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Solar Senior Capital Ltd (SUNS)
Q2 2019 Earnings Call
Aug 6, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen, and welcome to the Q2 2018 Solar Senior Capital Ltd. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Mr. Michael Gross, Chairman and Co-CEO. You may begin.
Michael Gross -- Co-Chief Executive Officer, Chairman of the Board, President
Thank you very much, and good morning. Welcome to Solar Senior Capital's earnings call for the fiscal quarter ended June 30, 2019. I'm joined here today by Bruce Spohler, our Co-CEO; and Rich Peteka, our Chief Financial Officer. Rich, would you please start off by covering the webcast and forward-looking statements?
Richard Peteka -- Chief Financial Officer & Treasurer
Of course. Thanks, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Senior Capital Ltd., and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast on our website at www.solarseniorcap.com. Audio replays of this call will be made available later today as disclosed in our press release.
I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties.
Additionally, 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. Solar Senior Capital Ltd. undertakes no duty 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 to our Co-CEO, Michael Gross.
Michael Gross -- Co-Chief Executive Officer, Chairman of the Board, President
Thank you, Rich. We're pleased to report that Solar Senior Capital continued its solid operating performance during the second quarter of 2019. Net asset value was $16.34 per share at June 30th. In addition, GAAP net investment income of $0.35 per share fully cover our distributions for the quarter. At quarter's end, our comprehensive portfolio was $652 million, an increase of approximately 9% over the prior quarter due to $58.2 million of net positive originations across the platform, including an acquisition by our ABL subsidiary, North Mill, which I'll highlight in a moment.
Overall, the fundamentals of our portfolio companies remains strong. Our diversified portfolio of senior secured cash flow and asset-based loans is 99% performing at 6/30 on a cost basis with only one loan on non-accrual status. At June 30th, approximately 98% of Solar Senior's comprehensive portfolio is invested in first lien senior secured loans with approximately 43% of total portfolio in first lien asset-based loans and 55% in first lien cash flow loans. Middle market cash flow lending continues -- remains extremely competitive due to sustained inflows of capital to private credit funds and the lower volume of middle market transactions in the first half of 2019 compared to a year ago.
We believe it is paramount to maintain our discipline in cash flow lending in the face of aggressive structures, tight pricing and elevated risk. While facing frothy market conditions in cash flow lending, our specialty finance businesses, Gemino Healthcare Finance and North Mill Capital, provide investments with collateral coverage and strong structural protections. These niche businesses generate loans that yields double-digit IRRs. To further capitalize on the favorable risk return characteristics available in our ABL niches, we are expanding our ABL footprint.
At the end of the second quarter, North Mill Capital acquired Summit Financial Resources, including its $40 million portfolio. In conjunction with the transaction, the Summit origination team has joined North Mill. Summit expands North Mill's geographic footprint, particularly on the US West Coast. Additionally, the acquisition enhances North Mill's factoring capabilities, which provides further diversity to SUNS portfolio as well as yield, given factory loans tend to carry higher returns. Driven by the acquisition, approximately 78% of our comprehensive portfolio gross originations in the second quarter came through our asset-based lending businesses, Gemino and North Mill.
We're pleased with the progress we've made in our efforts to evolve SUNS into diversified niche specialty financial company. The asset coverage modification approved last year provide SUNS with additional flexibility and capacity to make controlled equity investments in specialty finance businesses and we're actively evaluating additional portfolios of asset-based loans and special lending platforms to acquire.
At June 30th, Solar Senior is in a strong liquidity position with net leverage of 0.81 times debt to equity. We intend to move close to our target leverage of 1.25 times to 1.5 times debt to equity by growing our portfolio over time. When considering the combined credit facility of SUNS' balance sheet and the North Mill and Gemino, there's $157 million of available debt capacity across the SUNS platform subject to borrowing base limitations. We'll continue to be highly disciplined in deploying our available capital.
At this time, I'd like to turn the call over to our Chief Financial Officer, Rich Peteka.
Richard Peteka -- Chief Financial Officer & Treasurer
Thank you, Michael. Solar Senior Capital Ltd. net asset value at June 30th was $262.1 million or $16.34 per share. This compares to a net asset value of $263.1 million or $16.40 per share at March 31, 2019. Solar Senior's balance sheet investment portfolio at June 30, 2019, had a fair market value of $474.2 million in 50 portfolio companies, operating in 22 industries compared to a fair market value of $467.7 million in 49 portfolio companies, operating in 21 industries at March 31st.
