SLR Investment Corp. (SLRC) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to your Solar Capital Limited Earnings Conference Call for the quarter and fiscal year ended December 31, 2015. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to introduce you to your host for today’s call Chairman and Chief Executive Officer, Michael Gross. Sir, you may begin.

Thank you very much and good morning. Welcome to Solar Capital Limited’s earnings call for the quarter and year ended December 31, 2015. I am joined here today by Bruce Spohler, our Chief Operating Officer and Richard Peteka, our Chief Financial Officer. Before we begin, Rich, could you please start off by covering the webcast and forward-looking statements?

Of course. Thank you, 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 Limited 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. Actual results may differ materially as a result of number of factors, including those described from time-to-time in our filings with the SEC. Solar Capital Limited 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 would like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. During the frothy market condition of the past few year, the [indiscernible] credit cycle. As you well know, the tide recently began to move out. After three years of patience and disciplined investment approach with a focus on building strategic investment niches, rather than leveraging up and buying the market, we welcome the sea change. As significantly shareholders we share our investor’s disappointment with where our stock is currently trading. We are however pleased with our operating performance in the fourth quarter and 2015 as a whole. This puts us in a position of strength that will enable us to not only by weather the credit conditions in 2016 and beyond, but to capitalize them in order to deliver shareholder value. On all three major metrics by which we measure our fundamental performance; credit quality, NAV preservation and portfolio earnings power, we had a highly successful fourth quarter and full year 2015. First, the credit quality of our portfolio remained strong. Throughout 2015, we had only one legacy asset on nonaccrual, representing less than 1% of the entire cost of our portfolio. Over the course of the year, our portfolio companies collectively experienced both revenue and EBITDA growth, as well as deleveraging. We continue to have no direct exposure to oil and gas or commodities industries. Our lack of exposure to these troubled sectors is not the result of [indiscernible]; however it is due to our philosophy investing in non-cyclical defensive industries with high visibility and recurring cash flows. Second, our December 31, 2015 net asset value per share of $20.79 remains above our adjusted NAV of $20.52, at the time of our IPO six years ago. The ability to preserve NAV is largely determined by net investment income coverage and portfolio of credit quality, both of which are strong for Solar. Market technical’s however do impact the net unrealized gain or loss component of our balance sheet. Our NAV decline of 3.4% quarter-over-quarter is solely attributable to unrealized losses. The vast majority of which is due to technical mark to market impact on investment fair values, which we expect to fully recruit when the loans repay unfold. Third, our net investment income per share for the fourth quarter was $0.40, fully covered our distribution. Our 2015 origination efforts resulting in 33% portfolio growth for the year moved us closer to our goal of increasing our quarterly distributions by the end of 2016. We are growing our portfolio and lifts the earnings power at the right time in the credit cycle. During the fourth quarter, when market terms have begun to come our way and our proprietary sourcing engines, we originated $163 million for attractive investments. For the entire fiscal year 2015, our $478 million of new investments and nearly $142 million of exits resulted in portfolio growth of $333 million. Our fourth quarter activity include unitranche loans orginated by SSLP, our strategic unitranche loan industry with Voya Investment Management and PIMCO. Since inception, our first lien venture with Voya at our sister company Solar Senior Capital, sourced loans to 15 different issuers. Based on this experience, as well as the fourth quarters smooth start ramped our newly configured strategic initiative, we are confident in our ability to scale SSLP such that we can achieve the diverse required to incur leverage, and subsequently generate low to mid-teens returns. We believe our success in 2015 has positioned us well for growth in 2016 and beyond. In today’s market environment with many of our competitors fully levered and therefore struck out of the new issue market. And bank syndication desk generally closed for business to collective capital resources of our three way partnership with Voya and PIMCO provides us with a tremendous opportunity to build and financing Voya on attractive terms. In short, we believe our shareholders will reap the benefits of our patience in 2016 and beyond. Thus far the downturn in liquid credit markets was translated into better covenant packages, lower leverage ratios and approximately 100 basis points to 200 basis points of incremental yield on new issues. We expect to see further improvement as the middle market tends to lag the liquid markets. While we have seen a typical slow start to the year for new issuances, the market disruptions had timed refinancings resulting in muted first quarter repayment activity. For the year, we’re anticipating meaningful portfolio of growth due to deployment of our approximately $700 million of available capital including anticipated leverage at SSLP. At the end of the year, our leverage was 0.49 times. Based on the current positive momentum with SSLP and Life Science platform, we hope to reach our regulatory target leverage of 0.65 to 0.75 times by the end of this year. As a result of our discipline during the past three years of market euphoria, we now have a luxury devoting our efforts to portfolio expansion and what we anticipate the better vintage of investments. Put it another way, given our over 99% portfolio, we spent virtually no time in investment committee meeting discussing credit loss situations. We’re also planning to deliver incremental shareholder value in 2016 through continue shareholder friendly actions. One of the core tenants of our management philosophy is consistent alignment of interest with those of our fellow shareholders. Again, in the fourth quarter we waived a portion of our incentive fee, so that our GAAP net investment income would fully cover our $0.40 per share dividend, bringing the total amount of incentive fees waived to $1.7 million for 2015. Further, to bridge any potential gap until we’ve completed our prudent portfolio expansion, we are committing to waive our incentive fee in 2016 such that total GAAP net investment income is not less than $1.60 per share of expected distributions. Additionally, since we announced our $30 million share repurchase in October of last year, we have bought back $3.4 million of stock at an average purchase price of $15.76 at an average discount of 24%. We expect to continue repurchase shares at this level via our 10b5-1 program. Additionally, during 2015 alone, management personally purchased $3.2 million of incremental common stock, taking us up to 5.6% ownership stake and we intend to continue purchase more this year. Now I’d like to make a general comment. Being shareholder friendly is as much about the actions the management doesn’t take, as it is about the steps that managements do take. The course of action we did not pursue during the past three years of frothy market conditions was raising capital and leveraging our portfolio via low yielding, highly lev investments in order to maximize management incentive fees. From 2012 through 2015, when the daily average yield of the Bank of America-Merrill Lynch 5%, BDCs collectively raised almost $10 million of public equity capital and associated debt and rapidly invest in those proceeds. During that time, we were unwilling to materially change the originations in such a frothy market environment. In short, we are taking shareholder money that we didn’t believe we could invest an attractive risk adjustment returns. As a reminder, during those years, we also ran our portfolio meaningfully below our target leverage. As a result, we willingly and knowingly, allowed our portfolio to remain as a size such that our management incentive fee shrunk significantly over the last two years. In our view, the capital not raised in investment during heated market conditions is an important component of the BDCs ability to preserve net asset value over the long term. Our history of capital preservation is also why to date we’ve never issued shares below net asset value, nor we conducted a rights offering. We believe our history of vesting in the best interest of our shareholders played a big role in our success in 2015 and our strong positioning for 2016. As a third largest shareholder we are disappointed where our stock has been trading through this period of market volatility. We recognize that our long-term investment have suffered during this period as well. We thank them for the patience and continued support. Our hope is that as a conservative approach over the past two years and growth trajectory translates into increases in net investment income over the course of 2016, our share price will reflect that strength. At this time, I will turn the call over to our Chief Financial Officer, Rich Peteka to take you through the financial highlights. And then Bruce will walk you through portfolio details.

