SLR Investment Corp. (SLRC) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's Q1 2025 SLR Investment Corp. Earnings Call. [Operator Instructions] Please note, this call is being recorded, and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Michael Gross, Chairman and Co-CEO.

Thank you very much, and good morning. Welcome to SLR Investment Corp.'s Earnings Call for the quarter ended March 31, 2025. I'm joined today by my long-term partner, Bruce Spohler, Co-Chief Executive Officer; as well as our Chief Financial Officer, Shiraz Kajee, and the SLR Investor Relations team. Shiraz, before we begin, would you please start by covering the webcast and forward-looking statements?

Thank you, Michael. Good morning, everyone. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of SLR Investment Corp. and that any unauthorized broadcast in any form is strictly prohibited. This conference call is also being webcast from the Events Calendar in the Investors section on our website at www.slrinvestmentcorp.com. Audio replays of this call will be made available later today as disclosed in our May 7 earnings press release. I would also like to call your attention to the customary disclosures in our press release regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections. These statements are not guarantees of our future performance or financial results and involve a number of risks and uncertainties. Past performance is not indicative of future results. 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. We do not undertake 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 over to our Chairman and Co-CEO, Michael Gross.

Thank you, Shiraz, and thank you to everyone for joining our earnings call this morning. Following a strong year of operating performance, portfolio credit quality and platform expansion in 2024, we're pleased to report a solid start to 2025 despite looming global economic and policy uncertainties. While the path ahead is fraught with many unknowns from the impact of tariffs, changes in supply chains and investor angst, we believe SLRC's portfolio is entering this uncertain period in a position of strength. Our first quarter results reflect another quarter of stability and resilience, furthering a pattern of performance at SLRC, which is grounded in conservatism, broad diversification, tactical asset allocation and downside protection. The appearance of these tenants can be evaluated through the lens of the portfolio's credit quality via SLRC's substantial portfolio composition in first lien loans, low levels of nonaccruals, low level of stressed investments and low levels of PIK income. Consequently, we remain confident in our ability to navigate this period of uncertainty and any slowing in domestic economy and to capitalize on volatility from widening credit spreads, create a growing investment pipeline across our specialty finance strategies. Summarizing results, SLRC reported net investment income of $0.41 per share in the first quarter of 2025 compared to our base dividend of $0.41 per share, representing a return on equity of approximately 9%. Net investment income per share in the first quarter withstood the lag effect from the FOMC's 100 basis points reduction in base rates in the second half of 2024 and a continuation of fiercely competitive market conditions in sponsor finance that led to a compression in illiquidity premiums on new investments. The company's net asset value at quarter end was $18.16 per share, down only $0.04 from December 31. We believe the durability of our portfolio yields and our strong credit profile reflective of the stability in our net asset value are the direct result of the disciplined exercise during borrower-friendly market conditions and our multi-strategy approach to private credit investing. More than a year ago, we began a gradual shift in the portfolio mix to asset-based specialty finance strategies that provide greater downside protection of principal from underlying liquid and hard collateral. We have favored these borrowing-based structures to the protection of principal from the more cyclical nature of enterprise value that secures cash flow loans while simultaneously offering attractive and often higher yields from the complexity premiums of specialty finance investments. As of March 31, approximately 80% of our portfolio is derived from specialty finance investments, the remainder of the portfolio being comprised of cash flow sponsor-backed loans to companies in recession-resilient industries like health care and business services. SLRC originated $361 million of new investments across the comprehensive portfolio and received repayments of $391 million in the first quarter, resulting in a total portfolio of $3.1 billion at quarter end. Originations were up approximately 38% year-over-year and 7% versus a seasonally strong fourth quarter. The yield on the comprehensive portfolio was 12.2%, representing a 10 basis points increase in the yield of 12.1% in the fourth quarter and a 40-basis point increase in the yield of 11.8% in the first quarter of 2024, which we believe compare favorably to changes in base rates over the comparable periods. Due to the more favorable conditions in the specialty finance markets, the company's investments in the first quarter were once again more heavily weighted to those asset classes, which we believe currently provide a more attractive risk-adjusted return relative to sponsor finance loans. Approximately 88% of our first quarter originations were in specialty finance. We passed on the refinancing of several cash flow investments within our portfolio, allowing our sponsor finance portfolio to further shrink. Cash flow loans now represent less than 20% of our comprehensive portfolio, the lowest level in 3 years. A bright spot against the more competitive environment for cash flow investments has been the supportive fundamental and technical tailwinds for our asset-based lending strategies. Regional banks continue to tighten credit standards, modernize regulatory capital ratios and rationalize business lines, providing an increasing supply of portfolio level transactions, joint ventures or acquisition opportunities. This coincides with financial sponsors seeking more creative ways to provide liquidity to their portfolio companies through ABL financing solutions. Today, the current environment is marked by a degree of policy volatility and economic uncertainty that is unprecedented in recent memory. sweeping policy shifts, particularly around trade and tariffs, have introduced a wide range of potential economic outcomes with most market participants now significantly increasing their expectations for elevated inflation, slower global growth and the risk of a tariff-driven recession. In operating a business development company that invests in the United States companies, we think investors should take comfort in the fact that our cash flow investment portfolio is heavily focused on domestic service-oriented businesses, primarily the health care providers and services, insurance brokerage services, business services and select financial and software services. In addition, the majority of our specialty finance loans are backed by working capital collateral, which we expect to be more insulated from the direct impact of higher tariffs as a result of less exposure to international markets and global supply chains. Quarter-to-date, the impact from tariffs has little to no impact on the existing portfolio. Across SLR, we are actively engaged with our portfolio companies and are carefully monitoring any primary or secondary impacts from tariffs. We remain pleased with the composition, quality and performance of our portfolio. The tactical allocation afforded by SLR's multi-strategy approach and decisioning more discerning in cash flow loans has safeguarded our performance through the prolonged high interest rate and inflationary environment. At quarter end, 96.4% of our comprehensive investment portfolio was comprised of first lien senior secured loans. SLR's long-standing focus on first lien loans has resulted in a portfolio which we believe is conservatively positioned and better equipped to withstand persistent inflationary pressures and high interest rates than portfolios with second lien and broader cyclical exposure. As of March 31, we had only one investment on nonaccrual, representing just 0.6% and 0.4% of the investment portfolio on a cost and fair value basis, respectively. And only 2% of our income -- our total income was from restructured PIK and cash flow loans. We believe these metrics compare very favorably to peer public BDCs. At March 31, including available credit facility capacity at SSLP and our specialty finance portfolio companies, we had over $800 million of available capital to deploy. This puts the company in a position to take advantage of either durable economic conditions or a softening of the economy. I'll now turn the call back over to Shiraz, our CFO, to take you through the Q1 financial highlights.