At June 30, 2019, SUNS net leverage increased to 0.81 times from 0.78 times at March 31st. As a reminder, Solar Senior's target leverage is 1.25 times to 1.50 times debt to equity under the reduced asset coverage requirement. From a P&L perspective, gross investment income for the three months ended June 30, 2019, totaled $10.0 million versus $10.2 million for the three months ended March 31, 2019. Net expenses for the three months ended June 30, 2019, were $4.4 million compared to $4.6 million for the three months ended March 31st. Net investment income for the quarter ended June 30th, therefore was $5.7 million or $0.35 per average share as compared to $5.7 million and $0.35 per average share for the three months ended March 31st.
Below the line, Solar Senior had net realized and unrealized loss for the second fiscal quarter totaling $1.1 million compared to a net realized and unrealized gain of $1.7 million for the three months ended March 31st. Accordingly, Solar Senior had a net increase in net assets resulting from operations of $4.6 million or $0.29 per average share for the three months ended June 30, 2019. This compares to a net increase in net assets resulting from operations of $7.4 million or $0.46 per average share for the three months ended March 31st.
Lastly, our Board of Directors declared a monthly distribution for August 2019 of $0.1175 per share payable on August 30, 2019 to stockholders of record on August 22, 2019.
At this time, I'd like to turn the call over to our Co-CEO, Bruce Spohler.
Bruce Spohler -- Co-Chief Executive Officer, Chief Operating Officer, Director
Thank you, Rich. As Michael highlighted, our intention is to expand our portfolio by investing in our three core strategies; first lien cash flow loans to upper middle-market sponsor-owned companies; first lien asset-based loans secured by accounts receivable to mid-sized companies operating in the healthcare industry through our wholly owned subsidiary, Gemino; and lastly, through North Mill, which offers first lien asset-based and factoring facilities secured by accounts receivable to mid-sized companies operating primarily in the manufacturing, services and distribution industries.
Additionally, we are actively evaluating opportunities to further expand our specialty finance business lines through either controlled equity stakes in specialty finance platforms as well as through organic growth. In the aggregate, at June 30th, our investments across all three businesses total $650 million encompassing 232 borrowers. The portfolio is highly diversified with an average investment per issuer of approximately $2.8 million or 0.4% of the portfolio. Approximately 98% of our portfolio consisted of senior secured loans, of which approximately 55% are in first lien cash flow loans and approximately 43% are in first lien asset-based loans with only 1.6% in second lien cash flow loans.
Our equity exposure increased slightly in the quarter to 0.5% of the portfolio as a result of the fair value appreciation of this equity investment. SUNS weighted average yield on a fair value basis at June 30th was 10.1%. Including investments and repayments across all three business lines, our second quarter gross originations totaled $87 million and we had repayments of $29 million resulting in net portfolio growth at $58 million for the quarter.
Now let me provide an update on the credit quality and earnings power of the portfolio. At June 30th, 98.5% of the portfolio on a cost basis was performing with one investment on nonaccrual status. Our internal risk assessment maintained an approximately two rating when measured at fair market value based on our one to four risk rating scale with one representing the least amount of risk. And at June 30th, our watch list represented approximately 4% of our portfolio.
Now let me provide an update on our investment verticals. Cash flow segment. At quarter end, our cash flow portfolio totaled $370 million representing 57% of the portfolio. It was comprised of loans to 48 borrowers with an average investment of $7.7 million. The weighted average asset level yield of the cash flow portfolio was just under 8% consistent with the prior quarter. Our second lien exposure represents 1.6% or only $10 million of the $652 million total portfolio and we expect this to continue to decline over the coming quarters. At quarter end, the weighted average EBITDA of our first lien senior secured cash flow investments was $110 million. On a fair value weighted average basis, first lien leverage through our investment was 4.7 times and interest coverage was 2.4 times, representing a lower risk profile than the liquid leveraged loan market. In addition, the weighted average 12-month revenue and EBITDA growth for our portfolio companies was in the mid-single digits, but has been slowing relative to the prior quarter.
During the second quarter, we originated cash flow investments of just under $19 million and had repayments of just under $12 million. Thematically, we are continuing to increase our investments in existing cash flow credits that have been performing well through doing incremental financings for these companies.