Thank you, Michael. Solar Capital Limited’s net asset value at December 31, 2015 was $882.7 million or $20.79 per share compared to $913.9 million or $21.52 per share at September 30. The decline in NAV was primarily related to net unrealized depreciation from mark-to-market yield related valuation adjustments. At December 31, 2015 our on balance sheet investment portfolio had a fair market value of $1.31 billion in 54 portfolio companies across 30 industries compared to a fair market value of $1.21 billion also in 50 portfolio companies and 30 industries at September 30. The weighted average yield on our income-producing portfolio increased to 10.5% at December 31, 2015 versus 10.1% at September 30 measured at fair value. For the three months ended December 31, gross investment income totaled $31.5 million versus $30.4 million for the three months ended September 30. Net expenses totaled $14.5 million for the three months ended December 31 compared to $13.5 million for the three months ended September 30. During Q4, our investment advisor, as Michael noted, waived $994,000 of its performance-based incentive fees, resulting in $1.7 million of performance based incentive fees waived during 2015. Accordingly, the company’s net investment income for the three months ended December 30, 2015 totaled $17.0 million or $0.40 per average share consistent with $17.0 million or $0.40 per average share for the three months ended September 30. Below the line, the company had net realized and unrealized losses for the fourth quarter totaling $31.2 million versus net realized and unrealized losses of $16.9 million for the third quarter. Ultimately, the company had a decrease in net assets from operations of $14.2 million or $0.33 per average share for the three months ended December 31. This compares to a slight increase of $0.1 million or $0.00 per share for the three months ended September 30. Finally, our board of directors declared a Q4 distribution of $0.40 per share payable on April 1, 2016 to shareholders of record on March 24, 2016. With that, I’ll turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich. I’d like to begin by providing an update on the credit quality of our portfolio. The financial health of our portfolio companies remained sound. With the trends of continued modest growth, as well as deleveraging through strong free cash flow, which continued through the fourth quarter. At 12/31, the fair value weighted average leverage level through our security was 5.3 times down from 5.5 times at the end of the prior year. Also at year end, the fair value weighted average interest coverage for our portfolio of companies was 2.7 times covered. At the end of 2015, our portfolio had a weighted average EBITDA of over $80 million. On a fair value basis, revenues and EBITDA for the portfolio of companies increased 7% and 15% respectively for 2015. The weighted average investment risk waiting of our portfolio was just over 2, based on our 1 to 4 risk rating scale with one representing the least amount of risk. Measured at fair value, our 99.9% of our portfolio was performing at December 15. On a cost basis, our one investment on non-accrual accounted for 63 bps of the portfolio. Excluding this one 2007 legacy asset, our portfolio continues to perform well. Furthermore, as Michael mentioned, we continue to have no direct exposure to the oil and gas or commodity sectors. In the fourth quarter, our NAV decline of 3.4% was primarily due to technical mark-to-market write-downs resulting from the broad sell off in the liquid credit markets. We expect to fully recoup this value when our loans are repaid. Now I’d like to provide some color on the composition of our comprehensive investment portfolio; this includes Crystal Financials full portfolio of asset based loans, as well as our ownership of the Unitranche Loans in our SSLP joint venture. Thanks to our focused origination efforts, over the last couple of years we’ve essentially completed the rotation of our existing portfolio into senior secure floating rate investments. At fiscal year-end, our $1.5 billion comprehensive investment portfolio included 76 borrowers across 46 industries with neither direct energy nor commodities on that list. When measured at fair value, roughly 93% of our portfolio of consistent senior secured loans. The remaining 7% of the portfolio was comprised of 4.5% subordinated debt and 2.5% equity. At December 15, approximately 92% of our income producing portfolio was floating rate when measured at fair value. Before I turn to specific portfolio activity, let me give you a brief update on each of our strategic initiatives. During the fourth quarter, we seeded the SSLP with four investments; two of which we sold from our balance sheet into joint venture and two of which we closed directly into the joint venture. At quarter-end, our ownership interest totaled just over $80 million of the approximately $92 million of portfolio fair value. The four loans in the SSLP had a weighted average yield of 8.5%. The JV is currently unlevered. We intend to close the credit facility or the SSLP in the second quarter and lever the vehicle approximately 1.5 to 2 times when its fully ramped, which we expect will result in a low to mid-teens ROE at full ramp. Over the coming quarters, we expect our momentum with the strategic initiative to increase. We have over $1.5 billion of available capital collectively committed to the strategy by Solar-PIMCO partnership with a competitive advantage in the current market. With the benefit of hindsight, we are happy with our decision to take a patient approach to deploying our capital into this strategy. We expect the current market dislocation to enable us to support to source Unitranche Loans with higher yields and better terms that had been possible last year. In fact, we view Unitranche and First Lien loans as providing the best risk reward characteristic in the current market environment. Now, let me turn to Crystal. Crystal Financial, our stretch first lien ABL lending platform at December 31 had a diversified portfolio consisting of approximately $465 million of funded senior secured loans across 26 borrowers with an average exposure of just under $18 million. During 2015, Crystal funded new loans of approximately $225 million and experienced repayments totaling approximately $231 million. As a reminder all of Crystal investments are floating rate senior secured loans. For Q4, Crystal paid Solar a cash dividend of $7.9 million, representing an 11.5% annualized cash on cash yield, this is consistent with the prior quarter. Crystal’s net debt to equity ratio was 0.77 times at year-end. Now let me turn to our life science portfolio. For fourth quarter our life science portfolio totaled approximately $119 million of first lien senior secured loans across 9 borrowers with an average investment of $13 million