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Solar Capital (NASDAQ:SLRC)

Q1 2014 Earnings Call

May 06, 2014 10:00 am ET

Executives

Michael S. Gross - Chairman, Chief Executive Officer and President

Richard L. Peteka - Chief Financial Officer, Treasurer and Secretary

Bruce J. Spohler - Chief Operating Officer and Director

Analysts

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Jonathan Finger

Jonathan Gerald Bock - Wells Fargo Securities, LLC, Research Division

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2014 Solar Capital Ltd. Earnings Conference Call. My name is Sumanda, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Michael Gross, Chairman and CEO. Please proceed, sir.

Michael S. Gross

Thank you, and good morning. Welcome to Solar Capital Ltd.'s earnings call for the quarter ended March 31, 2014. I'm joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you please start off by covering the webcast and forward-looking statements?

Richard L. Peteka

Of course. Thanks, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Ltd., and that any unauthorized broadcasts, in any form, are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.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 providing 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. 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 Capital Ltd. 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'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Michael S. Gross

Thank you, Rich. In spite of a number of geopolitical developments and macroeconomic events, U.S. and global credit markets remain awash with excess liquidity. The combination of historically low interest rates and investors seemingly insatiable demand for yield products continues to result in tight spreads, higher leverage levels and covenant protection that favor borrowers. Against this backdrop, the large syndicated leverage loan market has continued its record pace with first quarter of 2014 volume up over 25% over the fourth quarter 2013.

According to recent first quarter data from Thomson Reuters, large corporate LBO leverage levels have increased to 6.4x debt to EBITDA, while middle market LBO leverage levels are more than a full turn less at just over 5x debt to EBITDA. There continues to be an attractive opportunity to capture an illiquidity premium in underwriting middle market loans. In the current environment of elevated risk and compromised structures, Solar Capital continues to be disciplined and highly selective with its new investments.

Over the last 5 quarters, we have invested, on average, $100 million per quarter, a level that is consistent with our historical pace of originations. However, we have continued to experience an elevated amount of repayments as loans have repaid early. We have not felt compelled to accelerate the pace of our originations, preferring instead be patient and stick to our underwriting disciplines.

We have purposely managed our portfolio to a higher percentage of senior secured and floating rate investments in anticipation of expected changes to market conditions. At the current stage of this credit cycle and with the possibility of a rising rate environment, as the Fed continues to taper, we believe the portfolio is defensively [ph] positioned to generate attractive risk-adjusted returns, and importantly, it maintains the flexibility to take advantage of credit market dislocations, should they occur.

During the first quarter, we invested approximately $145 million across 10 portfolio companies. Repayments for the quarter totaled $208 million, including $60 million for the previously announced repayment of our mezzanine-positioned Earthbound Farms. During the first quarter, the percentage of our portfolio invested in senior secured and Crystal Financial, whose portfolio consists entirely of senior secured loans, rose from 69% to 76.4%. And the floating rate portion of our income-producing portfolio rose from 64% to 70%.

At March 31, 2014, we believe Solar Capital's portfolio had a lower risk profile and was more diversified than at any time in our history. Solar Capital's net asset value at March 31 was $22.43 per share, down slightly from NAV at December 31, 2013. And our net investment income for the quarter was $0.40 per share.

During the 3 months ended March 31, 2014, we repurchased $19.6 million of our common stock, at an average price of approximately $22 per share, representing a 2% discount to the NAV per share at March 31, 2014. Subsequent to the end of the quarter, we have purchased an additional $15.6 million of our common stock at an average price of approximately $22.01 per share. Repurchase program continues to provide flexibility to generate incremental net investment income per share and is a complementary tool in deploying our available capital.

At the end of the quarter, we had substantial unused credit capacity subject to borrowing base limitations and cash available for new investments. We do not anticipate raising additional equity capital until we are close to our 0.7x debt-to-equity leverage target. We remain focused on increasing the efficiency for our capital structure by utilizing our available leverage to grow and further diversify our portfolio through prudent growth. Our pipeline is strong with a good mix of traditional senior secured floating rate investment opportunities. In addition, we continue to make progress in our efforts to develop other strategic initiatives to expand and diversify earnings streams while remaining true to our middle market lending mandate.

