Solar Senior Capital Ltd. (NASDAQ:SUNS)
Q2 2014 Results Earnings Conference Call
August 5, 2014; 11:00 a.m. ET
Michael Gross - Chairman & Chief Executive Officer
Bruce Spohler - Chief Operating Officer
Richard Peteka - Chief Financial Officer
Ron Jewsikow - Wells Fargo Securities
Mickey Schleien - Ladenburg
Good day ladies and gentlemen and welcome to the Second Quarter, 2014 Solar Senior Capital Limited Earnings Conference Call. My name is Crystal and I will the operator for today.
At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Mr. Michael Gross, Chairman and CEO. Please proceed sir.
Thank you very much and good morning. Welcome to Solar Senior Capital Limited’s earnings call for the quarter ended June 30, 2014. I’m joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka, our Chief Financial Officer.
Rich, would you please start off by covering the webcast and forward-looking statements.
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 Senior Capital Limited, and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast on our website at 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 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 the 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 CEO, Michael Gross.
Thank you, Rich. As we mentioned in the earnings call for Solar Capital early this morning, credit markets continue to be challenging. We appear to be entering a more volatile environment, where investor sentiment is driven alternatively by geopolitical macro risks; the prospect of rising interest rates and conflicting data on the quality and degree of U.S. economic traction.
Interestingly, after a long run of positive inflows, market technicals for bank loan funds and ETF turned negative over the last quarter. These outflows were somewhat offset by robust CLO issuance. As a result, the syndicated leverage loan market remains fully priced and characterized by tight spreads, high leverage ratios and loose covenant structures.
Spread compression is more muted in less liquid markets for middle-market senior secured loans. However, the availability of debt continues to favor middle market borrowers in the current environment. Risk levels in the second quarter were roughly similar to what we saw in Q1. Against this backdrop we continue to be highly selective with our investments.
In the second quarter, portfolio activity resulted in new investments of $47 million across nine portfolio companies and sales and repayments of $39 million. Originations continue to hold steady at approximately $50 million per quarter on average; sales repayment remain stubbornly elevated through the first half of 2014. Over the last five quarters repayments in sales have averaged over $41 million.
Based on the recent vintage of the SUNS portfolio and our current visibility, we anticipate lower levels of repayments and portfolio growth in the second half of 2014. At present, 100% of our portfolio is performing and the credit quality with a diversified portfolio of senior secured floating rate loans remains strong.
The weighted average yield of the portfolio based on fair value was 7.4% in June 30. In comparison, the S&P/LSTA U.S. leverage loan 100 which tracks the 100 largest loans in the broader index had a U.S. maturity of just 5.33% at June 30.
Our investment in Gemino Senior Secured Healthcare continues to demonstrate the strategic values of investment, with recurring cash income, diversified portfolio and differentiated origination platform. Bruce will provide additional information on Gemino in our Q2 portfolio activity.
I’d like to take a minute to describe several growth initiatives we are pursuing at Solar Senior that we believe will strengthen our presence with the financial sponsors and entrepreneurs and enhance our capabilities of providing Senior Secured financing solutions to private and middle market issuers.
The addition of two senior investment professionals at the beginning of the year has enhanced origination efforts. Their long standing relationships with sponsors and intermediaries has positively impacted the flow in quality of investment opportunities.
We are also seeking to expand our hold levels through a potential joint venture of strategic capital partners. The goal is to create a dedicated loan program that will invest primarily in senior secured, first lien terms loan consistent with SUNS co-underwriting mandate. The ability to speak for a larger portion of an issuers finance requirement through core investing will enable us to be more competitive, allow us to scale Solar Senior's balance sheet more efficiently and improve the churn on equity for SUNS shareholders.
We were granted exempted release by the SEC in July that allows Solar Senior to co-invest in negotiated transactions with our sister company Solar Capital. While SUNS predominantly invest in traditional senior secured bank loans, it does have a basket for more stretched (ph) senior secured loans. We believe this co-investment capability provide attractive and incremental opportunities, in which SUNS can participate.