and an average all in yield excluding potential success fees and warrants of just over 10.5%. During 2015, the Life Science lending platform originated $104 million of investments and had approximately $45 million of repayments. The blended IRR on all realized Life Science investments to date exceeds 20%. Our investment thesis continues to focus on building a diversified portfolio of senior secured loans and having a very modest debt to equity ratio, along with significant enterprise value protection. Ultimately, we’d like to see our Life Science portfolio grow to approximately $200 million to $250 million and we are well on the way to do that this year. Now I’d like to turn to our specific fourth quarter portfolio activity. The restrains that we demonstrated in deploying capital during the frenzy of late 2012 through 2015, while we developed our strategic initiatives is finally paying off. During the fourth quarter, including the activity with the SSLP that is attributable to our 87.5% ownership, Solar originated approximately $162 million of senior secured floating rate loans across 11 portfolio of companies. Investments prepaid during the quarter, totaled approximately $27.5 million, which resulted in net originations of approximately $135 million for the quarter. Thus far, in the first quarter we have visibility of $30 million of repay, and we expect repayment activity to be muted during the remainder of this year. For the full year 2015, we originated approximately $478 million of new senior secured floating rate loans. During the year, we repaid or sold $145 million of investments, which compares to $655 million of repayment in 2013 and $626 million of repayment in 2014. Our strong origination results coupled with repayments far below 2013 and 2014 average resulted in net portfolio growth of $333 million last year. I will now provide the highlights of our fourth quarter activity. We played a significant role in the underwriting of $215 million of senior secured first lien term loan to finance the Huntsman Family acquisition of Am Pac’s specialty chemicals. Of the total investment, Solar and the SSLP funded $50 million with Voya and our PIMCO SMA purchasing the loan as well. The company is the only North American producer of certain rock grade chemicals used in the US Department of Defense Programs, NASA and the US Air Force Satellite launches, in addition to NASA’s space exploration programs. Closing leverage was 4.4 times and our yield exceeds 8.2%. We also originated a $35 million investment in the unitranche facility, at PSKW. Owned by Genstar Capital, the company is a leading provider of co-pay assistance programs for branded prescription drugs. Of the total investment, Solar and the SSLP funded $35 million. Voya also participated directly alongside of us. Leverage store loan approximated 5.8 times and the all in yield is over 9.5%. During Q4, we sold into the SSLP our $20 million first lien term loan for SSLP partners. On balance sheet at Solar, we continue to hold $30 million of the company’s second lien term loan, which was repriced upward during Q4. I’ll touch on that momentarily. We also sold into the SSLP in Q4 our $15 million first lien term loan issued by [indiscernible]. During the fourth quarter, our $30 million second lien investment in US Anesthesia repriced from L800 to L plus 925, in conjunction with the financing to support a strategic add on acquisition. Since our initial investment in the company’s loans in September 2014, USAF has experienced significant growth both organically and through acquisitions resulting in pro forma EBITDA today of approximately $159 million alongside significant deleveraging. The all in yield on our second lien investment is now just under 11%. In addition, we invested $32 million in the second lien term loan to five med management, which is a leading provider of outsourced Anesthesia services to hospitals and other medical providers. Solar and Aries Capital clubbed together to provide full second lien term loan to the company, which is owned by Ontario Teachers, the all-in yield on the loan just under 11%. Lastly, we made a $9 million incremental in TierPoint, a leading provider of infrastructure solutions, which brought out full exposure to TierPoint up to $34 million. The incremental loans supported the company’s acquisition of Windstream Hosted Solutions. This acquisition strategically increased the company’s scale, extends its national footprint and enhances its product suite. On a pro forma basis, the company received approximately $120 million. In conjunction with our add on investment, our existing investment was repriced upward by 100 basis points to L875, and the leverage levels were reduced. Our all in yield is now just over 10.25%. The repricing of our loans to both TierPoint and US Anesthesia speaks to the current trend of market terms coming our way, both in terms of higher yields, as well as larger more stable companies needing our capital because their access to the liquid new issue markets has become limited. During the quarter, we took advantage of headline noise in two portfolio companies to increase our holdings via the secondary market. We purchased just under $7 million of Global Tel Link, GTL, first lien loan at a weighted average price of approximately 78% at par, and a weighted average yield of 11 and two thirds, 11.67. Global Tel provides telecom services to FCC. Global Tel provides telecom services to the US Prison population. In late 2015, the FCC passed the vote and drafted pay order, capping inter-state and intra-state call rates and fees, in response Global Tel is seeking a stay – and seeking to appeal the order. The industry previously experienced similar regulatory challenges with mutual positive outcomes for the company and the credit. Currently, senior leverage is approximately 3 times and total leverage is approximately 4.3 times. Based on our current understanding, we believe the first lien term loan, which repurchased in Q4 at deep discounts will be repaid at par. Since the end of the quarter, the first lien term loan has been quoted up and is currently in the 80 to 83 area following the release of the company’s strong 2016 budget. This compares to our most recent purchase of the loan at 73. Again, we believe we will be repaid in full on Global Tel Link. As Michael mentioned we have been patiently waiting for the credit cycle to turn our way. And now is the time for us to grow our portfolio via more attractive investments. We believe that first lien loans grew our Life Science platform, our Crystal platform and SSLP joint venture offer the best risk reward characteristics in today’s credit environment. Our Life Science pipeline is robust. In addition with PIMCO and Voya, our collective dry powder gives us a competitive advantage as we seek to ramp SSLP. Now I’d like to turn the call back over to Michael.