Finally, our Board of Directors declared a quarterly distribution of $0.40 per share, which we paid on July 1, 2014, to shareholders of record as of June 19, 2014.

At this time, I'll turn the call back over to our Chief Financial Officer, Rich Peteka, to take you through some of our financial highlights.

Richard L. Peteka

Thanks, Michael. Solar Capital Ltd.'s net asset value at March 31, 2014, was $972.3 million or $22.43 per share, compared to $995 -- $995.6 million or $22.50 per share at December 31, 2013. Our investment portfolio at March 31 had a fair market value of approximately $1.03 billion as compared to approximately $1.09 billion at December 31.

At March 31, 2014, we had investments across 43 portfolio companies in 28 industries versus 40 portfolio companies in 26 industries at December 31. The weighted average yield on our income-producing portfolio was 10.9% measured at fair value. This compares to 11.3% at year end 2013.

For the 3 months ended March 31, gross investment income totaled $32.6 million versus $35.4 million for the 3 months ended December 31, 2013. Expenses totaled $15.2 million for the 3 months ended March 31, compared to $16.8 million for the 3 months ended December 31.

Overall, the company's net investment income for the quarter ended March 31, 2014, totaled $17.4 million, or $0.40 per average share, versus $18.5 million, or $0.42 per average share, for the quarter ended December 31, 2013.

Net realized and unrealized losses for Q1 2014 totaled $3.7 million versus gains of $10.4 million for Q4 2013. For the 3 months ended March 31, the company had a net increase in net assets resulting from operations of $13.8 million or $0.31 per average share. For the 3 months ended December 31, 2013, the net increase in net assets resulted from operations was $28.9 million or $0.65 per average share.

At this time, I would like to turn the call over to our Chief Operating Officer, Bruce Spohler.

Bruce J. Spohler

Thank you, Rich. As Michael highlighted, we believe our Q1 activity has further diversified and enhanced the composition of our portfolio. We are pleased with the financial performance of our portfolio companies, and their management teams continue to see signs of higher levels of business activity and are cautiously optimistic about their individual growth prospects.

At March 31, the weighted average yield on our income-producing investment portfolio was 10.9%. The weighted average investment risk weighting on our portfolio remained at approximate 2 when measured at fair market value at 3/31, based upon our 1 to 4 risk rating scale, with 1 representing the least amount of risk.

At the end of the first quarter, our portfolio consisted of 43 companies operating in 28 industries. Measured at fair value, our portfolio was comprised 47% senior secured loans, just over 29% in Crystal Financial, 17.5% in subordinated debt and 6% in preferred equity, common equity and warrants, excluding our investment in Crystal's portfolio. When we include Crystal Financial, whose portfolio consists entirely of senior secured loans, approximately 76% of the Solar portfolio exposure is across secured investments.

Additionally, at March 31, just under 70% of our income-producing investment portfolio is invested in floating rate securities when measured at fair value.

For the quarter, we originated approximately $145 million of new investments across 10 portfolio companies. All of these loans were senior secured loans and all were based on a floating rate interest rate. Investments sold and prepaid during the quarter totaled approximately $208 million.

Before I go through our Q1 portfolio activity, I'd like to spend a moment on some recent portfolio developments. Post quarter end, TIAA-CREF announced the acquisition of Nuveen for just over $6.25 billion with expectations that the transaction will close in the fourth quarter of 2014. Solar Capital first invested in Nuveen as part of Madison Dearborn's buyout in 2007. The original cost of our equity investment was $30 million. In addition, Solar bought a small secondary equity position at a discount to cost to bring the total position to just under $31 million at cost. At the trough of our [ph] credit crisis back in '08, the Nuveen equity position was held at a $0.15 mark in our portfolio.

With respect to recovery, we currently believe that it will be well north of our 3 31 mark of $0.55 of cost. If we were fortunate enough to experience a full recovery, it would add approximately $0.32 a share to our NAV. We believe the outcome is positive for Solar on both the recovery basis as well as creating the ability to reinvest these proceeds from a non-yielding asset into a cash-yielding investment. The long investment horizon afforded by our permanent capital enabled us to be patient with this investment.

