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

Hello, and welcome, everyone, joining today's Q2 2026 SLR Investment Corp. Earnings Call. [Operator Instructions] Please note, this call is being recorded. It is now my pleasure to turn the meeting over to Michael Gross, Chairman and Co-CEO. Please go ahead.

Thank you very much, and good morning. Welcome to SLR Investment Corp.'s Earnings Call for the quarter ended June 30, 2026. 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 members of 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 on 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 August 4 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 would like to turn the call back to our Chairman and Co-CEO, Michael Gross.

Thank you, Shiraz. And again, thank you to everyone for joining our earnings call this morning. Before we discuss our Q2 results, I'd like to spend a moment on our approach to navigating what has become a more challenging environment for direct lending. My partner, Bruce and I as well as our partners have been in private credit for a long time. This summer marks our 20th year managing SLRC. Over those years, we've seen time and again that patience and discipline pay off for the long run. Importantly, over 15 years ago, we also saw the need to diversify our investment focus with higher barriers to entry and consistent performance across economic cycles. Against the backdrop of a market ripe with risk taking, we view our specialty finance platform as a differentiator that enables us to successfully navigate this environment. With the retrenchment of regional banks and the experience and skill set needed to underwrite and monitor collateral, we are not seeing the level of competition in our specialty finance strategies that has gripped the sponsor cash flow market. As a result, we are securing higher yields than the market levels for cash flow loans with better structural protection and importantly, liquid collateral coverage, which we actively monitor and adjust. Nearly all of originations last quarter were in specialty finance, and this trend is continuing in our third quarter pipeline. Turning to our second quarter results. For the second quarter of 2026, SLRC reported net investment income or NII of $0.33 per share and net income of $0.15 per share. As of June 30, the company had a net asset value per share of $18, down less than 90 basis points from the prior quarter. The decline was primarily driven by a markdown in 2 loans, which we placed on nonaccrual during the quarter, a move from 0 nonaccruals. Bruce will provide more detail on these. Importantly, these are isolated situations and do not represent a systemic trend in our portfolio. At June 30, our watch list accounts for only 2.5%, and we continue to have strong conviction in the credit quality of our portfolio companies. Moreover, our de minimis exposure to the software industry puts us in a position of strength as the software maturity wall draws closer. We are concerned that many of the software loans currently outstanding, which according to KBRA represents $224 billion or 22% of total private debt exposure may be challenging to refinance. This dynamic provides us with the ability to be opportunistic in other areas as the software maturity wall approaches. Meanwhile, after having been repaid at a premium to par on a software investment during Q2, our exposure to the software industry now stands at less than 1% of fair value. Furthermore, only 2% of our gross income is derived from restructured PIK resulting from amendments. With a conservatively positioned portfolio, we are focused on attractive investment opportunities in asset-based lending. During the second quarter, we originated $471 million of new investments across the comprehensive portfolio. This volume weighted 98% of specialty finance was 60% higher than our average gross originations since 2018. During the second quarter, we received repayments of $431 million for net originations of approximately $40 million, resulting in a quarter end comprehensive portfolio of $3.2 billion. We view this level of portfolio churn favorably as repayments typically represent successful realizations at par or better and the associated prepayment and exit fees add a further source of income. Based on our current pipeline, we are expecting another solid quarter of originations with a similar weighting towards specialty finance investments. With our strategic focus on specialty finance, we are executing growth strategies to expand our footprint through new hires, acquisitions and sourcing partnerships. We remain active in the cash flow market in our core industry, healthcare and are ready to pivot to this asset class more broadly should market dislocation improve the opportunity set. At June 30, including available credit facility capacity at SSLP and our specialty finance portfolio companies, SLRC had over $900 million of available capital to deploy. Our liquidity profile and minimal watch list puts us in a position to take advantage of either stable economic conditions or softening of the economy. I'll now turn the call over back to Shiraz, our CFO, to take you through second quarter financial highlights.

