Solar Senior Capital: 8.4% Dividend Yield Covered Through Fee Waivers

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About: Solar Senior Capital (SUNS), Includes: ARCC, CGBD, GAIN, GBDC, GSBD, MAIN, NEWT, OCSI, OCSL, PFLT, SAR, SLRC, TSLX
by: BDC Buzz
Summary

SUNS is a lower yielding BDC likely due to its safer portfolio of mostly first-lien "bank-like" debt positions as well as book value stability.

Its first-lien investment in Metalogix was added to non-accrual status during the quarter with a cost of $8.0 million and fair value of $3.6 million (0.9% of the portfolio FV).

SUNS continues to cover its dividend thanks to fee waivers by management.

BDC Market Update:

BDCs were pulling back since May 2017. However, they have recently started to rebound, and as mentioned in "BDC Buzz Begins Purchases Of Higher Quality BDCs," I have been buying additional shares of higher-quality BDCs, especially given the oversold conditions driving higher yields.

Some of the positive changes in the BDC sector include:

As discussed in previous articles, I was expecting a rally in BDC pricing in Q1 2018 (similar to previous years). Since March 1, 2018, the average BDC has easily outperformed the S&P 500 even before taking into account dividends paid. I am expecting BDCs to continue higher for many reasons, including the recently announced strong Q1 2018 results reported by most BDCs, with higher portfolio yields and management guidance for increased portfolio growth potential in 2018. Also, many BDCs reported higher-than-expected earnings and dividend coverage with increased net interest margins.

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Solar Senior Capital (SUNS) is a lower yielding BDC likely due to its safer portfolio of mostly first-lien "bank-like" debt positions as well as net asset value (book value) per share stability.


SUNS Dividend Coverage Update:

For the quarter ended March 31, 2018, SUNS hit my base-case projections covering its dividend, thanks to continued fee waivers which remained around $0.3 million as shown in the following table. The portfolio yield remained at 8.9% and its debt-to-equity increased to 0.52 as the company grew its first-lien portion of the portfolio. As mentioned in previous articles, there is the potential for improved dividend coverage as the company integrates and grows its recent acquisition/investment in NorthMill Capital (“NMC”) as well as ramping its Solar Life Science Program LLC (“LSJV”) and First Lien Loan Program (“FLLP”), providing continued higher returns and overall portfolio yield growth. However, as of March 31, 2018, the LSJV has not commenced operations.

We are pleased with Solar Senior Capital’s portfolio growth and operating performance in Q1 2018. Overall, the financial health of our portfolio companies remains sound. The Company benefited from the first full quarter of our investment in NorthMill. With its highly diversified portfolio of asset-based loans, NorthMill has immediately increased the earnings power of Solar Senior,” said Michael Gross, Chairman and CEO of Solar Senior Capital Ltd. “Solar Senior’s comprehensive portfolio is comprised of 97.5% first lien senior secured loans of which 95% are in floating rate coupons. We believe the Company is well positioned for the current environment and has the sourcing engines across cash flow and asset-based lending niches to drive additional portfolio growth and generate increased investment income.”

Source: SUNS News Release

Source: SEC Filings and BDC Buzz

Source: SEC Filings and BDC Buzz

SUNS Portfolio and Asset Quality:

Its first-lien investment in Metamorph US 3, LLC (Metalogix) was added to non-accrual status during the quarter with a cost of $8.0 million and fair value of $3.6 million (0.9% of the portfolio FV). During Q1 2018, Metamorph was marked down by $2.2 million offset by a $2.1 million markup in its investment in NorthMill Capital for a stable NAV per share at $16.84.

Source: SEC Filings and BDC Buzz

As of March 31, 2018, the composition of the SUNS portfolio, on a risk ratings basis, was as follows with an increase in rating ‘4’ due to the previously mentioned Metamorph US 3, LLC (Metalogix):

During the quarter, we placed our investment in Metalogix on non-accrual status that this investment representing 1.8% of the SUNS portfolio at cost and 0.9% at fair value."

"We are working closely with our co-lenders and the sponsor to maximize our recovery on this investment and look forward to reporting progress next quarter."

Source: SUNS Earnings Call

Source: SUNS News Release

NorthMill LLC

NorthMill currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of March 31, 2018, the portfolio totaled approximately $318,135 of commitments, of which $162,237 were funded, on total assets of $185,814. At March 31, 2018, the portfolio consisted of 97 issuers with an average balance of approximately $1,675 versus 92 issuers with an average balance of approximately $1,600 at December 31, 2017. NMC has a senior credit facility with a bank lending group for $135,000, which expires on October 20, 2020. Borrowings are secured by substantially all of NMC’s assets. NMC’s credit facility, which is non-recourse to us, had approximately $127,950 and $116,574 of borrowings outstanding at March 31, 2018, and December 31, 2017, respectively. For the three months ended March 31, 2018, NorthMill had net income of $940 on gross income of $4,892.

Solar Life Science Lending

On February 22, 2017, Solar Senior Capital and its affiliates announced the formation of the Solar Life Science Program LLC ("LSJV"). LSJV is expected to invest the majority of its assets in first lien loans to publicly-traded companies in the U.S. life science industry. Solar Senior Capital has committed $75 million of equity to the joint venture. The joint venture has established a pipeline of investment opportunities to effectuate the ramping of LSJV's investment portfolio. As of March 31, 2018, LSJV has not commenced operations.

First Lien Loan Program LLC

As of March 31, 2018 and December 31, 2017, FLLP had total assets of $118,365 and $121,791, respectively. For the same periods, FLLP’s portfolio consisted of first lien floating rate senior secured loans to 23 and 23 different borrowers, respectively. For the three months ended March 31, 2018, FLLP invested $2,624 across 4 portfolio companies. For the three months ended March 31, 2017, FLLP invested $12,010 across 6 portfolio companies. Investments sold or prepaid totaled $429 for the three months ended March 31, 2018, and $4,970 for the three months ended March 31, 2017. At March 31, 2018, and December 31, 2017, the weighted average yield of FLLP’s portfolio was 7.5% and 7.3%, respectively, measured at fair value and 7.5% and 7.2%, respectively, measured at cost.

Gemino Healthcare Finance LLC

As of March 31, 2018, the portfolio totaled approximately $170,898 of commitments, of which $109,828 were funded, on total assets of $110,157. As of December 31, 2017, the portfolio totaled approximately $176,332 of commitments, of which $106,620 were funded, on total assets of $110,584. At March 31, 2018, the portfolio consisted of 28 issuers with an average balance of approximately $3,922 versus 29 issuers with an average balance of approximately $3,677 at December 31, 2017. All of the commitments in Gemino’s portfolio are floating-rate, senior-secured, cash-pay loans. Gemino’s credit facility, which is non-recourse to us, had approximately $75,000 and $75,000 of borrowings outstanding at March 31, 2018, and December 31, 2017, respectively. For the three months ended March 31, 2018, and 2017, Gemino had net income of $712 and $767, respectively, on gross income of $2,719 and $2,852, respectively.

This information discussing SUNS was previously made available to subscribers of Sustainable Dividends, along with target prices and buying points, real-time changes to my personal BDC positions, updated rankings and risk profile, any changes to dividend coverage and worst-case scenarios, suggested BDC portfolio, and timing of Upcoming BDC Public Articles.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.