified portfolio, our differentiated origination engines, our disciplined investment philosophy and low fee structure, we believe SUNS represents an attractive investment on both the relative and absolute value basis. We thank you for your time this morning and we look forward to speaking to you next quarter.

Operator, could you please open the line for questions?.

[Operator Instructions] And our first question comes from the line of Allison Taylor Rudary with Oppenheimer. Your line is now open. Please go ahead..

Good morning everyone. So quick question on the Life Sciences JV, you announced it earlier this year that hasn’t gotten underway yet.

Maybe you could give us some color about when you expect that to get going? And then, could you talk a little bit about the pace of investments there and how the life science market might be a little bit different from the markets on the whole? Are you seeing the same type credit challenges there that you are seeing kind of in the overall market?.

Good question. So, the real driver in life science business is first and foremost the raising of the BC capital which has continued at a pretty good clip.

But because we’re focused on late stage healthcare life science businesses, it will be several rounds of equity before we feel that the business; A, is capitalized to sufficient point; and B, has had enough time to get through the FDA process to get far enough long that we feel this is truly a late stage proven drug or medical device technology.

And so, there is a bit of a lead and then lag time before we will decide to deploy our capital, very often the VCs will show us these investments, maybe two years in, and we feel it’s not quite late enough yet.

And we will keep our eye on it and the team will be calling the management every couple quarters until it feels like perhaps they fit some of the more critical milestones. And so, the flow has been pushed back a little bit just because the capital that was raised, the equity capital that, that is -- needs some time to be deployed.

But we expect to start to see some activity here before the year is out..

[Operator Instructions] Our next question comes from the line of Jonathan Bock with Wells Fargo. Your line is open. Please go ahead..

Good morning, Joe Mazzoli filling in for Jonathan Bock. Thank you for taking my questions.

The first one, shareholders clearly benefit from the diverse strategies within SUNS and there is no doubt that the market does appreciate the conservative approach, but as we look at the trajectory of NOI overtime, I think a lot of folks are focused on leverage and deployment.

And the market has been difficult, but how would describe your ramp up to that target 0.8 times leverage? And would volatility in the markets, in the syndicated markets kind of create a faster ramp towards that target?.

Great question. So, the good news is we are half way there, its 0.4 today. I think the other good news is that, we are not a 0.8 today because you would be questioning what we invested in given the elevated risk in the market place.

I think we are very pleased that we were able to effectively increase leverage slightly, maintain our portfolio yield, and importantly not take on additional risk and see the portfolio contrast. So we have been highly selective in replacing assets without taking on too much risk in this -- we think somewhat trophy environment.

But yes, I think you are right if there is any dislocation we are extremely well positioned because we do have available capital to deploy, and importantly to your point we have Gemino, we have the Life Science vertical. Both of those beat to different metrics and different drivers as you know than the cash flow sponsor that lending business.

So, I think our intention is to continue to be prudent, but we are heading in the right direction towards that higher leverage. But clearly any dislocation occur to see, if perhaps our current administration, we are well positioned to take advantage of..

And then just one last question, I think I may have missed it.

Did the manager commit to waive fees for certain period of time? Or is it just kind of quarterly evaluation?.

We committed to do it through this current quarter, the June quarter for the past four quarters..

[Operator Instructions] And I'm showing no further questions, and I would like to turn the conference back over to Chairman and Chief Executive Officer, Michael Gross, for any closing remarks..

Just thank you and enjoy rest of summer..