SLR Investment Corp. Q4 FY2024 earnings call

• This month marks the fifteen-year anniversary of trading since the IPO on February 10, 2010. Since IPO, over $7.5 billion of investments deployed.
• Q4 2024 net investment income $0.44 per share, flat YOY but down from Q3. Full-year NII per share $1.77, up 5% from 2023. Net asset value at year-end $18.20.
• 79% allocation to specialty finance investments, remainder in cash flow loans to recession-resistant industries. Originated $338M in Q4, repaid $442M, portfolio $3.1B. Yield 12.1%, up from prior quarter.
• 96.4% of portfolio in first lien senior secured loans. Specialty finance markets more attractive, 94% Q4 originations in specialty finance. Passed on refinancings of cash flow investments, sponsor finance portfolio shrank. Yields in specialty credit strategies more insulated. Only 1 investment on non-accrual, 0.6% of portfolio. Over $900M available capital to deploy.

The portfolio at year-end was $3.1 billion. Specialty finance investments accounted for over 79% of the total portfolio. The remaining portfolio primarily consisted of cash flow loans to borrowers in recession-resistant industries. In Q4 2024, SLRC generated net investment income of $0.44 per share, flat year over year but down from the prior quarter. The portfolio yield was 12.1%, a slight increase from the prior quarter's 11.8%. Ninety-four percent of Q4 originations were in specialty finance. At quarter-end, 96.4% of the comprehensive investment portfolio was first lien senior secured loans.

• Board declared Q1 2025 quarterly distribution of $0.41 per share payable March 28, 2025. Expect net debt to equity ratio to migrate towards 0.9 - 1.25 times. Optimistic about sponsor finance conditions improving as CEO confidence increases and M&A activity picks up.

• Global economic uncertainties from rising geopolitical tensions, executive actions, and higher for longer rate environment. Potential impact of tariffs on portfolio, though assessed as minimal.

Q: Erik Zwick asked about acquiring whole portfolios or teams in specialty finance, reasons for passing on some opportunities.

A: Great question. Starting with last year, we did see some opportunities that we could have transacted on. And we decided to pass. I think that, generally, if we pass, it's because we get in there and begin to see some of the credit underwriting processes and how the portfolio looks relative to the portfolios that we own and generally have passed on that basis where we feel that we can create organically a better something than what we would be buying in the market. But we do have a team that is dedicated, you may recall, to sourcing portfolios and teams. And we have, post the regional banking disruption, seen elevated activity levels across specialty finance in terms of bringing on teams and portfolios. So we expect to be a contributor this year. But you do have to kiss a lot of frogs.

Q: Casey Alexander asked about sponsor finance structure and pipeline in ABL.

A: So I would say that both the spread compression and the loosening of terms in the sponsor market feel to have stabilized, albeit at a level that we find relatively unattractive in comparison to our ABL and specialty finance strategies. But there does seem to be a little bit of stability there. I don't know if the influx of new capital relative to the deal flow has kind of found its equilibrium. But at the moment, we're just not liking the absolute returns afforded in the sponsor finance business. New platforms are, if you can find them, are in the 9% to 9.5% all-in. As you heard, our yield in the sponsor book went from 11.1% down to 10.6%. And that's kind of what we're targeting is 10.5% to 11% returns if we're going to invest in sponsor. But I would say things have stabilized for the moment. Correct. It's individual ABL loans. I mean, you saw, you know, we've taken down our cash flow book from what was a peak of 26% of the portfolio in 2023 when we liked that risk, down to just about 20%. And my guess is that we'll head lower. I think our trough in the last few years has been closer to 15%. And instead, we are doing individual ABL loans. That is separate and apart to your question from any potential portfolios like the one we purchased from Webster that would accelerate that. But as you see, we have taken down our leverage to 1.03, was up at 1.19 about a year ago. So we do have ample capacity to both buy portfolios and just pursue the individual loans that are making up our pipeline of ABL assets.

Q: Melissa Wedel asked about ABL yield resilience and repayments.

A: Sure. So the yield is, I think the takeaway there should be more about the stability and whether it ticks up a couple of basis points quarter over quarter, it's not a systemic trend in ABL. What we like about ABL is that it is a stable return asset across interest rate cycles. But to your point about repayments, you know, sometimes you get repaid as a lender, and that's something that we celebrate, as you know, at SLR. The average duration of the loans that got repaid, we had $205 million of ABL repayments in the fourth quarter. The average duration was four years. So if you think about it, that's longer than you typically see in sponsor loans, life science loans. So it just happened to be idiosyncratic that we had a number of loans that were coming due and they were moving on. We'd love to have kept them, but that is the nature of ABL. These companies will move to lower-cost financing when they can. But again, we kept them on SLR's balance sheet for over four, close to four years. So it was just an odd quarter in that regard. The other point worth noting is in ABL lending, as you think about, for example, the Webster portfolio that we purchased at the end of the quarter, you often structure your loan, unlike cash flow, where you have a term loan and maybe a small revolving credit facility, the entire facility in ABL is often structured as a revolver. And so what happens is you will have usage of that facility while we mandate economically through fees and minimal utilization of the facility, you will see outstandings go up and down. So just to put it in context, we saw $60 million of repayments in that $205 million in the fourth quarter, were temporary repayments of a facility. They were not a loss of a borrowing relationship per se, if you think about a typical repayment. So those outstandings will ebb and flow across the ABL credit facilities.

Q: Paul Johnson asked about sponsor lending focus and ABL hires.

A: All of our funds we manage, for the most part, are multi-strategy funds. So they have exposure to all the ABL strategies and the cash flow. So with very few exceptions, any cash flow that we're putting into SLRC is also being invested on behalf of all the high net worth funds, funds of one, commingled funds. And that allows us to take down anywhere from $50 to $100 to $200 million of a loan and keep diversification across the platform. So we're not treating SLRC differently than we are with regards to cash flow loans than we are in our institutional funds. But I think, you know, a corollary is you may wonder what is our relevance to the borrowing sponsored community if it seems that our commitment to the asset class ebbs and flows across cycles. And the answer is we are very targeted in our sponsor cash flow lending business towards three industries: healthcare, business services, and financial services. That probably comprises 75% to 80% of our cash flow portfolio. And so we have deep relationships in those industries and we will be active as a lender when those sponsors are active. But in those sectors, they tend to be the sponsors much more focused on creating value for the equity over time, less focused on trying to drive the cheapest borrowing cost with the least amount of covenants. It's much more of a partnership. So we make sure that we maintain our relevance to these cash flow borrowers to the sponsor community in those industries across the cycle. So our activity closely follows theirs in terms of how they see the investment opportunity just as we do. If you look at our portfolio companies under SLRC, they're all built for growth. So the infrastructure's all there. As evidenced by the fact that we bought the Webster portfolio into business credit, the prior owner had about ninety people servicing it. We took ninety people to service it since we already have the infrastructure in place. What we're adding people is really exclusively on the origination side. To boost their LACOM, we are committed to the ABL business, and we're able to recruit highly talented and experienced people from commercial banks that are looking for a different experience and a different way to grow their personal business. Especially FinCo.