Thank you, Michael. SLR Investment Corp.'s net asset value at March 31, 2025, was $990.5 million or $18.16 per share compared to $18.20 per share at December 31, 2024. At quarter end, SLRC's on-balance sheet investment portfolio had a fair market value of approximately $2 billion in 118 portfolio companies across 32 industries compared to a fair market value of $2 billion in 122 portfolio companies across 32 industries at December 31. SLRC's investment portfolio is funded by a combination of our revolving credit facilities and the issuance of term debt in the unsecured debt markets. The company is investment-grade rated by Fitch, Moody's and DBRS. During the first quarter, the company issued privately placed $50 million of 3-year unsecured notes at a fixed interest rate of 6.14%, representing a spread to the then 3-year treasury rate of only 190 basis points. As of March 31, 2025, SLRC had $359 million of unsecured debt, representing over 34% of funded debt. The company does not have any near-term refinancing obligations with the next maturity occurring in December 2026. Given our pipeline and expectations to expand leverage, we expect to opportunistically access debt capital markets. At March 31, the company had approximately $1 billion of debt outstanding with a net debt-to-equity ratio of 1.04x. We expect our net debt-to-equity ratio to migrate towards the middle of our target range of 0.9x to 1.25x. In terms of liquidity, we believe we have ample amounts of cash and borrowing capacity to support unfunded commitments with capacity amounting to more than 2x our unfunded commitments to noncontrolled borrowers. Moving to the P&L. For the 3 months ended March 31, gross investment income totaled $53.2 million versus $55.6 million for the 3 months ended December 31. Net expenses totaled $31.1 million for the 3 months ended March 31. This compares to $31.8 million for the prior quarter. Accordingly, the company's net investment income for the 3 months ended March 31, 2025, totaled $22.1 million or $0.41 per average share compared with $23.8 million or $0.44 per average share for the prior quarter. This was in line with our $0.41 per share distribution during the period. Below the line, the company had net realized and unrealized loss for the first quarter totaling $2.2 million versus a net realized and unrealized loss of $1.2 million for the fourth quarter of 2024. As a result, the company had net increase in net assets resulting from operations of $19.9 million for the 3 months ended March 31 compared to a net increase of $22.6 million for the 3 months ended December 31, 2024. On May 7, the Board of SLRC declared a Q2 2025 quarterly distribution of $0.41 per share payable on June 27, 2025, to holders of record as of June 13, 2025. With that, I'll turn the call over to our Co-CEO, Bruce Spohler.