We also continue to actively pursue proprietary investments like Gemino in niche specific finance companies that produce attractive recurring cash income for diversified assets with risk award characteristics having distinct differences from and a lot correlation to our traditional cash flow based loans.
We have a good pipeline of opportunities. As you know these transactions take time and it is impossible to predict when these efforts may come to fruition; however, it remains a priority, an important initiative to presently grow and diversify our portfolio.
At June 30 we announced the amendment of our senior secured revolving credit facility. This amendment allows for greater flexibility and extends the final maturity date to June 28, 2019. At the end of the quarter Solar Senior Capital had approximately $124 million of available credit capacity subject to borrowing base limits.
Lastly, our Board of Directors declared a monthly distribution for August 2014 of $0.1175 per share payable on September 3, 2014 to stock holders of record on August 21, 2014.
At this time I’ll turn the call back over to our Chief Financial Officer, Rich Peteka.
Thank you, Michael. Solar Senior Capital Limited’s net asset value at June 30 was $205.9 million or $17.85 per share, compared to $208.0 million or $18.04 per share on March 31. Our investment portfolio at June 30 had a fair market value of $265.9 million compared to $274.9 million at March 31. At June 30 we had investments in 37 portfolio companies in 20 industries versus 37 portfolio companies across 22 industries at March 31.
The weighted average yield on our income producing portfolio was 7.4% at June 30 versus 7.7% at March 31, measured at fair value. For the three months ended June 30, gross investment income totaled $5.1 million compared to $5.7 million for the three months end March 31.
Expenses totaled $2.7 million for the second quarter compared to $1.9 million for the first quarter. The increase in expenses from the prior quarter was primarily a result of an approximate $1 million charge related to the June 30 amendment and extension of credit facility.
The company’s net investment income for the three months ended June 30 totaled $2.4 million or $0.21 per average share, excluding the approximate $1 million charge related to the amendment and extension of our credit facility. The company’s net investment income would have been $3.4 million or $0.29 per average share versus $3.9 million or $0.33 per average share for Q1, 2014.
Net realized and unrealized loss for the three months ended June 30 totaled approximately $0.5 million, compared to net realized and unrealized gain of $0.1 million in the three months ended March 31. Ultimately the company had a net increase and net assets resulting from operations of $1.9 million or $0.17 per average share for the three months ended June 30. This compares to $4.0 million or $0.35 per average share for the three months ended March 31.
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 a portfolio update. Overall, the financial performance of our portfolio of companies remains steady to modestly improving. While the portfolio is broadly diversified across multiple industries, we continue to favor issuers operating in more defensive, non-cyclical industries. At June 30 our portfolio was 100% performing and we feel confident about the prospects of our company’s operating performance.
At June 30, the weighted average yield on our portfolio was 7.4% based on fair value. Our internal risk assessments on our weighted average of our total portfolio remained at approximately 2 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk.
SUNS portfolio ended the second quarter with investments in 37 issuers across 20 industries. The average position is approximately $7.2 million. Our portfolio was invested 84% in senior secured loans; 13% in Gemino Senior Secured Healthcare, whose portfolio is also comprised 100% of senior secured loans; 2% in unsecured loans and 1% is common equities, excluding our investment at Gemino.
Including our investment in Gemino is 100% floating rate. Close to 93% of our income producing portfolio is floating rate and only 7% is fixed rate. In the second quarter SUNS made investments of approximately of $47 million across nine portfolio companies and had sales and repayments of approximately $39 million.
Before I give you an overview of our Q2 activity, let me provide an update on Gemino. At quarter end Gemino had approximately $177 million committed senior secured revolving of term loans with approximately $102 million of funded assets. The highly diversified commitments are across 34 separate insurers, having an average loan balance of approximately $3 million. All of the commitments from Gemino are floating rate senior secured cash paid loans.