Thank you, Mike. SLR Investment Corp.'s net asset value at June 30, 2026, was $982 million or $18 per share compared to $18.16 per share at March 31, 2026. At quarter end, SLRC's on-balance sheet investment portfolio had a fair value of approximately $2.1 billion in 79 portfolio companies across 24 industries compared to a fair value of $2.1 billion in 99 portfolio companies across 28 industries at March 31. SLRC's investment portfolio continues to be funded by a combination of our multi-lender revolving credit facilities and the issuance of term debt in the unsecured debt markets to institutional investors. Company is investment graded by Fitch, Moody's and DBRS and more than 40% of the company's debt capital is comprised of unsecured debt as of June 30. At June 30, the company had approximately $1.16 billion of debt outstanding with a net debt-to-equity ratio of 1.16x, within our target range of 0.9 to 1.25x. We have ample liquidity to fund our unfunded commitments and for future portfolio growth. Looking forward, the company has 3 unsecured debt maturities of $75 million in December 2026, $135 million in January 2027 and $50 million in March 2027. We expect to continue to prudently access the debt capital markets and issue unsecured debt as and when needed. During Q2, the company increased its revolving facility capacity by $25 million with the addition of a new lender. Total revolving commitments across our 2 credit facilities now totals $995 million. Moving to the P&L. For the 3 months ended June 30, gross investment income totaled $48.8 million versus $49.3 million for the 3 months ended March 31. Net expenses totaled $31.1 million for the 3 months ended June 30. This compares to $31.4 million for the prior quarter. Accordingly, the company's net investment income for the 3 months ended June 30 totaled $17.8 million or $0.33 per average share, in line with the prior quarter. Below the line, the company had net unrealized losses of $9.5 million in the second quarter versus net unrealized losses of $0.7 million for the first quarter of 2026. As a result, the company had a net increase in net assets resulting from operations of $8.3 million for the 3 months ended June 30, 2026, compared to a net increase of $17.1 million for the 3 months ended March 31, 2026. Lastly, on August 4, 2026, the Board of Directors declared a quarterly distribution of $0.31 per share payable on September 25, 2026, to holders of record as of September 11, 2026. With that, I'll turn the call over to our Co-CEO, Bruce Spohler.