Thank you, Shiraz. Before I give an update on the portfolio, let me spend a minute reminding shareholders that our multi-strategy investment approach, which spans both specialty and sponsor finance credit investments, is designed to deliver consistent returns and protect capital across market cycles. Asset-backed strategies often exhibit countercyclical characteristics, benefiting from periods of market volatility and capital dislocation, while sponsor finance can outperform in periods of economic expansion and robust M&A activity. The low correlation between these investment strategies enhances portfolio stability while diversified exposure enables us to capture shifting market dynamics without compromising our credit discipline. As Michael indicated, we've deliberately tilted the portfolio to specialty finance investments, which we believe offer superior downside protection and more actionable risk controls relative to traditional sponsor finance-only portfolios. Our specialty finance strategies include ABL, life science and equipment finance and are underpinned by high-quality collateral such as accounts receivable, finished goods inventory, commercial loan portfolios, essential use equipment, as well as intellectual property. In most cases, the assets are governed by dynamic borrowing base frameworks, which enable real-time monitoring of the underlying asset performance and levers to manage our exposure, which include eligibility tightening, advanced rate adjustments and cash dominion. Unlike sponsor finance loans that can delay active lender engagement, specialty finance investments allow us to engage early with our borrower, intervene proactively and take steps to ensure repayments. In the current market environment, the relative value in specialty finance is especially compelling, not only offering greater structural protection and real-time risk monitoring, but also delivering what we believe is a superior risk-adjusted return profile compared to cash flow lending. Our flexibility to allocate capital to the most attractive risk-return investment opportunities is especially critical in a market where selectivity and downside risk mitigation are paramount. Now let me turn to the portfolio. At quarter end, the comprehensive investment portfolio consisted of $3.1 billion of investments with an average exposure of approximately $3.2 million. Measured at fair value, 98.2% of our portfolio consisted of senior secured loans with 96.4% invested in first lien loans, including investments in our SSLP, and only 0.2% was invested in second-lien cash flow loans with the remaining 1.6% invested in second-lien asset-based loans. At quarter end, our weighted average yield on the portfolio was 12.2% up from year-end. Based on our quantitative risk assessment scale, our portfolio currently has one of the strongest credit profiles in our history. At quarter end, the weighted average risk rating was under 2 based on our one to 4 risk rating scale, with 1 representing the least amount of risk. Just under 90% of the portfolio was rated 2 or higher. Moreover, 99.4% on a cost basis and 99.6% on a fair value basis was performing with only one investment on nonaccrual. Now let me touch on each of the 4 investment verticals. Cash flow sponsor finance. In this business, we originate first lien senior secured loans to middle market companies in noncyclical industries such as health care, business services and financial services. This has helped to mitigate the impact on the portfolio from cyclical economic factors. At quarter end, this portfolio was just under $590 million across 35 borrowers, representing 19% of our comprehensive portfolio. With approximately 99% of this portfolio invested in first-lien loans, we believe we are well positioned to withstand pressures that our borrowers may face. Our borrowers have a weighted average EBITDA of approximately $90 million and carry low LTVs of under 44%. Sponsor Finance, the portfolio company average EBITDA and revenue growth continues to be in the mid-single digits year-over-year. Overall, they have successfully managed the transition to an environment with higher cost of capital as well as inflationary premiums. Weighted average interest coverage on this portfolio increased to 2x from 1.8x the prior quarter. Additionally, only 2% of our gross income is in the form of capitalized PIK income from cash flow borrowers resulting from amendments. During the quarter, we made investments of $45 million in first lien cash flow loans and had repayments of $73 million. As Michael mentioned, sponsor finance deal flow continues to be muted due to lower M&A volume, and we are selectively letting investments go in connection with refinancings if the new risk return profiles do not meet our criteria. As credit investors focus on downside protection, our ability to say no and pass on opportunities that don't meet our high hurdle can often be measured by the investments that we don't do. At quarter end, the weighted average cash flow yield was 10.4% compared to 10.6% at year-end. Thus far in 2025, there's not been a significant uptick in M&A and the supply/demand for middle market debt supporting sponsor finance transactions remains out of balance. In addition, the introduction of punitive tariffs has led to economic uncertainty, resulting in widened spreads for new issuance U.S. middle market debt. That said, wider spreads do not compensate for poor credit risk, and we will remain highly selective. Now let me turn to our specialty finance segments. Across the board, the credit quality of these investments continues to be solid with attractive LTVs, which have meaningful collateral support and borrowing base structures. Let me first discuss our asset-based lending portfolio. At quarter end, this portfolio totaled $1.1 billion across 254 issuers, representing 37% of the comprehensive portfolio. Regional domestic banks have continued to adjust their business models in a higher rate environment and are retreating from the ABL market, creating an attractive opportunity for SLR's ABL team. Under tighter credit regulations, regional banks ABL loans to non-rated companies are bumping into higher risk capital charges, making those business lines economically less attractive for the banks. SLR is positioned to collaborate with regional banks who are shifting their ABL strategies in reaction to these challenges. Our late acquisition -- late last year acquisition of a loan portfolio and servicing platform from Webster Commercial Services is an example of this. The integration of the portfolio went smoothly and it's performing in line with our expectations. For the first quarter, we had approximately $164 million of new ABL investments and repayments of just under $100 million. The weighted average asset level yield was 13.8% compared to 14.6% in the prior quarter. Additionally, we're continuing to see opportunities to provide ABL facilities to traditional cash flow borrowers who are experiencing tightening liquidity pressures. Some sponsor-backed borrowers who had access to the cash flow and BSL market in a lower rate environment are now more receptive to our ABL solutions in order to provide incremental capital. These ABL facilities carve out working capital assets that are pledged to our borrowing base and which support the loan and will provide liquidity for the borrower. The new business pipeline has also expanded as Fallen Angel credits and other businesses seek additional liquidity in light of macroeconomic headwinds. Access to the larger SLR platform has allowed SLRC to speak for bigger hold sizes and accordingly, win more business, which led to our ABL team recently originating some of the largest investments in the company's history. Finally, our ABL teams added new business development personnel, including senior level hires and origination professionals last year and continue to do so in 2025. Now let me touch on equipment finance. At quarter end, this portfolio totaled just over $1 billion, representing approximately 36% of our comprehensive portfolio and was highly diversified across 636 unique borrowers. Credit profile of this portfolio remained stable quarter-over-quarter. During the first quarter, we originated $128 million of new assets with the majority of this coming from our business that provides leases to investment-grade borrowers for mission-critical equipment. We had repayments of approximately $173 million. Weighted average asset level yield was 11.5%. Our investment pipeline has expanded in conjunction with the disruption caused by last year's regional bank failures, and we are seeing demand from our borrowers to extend leases on equipment rather than buy new equipment at higher tariff-adjusted prices. Finally, let me turn to our life science portfolio. At quarter end, this portfolio totaled $187 million across 8 borrowers. Just under 89% of this portfolio is invested in companies that have over 12 months of cash runway. Additionally, all of our life science portfolio companies have revenues and at least one product in the commercialization stage, which significantly derisks our investments. Life science investments represented 6% of the portfolio and contributed 13% of our gross investment income for the quarter. During the first quarter, the team funded $25 million in one new investment and had $45 million of repayments. At quarter end, the weighted average yield on our life science portfolio, including success fees, but excluding warrants, was 12.5% compared to 12.1% in the prior quarter. While the U.S. remains the most robust global market for biotech innovation and venture funds continue to sit on record levels of dry powder, recent cuts at the FDA and NIH will likely affect research, innovation and public health initiatives with anticipated disruptions to the pipeline for new medical innovations. Initial signs of recovery from lower-than-normal originations in life sciences are expected this year, but it may take more time for a substantial market reset until greater policy clarity is realized, which should result in improved investor confidence, increased investment and M&A activity. In the interim, we will continue to focus on later-stage life science companies, which are in or preparing for commercialization with very little FDA-related risk that seek non-dilutive capital to fund commercial scale up. Lastly, let me touch on our SSLP. During the first quarter, we earned income of $1.9 million, representing a 15.7% annualized yield, consistent with the prior quarter. During the quarter, we made $6.6 million of new investments and had repayments of approximately $20 million. At quarter end, the SSLP had additional investment capacity in excess of $70 million and a portfolio fair value of $165 million. Now let me turn the call back to Michael.