During the quarter end of June 30, Gemino originated new funded loans for approximately $5 million, which were comprised of one new issuer, as well as increases at the three existing relationships. There were no commitments extinguished during that period.
For the second quarter Gemino paid interest in dividend distributions of approximately $820,000 to SUNS, which equates to a 10% annualized distribution yield, consistent with our annualized distribution yield for Q1. In addition Gemino had $75 million outstanding under its credit facility. During the second quarter Gemino added an additional lender and expanded its credit facility to $110 million.
Now let me highlight a couple of our Q2 investments. We funded an $8 million investment in the first lien term loan for McLarens International, a provider of claims management services. Solar Capital was previously the sole provider of a secondly lien term loan for the company, which was repaid as part of an all first lien refinancing. McLarens is owned by Altamont Partners. At close the net leverage of our first lien investment was slightly above two times and the loan carried a yield of approximately 6%.
During the second quarter we also funded a $10 million investment in the first lien term loan of IPC Systems, which is owned by Silver Lake Partners. It’s a provider of specialized voice and data communications and trading systems to financial market participants. Our yield on this investment is approximately 6.25%.
In addition we purchased approximately $10 million of the first lien term loan of Hostway Corporation, which is a Littlejohn portfolio company. Hostway is a leading provider of managed hosting and cloud solutions for small and medium sized businesses. The yield on this loan exceeds 6%.
Finally, SUNS funded $7 million investment in the first lien term loan of ConvergeOne, which is a recent portfolio acquisition by Clearlake Capital. ConvergeOne is a leading enterprise voice systems integrator for OEMs such as Avaya, Cisco and Microsoft. The all in yield on this investment is approximately 6.2%.
Now, let me highlight a couple of our Q2 repayments. We repaid on our $10 million investment in the first lien term loan of authentic brands, companies that is owned by Leonard Green. We elected not to participate in the refinancing transaction. Our IRR from inception was 7.5% on this investment.
We were also repaid on our $10 million investment in the first lien term loan for Hearthside Food Solutions. We were first invested in this business back in Q2, 2011 and then participated in a recapitalization for the company in the fourth quarter of 2012. We passed on the opportunity to reinvest in this capital structure based upon our perspective on offer terms. The IRR from inception to realization on our investment exceeded 7%.
And finally, our $6 million investment in the first lien term loan, $3million investment in the second lien term loan for Hoffmaster were repaid at par and 101 respectively. SUNS first invested in Hoffmaster back in January 2012 in connection with Metalmark's buyout of the business and made subsequent investments back in May 2012 and August 2013. Our blended IRR on these investments in Hoffmaster was 9%.
Based on our Q3 activity today and our current visibility for the remainder of the third quarter, we are expecting repayments to slow. The expected lower repayment levels, when combined with maintaining a steady phase of originations should result in net portfolio growth in the second half of 2014. Our pipeline of opportunities continues to be strong.
Now, I’d like to turn the call back over to Michael.
Thank you, Bruce. In conclusion I would like to repeat the goal of SUNS is to build and manage a diversified portfolio of attractive senior secured credits that will generate a steady and stable distribution stream for shareholders, while protecting capital.
Being fairly compensated for risk and having our loans repaid remains top priorities of our underwriting philosophy. Our collective experience operates through various credit cycles has taught us to remain disciplined in our investment process and highly selective, particularly in liquidity driven markets, such as the one we are navigating presently.
As significant owners, principles and shareholders of this business, you can be assured we will continue to take a prudent and patient approach to deploying our variable capital. While we remain focused on increasing the efficiency of our capital structure by growing our portfolio, we are not willing to compromise our credit standards in order to achieve target leverage.
Given the recent vintage of the SUNS portfolio, its visibility into the third quarter activity, we believe the high level repayments will abate and expect to grow our portfolio more meaningfully in the second half of 2014.