Thank you, Bruce. On all of our metrics for BDCs, we are proud of our high rankings within the industry. With only one non-accrual accounting for less than 1% of our portfolio at cost, collective growth across the portfolio of companies and no direct exposure to oil and gas and commodities, our credit quality is among the highest in our peer group. Despite the technical markdowns during the second half of 2015, we preserved our net asset value since our IPO six years ago. Additionally, we believe there is upside to our NAV as our loans that are marked below par are repaid in full. With our healthy portfolio, modest leverage and approximately $700 million of dry powder to deploy across our differentiated growth engines, we are one of only a few BDCs who can increase net investment income this year by taking advantage of the current and more favorable credit investing environment. We always have and will continue to act in best interest of our shareholders. Over the past three years of heated market conditions, we did not raise capital and leveraged it up by investing in an attractive investment. We knowingly shrunk our portfolio such that we are paid an incentive fee in only three of the past eight quarters. In 2015, we waived $1.7 million of incentive fees, we’ve committed to future waived of incentive fees in 2016 so that our net investment income fully covers our distributions. Additionally, we are executing our share repurchase plan at highly accretive levels and managed to do by common stock, further aligning ourselves with our shareholders. In conclusion, our align with shareholders and Solar Capital’s conservative investment philosophy has enabled us to attract and maintain and retain high quality strategic partners and institutional investors. In light of our strong credit quality and 2016 earnings growth potential, we are disappointed our investors aren’t reaping the benefits of our success via higher share price. As I mentioned before, we believe, we are positioned well to capitalize on the current market environment and I believe as the stock prices spuns, accordingly expecting net investment income growth continues to materialize. At 11 o’clock this morning, we’ll be hosting earnings call for the fourth quarter 2015 results of Solar Senior Capital Funds. Our ability to provide traditional middle market senior secured financing to this vehicle continues to enhance our origination teams ability to meet our clients capital needs. We continue to see the benefit of the value proposition in Solar Capital deals flow. We appreciate and thank you for the time this morning. Operator, could you please open the line for questions.

