SLR Investment Corp. Q3 FY2025 earnings call

• Michael Gross mentioned third quarter results reflect broad stability in portfolio, attributed to multi-strategy approach and conservatism. Net asset value per share and earnings resilient vs peers.
• Originated $447 million new investments in Q3, year-over-year up 12.7%. Commercial finance strategies had significant deal activity.
• Asset-based lending year-to-date originated close to $840 million, almost double 2024's volume. Hired Mac Fowle as President of Asset-Based Lending.
• Shifted portfolio towards specialty finance strategies due to more attractive risk-adjusted returns. Specialty finance makes up ~93% of Q3 originations.
• Portfolio composition: 94.8% first lien senior secured loans, 99.5% debt investments at cost performing.
• Issued unsecured debt, increased revolving commitments, net debt-to-equity ratio 1.13x at Q3 end.
• Bruce Spohler discussed underwriting discipline in ABL, cited examples of ABL benefits and importance of rigorous underwriting.

SLRC reported net investment income of $0.40 per share and net income of $0.43 per share in the third quarter. Net asset value per share was $18.21 as of September 30. Net investment per share was $0.01 below the base dividend of $0.41 per share. Originated $447 million of new investments, with year-over-year new originations up 12.7%. Commercial finance strategies had significant deal activity. Asset-based lending year-to-date originated close to $840 million, almost double 2024's volume. Specialty finance strategies made up approximately 93% of third quarter originations. Portfolio composition: 94.8% first lien senior secured loans, 99.5% debt investments at cost performing, PIK income de minimis. Net asset value per share $18.21, up slightly q-o-q, flat y-o-y. Gross investment income $57 million in Q3 vs $53.9 million in Q2. Net expenses $35.4 million in Q3 vs $32.3 million in Q2. Net investment income $21.6 million or $0.40 per average share in Q3.

• Declared Q4 2025 quarterly base distribution of $0.41 per share payable on December 26.
• Expect to continue prudently issuing unsecured debt.
• Will consider adjusting dividend based on portfolio performance and earnings potential.

• Concerns about growth in private credit industry and underlying credit quality.
• Recent high-profile bankruptcies in asset-backed finance market raised questions about collateral verification practices and information integrity.
• Potential softening of the economy could impact performance.

Q: Did you mention that you'd hired 100 new people over the past few years?

A: We have, and primarily in our asset-based and special lending strategies.

Q: So I guess kind of safe to assume there that with the banks retrenching in addition to having augmented lending opportunities, have you had opportunities to kind of pull teams out as, I guess, as they maybe become disenfranchised with their prior employer?

A: Yes, it's a combination of that. And as you know, we've also made some tuck-in acquisitions. And with that selectively added people that we're managing portfolios that we acquired to expand our footprint further.

Q: I was reading about another BDC recently, and they mentioned that some of their ABL investments did not meet the criteria to be qualified assets, kind of in the BDC structure. So just curious, from your perspective, is there something specific that you guys do?

A: Nothing on qualified assets. That said, we have not been limited in being able to grow our specialty finance and asset funding strategies by that 30% issue. We have plenty of room. Some of our lender finance are the companies that would not qualify. But again, we have plenty of capacity to take advantage of it. But in the direct ABL market, they are all qualifying assets where we're lending direct to asset-backed borrowers against their working capital assets.

Q: I wanted to make sure I'm understanding what's driving this really elevated churn in both. Obviously, you're finding good opportunities in ABL, but there is a lot of churn. And then also on the equipment finance side, can you dig in a little bit there?

A: On the asset-based churn, but you're very often working with companies that are in transition. An asset-based structure is very often a 2- to 3-year duration. And so you will see a churn if they can tap into a covenant-light, more flexible cash flow structure. So that will drive that elevation asset class. Sometimes there's a subset where you're just providing the working capital facility longer term. But very often, these are short-duration facilities.

Q: I think, Bruce, in your remarks, you said you think the ABL side is going to be the most attractive of all the areas going into 2026. I mean, what do you think that because you expect a pullback in the marketplace, with all the other noise and banks often retreating when this happens? I mean, what's the risk of incremental capital, if you will, coming out of the woodwork, right?