Thank you, Bruce. Concerns about earnings and credit quality in private credit and BDC portfolios continue to remain top of mind for investors. We believe many decisions taken at SLRC over the last couple of years have put both the portfolio and the company in a position of strength today and view the consistency of results as a testament to SLR's multi-strategy approach to private credit investing. The operating environment remains highly unpredictable, but we believe our 15-plus year track record with de minimis losses and a successful history of managing through periods of economic distress should give investors comfort to expect more of the same from us. The SLR platform has grown meaningfully over the last couple of years, creating a diversified commercial finance company with broad investment capabilities and deep experience through a 330-member team. Our multi-strategy approach to emphasis on preservation of capital and dynamic portfolio construction with a specialty finance emphasis differentiates us from a majority of our peers and provides us an investment portfolio that contains very limited investment overlap. This platform growth, along with the stability of performance positions the company favorably with momentum across our businesses and a growing investment pipeline heavily tilted towards specialty finance investments. We are confident that we will remain opportunistic and prudent as we deploy capital with discipline and conviction. In closing, SLRC trades at approximately a 10.5% dividend yield as of yesterday's market close, which we believe presents an attractive investment for both income-seeking and valued investors and offers a more diversified investment portfolio compared to cash flow-only private credit strategies. Our investment advisers' alignment of interest with SLRC shareholders continues to be one of our significant hallmark principles. The SLR team owns over 8% of the company's stock and is a significant percentage of their annual incentive compensation invested in SLRC stock each year. The team's investment alongside fellow institutional and private wealth investors demonstrates our confidence in the company's portfolio, stable funding and earnings outlook. Thank you all again for your time today. As we know it's a busy day for those that follow the listed BDC marketplace closely. Operator, will you please open the line for questions.

