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Solar Capital (NASDAQ:SLRC)
Q1 2020 Earnings Call
May 08, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Solar Capital Ltd. earnings conference call. [Operator instructions] And please be advised that today's conference is being recorded. [Operator instructions] I'd now like to turn the conference over to Michael Gross, chairman and co-chief executive officer of Solar Capital Limited.

Please go ahead.

Michael Gross -- Chairman and Co-Chief Executive Officer

Thank you very much, and good morning. Welcome to Solar Capital Ltd.'s earnings call for the quarter ended March 31, 2020. I'm joined here today by Bruce Spohler, our co-CEO; and Richard Peteka, our chief financial officer. Rich, before we begin, would you please start by covering the webcast and forward-looking statements.

Richard Peteka -- Chief Financial Officer

Of course. Thanks, Michael. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Ltd.

and that any unauthorized broadcasts in any form are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replays of this call will be made available later today as disclosed in our earnings 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, including the impact of COVID-19 and related changes in base interest rates and significant market volatility on our business, our portfolio companies and the global economy. 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 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. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer Michael Gross.

Michael Gross -- Chairman and Co-Chief Executive Officer

Thank you very much, Rich. Good morning, and thank you for joining us today. First and foremost, we hope that you and your family, friends and colleagues remain healthy and safe during this pandemic. Our thoughts are all with our stakeholders, including the dedicated employees across Solar Capital and the company's investment advisor, Solar Capital Partners, who continue to work from home with full business continuity.

Also, we would like to express our heartfelt gratitude to all the healthcare and other frontline workers and our sincere condolences to those families who have lost loved ones. The global spread of COVID-19 led to an unprecedented level of market volatility and dislocation in March. The shutdown response plunged the world into recession and financial markets into a broad-based and deep sell-off. The resulting Fed rate cuts, a steep drop in inflation expectations and the flight to safety drove the U.S.

Treasury 10-year to yield below 1% for the first time in their more than 150-year history. Near-term liquidity issues have been partially mitigated by rapid and expansive U.S. monetary and fiscal policy response, but uncertainty and volatility are expected to remain for the foreseeable future, given the lack of clarity and timing of getting our economy back to work. To best serve our stakeholders during this evolving crisis, we are providing detail on our first-quarter results, as well as an update on April 30.

As we outlined in our stakeholder letter issued on April 1, our conservative management of both our assets and liabilities have resulted in a defensive portfolio, stable funding, low leverage, strong liquidity and favorable positioning to make new investments. At March 31, our net asset value per share was $19.24, representing a 10.3% decline from year end. This is inclusive of a mark-to-market gain on our $150 million of unsecured notes to which we apply fair value accounting. Excluding this gain, our net asset value would have been $18.97 per share, representing an 11.5% decline.

Unrealized depreciation represented that vast majority of decline was primarily driven by mark-to-market losses related to the impact of spread widening on the valuation of our portfolio. While our portfolio as a whole has not been immune to the severe economic disruption caused by COVID-19 pandemic, we expect to recoup a significant portion of this unrealized depreciation as the secondary market technicals and economy improve. Overall, our portfolio companies are proving their business models and access to liquidity that will enable them to successfully withstand this crisis. We attribute the strong positioning of our portfolio to our long-standing investment discipline centered in the philosophy that we invest as if we're always late in the credit cycle.

In addition, we undertook a multiyear effort to build and acquire niche asset-based lending businesses, which have historically exhibited lower default and loss rates through business cycles compared to CASA lending. Importantly, our ABL business, Crystal Financial, provides a countercyclical capability to our platform. The team has expertise lending distressed companies and has historically achieved outsized returns during downturns. The team has over 25 years of experience, much of which has been focused on turnaround situations.

Specifically, they have expertise in consumer and retail lending, sectors we expect will have a need for their structured solutions over the coming 12 to 18 months. In addition, over the past several years, we migrated the company's portfolio to predominantly first lien senior secured loans. We remain patient and intentionally under-levered in order to preserve liquidity from market dislocation when risk-adjusted returns are generally more attractive. At March 31, 2020, 92% of our $1.6 billion comprehensive investment portfolio at fair value was comprised of first lien loans and 80% of the total fair value consisted of loans and the specialty finance strategies.

$172 million of the contraction in our portfolio at fair value during the quarter resulted from net prepayments in the portfolio. During Q1, we had $256 million repayments at par or higher, consisting of early refinancing activity where the borrowers took advantage of the frothy market to issue new debt at spreads and in terms which caused us to pass on participating. None of the Q1 repayment activity represented secondary market sales. During the first quarter, all of our borrowers, excluding one were nonaccrual at December 31 major interest payments.

As of March 31, 2020, we had only one loan comprising 1.3% fair value with a partial PIK component with interest rate. Cash interest and cash dividends represented over 99% of our first-quarter 2020 gross investment income. Also, at March 31, 100% and 98.2% on a fair value and cost basis, respectively, of our portfolio was performing. For the first quarter, Solar Capital's net investment income per share totaled $0.38.

The modest decrease in our NII per share quarter-over-quarter was a result of negative portfolio activity and yield compression in Q1, which reduced the size of the income-earning portfolio. With our net leverage at just 0.56 times at March 31 and our estimated net leverage at April 30 of 0.58 times, we are significantly under-levered both on an absolute basis and relative to our BDC peers. As a result, our current portfolio is meaningfully under its full earnings potential. Our decision to run the business under-levered was founded in our conservatism and belief that markets were overheated.

Only when this economic crisis has run its full course will we be able to quantify the benefit to our shareholders of that conservatism. But we are confident that our low leverage will translate into greater net asset value preservation. Now that the market has shifted, the new investment opportunities we are seeing carry higher expected returns and better structural protections. This is an ideal time to grow our income-earning portfolio.

The investment opportunity set in our cash flow lending business is the most attractive we've seen in many, many years. Solar Capital has expanded its investment team to provide borrowers senior secured liquidity facilities and refinancing solutions for the stronger, more durable businesses. This, while many of our peers reduce leverage and sell assets to remain within financial covenants or regulatory limitations. Today, Solar Capital has approximately $700 million of available capital to invest.