Secondarily, at March 31, Quantum Foods was under contract to be sold to a strategic buyer at a price that exceeded our cost on the investment. Subsequent to the quarter, the strategic buyer defaulted on its purchase contract. The company was encouraged to pursue liquidation as well as its remedies against the defaulted buyer.

At March 31, the aggregate cost of our investment in Quantum between both Solar Capital and Crystal Financial was just over $44 million. While we are disappointed with the potential for impairment on this investment, the benefit of investing on a senior secured basis is that we anticipate our recovery, inclusive of interest and fees, to be between $0.90 and par. At this time, it is not possible to quantify with precision the impact of these 2 subsequent quarter-end events. However, on a net basis, we believe the ultimate proceeds from both the sale of Nuveen and the recovery on our investment in Quantum will not have a material effect on Solar's net asset value per share.

Finally, I'd like to give a quick update on Crystal Financial. As a reminder, Crystal is a commercial finance company that provides asset-based and other secured financing solutions to midmarket companies. At March 31, Crystal had $442 million of funded senior secured loans across 25 issuers with an average loan balance of $17 million. All of the commitments from Crystal Financial are floating rate senior secured loans with a weighted average yield of 12.3%, similar to the yield at year end.

At the end of Q1, total debt on the Crystal portfolio was approximately $171 million, for a debt-to-invested equity ratio of 0.62x. At 3/31, Crystal had $65 million of available capital, subject to borrowing base limitations under its credit facility. For the first quarter, our investment in Crystal paid Solar a cash dividend of $7.8 million, which is the equivalent of an 11.3% annualized cash-on-cash yield. In addition, Crystal Financial was able to increase the revolving credit facility by $25 million to aggregate $300 million during Q1.

I will now highlight some of our first quarter investments. We funded a $19 million investment in the second lien term loan of Ikaria supported Madison Dearborn's acquisition of a majority stake in this leading critical care company, and the only significant provider of nitric oxide therapy for patients with acute respiratory conditions. The all-in targeted yield on this investment is 9%. In addition, Solar funded a $25 million investment in the second lien term loan offering by Bishop Lifting products to support an add-on acquisition of Delta Rigging & Tools by AEA Investments.

Pro forma for the acquisition, Bishop will be the market leader in the highly fragmented wire rope rigging and lifting distribution segment. The all-on yield in this investment is targeted to exceed 9.25%. We also funded a $21 million investment in the second lien term loan offering by Aegis toxicology services in support of ABRY Partners' purchase of the company. Aegis is a leading player in the fragmented pain medication monitoring and specialty lab services segment. Our all-in yield here approaches 10%.

During the quarter, we invested $10 million in the new second lien term loan of Asurion in conjunction with the company's refinancing, in which Solar Capital's 2012 investment of $12 million in Asurion's Holdco loan was repaid. You may recall that Solar was an original investor in Madison Dearborn's acquisition of the company back in 2007. Across the Solar Capital and Solar Senior Capital platforms, we had been redeemed on or sold approximately $135 million at a weighted average sale price of 1 01. Our experience with Asurion is a great example of our ability to leverage our knowledge and expertise with a familiar issuer across our platforms to achieve investment duration in highly attractive credits. In addition, we funded a $10 million investment in the second lien term loan for LANDESK support of Thoma Bravo's recapitalization of the company. Solar Senior Capital had original invested in LANDESK back in early 2012 and supported the company's add-on acquisition. LANDESK provides software tools that enable IT departments to manage and secure network devices ranging from PCs to mobile services. The all-in yield on this investment approaches 9%.

I'll now highlight some of our Q1 repayments. As Michael mentioned, Solar Capital was repaid on its approximately $60 million investment in the mezzanine notes of Earthbound Farms as part of the sale of the company to WhiteWave Foods. Solar first invested in Earthbound, the largest producer and marketer of organic salads in North America, back in 2009, as part of HM Capital's [ph] buyout of the company. Follow-on investment was made in December 2010 in support of a recapitalization of the company. Solar was paid a premium to par in Q1 resulting in IRR just over 17% and a 1.6 multiple on invested capital. In addition, Solar's $25 million investment in the second lien term loan of TriNet was repaid at a premium to par as a result of proceeds the company received from its recently completed IPO. Our investment generated an IRR exceeding 17%. And finally, we are repaid a premium to par on our $25 million position in SMG's second lien term loan as part of a recapitalization transaction. As a reminder, SMG is the largest venue management company, providing management services for public assembly facilities. Solar made this investment in June 2012 and generated an IRR in excess of 12%. Based upon our current pipeline, we continue to see opportunities that would allow us to invest at our historic average quarterly pace.