[Operator Instructions] And we will take our first question from Eric Zwick with Lucid Capital Markets.

I wanted to start with just kind of a follow-up on some of your commentary about the pipeline being more weighted towards the ABL and equipment finance opportunities. I wonder if you could just maybe put some rough percentages around the pipeline through your kind of main lending verticals as well as touch on where spreads are today versus, say, 3, 6 months ago.

Sure. Great question. The pipeline, I would say, is 75%, 80% weighted towards ABL in particular. And as a reminder, our ABL strategies cover not only regional areas of focus, but also industry focus such as health care, digital media, apparel in connection with the Webster acquisition. So, it's across industries and the country. So that is the dominant part of our pipeline. I think as you look at pricing, we really don't think of this as a spread business. This is an all-in return business because there are a variety of fees that go into the eventual IRR. And this has been one of the hallmarks of ABL lending is that it doesn't have the same variability. It didn't cap out the way cash flow lending did when rates popped up to 5.25% base rates, but it also doesn't compress to the same extent. So, it tends to be an absolute return asset class that moves between, I would say, 11% and 13% depending on where we are in the cycle. Today, it's probably in the midpoint.

And just in terms of -- I think you used the word opportunistic in terms of cash flow lending opportunities that you would choose to move forward. I'm wondering if you could just kind of maybe generally give a description of something you've done recently where you did see what was attractive about a cash flow deal that you've done recently?