Combined with the available capital at Solar's sister BDC, Solar Senior Capital, and the private funds, which Solar Capital Partners manages, the platform has over $3 billion of available capital to support existing investments. But we do not believe there will be a significant need and to provide liquidity and capital solutions to U.S. middle-market companies that sustain our business models. While money lenders are burdened by portfolio concentrations in struggling industries and/or lack of liquidity, we are poised to deploy capital to support our valued sponsors and management teams.

As we evaluate new opportunities, our underwriting teams are collaborating to form a unique view of collateral and risk that provides us with additional competitive advantages. Yesterday, consistent with the past eight quarters, our board of directors declared a $0.41 per share dividend payable in Q3. Given our low leverage and earnings power, we expect to maintain a stable dividend for the foreseeable future. While we expect the Q1 decline in our net investment income per share as a result of being under-levered, to be a dynamic that may persist for a few quarters as we maintain our patient investment approach during such uncertainty, we believe we will grow our NII.

Specifically, we expect to fully cover our distributions as we grow the portfolio. Based on the current assessment of the opportunity set and the solid fundamentals of our existing portfolio, we believe that as we approach target leverage, our NII per share will reach the mid- to upper-$0.40 per share. Earlier this week, we announced the addition of four professionals to the Solar Capital Partners' team. The expansion of both our investment and business development teams speak to our confidence and strength of the platform and conviction in the investment opportunity set.

On a final note, our investment advisor's alignment of interest with the company stakeholders has always been one of our guiding principles. Through significant SLRC share purchases since inception, including recent purchases by all of our executive officers, our senior management team now owns approximately 7% of our outstanding common stock. Additionally, all members and the senior investment team have a significant percentage of annual compensation invested in our stock. We believe our management and investment team's recent share purchases in the face of this crisis demonstrate our confidence in the company's defensive portfolio, stable funding, strong liquidity and a favorable position to make new investments.

At this time, I'll turn the call back over to our chief financial officer, Rich Peteka, to take you through the financial highlights with a specific emphasis on our liquidity and funding profile.

Richard Peteka -- Chief Financial Officer

Thank you, Michael. Solar Capital Limited's net asset value at March 31, 2020, was $813.1 million or $19.24 per share, compared to $905.9 million or $21.44 per share at December 31, 2019. At March 31, 2020, Solar Capital's on-balance sheet investment portfolio had a fair market value of $1.3 billion in 105 portfolio companies across 26 industries, compared to a fair market value of $1.5 billion in 108 portfolio companies across 28 industries at December 31. Turning to our funding profile and leverage.

At March 31, 2020, the company had no borrowings under its $620 million and $50 million revolving credit facilities and had approximately $60 million of cash on hand. As previously announced, in February 2020, Solar Capital secured an additional $75 million commitment to the company's primary credit facility. A month into the second quarter, the company continued to have 0 borrowings under these facilities and had $39 million of cash on hand at that time. Currently, our borrowing base far exceeds the capacity of our primary credit facility, which provides us with full access to this capital.

As of March 31, 2020, Solar Capital had $446 million of fixed rate unsecured notes, including the issuance in December 2019 of $200 million of unsecured notes consisting of $125 million of five-year notes and $75 million of seven-year notes. At March 31, 2020, approximately 86% of the company's funded debt was comprised of unsecured term notes, which gives the company significant unencumbered assets and provides meaningful overcollateralization of its combined $670 million secured credit facilities. Solar has used the same delivery construction with our liabilities as with our portfolio. As a reminder, the company has no near-term debt maturities, having termed out its primary credit facility to 2024.

In addition, it has staggered maturities of its unsecured fixed rate notes from 2022 -- excuse me, 2022 through 2026 with a weighted average maturity of mid-2023. Since inception, Solar Capital has taken a conservative approach to leverage and has consistently operated well below its stated target range. On March 31, 2020, the company's net leverage was 0.56 times. As of April 30, 2020, the company's estimated net leverage is 0.58 times based on quarter-to-date portfolio activity and assuming no change to Solar Capital's March 31 fair values.

Solar Capital's current leverage provides a significant cushion to covenant levels and the regulatory limit of 2:1 total debt-to-equity. During April, both Moody's Investors Service and Fitch Ratings affirmed their investment-grade ratings of Solar Capital Ltd., which we believe is a testimony to our conservative balance sheet and our portfolio's early resilience to the crisis. Importantly, these investment-grade ratings provide the company with access to the investment-grade term note markets. Solar Capital's liquidity remains strong with approximately $700 million of available capital today.

As of April 30, 2020, Solar Capital had unfunded commitments of approximately $118.5 million, which included $44 million designated as potential growth capital to Solar Capital -- I'm sorry, to Crystal Financial, a portfolio company that the company controls. At this point, less than $12 million of the company's $118.5 million of unfunded commitments are for revolvers that can be fully drawn by the borrowers. Moving to the P&L. For the three months ended March 31, 2020, gross investment income totaled $32.9 million versus $37.1 million for the three months ended December 31, 2019.

Expenses totaled $17.1 million for the three months ended March 31, 2020. This compares to $19.9 million for the three months ended December 31, 2019. Accordingly, the company's net investment income for the three months ended March 31, 2020, totaled $15.9 million or $0.38 per average share, compared to $17.1 million or $0.41 per average share for the three months ended December 31. Below the line, the company had net realized and unrealized losses for the first quarter totaling $91.3 million versus net realized and unrealized losses of $19.3 million for the fourth-quarter 2019.

Ultimately, the company had a net decrease in net assets resulting from operations of $75.5 million or $1.79 per average share for the three months ended March 31, 2020. This compares to a net decrease of $2.2 million or $0.05 per average share for the three months ended December 31, 2019. Now I'll turn the call over to Bruce Spohler, who will provide you with an update on our portfolio.