Now I'll turn the call back to Michael.

Michael S. Gross

Thank you, Bruce. In conclusion, I would like to reiterate that we've always run our business with a long-term perspective and as shareholders. We believe that adhering to this philosophy is more important during periods of frothy credit market conditions like we experienced in the last few years. This philosophy translates into being patient and highly selective with our investment decisions. Our permanent capital and investment horizon allows to be an attractive and reliable provider of capital to sponsors and entrepreneurs and also enables us to be prudent during periods of tight spreads and excessive risk. It simply means we have to exercise our continued patience in sourcing opportunities that meet our underwriting criteria. We take our investment management responsibility very seriously and with over 5% ownership, we are well aligned with our fellow shareholders. We are continuing to focus our origination efforts on finding higher-quality investments that we expect to protect our net asset value, rather than lowering our credit standards to achieve growth that may not benefit shareholders in the long run.

If the current lending environment persists, we believe our distribution rate is at a level that will allow us to invest selectively and continue to generate sufficient net investment income to cover our dividend. Portfolio activity during the first quarter of 2014, along with announced and realized exits from our non-income-producing equity investments further enhances the composition of our portfolio. We have purposely and proactively managed the portfolio into a predominantly higher percentage of senior secured and floating rate assets and believe it's appropriately and defensively positioned. We are actively pursuing growth initiatives and strategic partnerships, including third-party capital that would allow us to expand the range of investment solutions, including unitranche structures, that we can provide to issuers. In addition, we continue to evaluate niche investment opportunities with differentiated income streams that we believe can further diversify our portfolio and lower the overall correlation to traditional sponsor-backed cash flow enterprise value based lending.

In the first quarter, we added 2 seasoned professionals whose incremental networks of relationships are already enhancing our sourcing capabilities and expanding our investment opportunities. We remain focused on utilizing our available capital to build a larger and more diversified portfolio that can protect capital and generate attractive risk-adjusted returns for our shareholders. At 11:00 this morning, we'll be hosting earnings call for the first quarter 2014 operations for Solar Senior Capital, or SUNS. Our ability to provide senior secured financing through this vehicle enhances our origination team's ability to meet our clients' capital needs. We continue to see benefits of this value proposition in Solar Capital's deal flow.

Thank you, all, for your time. Operator, at this time, will you please open up the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Troy Ward of KBW.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Bruce and Michael, can you just speak to kind of the yields on new assets? Bruce, I know you said you believe you can continue to go with the historical average pace volume-wise on originations, but can you speak to kind of where the yields are? I know this quarter, it was a little bit soft at 9% based on what we saw, as just a stated coupon, I know it's slightly higher than that based on expected fees maybe. But how do you feel the yields will hold in there going forward on the portfolio?

Bruce J. Spohler

Sure. I think your question's a good one. The yields on a going-in basis have been between 9% and 10% when you look at the upfront fees, to your comment. But I think it's important to note good news, bad news. As you went through and heard some of our repayments, many of these were 2012, 2013 investments that we were underwriting, say at 10%, 10.5% where as you heard me comment, we were earning anywhere from 12% to 17%. Good news, higher IRR, bad news, short duration that accelerated the amortization of these upfront fees, and in some cases, we had a little bit of prepayment fees. So the yields actually, because of the churn, are exceeding our expectations. We're underwriting to 9.5%, 10% and realizing low- to mid-teens. But I think that as we look at the environment this quarter and looking into the summer, it feels as if the compression that we have seen consistently over the last 18 to 24 months has abated and that this feels like this is the level that we continue to invest at sort of that 9% to 10% yield to maturity, again, with a caveat that durations short of those yields will be heightened.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then one of the comments you had made about -- talking about exploring diversified income streams. I mean, obviously, one of the things we've seen in the BDC sector is kind of a bolt-on fund, a senior loan fund, we call it the SSLP in some and other BDCs are doing something similar. But how do you look at the availability for you to do something like that inside of Solar here because you have Solar Senior already, and then kind of a follow-on to that is how do you view the cost, the expense construct at Solar Capital as you move further into senior and floating rate. Is 2 and 20 the right cost structure for your new -- kind of your new asset focus, of where you about have to be focused in this market?