Thank you, Shiraz. As Michael mentioned, we are maintaining a defensive investment approach in the current uncertain investment environment. Fixed income markets are now pricing in more rate hikes, not relief. We are, therefore, treating this as a lasting rise in operating interest expense, not a temporary peak. Companies growing EBITDA organically are managing well. Those with flat or declining cash flows are seeing interest coverage erode and prolonged high interest rates are turning manageable strain into real stress for this group. This gap reinforces our long-standing approach at this stage of the credit cycle to prioritize asset-heavy, liquid collateral-backed lending over cash flow dependent structures. Before I dive into our portfolio, I'd like to touch on our approach to investing during the seismic advance of AI in our world. As a reminder, earlier this year, we formed an AI committee that assesses the risk of AI disruption on potential new as well as existing investments. Regarding our view of AI as it relates to cash flow investments specifically, we have historically avoided software lending, given questions about the long-term durability of software IP, a decision that is currently paying off. We do, however, prefer the more defensible IP profile of late-stage life science companies where value requires years of clinical and regulatory validation to create. In healthcare services and physician practice management companies, we look for AI that solves real operational problems. For example, unifying fragmented legacy billing systems into standardized claims processes, cutting administrative friction and errors and speeding up collections, specifically assess how AI makes the business more resilient to disruption, not just more efficient. Now let me turn to the portfolio. At quarter end, on a fair value basis, the comprehensive portfolio consisted of approximately $3.2 billion with an average exposure of $3.7 million. Measured at fair value, approximately 98% of the portfolio consisted of senior secured loans with approximately 96% invested in first lien loans. 2% of our loan portfolio invested in second lien investments consists entirely of asset-based loans, which contain underlying borrowing basis with no second lien cash flow loans. At quarter end, over 86% of the comprehensive portfolio is comprised of specialty finance investments. June 30, our weighted average asset level yield was 11.1%, consistent with the prior quarter. Overall, we believe our portfolio has been less impacted by changes in base rates and spread compression compared to the broader peer group due to our higher allocation to specialty finance loans. As Michael mentioned, during the second quarter, we increased our nonaccrual loans from 0 to 2 investments. Now let me just briefly address both of those. We have a cash flow loan to RQM Corporation, a contract research organization and consulting firm that focuses on medical devices and diagnostics. After strong performance in our initial years following our $26 million investment, the company faced challenges following a change in regulations that delayed the market need for their services. We are focused on maximizing our returns and are currently in constructive dialogue with the stakeholders, and we'll share updates as we move forward. Now let me turn to our second nonaccrual, OmniGuide Holdings, which is a manufacturer of advanced surgical lasers and proprietary single-use fibers used predominantly for urological indications. They have been adversely affected by operational and supply chain issues. In anticipation of liquidity challenges, we placed the $34 million par value loan on nonaccrual. We have engaged third parties to assist us with the operational challenges and are committed to maximizing our value. Outside of these 2 investments, which accounts for the majority of our watch list, our portfolio continues to perform well. At quarter end, the weighted average investment risk rating was under 2 based on our 1 to 4 risk rating scale with 1 representing the least amount of risk. 97.5% of the portfolio is rated 2 or higher at quarter end. Our portfolio companies continue to exhibit healthy business fundamentals and perform at or above our expectations. In addition, only 2% of our gross income is derived from PIK interest resulting from amendments. Now let me touch on each of our 4 investment verticals. Let me start with asset-based lending. Direct corporate ABL remains a highly fragmented industry and contains high barriers to entry through the complexity of sourcing, underwriting, collateral monitoring and active borrowing base management. Commercial banks have continued to retreat from this market. Due to the significant investment in experienced human capital as well as infrastructure required for this strategy, competition from other private credit firms also remains limited. Our priority remains a first lien position on liquid current assets, predominantly accounts receivable and inventory, which has historically minimized our risk exposure. At quarter end, our ABL portfolio totaled just over $1.4 billion across 246 borrowers, representing over 43% of our comprehensive portfolio. For the first quarter, we originated just over $200 million and had $246 million of prepayments. Weighted average asset level yield on this portfolio was 12% compared to 12.3% in the prior quarter. We are seeing increased activity across our ABL platform. see an uptick post a very quiet first quarter from both sponsor finance clients as well as entrepreneurs who are seeking incremental liquidity through ABL solutions for their portfolio companies. PE firms are increasingly using ABL structures to finance LBOs, strategic acquisitions as well as turnaround asset purchases. In particular, we are seeing traction with healthcare sponsors given our understanding of complex healthcare accounts receivable. SLR and its affiliates have been financing healthcare receivables for over 30 years and understand the reimbursement nuances of accounts receivable typically used for ABL facilities in the healthcare industry. This kind of asset-level diligence is often what separates a lender willing to structure around complexity from one that simply lacks the historical context of healthcare accounts receivable collectability. Based on our third quarter pipeline and longer-term outlook, we expect to produce net portfolio growth across