Bruce Spohler -- Co-Chief Executive Officer and Director

Thank you, Rich. Solar Capital's portfolio has benefited greatly from Solar's initiative to expand its origination platform through the development and acquisition of specialty finance businesses. At quarter end, only 19% of our total portfolio exposure was in senior secured cash flow loans, with the remaining 81% of our portfolio invested in our specialty finance strategies. At March 31, our $1.6 billion portfolio is highly diversified, encompassing over 190 borrowers across 80 different industries.

Our largest industry exposures are healthcare providers and services; diversified financial services, which are predominantly insurance brokerage platforms; and pharmaceuticals. The average investment per issuer was $8 million or 0.5% of the portfolio. At March 31, 99% of our portfolio at fair value consisted of senior secured loans. This was comprised of approximately 92% first lien assets and 7% second lien assets.

Of our second lien loans, 3.7% were cash flow loans and 3.5% were asset-based loans, which were subject to borrowing bases. We believe that our portfolio of predominantly first lien loans, again, 92%, which carry less risk than second lien and mezzanine loans, will result in greater capital preservation during this crisis. At quarter end, our weighted average asset level yield was 10.6%. By focusing on our commercial finance verticals, we've been able to maintain our asset level yields above 10%, despite the sharp drop in LIBOR resulting from the Federal Reserve's efforts to aid the economy.

Approximately 77% of our portfolio was floating rate-based. Of these, 80% have a LIBOR floor with a weighted average LIBOR floor of 1.1%. The 23% of our portfolio, which are fixed rate loans, are primarily in our equipment financing vertical. Today, Solar has $446 million of fixed rate term debt.

And its $620 million of floating rate credit facilities, as well as our $50 million floating rate credit facility do not have LIBOR floors. At quarter end, 14% of our funded liabilities were floating rate with no LIBOR floor. The company's net interest margin declined by approximately 40 basis points during the quarter, which compares favorably to an approximately 80-basis-point drop in one-month LIBOR during this quarter. At March 31, the weighted average investment risk rating on our portfolio was 1.9 times based on our one to four risk rating scale, with one representing the least amount of risk.

As further indication of the current resiliency of our portfolio, 100% of the on-balance sheet portfolio was performing at quarter end. Including activity across our four business lines, originations for the first quarter totaled $84 million, while repayments were $256 million. Originations for the quarter were a mix of new deals, as well as upsizing to existing borrowers. New investment activity was a combination of cash flow deals weighted toward the healthcare and business service sectors, as well as life science investments.

Our outsized realizations during the quarter were repayments at or above par and were primarily the result of refinancings that we had the opportunity to participate in, but opted not to, due to the frothy market conditions that continued in January and February. We now have the opportunity to recycle this capital into investments with higher yields and better structures. Now I'll provide an update of each of our four investment verticals, including details around our valuation process. Let me start with our cash flow segment.

While the disruption to the economy as a result of the COVID pandemic has been unprecedented, we believe that our cash flow portfolio is well-positioned to withstand a prolonged recession. Our cash flow portfolio does not have direct exposure to cyclical industries such as energy, commodities, travel, retail, leisure, heavy manufacturing or consumer discretionary sectors. We have been in active dialogue with our management teams and sponsors of our portfolio companies regarding business prospects as a result of COVID. We're encouraged by the steps taken by our portfolio companies to preserve liquidity, as well as their continued strong sponsor support.

Our predominantly first lien portfolio with relatively modest first lien leverage of approximately five times, as well as significant junior capital beneath our investment tranche and strong sponsor support positions us well to withstand a prolonged economic headwind. We view our portfolio companies as generally providing essential services in non-cyclical sectors that will continue to be required as the stay-in-place restrictions are eased. Solar conducted a rigorous COVID stress test across our cash flow portfolio as part of our first-quarter valuation process. Our valuation framework incorporated sector-specific market spread movements during the quarter, adjusting for the existence of LIBOR floors, the expected weighted average life of our investments, existence of covenants and other issuer-specific factors such as industry, liquidity profile, sponsor support of the business and our position in the company's capital structure.

The vast majority of the decline in our cash flow portfolio mark is reflective of market spread movements that we expect to reverse over time. To provide further context, market spreads for the LCD first lien single-B index widened out approximately 400 basis points during the first quarter. Since quarter end, that has tightened back approximately 150 basis points or 35% recovery as of April 30. At March 31, our cash flow loan portfolio was $291 million or approximately 19% of our total portfolio.

It's invested across 18 borrowers with an average investment size of $16 million. These companies had a weighted average EBITDA of $57 million, which highlights our long-standing commitment to finance larger businesses, which we believe are better positioned to withstand a downturn. The weighted average yield of our cash flow portfolio was 10%. For the first quarter, our cash flow segment contributed $9.6 million to gross income, representing 29% of our total gross income.

During the first quarter, we wrote down IHS second lien investment to zero. We had placed this investment on nonaccrual back in the third quarter of last year. It represents 1.8% of the cost of our balance sheet at $331 million. During the first quarter, we originated $32 million of first lien senior secured cash flow loans and experienced repayments of approximately $160 million as we continued to allow our cash flow portfolio to organically run off.

Our investments during the first quarter included loans in the healthcare and business services industry, as well as upsizing to existing credits. We're very encouraged by our available liquidity at SLRC to take advantage of the current market dislocation that we expect to persist. Over the last few years, we opted to shrink our cash flow portfolio, owing to frothy market conditions, which resulted in highly levered capital structures and loose documentation structures. We've begun to see opportunities to finance large upper mid-market companies at lower leverage with better covenant protections and at wider spreads.

We will continue to maintain our discipline of investing in non-cyclical sectors focused on the upper end of the middle market. Now let me turn to our asset-based segment. Overall, our portfolio companies in this asset class continue to perform according to expectations at the time of our initial underwriting. At quarter end, all issuers were current on their interest payments.

As Michael mentioned, our ABL business, Crystal Financial, specializes in financing companies that are in transition and who have reduced access to traditional financing options. Our ABL loans are underwritten at a discount to net liquidation value of the underlying collateral. As a result, they've historically been very active in challenged sectors with significant working capital assets such as retail and consumer goods industries. Accordingly, we believe their business is exceptionally well-positioned in the current environment.