Michael S. Gross

Yes, with regard to unitranche and Solar Senior versus Solar, as you know the unitranche asset class tends to be much larger facilities, $100 million to $200 million. And so for Solar on its balance sheet, we would not want to be anywhere near that mark [ph] for diversification perspective. So it would make sense that if we want to pursue the unitranche market aggressively to bring in outside money alongside of us and also to co-invest alongside funds. It will be more than enough to go around. So that's something we are actively pursuing.

Bruce J. Spohler

And I think to add to that. It's important to note as you just asked on the yields for Solar, and we talk in half hour on SUNS, you will hear that the yields there are probably close to the 6% than this 10% area at Solar. And obviously, that's a good indicator of the underlying risk. So we believe that the stretch senior, unitranche, second lien type assets that we are investing more prominently over at Solar clearly carry a higher level of risk than your traditional first lien mid-market bank debt over at SUNS. Not to say we won't do a little bit of unitranche at Solar -- at SUNS, I'm sorry, but it's a predominantly, as you know, lower risk, lower return, lower volatility traditional mid-market bank debt portfolio. And I think that goes to your follow-on question regarding the underlying fee structures. Obviously, as you know, SUNS carries a fee structure that is roughly half the structure at Solar, and we think, again, that is indicative of the relative risk of the 2 portfolios and the appropriate return for that risk.

Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division

As you've seen the returns in the market be competed down on the traditional Solar capital assets, has the board had any discussions about addressing the expense structure at Solar Capital?

Michael S. Gross

The board, in its ordinary course, goes through the renewal process, which happens on an annual basis and chose to do -- but I think importantly, if we're sitting here, Troy, invested at our full [indiscernible] 7 levels, which means we're kind of doing it just for fees and put assets [ph] on the books, we could have that conversation. But the fact that we are running as an underinvested we are, which we have willingly done, means we have willingly chosen to significantly decrease our management fees.

Operator

Your next question comes from the line of Doug Mewhirter with SunTrust.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Just 2 questions. First, Bruce or Rich, have the -- your leverage levels for your portfolio, debt either -- total debt-to-EBITDA or debt-to-EBITDA to your security and compare that with the 4Q leverage levels? And I guess, while they're looking for that, maybe Michael, a bigger picture question. Obviously, relatively large amount of exits in repayments and Bruce had noted the shortening of the duration of your securities unintentionally, I remember a while back, I was talking about the economy, either you or one of your competitors said that a slow-growing economy is great for BDCs, because they -- your portfolio companies can't grow their way out of the portfolio as easily. So they basically refi with you instead of with a bigger entity or the public markets. Is this, I guess, churn more of a -- maybe a commentary that the economy might be better than people expect or is it more about the availability of capital?

Michael S. Gross

It's more about the availability of capital and importantly, the willingness of investors to take on more risk, frankly, than we think we should. I think were we in a more stable credit environment where you didn't see continued compressed yields and people were willing to do covenant-light deals, we would have seen the duration we expected because the economy hasn't grown that fast. But what's grown faster than the economy is people willingness to take on outside risk to finance these companies.

Bruce J. Spohler

And just for clarity's sake, we do believe that the fundamentals across all of the portfolios that we have visibility in to, whether it's Solar or SUNS or Crystal or Gemino, we think the fundamentals are stable to growing. To Michael's point, the growth rates are single digit, but that's just fine as a lender. So we're seeing good free cash flow generation. I think the challenge for us, as we've talked about, has really been on that availability of capital and what it's done to underlying terms that are available to issuers in terms of both lack of covenants and also leverage levels that are approaching levels that exceed anything we saw pre the credit crisis. And so in a rising rate environment, even a strong capital generating company, if you put 6x to 7x leverage on it, will start to be challenged on their debt service requirement. And so we've had structural concerns, not fundamental concerns. Back to your earlier question, the leverage levels from Q4 to Q1 across the portfolio really have not moved much from about 4.9x to 5x and same on the interest coverage levels, relatively flat.