[Operator Instructions] And our first question comes from the line of Ryan Lynch with KBW. Your line is now open.

Hey good morning guys and thank you for taking my questions. But first one, if I heard you guys correctly, that – senior loan program with Voya currently doesn’t have a credit facility and that’s not going to close till Q2. It looks like you guys in total have about $90 million of assets and equity in that fund. Is the plan then to continue deploying equity and growing that asset base of that fund or do you kind of plan on waiting it out, so you close the credit facility and then lever up that current equity base, in the loan program?

You can’t match the timing perfectly, but the goal is to close the credit when it’s most efficient in terms of cost. But our goal is to close in – close to when we’re beginning to fund the next investment or two. You will see us borrowing as we begin to ramp from here.

Okay. Then I do appreciate you guys having a buy back in place and using it a bit in the corner, but just given the strength you guys outlined, you guys still in your portfolio, current stock price and low leverage, why not put more resources into the buyback program?

Look as you know, we believe very strongly first requirement that having capital is huge type of advantage. And if you look at kind of our growth capacity, things like our SSLP generates 15% to 16% returns on levered basis, our Life Science business has been generating 15% to 18% on a realized basis or more. So look, we intend to use it judiciously and we’ve put in place originally for a period to stream this location, i.e., when a stock is trading in the mid-15s and we will put back a 10b5 plan back in place when our winter period close in a few weeks, so that we can continue to do the same. And we expect given the volatility of that there will be buying opportunities, so we just think we should be doing at the lowest price as possible.

And then one last one; there have been some discussions I’ve had with investors around fair value marks and portfolio valuation, not Solar specific, but just in general with the BDC investment community. So, can you guys just walk through the typical valuation process, Solar goes through to value your investments on a quarterly basis?