The senior management team of Crystal has worked together for over 20 years and has experienced managing through several economic cycles. We believe the opportunity set for this strategy will only grow over the next 12 months. At quarter end, our asset-based loan portfolio totaled approximately $620 million, representing approximately 40% of our total portfolio. It's invested in 35 borrowers with an average loan size of approximately $18 million.

The weighted average asset level yield for this portfolio was 10.6%. And for the first quarter, our ABL segment contributed approximately $9 million to the gross income, representing 20% of the total. The portfolio statistics I just outlined are on a look-through basis to Crystal's underlying loan portfolio. For GAAP reporting, we list our equity position in the Crystal Financial subsidiary on our scheduled investments and we fair value it on a quarterly basis.

Our valuation framework incorporates both the comparable company analysis of other ABL finance companies that have recently been sold or are publicly traded, as well as an analysis of Crystal's underlying loans, including the company's fundamentals as well as the loans' maturity, yield, collateral, coverage and structural protection such as covenants. In accordance with this framework, we marked our investment in Crystal Finance down by 7% at quarter end. We expect to recover this unrealized loss as the economy and valuations for comparable asset-based companies improve. During the first quarter, we funded approximately $11.5 million of new ABL investments and had repayments of just under $34 million.

Our ABL capability through Crystal, with its senior team, who has expertise in financing stressed companies over the course of 30 years together, provides us with an extremely valuable capability during the current economic disruption. Not only has their opportunity set increased dramatically, but we are able to work with our cash flow clients to create structured solutions for their liquidity-strapped portfolio companies. We are currently focusing our origination efforts on companies that have stable asset values in defensible business models. Now let me turn to equipment finance.

This vertical is led by a team of seasoned professionals who have an average of close to 30 years of experience, having managed through several economic cycles. A large portion of our equipment portfolio -- finance portfolio is invested in industries that have been deemed essential businesses such as construction. Those issuers are showing stability. However, NEF's best-performing segment is transportation, and this sector has been impacted, school, tour and charter bus leasing.

Many of our equipment finance borrowers qualify for loan under the CARES Act. It is important to remember that we provide financing to a borrower on specific equipment. The financings are at loan to values that are typically in the 70% to 80% of liquidation value and are well within the borrowing base during normal markets. In addition, a large portion of our investments have personal guarantees and other forms of credit protection from the owners.

At present, it is not the time to liquidate our collateral, as the market for this type of equipment is limited during the economic shutdown. At quarter end, NEF had a portfolio of over $345 million of equipment asset-based loans at fair value. The portfolio was invested across 115 borrowers with an average exposure of approximately $2.8 million. As a reminder, included in this line of business are equipment finances that are held directly on Solar's balance sheet, as well as our wholly owned subsidiary, NEF Holdings, a portfolio company that for tax efficiency purposes holds some of the NEF investments.

Our valuation framework for NEF incorporates both the comparable company analysis of other equipment finance companies that have recently been sold or are publicly traded, as well as an analysis of each of NEF's underlying loans, including the company fundamentals as well as the loans' maturity, yield, structural protection such as covenants, and importantly, collateral coverage. In accordance with this framework, we have marked our aggregate investments in the equipment finance segment down by 11% from the prior quarter. We expect to recover the majority of this unrealized depreciation as the economy and valuations for comparable equipment finance companies improve. The equipment finance asset class represents 22% of our portfolio.

100% of these loans are first lien, and at quarter end, the weighted average asset level yield on our equipment loans was just under 11%. Additionally, 99% of the portfolio is fixed rate and thus is not impacted by recent rate reductions. For the first quarter, this segment contributed $5 million to our gross income, representing 15% of the total. During the quarter, we invested in $19 million of new equipment loans and had just under $40 million of repayments.

Our equipment finance team remains focused on managing the existing portfolio through this challenging time. Additionally, the team is working with our broader origination team to offer equipment financing solutions to sponsors in their portfolio companies. Now, finally, let me turn to our life science lending business. Overall, our life science portfolio has been largely insulated from short-term market and economic dislocations, given the long-dated equity investment periods and product development cycles.

At the present time, the impact of COVID has had a de minimis impact on the portfolio. 100% of our loans in this segment are performing, and we continue to expect to incur no losses in this segment. As a reminder, we had never realized a loss in our life science portfolio, nor has the team in their prior period of time at GE Capital. Currently, none of the life science portfolio companies have less than three months of cash runway.

And 85% of our portfolio have more than 12 months of cash runway. This is largely a result of our investment focus on public and venture capital-backed late-stage, multiproduct, pharma and medical device companies that are close to entering or are in commercialization. It's important to remember that our life science investments are at low loan to values, 15% to 20% generally, where value is defined as the actual cash that has been invested in the business and not the enterprise value post the most recent round of funding or the market capitalization if it's a public company. While the FDA may be slowing trials in favor of fast-tracking COVID treatments or vaccines and patients may be reluctant to participate in trials, given the pandemic, the projected three to nine-month potential delays for some of these companies is small in relation to the 10 to 15-year development process and significant capital invested in these companies prior to us making a loan.

In addition, there are some late-stage development companies whose revenues may be delayed as a result of delays in medical procedures or surgeries considered elective or nonessential. The financial viability of many hospitals, doctors and healthcare providers rely on these sources of revenue, and we expect these services to begin to ramp back up over the next few months and into the second half of 2020. At quarter end, our life science portfolio totaled just under $285 million. The portfolio consisted of 16 borrowers with an average investment of just under $18 million.

Our life science loans represented 18% of our total portfolio and contributed roughly $9.5 million of gross investment income, equating to approximately 29% of Solar's gross investment income for the quarter. The weighted average yield on our life science portfolio was just over 10.5%, excluding success fees and warrants. Our valuation framework for the life Science segment is based on marking each investment close to its amortized costs, including the final fee, which is due at repayment. In addition, the cash liquidity of each of these borrowers is a significant valuation input.