Operator

[Operator Instructions] Your next question comes from the line of Jonathan Finger with Finger Interests Limited.

Jonathan Finger

I have a question just about your share buyback and sort of your thoughts there. I guess, my question was why not sort of keep your powder dry for when there is more of a market dislocation as opposed to buying back shares at just a modest discount?

Michael S. Gross

Well, a couple of comments, one is we have a lot of capital to do that. We have $600 million available to us today between cash and the borrowing facility, subject to our borrowing base. So we bought back $50 million of stock. So we've taken away less than 10% of our capacity to do. So we just think that we like our portfolio a lot. And frankly, when we look at the alternative marketplace, we'd rather invest more in our own portfolio in some cases than new assets. So we think it's a good tool for us, good balance.

Operator

Your next question comes from the line of Jonathan Bock with Wells Fargo Securities.

Jonathan Gerald Bock - Wells Fargo Securities, LLC, Research Division

Michael, Bruce, perhaps talking a little bit about the new investments this quarter. You mentioned about 9.5% to 10% kind of targeted returns, and looking at the composition, while I see the investments are senior secured, what percentage of the new investments made are second lien?

Michael S. Gross

Yes, most of the ones in Q1 were second lien.

Jonathan Gerald Bock - Wells Fargo Securities, LLC, Research Division

Okay. So when we look at a 9% second lien or maybe we look at -- I'm going to mispronounce it but Ikaria, the healthcare technology firm, second lien, 8.8%, I think you put about $20 million in. Can you give us a sense of the risk reward in this security given that it is a covenant-light security of which you own less than 10% of that second tranche at L+775. Some might argue that this is where the froth is in this environment. And I'd be interested in hearing why this investment is different.

Michael S. Gross

Certainly. So as we -- as you well know, most of the leverage levels out in the marketplace today are somewhere in the 6 to 7x total leverage. Ikaria is levered to 5.1x with strong free cash flow generation, is $237 million of EBITDA, given our -- and only $12 million of CapEx. And we have a very strong relationship with Madison Dearborn given our relationship dating back to Nuveen and earlier on in our carriers. And so we were able to get direct due diligence beyond what the broader market was able to see. So we felt extremely comfortable with their dominant position. Having been blessed with triplets who were born prematurely, this is a phenomenal product in terms of helping premature children and really is the dominant position to get nitrous oxide into children and patients more broadly with respiratory problems. And we felt that there was just substantial derisking here. This is a great example of an asset where -- as we commented on some of our repayments in Q1, where I would expect we have call protection of a couple of points this year and next year, we expect to be taken out probably over the next 12 to 18 months as the company continues to grow. And we will probably see returns significantly in excess of the 9 and change that underwrote to. Having said that, even at 9 and change, to your point about the risk side, again, we think the dominant market position, the substantial size of the business, as well as the strong free cash flow and our access to direct due diligence really justified this investment.

Jonathan Gerald Bock - Wells Fargo Securities, LLC, Research Division

It makes some sense. And maybe perhaps in terms of investing in middle-market club deals that are covenant-light, only because there's been a resurgence and that seems to kind of carry a bit of negative stigma associated with it. Walk us through where a covenant-light loan effectively make sense because a number of people would assume that if you're doing covenant-light transactions and have no ability to reprice in the event EBITDA goes the wrong way, that only increases the risk profile of an investment. So I'd just kind of be interested in the contrast to that point.