our ABL strategy this year. Turning to our asset-based lending strategic initiatives. Our adviser recently established a sourcing arrangement for ABL investments with a large U.S. commercial bank that spans many of our ABL strategies. This partnership broadens our origination reach. We're optimistic that this initiative will enhance our investment sourcing funnel and support portfolio growth and attractive ABL investments. We are currently in discussions for other partnership opportunities. We are also continuing to evaluate strategic acquisitions such as portfolio and business acquisitions, and we continue to expand our ABL origination team. Now let me touch on equipment finance. At quarter end, this portfolio totaled just over $1.1 billion, representing 34% of our comprehensive portfolio. It was diversified across 580 borrowers. Credit profile of this portfolio was stable quarter-over-quarter. During the second quarter, we originated $154 million of new assets with the majority of those investments coming from our business that provides leases predominantly to investment-grade corporate borrowers for mission-critical equipment. During the quarter, we had repayments of just under $140 million. Weighted average asset level yield for this portfolio was 10.7%. Our equipment finance pipeline has expanded. Additionally, we're continuing to see demand from existing borrowers who are looking to extend their existing lease on equipment rather than buying new equipment at higher tariff-adjusted prices. Now let me turn to life sciences. Life science industry and the corresponding capital market conditions continue to recover in the first half of '26. The opportunity set for late-stage life science loans is improving. With greater market activity, our pipelines increased. That said, we are holding firm on our rigorous underwriting standards in the face of an environment where new competitors are winning transactions by offering terms and structures that don't align with our approach to long-term capital preservation. During the second quarter, we had originations of $24 million and repayments of $11 million. At quarter end, the portfolio had $190 million senior secured investments across 6 borrowers, representing just under 6% of our total portfolio. This is down from a peak of 15% in 2020. With our recently expanded life science finance team and product offering, we have been seeing a broader set of opportunities. We are issuing term sheets that combine our capabilities such as a traditional first lien term loan with an asset-based revolver for working capital needs. We believe these efforts to provide full financing solutions should generate portfolio growth over the coming quarters, which will eventually increase our portfolio churn as well as our fee income. Finally, let me turn to cash flow lending. With greater competition in the sponsor finance market, we are taking an opportunistic approach to this asset class. Our broad platform expertise in healthcare enables us to continue to serve as a valuable cash flow loan provider to companies in the healthcare industry. Broadly, cash flow activity continues to be muted. Sponsors have been focused on working on portfolio companies as well as amend and extend executions with 2021 maturity wall approaching. Activity in healthcare is starting to pick up as these companies have suffered less enterprise value degradation than many other industries. Many private credit lenders have pulled back from healthcare as they may lack the expertise, which gives us an even larger opportunity set and the ability to be more discerning. At quarter end, our sponsor cash flow portfolio was $450 million across 26 borrowers, including our loans held in the SSLP. Following the repayment of a software investment at a premium to par in the second quarter, our direct software exposure accounts for less than 1% of our total portfolio. Weighted average EBITDA of the cash flow portfolio was approximately $116 million. 100% of our cash flow investments are first lien structures, and the portfolio had a weighted average loan-to-value of approximately 39%. Our underlying borrower fundamentals remain solid with growth in average year-over-year revenue and EBITDA and the average interest coverage ratio for our sponsor finance cash flow loans was 2.25x at quarter end. During the second quarter, we made investments of $9 million in first lien cash flow loans and had repayments of approximately $34 million. Weighted average yield on this portfolio was 9.6% compared to 9.9% at the end of the first quarter. Now let me touch on our SSLP. During the quarter, SSLP invested just over $6.5 million and had $12 million of repayments. Net leverage was 9x. In the second quarter, we earned income of $1.4 million from the SSLP, representing an annualized yield of 11.8% compared to 12.2% in the prior quarter. At quarter end, SSLP had $55 million of undrawn capacity, and we expect to continue to grow this portfolio opportunistically as conditions in the cash flow market warrant. Now let me just turn to originations. Regarding our outlook. Specialty finance now makes up the majority of our near-term pipeline. This is a deliberate relative value response to the current cycle, not style drift. In our specialty finance underwriting, we focus on liquidity, quality of collateral with requirements for frequent updated appraisals, monitoring of collateral with weekly or monthly borrowing basis and importantly, tight credit documentation. Our processes have been refined through our team's 4 decades of managing collateral-based loan facilities. A multi-strategy approach built on decades across multiple cycles ensures that our capital is deployed only when the market rewards discipline. We see this as a long-time resident of specialty finance, not a recent arrival during the current cycle. Our teams have drawn have underwritten these strategies across multiple cycles. Capital deployment is a genuine challenge for the industry right now with more capital chasing a narrower set of attractive opportunities than at almost any point in recent memory. Our diversified platform and broad solution set positions us to take advantage of opportunities as they evolve across our investment strategies. This combination of flexibility, experience and resources gives us the confidence during this more uncertain stage of the credit cycle. Now let me turn back to Michael.