There is no liquid market for private life science venture debt. We do not use equity benchmarks for determining the fair value. During the first quarter, our life science team originated approximately $20 million of investments and had repayments of approximately $24 million. The healthcare sector, in general, continues to be extremely attractive, and we are not seeing any slowdown in new life science investment opportunities.

Also, the increased scale of the Solar platform enhances the opportunity set for this team where many medical device companies and public pharma businesses require larger loan sizes. We will, however, continue to be highly disciplined as we make new investments. In conclusion, we believe Solar's portfolio is well-positioned to weather the crisis. As we continue to navigate this challenging environment, we remain in close contact with our portfolio companies, their management and sponsor teams to support them, as well as we are working closely with our extensive networks and relationships to source new investment opportunities.

Solar's commercial finance platform and significant dry powder enables us to provide structured solutions, including both cash flow and asset-based loans for capital-constrained companies in this environment. Solar will be able to participate in these financings while maintaining significant diversification across our portfolio. Now let me turn the call back to Michael.

Michael Gross -- Chairman and Co-Chief Executive Officer

Thank you, Bruce. In closing, all of us at Solar Capital Partners would like to thank our shareholders for their continued support during this difficult time. We believe our team's expertise and ability to provide financing across cash flow and ABL solutions should enable Solar Capital to continue to support its existing portfolio companies, and importantly, make new investments during this period of turmoil. Our ABL team is highly experienced in working with companies under financial stress, including asset liquidations and bankruptcies.

Crystal Financial's model of originating asset-based loans for companies in transition has historically thrived during previous economic downturns. Additionally, our senior cash flow loan investment professionals have significant private equity experience and have managed credit portfolio through several economic cycles. As a result of recent fundraising, the Solar Capital Partners platform now has over $6.5 billion of investable capital, including potential leverage with over $3 billion currently available to make new investments. SCP's private funds maintain a co-investment strategy with Solar Capital and provides the company access to attractive co-investment opportunities and upper mid-market companies that otherwise would not have been able to make with its capital base alone.

Specifically, the collective dry powder enables the platform to seek the large positions and to provide rescue financing, as well as add-on acquisition financing when M&A activity resumes. Now more than ever, SCP's scale should serve as a competitive advantage for Solar Capital. Importantly, for Solar Capital, the scale and flexibility to finance cash flow and asset-based solutions for larger companies is a significant advantage today. Traditionally, the greatest investment opportunities exist during periods of market dislocation when capital is scarce.

With approximately $700 million of available capital and a strong foundation, given our current high-quality portfolio and low leverage, we believe the company is positioned to originate attractive new investments while also supporting our existing portfolio companies as needed. Our patience and willingness to remain under-invested provides us the foundation to be opportunistic. Given the magnitude of the economic disruption, we believe that the improved investment opportunity set will persist for several quarters as companies continue to require financing solutions. In conclusion, the team is confident in Solar Capital's defensively positioned portfolio, stable funding sources, strong liquidity and potential to make new investments.

Despite the markdowns we took in our portfolio at quarter end, because of the large amount of repayments we received in January and February, our net leverage actually decreased from year end to the end of Q1. As a result, we have no anticipated need for additional liquidity or capital. And accordingly, we have no plans to issue dilutive equity or expensive unsecured debt. Each year for the past nine years, our shareholders have granted us approval to issue shares below net asset value, subject to board's approval at that time.

We have always viewed this trust in us as a great responsibility and have managed the business accordingly and have never taken advantage of this. Given our belief in the company's ability to successfully navigate the current challenges, we are disappointed in the current share price. We remain confident that the quality of our portfolio will result in a stable net asset value, which will ultimately be reflected in a higher absolute and relative share price. We hope that all of you're in good health and would like to thank the unsung heroes in the healthcare profession and the essential service workers on the front lines of this crisis.

To support their efforts, in our homes of New York, currently, the center of the epidemic, we, Solar Capital Partners, the investment manager of SLRC, have donated $1 million to The Mount Sinai Hospital and Columbia University Irving Medical Center collectively to be used for the procurement of PPE, COVID research and the mental health of those frontline healthcare workers and their families. 11:30 this morning, we'll be hosting an earnings call for the first-quarter 2020 results of Solar Senior Capital, or SUNS. Our ability to provide traditional middle market senior secured financing through this vehicle continues to enhance our origination capability to meet our capital needs for our clients, and we continue to see benefits of this value proposition in Solar Capital's deal flow. Thank you for your time this morning.

Operator, at this time, could you please open the line for questions?

Questions & Answers:


Operator

[Operator instructions] And your first question comes from Ryan Lynch.

Ryan Lynch -- Analyst

Hey. Good morning. And thanks for taking my questions, and hope you guys in your firm are doing well. I first had a question, a quick one on Crystal this quarter.

It looked like Crystal income fell by about $1.5 million quarter-over-quarter. I believe you said all those loans are still on accrual status, but correct me if I'm wrong with that. So can you just talk about what drove the decline in recognizing the same level of income you have in the past from that entity?

Bruce Spohler -- Co-Chief Executive Officer and Director

Sure. We did have a little bit of portfolio shrinkage early on, Ryan, which led to less income down there. And I think just in general, we're being a little bit more conservative. As you know, velocity really drives in certain assets with Crystal, a fair bit of prepayment fees.

We weren't seeing that, and we don't know that we're going to see that in this environment. And so we sort of rightsized the dividend to reflect the current run rate until we begin to ramp that portfolio.

Ryan Lynch -- Analyst

OK. Makes sense. You guys are, obviously, sitting in a very advantageous position, both with the low leverage on your balance sheet, as well as the very flexible liability structure with a lot of unsecured debt and a significant amount of capacity on your credit facility. So capital deployment is going to be key for you guys.