Sure. The process has been consistent since inception. Basically the investment team at the time we make an investment assigns a third-party valuation firm to the investment. They will say that the firm will stay with the investment until the time that we are repaid, that allows that valuation firm to have the full history of our investment in the underlying business, they get access to all of the company’s information that we receive over the course and the life of that investment. So we think that creates a bit of a partnership and a full knowledge base for the third-party firm. On a quarterly basis, the team will come up with a recommendation collectively including Michael and I, and that will be presented to the valuation firm. The valuation firm then comes up with their independent view of value, it is then presented to our independent board and the independent board then blesses the valuations on a quarterly basis.

Great I appreciate that commentary. That’s all for me.

Thank you.

Thank you. And our next question comes from the line of Doug Mewhirter with SunTrust. Your line is now open.

Hi. Thank you. Good morning. Just one question and a follow-up related to that question. If you were to look at your portfolio, your portfolio companies that you held over the past year, what is the aggregate revenue and EBITDA growth? I know you gave some specifics during the call, but I was not sure if that was sort of on a like-for-like basis or if that was just the total portfolio?

That was like-for-like.

So I think it was 15% EBITDA growth?

And 7% revenue growth.

Okay. Thanks for that. And I guess related to that, I mean obviously it’s great to be opportunistic, it’s great when prices go your way. A skeptic might say, well the market is trying to tell you something and maybe there is something bad hiding around the corner. I mean are you seeing anything at all like on the ground which would give you – which would maybe say you don’t want to catch a falling knife here, or is all the indications that the underlying economy – the economics of these companies just seem to be very stable?

I would say, as you know, Doug, over the last couple of years, and we’ve talked about the frothy credit markets and what’s kept us disciplined. It has been concerns over the underlying fundamentals, but more concerns over the structures that have been allowed by the marketplace broadly, be it leverage levels, be it pricing, be it lack of covenants. And so what we have seen change over the last several months is a bit of reversal of the technicals that have driven those frothy conditions, such as today we are seeing structures that are much more aligned with what we saw historically given that we’ve been doing for many, many years as you know. And so, it’s really the structures that have become more conservative and rational. The underlying fundamentals as we look across our 100 plus portfolio companies are actually consistent with what we saw over the last few years to your question around revenue growth, EBITDA growth, deleveraging, so we feel very good about the fundamental. Obviously, we all have to be mindful of what if any overhang will exist down the road to the sense that the energy challenges bleed into the rest of the economy. But so far, because we have been so focused on consumer stay full and some pretty defensive sectors, we are actually seeing most of our borrowers benefiting from lower oil prices today.

Keep in mind also that with our underlying loans today or year ago, we are doing the same thing which is our – we are running significant stress cases for downsides to make sure as a creditor we are in a good position if those happen and those underlying standards continue today.

Okay. Thanks. That’s all my questions.

Thank you.

[Operator Instructions] Our next question comes from Chris York with JMP Securities. Your line is now open.

Good morning guys. Just have a one question. So you’ve frequently highlighted your investment capacity as a competitive advantage in this environment, which we agree with. So I would be curious to get an update on how you are thinking about use of this capacity in terms of either organic growth of your primary deals or potentially considering the acquisition of a company or a portfolio?

I think that our core strategy is to stick to one thing and look for opportunities in the key strategic verticals that we have built out. The SSLP across our sponsor business, Crystal Financial in terms of asset based lending opportunities and Life Sciences. Separately, we are poised to be opportunistic as we see potential portfolios, I think as it relates to one off secondary trades, you saw us do some of that in G Tel because it’s something that we have deep knowledge in we believe. But generally speaking, we have not been a big buyer of the market over the last couple of years because of the structures and even if the paper is trading at a discount those structures still exist, lack of covenant, lack of inability to get to the table if things go sideways. So we are less focused on the secondary market. We’ll be opportunistic as it relates to portfolios and we’ll stick to our three core strategies.

Got it. That’s it for me. Thanks Bruce.

Thank you. And our next question comes from David Chiaverini with Cantor Fitzgerald. Your line is now open.

Thanks guys. Just I have a question on Crystal Financial. I was just curious how much growth do you expect from this business this year given that it is a non – made up of non-correlated assets and a non-correlated with the economy?

It’s a great question. As you know we don’t have a lot of visibility. We always have a very active pipeline with Crystal, but visibility is our actual closings is a little bit more challenge. I do think from 30,000 feet if the dislocation continues, you should expect to see that portfolio grow this year. As you know we’ve seen a grow two-steps forward, one step back since we’ve bought it at the end of 2011 and this environment only helps them, but it’s difficult to put a specific number on it.