We continue to believe that the senior secured middle market asset class remains attractive on both a relative and absolute basis. SUNS currently is a well diversified 100% point portfolio of primarily senior secured floating rate loans, trading at about 0.9 times book value and yielding approximately 8.7% and has ample capital to make additional investments.
The risk awarded value composition investment in our stock is compelling when compared to the liquid syndicated high yield and bank loan markets. SUNS yield of approximately 8.7% compares favorability to the 5.4% yield of the Barclays high-yield credit corporate index and a 6.2% weighted average yield on a representative sample of closed end bank loan funds.
Today we are in line in a number of important initiatives we have taken to enhance our long term competitive position and to more efficiently utilize SUNS balance sheet, including one, having recently added two senior investment professionals to support origination efforts; seeking joint venture capital partners to expand our hold-levels in first lien senior secured loans and continuing to pursue proprietary investment opportunities in niche (inaudible) finance companies to further diversify our portfolio with differentiated risk return; and lastly, by securing SEC exempt of release to our co-investments with SLRC. We are managing our portfolio and balancing prudently given the faulty markets, continuing global macro uncertainties and the prospect of increasing rates.
Thank you for your time this morning. We look forward to speaking next quarter. Operator, please open the line for questions at this time.
(Operator Instructions) Our first question will come from the line of Ron Jewsikow from Wells Fargo Securities. Please proceed.
Ron Jewsikow - Wells Fargo Securities
Good Morning and thanks for taking my questions. You mentioned that you are looking for strategic initiatives that would allow for larger hold sizes. Somewhat to what you announced at SLRC with uni-tranche investments, given the overlap of this asset class between the two vehicles, is there any potential that you could form a pro rata venture between SLRC-SUNS and an independent third-party or would the ability to co-invest strictly relate to individual transactions?
I'm sorry. Could you repeat the question?
Ron Jewsikow - Wells Fargo Securities
Yes. Now you have the ability to co-invest between SLRC and SUNS and you are looking to form a strategic initiative, which sounds like a uni-tranche fund.
Let me interrupt you there. So, what we are looking to do underneath SUNS is not a uni-tranche fund. It’s to invest in the same senior secured loans that it’s based on what our portfolio is made up of and those assets would not be high yielding up to put into the Solar type structures. So we are looking to really expand our hold size of the loans that SUNS is currently buying today.
Ron Jewsikow - Wells Fargo Securities
Okay, sorry, and then I guess I just read between lines wrong about the larger hold sizes. And with the amendment to the credit facility, was there a change in the advance rates on let’s say second lien investments or was it strictly just more flexibility?
Yes, it was really more flexibility in terms of how we can put collateral into the borrowing base, as well as extending our maturity.
Ron Jewsikow - Wells Fargo Securities
Okay. Thanks for taking my questions.
(Operator Instructions). Our next question will come from the line of Mickey Schleien with Ladenburg. Please proceed.
Mickey Schleien - Ladenburg
Yes, good morning. I just wanted to follow up on the uni-tranche proposal at Solar. In the previous call you mentioned some of those opportunities might be partially allocated to SUNS. I was just trying to get a sense of what size or what size of pieces you could put into the SUNS portfolio, given that those could be relatively higher yielders than what customarily we see there.
Yes, I don’t think that Mickey you would expect us to put much different sizing than we are already putting into SUNS on any asset, just from the diversification perspective across the portfolio. So as you are seeing, we generally are in the $7 million to $15 million. Most of our positions as you know are probably around $10 million on average at SUNS. So I think that’s a good proxy.
Mickey Schleien - Ladenburg
Okay, thanks Bruce.
(Operator Instructions). With no future questions, I would like to turn the call back over to Michael Gross for closing remarks.
Thank you this morning for all your time and your questions. We look forward to speaking to you on our next quarter.
Ladies and gentlemen, that concludes toady’s presentation, you may now disconnect. Have a good day.
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