Thank you, Bruce. To sum up, our strategy for navigating the challenges facing private credit as the industry matures is centered on our unique specialty finance platform. This can be most clearly viewed via the lens of our stability in our net asset value per share over the last 3 years following what was labeled the golden period of private credit, resulting in a total economic return that has exceeded the average of externally managed BDC peers. The solid financial health of our portfolio provides us with a foundation to focus on growing our portfolio of interest-earning assets and therefore, earnings power. We are advancing several growth initiatives that we expect will lift net investment income over the next year. We're continuing to expand our ABL personnel and infrastructure to deepen origination reach and adding life science investment professionals to broaden our capabilities. The collaboration between our life science and ABL teams has resulted in multiple investments combining term loans with working capital ABL facilities. In addition, we are evaluating an active pipeline of specialty finance acquisition opportunities. Our entire team at SLR owns over 8% of the company's stock today as a significant percentage of the annual incentive compensation invested in SLRC stock each year, including purchase that took place in the first quarter of this year. We thank you all again for your time today, given how busy this is with BDC earnings season. Operator, you please open the line for questions.

Our first question is from Jason Stewart with Compass Point.

Just in terms of ROEs on incremental new investment activity, could you frame out how you're seeing that given the mix that you discussed on the pipeline? And maybe discuss a little bit of how that perhaps shifts the leverage profile given the durable nature of specialty finance loans?

I think the yield that you're seeing across our underlying assets of around 11% continues to be a good target. We are seeing some things, as you heard in the cash flow portfolio opportunistically in the 9s. And we are seeing some opportunities in the 12s. But I think the 11% is a good target asset level return that we're seeing today aside from one's perspective on the forward base rate curve.

Okay. And then in terms of leverage, I mean, does this shift in origination mix shift your leverage profile at all to the higher end of that range or shift the range?

Yes. I think the short answer is we have been comfortable taking that leverage ratio up to the higher end of the range. It's really been the pace of repayments that has led it to be sort of stable in this, call it, 1.15 area. But our underlying comfort is extremely strong in taking that leverage higher up.

Our next question is from Rick Shane with JPMorgan.

Look, we are basically now about a year into a really bullish cycle in biotech and life sciences. I'm curious how you guys think about that. You talked about staffing up, but I'm curious about how that impacts both M&A, refinancing opportunities and pricing in the sector?

Sure. I think it's important to just sort of frame our track record in Life Sciences as kind of a key foundation that together with the market conditions, encourages us to lean in on the sector. While we did touch on the fact that we have a nonaccrual in life sciences, I think it's important to note that this team has been investing with us for close to 15 years, deploying $3 billion of capital. And that $3 billion of capital has generated 16% asset level returns with 0 defaults and 0 losses. So this is actually the first nonaccrual they've experienced, and that is consistent with the track record they had before they joined us having founded the business at GE Capital. So I have no doubt that all of our peers would welcome that type of track record, one nonaccrual over 20-plus years. So with that as a foundation, we are definitely leaning into the market. We have added senior-level professionals this year to expand the capability. You heard Michael talk about our focus on delivering full healthcare financing solutions. Our capabilities extend across not only life sciences and later-stage businesses that have revenues and royalty streams, but also underlying healthcare asset-based loans as well as our focus in healthcare cash flow. So it is a strong and deep bench for us. And you're right, the market has come our way. As we look back, the biotech index is up 100% since the trough a year ago. It's up 25% year-to-date. M&A activity, which is also a driver of velocity and churn of capital here has been up significantly. It's up over 2x first half of this year versus last year. And importantly, what drives all of this and attracts capital is FDA approvals. We've seen growth this year, up 44% in FDA approvals in this sector versus prior year. So it is a tremendously favorable backdrop. But as you know, the equity capital comes in first. And then as a late-stage lender, we come in after that fact. So we view it, Rick, as when, not if. but we do see a tremendous amount of opportunity. It's also led to some of the repays. We've seen some very high valuations taking out our existing portfolio, both across drugs and devices. So we do believe, as we look at our pipeline, which is up 20% over the prior year, that you will see growth across our Healthcare/Life Science book as well as the healthcare ABL book in tandem. But as I mentioned earlier, we will maintain our discipline because those returns are attractive. They bring in new entrants. But as you can appreciate, there is a tremendous amount of complexity in life sciences. And the good news is many of the new entrants, unfortunately, we wish ill will, but come in without their eyes wide open and kind of stub their toe quickly and exit. So long-winded way of saying we're very encouraged about the backdrop, to your point on the sector and expect additional growth there over the next...