And does pricing change in that business the way it does in the typical middle market lending environment broadly syndicated market when there is supply constrains or is it kind of consistent throughout cycles?

It tends to be consistent. It will spike when there is series of diversification because Crystal is basically pricing to certainty of providing that capital, and there is a greater premium put on that certainly in periods of stress. And so you will see their pricing spike when things move their way, but generally their pricing has less volatility because they are not correlated to your point with the liquid credit markets.

Great. Thanks guys.

Thank you. And our next question comes from Arren Cyganovich with D.A. Davidson. Your line is now open.

Thanks. I just want to clarify about the repayments that you’re expecting in the quarter, I think you said Global Tel, expected to be repaid at par. Where there any other ones that you were talking about repayments?

No. What we said, I am sorry for clarification is that we today have only seen $30 million of repayments and expect repays to be muted the rest of the year. On Global Tel, the comment was that we expect to be repaid in full, but that’s not going to be a near-term event in our estimation.

Okay, got it. Thank you.

Thanks.

Thank you. And our next question comes from Mickey Schleien with Ladenburg. Your line is now open.

Good morning, Michael and Bruce. You’ve described what continues to be a fairly denying economic backdrop with decent performance by borrowers. But on the other hand we are seeing all these volatility in the credit and equity markets, and in particular, you know meaningfully higher spreads both first lien and second lien in the middle market loans. So what I am trying to understand is given all of those dynamics, you know what it’s going to take for BDC valuations to get back to sort of historical levels. I understand there is idiosyncratic issues that certain BDCs that may have exposure to CLOs or maybe they have had a poor track record of underwriting, that’s certainly not the case at Solar. So, another caller sort of was alluding to the same question, you know what kind of catalyst is it going to take to get folks to recognize that the Solar portfolio is sound and then the stock is undervalued?

I think, look, in general, our whole sector unfortunately is kind of tied to properly liquid credit markets are doing to your point about spread widening, so I think it’s going to take kind of a recovery of a higher market leverage loan market, which probably means retail investments coming back in and giving money back to mutual funds to back buy again. I am not sure when that’s going to happen. That said, you know we are not sitting and waiting for that. I think our catalyst for us and look the knock has always been that we’ve been too conservative, we’ve run low lever and therefore our earnings have been – not been high enough. We are very comfortable in this credit environment. We are going to add assets that are very attractive and drive our equity to its target, and most importantly for all of us and all of our investors is increase our earnings. I think to our revaluation is when we are kind of – when we demonstrate that we continue our growth and we see our earnings go from $0.40 a quarter level to somewhere to mid $0.40. I think that’s going to differentiate us from our peers because I don’t think there is many people out there who can actually talk about delivering net investment income for share growth in 2016.

Thank you for that. That was my only question.

Thanks Mickey.

[Operator Instructions] Our next question comes from Jonathan Bock with Wells Fargo Securities. Your line is now open.

Good afternoon and thank you for taking my questions. Perhaps just first on Crystal, so we do understand that the credit environment actually is a bit advantageous for Crystal to make loans in more of a distress sense to perhaps trouble retailers et cetera, and I’d imagine that there will be a fair share of those – hence your comments on growth. I am more interested in the mark. And at a point when you understand the business prospects are likely going to get better, why you take the market as a portfolio to the investment? And two, walk us through the credit trends in the portfolio and whether or not any credit diminution led to that mark-to-market on Crystal Financial in the financial statements?

From 30,000 feet as you know, Jonathan, this is marked by a third-party every quarter and has been since we acquired it. And generally speaking what the third-party is looking to is comparables in the marketplace, and as you know, and understanding Crystal business it’s not the easiest thing to find a comparable to Crystal’s business. But they do look broadly to finance companies, BDCs, other finance providers into stressful situations. And so, as those moves just as our portfolio loans we mark based on a technical basis, as those valuations of underlying finance companies moves quarter-to-quarter that is the predominately reflection in the valuation of Crystal. So that’s the valuation comment. We do believe – and you’ve seen it as you know over the three years that we’ve owned it, it has moved quarter-to-quarter up and down, that’s really just comparable, no different from any other equity that we might own in private company. As it relates to credit trends, as you know, their trends are such that they always have a fair number of companies on watch. They watch everything almost from the time they fund it. We didn’t see anything materially shift in Q4. They had one investment in Q3 on non-accrual, which they are continuing to work through, but there is no real indicators more broadly about the health of their portfolio. Again, they tend to work through special situations and have a phenomenal track record of doing so.