Yes. Most of what we're seeing, and this is consistent with the broader cash flow environment. You're not seeing the creation of many new platforms. And so, what's attractive to us is to finance a tuck-in acquisition. It's a seasoned platform that the sponsor has owned for a couple of years, probably only having a couple of years left on the facility. So, it gives us a short duration and an ability to re-underwrite in 2 years, 3 years, determine if we want to stay in or move on. And again, we're financing an add-on acquisition, so the business is growing. Typically, additional equity might be coming in alongside that. And it will be in a sector that both the sponsor and we are extremely comfortable with. So, we saw this similar dynamic in dislocation in '23, and we're able to take advantage of it. So that's the typical opportunity that we would see. The ability to finance an acquisition or 2 as the sponsor is getting closer to potentially exiting that investment.

That's a great color. And last one for me. It looks like the contribution from Kingsbridge in the quarter was up relative to where it had been in the last few quarters. Curious if there's anything kind of onetime in nature there? Or is that a decent run rate going forward?

Yes. It's a combination. There's some onetime, where they had some gains from some asset sales, but it is continuing to perform well. As we mentioned in our comments, this is an environment where borrowers will extend their leases, and that just falls to the bottom line as additional income. So, we're cautiously optimistic, but there is definitely a little bit of onetime elevated income in Q1.

[Operator Instructions] And we will take our next question from Melissa Wedel with JPMorgan.

First, I wanted to say thanks for talking about how you're monitoring tariff exposure in the portfolio. I may have missed it, but did you give sort of a ballpark estimate of tariff-exposed companies in the portfolio?

No, you didn't miss it as always, Melissa, you're on top of it. Specifically, let me just comment that as you think of the industries where we are lending into health care services, business services, financial services, all domestic, by definition, it would actually be difficult to have much exposure just because we're service-based, U.S. service-based and recession-resilient businesses that are not dependent on the global economy, broadly speaking. So, as we look at it, we really think less than 1% of the portfolio has any direct exposure. There are a couple of healthcare companies in life sciences that may manufacture goods in Mexico. We think those are exempt and a small part of the business that those companies do. But we're trying to really dig into every little opportunity to face some headwinds, and we feel very, very good about it. I think as we also mentioned, a corollary is we're more focused on policy around health care policy than we are around tariffs given the construct of our portfolio. I will say that in our ABL portfolio, there are borrowers because we're financing inventory in a number of cases that are going to struggle, but because we are lending against liquid collateral, we feel extremely well-protected. Obviously, we're monitoring these borrowers. And because we are monitoring and have a front row seat on trends in their receivables and their inventory turns, collections, we can see if they're beginning to struggle and clamp down on our advance rates and make sure that we continue to be protected. So, it's not to say that our ABL borrowers won't have some headwinds, but we feel extremely well-protected given both our collateral and our underlying controls and ability to monitor that risk real time. But I think broadly, we're more focused on some of the policy initiatives around health care, as we touched on, and how that may impact not so much existing investments, but the future pipeline.

To follow-up on a comment you made about the equipment finance business, and you're seeing borrowers wanting to extend leases rather than go buy more expensive new equipment in a sort of post-tariff world. Is that why -- is that repricing that extension? Is that why the yield on that portfolio was up meaningfully quarter-over-quarter?

It is. But as I mentioned also, there are some onetime gains as they had some assets that they were able to sell off because our equipment finance business is selling off streams and keeping the residuals, and there is profit in that residual. That profit increases, to your point, if they extend the leases because they have sold off the stream, and so that's additional profit that falls to the bottom-line. It's too soon for us to know what the run rate of that will be. So, there is some onetime, as I mentioned, in Q1, but we do think that there's an opportunity to have elevated income subject to how the tariffs play out because, again, the borrowers, both because of the increased cost of new equipment as well as the uncertain economic environment, it's easier to extend the lease than to start extending capital expenditures.

And it appears that there are no further questions at this time. I will now turn the program back to Michael Gross for closing remarks.

I just want to say thank you for all your time on what we know is a busy earnings season. As always, if you have any follow-up questions, please feel free to reach out to any of us. Have a great day.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.