A: So great question. I'm just going to hit the life science first. I think the barriers to enter are lower for life sciences than ABL, which we'll touch on in a moment. But as we have seen in the marketplace, it's easy to get into life sciences. It's not so easy to succeed in life sciences. So people get in and stub their toe rather quickly and exit. But they first have to enter and realize that it requires a substantial amount of expertise. On the ABL side, we view it more as a manufacturing business than a service business, service being the cash flow business where it's easy to enter. To get into the ABL business, it's not just capital. You need this infrastructure that we have created organically and inorganically over the last 15-plus years. And that makes it difficult for new entrants to come in because it is, as these recent examples have highlighted in the market, you do need that infrastructure not only to source, but to monitor your collateral, which is what's so imperative in structuring your investments. And that's a challenge. I think new capital, if it were to come in, would be regional banks coming back in, but they would have to rebuild what they have exited also. I mean the example, as you may recall, last fall, we bought the business, the factoring business out of Webster Bank. So they are out of that business. If they want to come back in, they would need to rebuild that infrastructure in order to issue asset-based loans and monitor them.

Q: Just one more, if I can. On the dividend, obviously, you mentioned you do have levers to pull, taking up leverage a little bit, growing some of the specialty vehicles, et cetera. What's your confidence level that you have enough levers given what the forward curve looks like? I mean, where is the calculus on? Is this dividend sustainable? Can you catch back up to it?

A: Last several quarters, we've been plus or minus up or down $0.01 or $0.02 from our dividend. And it's kind of too early for us to kind of call the ball, if you will, about where this is going to go. I think we're going to obviously watch our portfolio performance closely, and we're going to align our dividend to what we think our earnings potential is.

Q: Just continuing on the dividend discussion there and tying into Michael, a couple of your closing remarks mentioned SOFR. For one, the sensitivity tables that you disclosed in the Q, I know those could probably be rigid or quirky as opposed to how BDCs really work. But the SOFR-based NOI downside has been creeping up or worsening. I think it's $0.07 for 100 bps in NOI now. So seeing if there's any nuance there in the say, composition of the FinCos that make you more interest rate sensitive recently. But also given it's sort of clearly going down, you've already been paying a return of capital for a couple of quarters. There's a little bit of leverage headroom, but not too much. So seeing why you're still declaring the $0.41. And to what extent would you continue to pay out a return of capital?

A: First of all, just to clarify, the last 2 quarters that we underearn by $0.01, our NAV actually increased in those quarters. And so we did not return capital. We grew our net asset value. So that's... Capital from a NAV perspective, we did not. And again, look, I'll stick on the answer before. We're obviously aware of what these theoretical hypothetical curves that were required to put in the 10-K today. We are among larger shareholders. So our interests are completely aligned with the rest of our investors. And as the portfolio develops, we'll decide how to adjust our dividend if necessary.

Q: A follow-up on the ABL franchises. So I think it's North Mill and Kingsbridge are continuing to appreciate. Can you remind us the context of that? Is it a retained earnings driver or a valuation expansion this quarter and in recent quarters?

A: Yes. So those are valued externally, and they're looking at a combination of the growth in the portfolio, to your point, the return on the portfolio as well as market comps as inputs in their valuation. So obviously, the businesses have continued to perform extremely well in this environment. But an overlay is also the market comps for the asset class ABL lending.

Q: I was just wondering, so with common reports of increasing private equity M&A activity, are you seeing more quality cash flow opportunities? If so, would you be looking to start investing more in your sponsor finance originations? Or is ABL just more advantageous?

A: Great question. We are opportunistically seeing better investments in cash flow. As you know, we're very tight in our industry focus there where we think we can get a complexity premium without taking on additional risk and predominantly in health care. And what we like to do is rather than go to new platforms exclusively, we tend to skew towards add-on financings for existing issuers who are getting bigger. That's a very good time as those companies are seasoned and their credit facilities are seasoned. So we'd like to come in. And you saw us do a lot of that in 2023. I'm not expecting that same volume given, to your point, our opportunity set in ABL and elsewhere, but we are seeing some selective opportunities in cash flow as well. And the last thing I would add on that is our cash flow sponsor origination team is spending a lot of time out there with the sponsor community trying to originate ABL assets. And as we mentioned, increasingly, you're seeing sponsors use ABL facilities rather than cash flow for acquisitions, for liquidity lines. And so we view that as a strategic advantage being able to offer both cash flow and ABL solutions to the sponsor community.

Q: Just one follow-up for me. I noticed that on a sequential basis, there was a little bit of a tick up, I think, maybe almost by $1 million on sort of G&A expense. I was wondering if there was anything onetime in nature? Or is that related to sort of building out the team and the platform and maybe that's more of a run rate going forward?

A: Yes. I think that was a onetime true-up on some expense accruals. I think if you look at our sort of track record the last 2 years, the sort of quarterly average should be $1.1 million, $1.2 million. So we'd expect that to be the run rate going forward.