And again, as I said, you're in a really good position. But right now, I know you guys said the cash flow lending market seems like that that's becoming a more favorable environment to be deploying capital into. It doesn't seem like there's really much activity going on in that market today. So can you just talk about the level of deal flow you are seeing? And what are your thoughts on kind of knowing that this is a very fluid situation, kind of the pace of capital deployment going forward, just given that it feels like primary market's issuances are pretty locked up right now?

Bruce Spohler -- Co-Chief Executive Officer and Director

Sure. Great question. As you know, the last couple of years, we've been shrinking our cash flow portfolio to up to 19% of the comprehensive portfolio. And yet, until the first quarter where we really shrunk the portfolio, we have largely been running in place, and that's because we're blessed with the specialty finance strategies that have been extremely active while we've stayed on the sidelines in cash flow.

And 12 to 18 months from now, we think we'll look back and we'll see growth not only in our specialty finance verticals, but also in the cash flow book. You're right, Ryan, in that it's not ramping up today. We are seeing some selective opportunities in cash flow, either from some of our peers who are selectively selling assets to create liquidity for their own platforms. So that's a good opportunity for us to add to things that we already like and know.

And then I think as we get deeper into 2020, we expect M&A activity will pick up, not so much for new platforms, but for add-ons. We've been a big and active participant in putting more capital into situations that are growing. And we're hearing from our sponsors that as they're stabilizing the existing companies, they are looking to take advantage of market dislocation to deploy the substantial private equity capital that has been raised over the last couple of years and is sitting on the sidelines to add on acquisitions at lower acquisition multiples. So we expect to be extremely active in the cash flow vertical over the next 12 months.

Ryan Lynch -- Analyst

OK. That makes sense. And then just one more. In the past, you guys have obviously made several platform acquisitions to grow out different lending verticals across your platform.

I would think that there's probably going to be several platforms under scratch, just broadly in the market, some of these specialty lending, not in your portfolio, but across the landscape in stretch. You guys have always been active in engaging and looking for different platforms. Can you just talk about your guys' willingness and ability to potentially add on additional specialty lending platforms, given the dislocation that's oncoming?

Michael Gross -- Chairman and Co-Chief Executive Officer

Yeah. That's a great question. As you know, we have a team that is dedicated 100% to both looking for acquisitions, but also importantly, lending money to other specialty lenders. We have a fairly diverse portfolio that's performed incredibly well since inception.

In fact, we've never had a default or payment default in that asset class. And so our team right now is actively looking at situations where other specialty lenders may need liquidity. And the nice thing about those is, many times, we make those loans and it gives us a real window into those companies and to figure out whether they are an acquisition opportunity going forward. So, yeah, we are very active there.

And given the breadth of platform today, we're effective strategic buyers now in many of the segments that we're in.

Ryan Lynch -- Analyst

OK. That makes sense. Those were all my questions. Bruce, I did just want to say, I appreciate the update you gave on all the specialty and lending verticals.

I thought that provided a lot of detail and insights into how you're thinking about those businesses going forward. So I really appreciate that, but those were all my questions. I appreciate the time today, and hope you guys all stay well.

Bruce Spohler -- Co-Chief Executive Officer and Director

Thank you. You too.

Michael Gross -- Chairman and Co-Chief Executive Officer

Thank you for the questions.

Operator

Your next question comes from Casey Alexander.

Casey Alexander -- Analyst

Hi. Good morning.

Bruce Spohler -- Co-Chief Executive Officer and Director

Good morning, Casey.

Casey Alexander -- Analyst

First of all, let me thank you for your donation to the healthcare providers. As a father of a frontline individual, I can't tell you how much I appreciate your generosity on that front. And with that, Ryan asked a couple of my questions. But one of the things that I was wondering about cash flow loan is, you know in economic theory, there's late cycle defensive investments.

And it would seem to me that some of that mentality might shift more toward early cycle recovery-type industry targets. How does sort of your -- especially on the cash flow side, your industry target focus change now that you're going on the offensive and arguably, because this is happening so quickly, we're likely transitioning to something more early cycle on the way out on the other side over the next couple of quarters. How does that industry target change and create an opportunity? And also on the cash flow side, given some of the distress, would you also consider starting to take some equity slices as a way of helping to assist rebuilding NAV over the cycle?

Bruce Spohler -- Co-Chief Executive Officer and Director

Sure. Great question. So where we are today is really in that transition period, to your point, Casey, where people are figuring out -- owners are figuring out what do they own and what are they going to support in which sectors that are going to -- and again, perhaps near-term pressure. I don't know what business won't, away from some of the essential services.

And then, to your point, focus on recovery capital. And so what we're doing right now is using our asset base expertise in sectors that we already are very comfortable with. We're not going to go into timing certain sectors. You know that's just not our DNA.

We're going to stay true to the high free cash flowing businesses, albeit when businesses are open, and less cyclical businesses, we're not cyclical timers. But what we're doing is we're using our ABL expertise to partner with our cash flow teams to go into big sponsored companies with ABL solutions so that we can get a toe in the door in businesses that we like. Lend at 10%-plus type rates against receivables in large mid-market companies where they're carving out collateral for liquidity lines, because their BSL credit facility allows them to pull capital away from the current term loans. And then we're positioning ourselves on the recovery, to your point, to put capital from a cash flow perspective once we have visibility on cash flows into these companies.

But I think the industry focus is going to be similar to what we see today and what we've done over the last several years. There's so much, as you know, to do in healthcare. It served us incredibly well. Again, not immune in this environment.

There are a lot of nonessential services that have been delayed, but will be reopened once the emergency rooms and other medical facilities are open for non-COVID-related treatments. So we're going to stick to our knitting on industries, but we're going to position ourselves for recovery investing through rescue financing with our ABL capability.

Casey Alexander -- Analyst

That's a great answer. Secondly, I mean, of the BDCs that I cover, your liquidity position is likely as strong and your leverage is low, and you've made an argument for maintaining the dividend. I don't recall if ever in the past, if the Board has ever considered a share repurchase program. I hear your dissatisfaction with the stock price, and perhaps that's another way to accretively build some NAV while you're waiting to get more of your available liquidity to work.