Now let me turn to North Mill. At quarter end, our North Mill portfolio was approximately $160 million, representing 24.5% of the combined portfolio at SUNS. During the second quarter, we funded $56 million of new investments and had repayments of $9 million. Including the $40 million factoring portfolio that we acquired with Summit Financial, the portfolio now consists of 151 issuers with an average funded loan size of just over $1 million. The weighted average asset level yield at North Mill was 13.5% compared to 13.1% for the quarter -- the first quarter. This increase was driven by the acquisition of Summit. We are pleased with the increased issuer and geographic diversification that Summit brings to North Mill. Additionally, we view factoring as a highly attractive asset class, and this portfolio as well as the addition of the Summit team increases North Mill's exposure to an expertise in factoring. Summit's strong Midwest and Western US presence complements North Mill's existing footprint. The Summit team has a strong credit culture consistent with North Mill's and we anticipate that the addition of Summit will result in continued portfolio growth for North Mill.
During the second quarter, North Mill paid SUNS a cash dividend of $1.4 million equating to an annualized yield of 11%. Now let me touch on Gemino. At quarter end, Gemino's portfolio was just under $120 million, representing 18% of SUNS' combined portfolio. Gemino had loans to 33 borrowers with an average funded loan size of $3.6 million. The weighted average asset level yield for Gemino was just over 12.25%. During the second quarter, Gemino funded $12 million of new loans and had repayments of just under $8 million.
During the second quarter, Gemino was able to refinance its credit facility with a new four-year $125 million credit facility with reduced pricing relative to the prior facility. For the second quarter, Gemino paid SUNS a dividend of $900,000. As Michael mentioned, the middle market cash flow lending environment remains frothy. At SUNS, we benefit from our diversified origination sources across both cash flow and asset-based lending verticals, which allows us to allocate capital to investments that meet our strict underwriting criteria. In addition, we believe that the growth of the investment advisors platform will result in more investment opportunities across both cash flow and specialty finance asset classes for SUNS. We will continue to be prudent and highly disciplined in deploying our substantial capital.
Now I'll turn the call back to Michael.
Michael Gross -- Co-Chief Executive Officer, Chairman of the Board, President
Thank you, Bruce. Since inception of SUNS in 2011, our investment decisions have consistently been focused on generating strong returns for shareholders over the long-term, on maintaining alignment of interest with you, our investors. Importantly, we've been prudent in the face of sustained, frothy credit markets and have remain disciplined not compromising credit quality for yield. The result is a solid portfolio foundation from which we can grow.
We've always maintained an investment philosophy of assuming that we're late in the credit cycle and we believe that in the current environment it pays to be cautious. We're confident that our differentiated origination platform and diversified portfolio position us well to navigate in any environment. At just over 0.8 times debt to equity, we are underlevered relative to our target range of 1.25 times to 1.5 times net debt to equity. We have substantial dry powder to deploy via differentiated investment verticals. If the credit cycle does shift, we believe our history of conservatism will enable us to outperform on a relative and absolute basis. We will be well positioned to take advantage of market dislocations.
As a reminder, late last year, Solar Senior's advisor, Solar Capital Partners announced the closing of private credit funds with total equity commitments of over $750 million bringing our combined investable capital across all fund mandate to approximately $5.5 billion, including expected leverage. The increased scale across the platform strategically positions Solar Capital Partners to be a solutions provider with an ability to speak for up to $200 million in a given transaction, while still maintaining highly diversified portfolios. The greater hold capacity across the platform has already resulted in more attractive investment opportunities for SUNS. At last night's close of $16.23 per share, SUNS carries a dividend yield of 8.7%, which represents a significantly high rate of return and a 6% implied yield of the S&P LSTA Leveraged Loan 100 Index. Given the overall credit quality of SUNS diversified portfolio, our differentiated origination engine and our disciplined investment strategy, we believe SUNS represents an attractive investment opportunity on both the relative and absolute value basis.
We thank you for your time this morning and look forward to speaking to you next quarter. Operator, could you please open the line for questions?
Operator -- Co-Chief Executive Officer, Chairman of the Board, President
Absolutely. [Operator Instructions] I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Michael Gross. You may proceed.
Michael Gross -- Co-Chief Executive Officer, Chairman of the Board, President
No further comments other than thank you for your participation today, and look forward to talking to you soon.
Operator -- Co-Chief Executive Officer, Chairman of the Board, President
[Operator Closing Remarks]
Questions and Answers:
Duration: 20 minutes
Call participants:
Michael Gross -- Co-Chief Executive Officer, Chairman of the Board, President
Richard Peteka -- Chief Financial Officer & Treasurer
Bruce Spohler -- Co-Chief Executive Officer, Chief Operating Officer, Director