Bruce J. Spohler

Yes, again, I think as you know from working with Michael and I and Rich and the team here, given our substantial ownership, for us, it's all about having access to direct due diligence and believing that this is a very stable, if not growing free cash story. But having said that, best defensive move is to make sure that you keep these positions diverse. And I think you've seen us actively enhance the diversity of our portfolio. This is a $19 million position, obviously, relatively small in the context of not only our portfolio, but our available capital. So we are very focused on where we would accept an investment that is covenant-light. Some of these investments that we've repaid at 12% to 17% returns in Q1 were also covenant-light. Asurion, as you may know, has been covenant-light now for a few years. But if you have a high growth cash flowing story, what's going to happen is it will delever to the point where they can take our leverage down, so that we really should be first lien. So what happens is, we're in at 5.1x. Importantly, we attached at 3.7, which is an extremely high attachment point on this business. So we don't have much in the way of senior debt ahead of us. The business has EBITDA margins north of 60%, which is obviously pretty impressive. So our expectation is just through free cash flow generation, our second lien will basically delever into the low 4s in the not-too-distant future. And we'll probably be refinanced out with cheaper first-lien debt, so that underwriting thesis is critical..

Michael S. Gross

So I think the key thing is where we do covenant-light deals, which are few and far between, are ones where we have real visibility on the cash flow. And we see our way to kind of immediate deleveraging, so that this cushion builds in right away.

Jonathan Gerald Bock - Wells Fargo Securities, LLC, Research Division

I understand and do also believe that there is an argument that can be made that having covenants, particularly if there is a commercial bank that chooses to act irrationally can, at times, jeopardize the entire enterprise value at a firm if someone rushes to a sale. It's good to see you thought through that. One additional question as relates to Adams Outdoor Advertising, obviously, the yield here is outsized and as we see outsized yields continue to be prepaid, it's worth the question, so at a 17% sub-debt piece, I believe coming on maturity of 12/8 of '15, with -- now trading at a premium to par. Can you give us a sense of the call protection or protection of refinancing here, and how that looks in light of the current financing environment we're in?

Michael S. Gross

Sure. Great question. I think it's fair to say, as you know, we've been in Adams Outdoor for several years now. And we've been blessed with this investment as this is a real niche player in the outdoor sector and also a 50% EBITDA margin type business. Importantly, we've had very good call protection in terms of non-call periods, that do disappear as well as call premiums at the end of this year. So we would anticipate in either Q4 or Q1, that either we will modify the rate and adjust it for today's return environment or be refinanced out [ph].

Operator

[Operator Instructions] Your next question comes from the line of Mickey Schleien with Ladenburg.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Michael and Bruce, we've had a lot of discussion about where the best risk-reward is in the market, I just want to step back looking at Solar versus Solar Senior. We saw Solar Senior's portfolio grow in the current -- in the last quarter and Solar's shrink. Was that idiosyncratic or do you have an overall preference for first-lien floating rate investments at this point?

Michael S. Gross

It's not -- if you look, we originated $147 million in Q1 in Solar, which is, frankly, above our historical average. So it's not for lack of trying to grow. It's just that we had over $200 million of repayments that we could not control. In SUNS, we invested about $50 million, which is basically our historical average since we started 3 years ago. So it's not a statement as to where we think there's better risk-reward at all.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And I noticed that you've restructured Crystal's balance sheet, converting half of your equity into debt. What was the reasoning for that?

Richard L. Peteka

Mickey, this is Rich. I think that there was just some confusion as to the overall structure of Crystal. It is 100% senior secured, and as you know, BDCs and just from a perspective -- a perception issue, we've looked at the structure, we tried to get some leverage on the equity and we just thought it was probably more represented of the underlying portfolio and asset class.

Bruce J. Spohler

And we have been approached by third-party debt providers to provide that piece of debt. So we thought it was just better positioned long-term to the extent that we would avail ourselves of that.

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Okay. Lastly, I was just curious working through some math, did you waive any part of your portfolio management or incentive fees in the first quarter?

Michael S. Gross

No, we did not. The reason our incentive fees are lower is because we are in hurdle in the catch up. So where -- any decline in the investment income comes directly out of us at this point.

Richard L. Peteka

And I can take you through it offline, Mickey, if you...

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Yes, I think will, Rich, When I did the math, I couldn't get it to foot, so I'll follow up with you.

Operator

And with no further questions, I would now like to turn the conference over to Mr. Michael Gross for closing remarks.

Michael S. Gross

We have no closing remarks. Thank you for your time and all your great questions. And for those of you who are participating, we'll talk with you in about 50 minutes on Solar Senior. Thank you.

Operator

Thank you for joining today's conference. That concludes the today's presentation. You may now disconnect, and have a great day.

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