Has that ever been a consideration at the board level?

Michael Gross -- Chairman and Co-Chief Executive Officer

So just going back in history a little bit, and it's quite a while back. We had a quarter many, many years ago where we had 25% of our portfolio literally repaid in one quarter, all with yields of loans that had come out of the crisis. So they were double-digit yielding loans, and it took a real dent into our earnings. We actually cut our dividend by a third as a result of that, because we did not see a path to reinvesting in a reasonable time period.

Back then, the only strategy we were in was cash flow lending. So we did not have the luxury of all these different ways to invest and underwrite. And so because of that, we did cut the dividend significantly. And we did actually buy back stock, because we did not see kind of the ability to reramp in a reasonable period of time.

I think the difference now is capital is so dear and we have the investment strategy to be able to put it to work that we don't want to put that at risk. We've locked in incredibly cheap financing. And it's math. If you lose your equity, whether it's through bad investments because of default or you kind of pay back shareholders with it, you can lose access to debt capital that is literally irreplaceable today.

Casey Alexander -- Analyst

All right. Ok. All right. Listen, I appreciate your answers and look forward to seeing how it develops over the next couple of quarters.

Thanks for taking my questions.

Michael Gross -- Chairman and Co-Chief Executive Officer

Thanks, Casey.

Bruce Spohler -- Co-Chief Executive Officer and Director

Thank you, Casey.

Operator

And your next question comes from Chris Kotowski.

Chris Kotowski -- Analyst

Hey. Good morning. Thank you.

Michael Gross -- Chairman and Co-Chief Executive Officer

Good morning, Chris.

Chris Kotowski -- Analyst

It sounds like we should be expecting, like for the next one, two, three quarters, most of the growth is going to come from ABL lending, if that's a correct assumption. And I'm wondering, it sounds like a more labor-intensive process than taking part of a cash flow loan and more monitoring of the collateral and all that? And are there volume constraints there? Or is that something you can ramp reasonably at will?

Michael Gross -- Chairman and Co-Chief Executive Officer

Yeah. That's a great question. And, Chris, as a supporter of both Solar and our sister BDC, Solar Senior, you appreciate that we had multiple ABL platforms across the firm. And so actually, we are looking at situations where North Mill, our receivables-backed business over at SUNS, is starting to source much larger facilities that we are sharing over at Solar.

And keeping a small piece of SUNS is appropriately sized for that portfolio. So we have tremendous capacity with 175 people. As you know, most of them actually are dedicated to the blocking and tackling and monitoring and underwriting of collateral in the ABL sectors as opposed to the cash flow business. So we feel very well-positioned.

And if anything, what we have been doing, as we announced earlier this week, is beefing up origination and particularly origination in a specialty vertical like life sciences, where we've had a tremendous track record with that team, but also origination that can source transactions across our sites, that's both cash flow and ABL.

Chris Kotowski -- Analyst

OK. All right. That's it for me. Thank you.

Michael Gross -- Chairman and Co-Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Robert Dodd.

Robert Dodd -- Analyst

Hi, guys. Going back to the cash flow lending market, because obviously, that's been something you haven't looked at for some time. One of the things you mentioned, you're seeing selective opportunities to buy essentially secondary loans, right, not liquid market stuff, but loans from other credit shops that are selling to gain liquidity. What's your approach on that? I mean obviously, you can get maybe overturned if they're selling at a discount, etc.

But one of the hesitations you've had in cash flow over the last couple of years is not just the coupon, but the structure. And is there a point either in the secondary market or forward originations where the price is worth the weakness on structure? How should we view that? This early cycle, maybe the structure isn't quite as critical?

Michael Gross -- Chairman and Co-Chief Executive Officer

So that's a great question. When we talk about looking at buying secondary pieces from other credit funds of either loans that we've been in or loans we've looked at, we're talking about loans that were structured the way we'd be comfortable with. So we actually bid on a couple of pieces that were being sold by a public BDC and we got outbid. But it was in a company that we're already a lender to.

So obviously, we like the structure. To your question, would we go by BSLs at a discount? The answer is, it'd be extremely rare if we did that, because again, having no covenants, you basically are going to sit there until the thing works itself out. I think the one exception would be is if an initiative we knew extremely well, had a maturity coming up in the next 12 months, 18 months, we knew there was an event that we could possibly play a role in refinancing. But I think it's highly unlikely you'll see us go participate in the liquid secondary market.

Robert Dodd -- Analyst

Appreciate that. And then on the kind of the forward, and you said you're seeing some initial signs and having discussions with, obviously, sponsors who are looking potentially later this year to do add-ons and things like that. What's the reaction been so far on that in terms of like the pricing talk, and to that point, again, the structure talk? Because I presume anything you'd be willing to fund on that, structures would be a lot tighter, again, than the sponsors had been able to get, but financing sites. So can you give us any color on how those very preliminary discussions that we're in?

Bruce Spohler -- Co-Chief Executive Officer and Director

Sure. Yeah. I think from a high level, structure is not even in negotiation. It's just thrown on the table right away.

Having lived through cycles for 30-plus years, Michael and I have seen this play out, where the first thing that comes back is structure. So there's really not much of a negotiation, around the edges of the covenants, but not around the existence of the covenants. So that's an easy dialogue. We're pens down without structure, and that's always been the case, as you know, even in the more frothy environment.

But then the critical factor is, obviously, leverage transactions where they were asking for five to six times leverage, they're now asking for four to five times leverage. And again, we're talking about upper mid-market companies. And then on pricing, I think it's fair to say that it's very situational. But loans that were 7.5% to 8.5% are now no less than 9% opening conversation, with, most importantly, some call protection, which had been nonexistent, as you know, in cash flow lending, particularly for a first lien loan.

We're not going to rent out our balance sheet for 12 months and then get refinanced out if the markets should recover. And so we want to make sure we have a little bit of call protection so that we get some duration as well.

Robert Dodd -- Analyst

OK. And then just one follow-up to that. To your point, right, the leverage used to be five to six times adjusted EBITDA. So higher than that on a real basis...

Bruce Spohler -- Co-Chief Executive Officer and Director

Yeah. We're not even discussing adjustments.

Robert Dodd -- Analyst

I appreciate it. Thanks a lot guys, and stay healthy everybody. Thank you.

Bruce Spohler -- Co-Chief Executive Officer and Director

Thank you.

Michael Gross -- Chairman and Co-Chief Executive Officer

Appreciate it.

Operator

[Operator instructions] And your next question comes from Finian O'Shea.

Finian O'Shea -- Analyst

Hi, guys. Good morning. A couple of questions on NEF that seem to have more cloudy remarks or less optimistic, understandably, given a lot of these businesses are smaller and cyclical. First question on PPP eligibility.

Is PPP funding able to support equipment lease obligations? And if that's the case, is NEF also generally not an affiliate? I guess, the question is, is this funding available to those issuers, and is that a line of support?

Bruce Spohler -- Co-Chief Executive Officer and Director

Yeah. That's a great question. So, yeah, on one hand, you're right. This is the portfolio that hopefully, I made it clear, we are watching closest, in part because it is cyclical, given the underlying borrowers.

And in part, while the team has 30-year experience, they're newer to our platform and were not here during the '08-'09 crisis. But obviously, we had the ability to underwrite that when we were able to partner with them and bring them on the platform. They do, to answer your question, Finian, have access to government stimulus, by and large, because these are not private equity-owned firms, so they avoid the affiliation issue. And our team has worked closely with as many of our borrowers as possible to provide access to that capital and give them a little bit of a lifeline and extend their ability to remain closed.

Fortunately, a number of them actually are in essential services. And as you know, typically, construction is something that is opening up sooner than others when states are phasing through their reopenings. So we're watching it. It is a deal-by-deal.

Fortunately, it's a very diverse portfolio. But this is the nature of that business, where there are a lot of discussions, you're getting monthly interest in principle. You have other pressure points on the borrowers. And then you work with them to get through the difficult times.

So early days, a lot of hand-to-hand combat, but government funding will definitely be helpful.

Finian O'Shea -- Analyst

Appreciate that. And in the event that one of the borrowers in a more COVID-challenged industry goes through financial events, bankruptcy, etc., do they normally continue to pay interest on your ABL or is there a gap usually?

Bruce Spohler -- Co-Chief Executive Officer and Director

So are you interested in ABL or are you in equipment?

Finian O'Shea -- Analyst

Equipment, sorry. But if you want to comment on that one as well.

Bruce Spohler -- Co-Chief Executive Officer and Director

In ABL, first of all, I think it's important -- you hit on a great topic. It's important to understand there's been a lot of conversation over the last year or two, if we would hit a downturn, are private credit firms positioned to handle and weather a downturn themselves, not just in terms of liability structure and portfolio construction, but in terms of team skill set. And because of our ABL businesses, not only the Crystal team and the Nations team, but our North Mill and Gemino teams over at Solar Senior, our sister BDC, that is what they do for a living. They work through bankruptcies, they work through stress, because they want to ensure that they are taking the collateral.

And very often, to your point, the companies are going to come out the other side and look to reorganize and operate. They're going to work with us so that we don't take the asset and foreclose and go liquidate the asset, because they want it in the operations. And so we, very often, are assumed if it's a lease or reinstated or repaid to the extent that there's a reorganization and were refinanced out. So that expertise, though, of being able to take these companies through a process, be it a liquidation or reorganization, is critical.

And it's something that is an asset that hopefully we don't need to use often, but is critical in this time period.

Finian O'Shea -- Analyst

Sure. That's helpful. And then just one final question. On the specialty finance verticals, NEF, Crystal, etc., any view on the SEC release granted on April 8, would allow you to take your third-party-managed funds and invest into these finance companies to expand them? Has that been an item of discussion, and have you any view on that?

Michael Gross -- Chairman and Co-Chief Executive Officer

Actually, this is the first time we will have discussed it. I think given the fact that we have $3 billion of available liquidity across the platform and each individual fund, clear to public utilities, there's plenty of liquidity themselves. There's no need to do that for us at all.

Finian O'Shea -- Analyst

Very well. That's all for me, and thank you so much.

Michael Gross -- Chairman and Co-Chief Executive Officer

Thanks, Finian.

Bruce Spohler -- Co-Chief Executive Officer and Director

Are there any more questions?

Operator

[Operator instructions] There are no further questions. I would now like to turn the call back over to Michael Gross, Chairman and Co-CEO.

Bruce Spohler -- Co-Chief Executive Officer and Director

This is Bruce. Before we turn it back over to Michael, I really just want to take a moment to thank not only the support of our investors in the research community, but Rich, Michael and I, you guys get to spend a longer time with us. You can see us on the front lines. But we would not be in this position of strength from a fundamental portfolio perspective and positioned to be in an offensive mindset if it weren't for the 175 people at Solar.

The senior team has really stepped up for us in a big, big way. And I think that is a huge credit to the team and the long duration that everybody has working together. There's a good thing that has come through this. It is that we have accelerated the integration across the platform of all these different teams that have come together in a common cause, a preservation of our investors' capital and looking for good opportunity.

So we can't thank you guys much. We're incredibly proud to be part of this team.

Michael Gross -- Chairman and Co-Chief Executive Officer

Thank you, and I'll reiterate that. And, again, we appreciate everyone's time this morning. We know these are difficult times, and we appreciate all of our shareholders' support. And as you know, we try to be as transparent as possible, so please feel free to reach out to any of us with any questions you may have now or whenever you want.

And we hope everyone remains safe, and take care, everybody.

Duration: 73 minutes

Call participants:

Michael Gross -- Chairman and Co-Chief Executive Officer

Richard Peteka -- Chief Financial Officer

Bruce Spohler -- Co-Chief Executive Officer and Director

Ryan Lynch -- Analyst

Casey Alexander -- Analyst

Chris Kotowski -- Analyst

Robert Dodd -- Analyst

Finian O'Shea -- Analyst

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