Okay. I appreciate that. And let’s dive into the actual originations that you made this question in particular, you know several that were split between the unitranche fund. And you know when we think of a unitranche, we’re seeing your senior secured loan fund, we typically come with a view that it’s you, it’s your partner and you're writing a big check facilitating something ala Aries, right, and understand I mean there is a couple iterations. So, would you characterize this fund that way or would you characterize it as you're buying some pieces of other largely originated deals ala, a large GSO ones, flash Franklin Square where you take 20 million and actually a little bit more across the franchise, and you’ll lever that up a little bit. I understand that directly originated aspect Aries versus this is fundamentally different, that’s okay. I just kind of what to know what investors are dealing with because that is a question when we see deals that you're doing that others are likely writing larger ticket sizes and taking the entire deal down. At least I would assume from GSO will know that when Franklin Square reports here shortly.

Yeah. I would say a couple of things, Jon. What we are trying to do in the unitranche joint venture, first and foremost is find good first lien or stretched first lien risk at attractive pricing. That may come in the form as it did with MBAC in Q4 where we and our partners were able to speak for $215 million of a loan or it may come in PSKW where we clubbed with Aries signed a deal. So it really is a home for both. I think in this environment where peers are somewhat capital constrained just like in the old days as you recall of mezzanine deals getting clubbed together as they got larger in size. We are seeing more clubbing together, but we are doing the same direct deep dive due diligence as our partners are on those situations whether we’re the sole provider or whether we have another BDC in that mix. So, hopefully that answers your question.

And part of this also relates to just ramp and sponsor relation with the product and there is a lots of variables that just take time and you actually have to operate and here we now kind of early in its operation. But, Bruce, would you be kind of take away from what you are saying to say that it’s really going to be more pieces of others deals?

So, the short answer is it’s going to be both as it was in Q4. And I think what you should take away is that the ramp can be accelerated because it’s not only going to be as it was two years ago where people did share and we didn’t really fully have this open, and people were doing more sole deals. Today things are being clubbed and so we might lose the lead, but still have the ability to participate alongside somebody on very attractive basis with the same deep dive direct origination. So I think the clubbing environment for us in particular as well as some of our peers who have capital will allow us to leverage this faster than we would have otherwise, but you’ll see us doing both Jonathan.

Makes total sense, and Michael and Bruce, this question goes to you, wouldn’t shy away, you haven’t shied away from repurchases in the past and appreciate the comments on 10b5 et cetera, so that we get that’s kind of a – that’s an easy question. Where we would go is, you know you’ve seen a few moves on behalf of peers and I won’t refer to them as your peers, but obviously you’ve seen kind of news in terms of activism et cetera. And I am interested in your thoughts as to whether or not you believe this business, participating with others and doing some direct together. Is this really a two and twenty business today? Because if I look at it, I think prospects at a base of two and tenants at a base of two, and when you think of Apollo they’ve got few waivers which have lowered it – Fifth Street also lowered it, so Medley as well. I am just curious if you still think it’s a two and twenty business when others – when the vast majority or not, and if so, why?

Well, first of all, and I’ll go back to Bruce, everything we do, whether work – [indiscernible], we are directly underwriting. We’re not just finding people’s deal. When someone brings the deal and they say, three days do it, and you’ll get that asset, the answer no matter how good the deal look on paper, is no. So we do the same amount of work on whether we’re underwriting the $200 million deal or we are buying $40 million of participation in an Aries deal, for example. I am not going to comment on what our peers or lot of peers have done. I think we’ve always shown that we’ve aligned ourselves to the shareholders. We’ve done shareholder friendly things. We’re the only BDC out there, I think who has lesser business shrink so that we fell below our hurdle rate and had no incentive fee. Everyone else is being running full out and clipping, god knows how many fees, so frankly, we’ve never had – as you know we’re – shareholders and frankly it’s never been raised.

I appreciate the commentary and of course you can’t fight against the shareholder friendly things that you have done, so thank you for the description, the discussion guys. That’s all my questions. Thank you.

Thanks Jonathan.

Thank you. And I would now like to turn the call back over to Michael Gross for closing remarks.

Yeah, I apologize if there is anyone else who have questions, we actually have our Solar Senior earnings call starting in two minutes. If you do have further questions, please feel free to contact us directly, so we can address those. Thank you for your time.

This concludes today’s conference. You may now disconnect. Have a great day everyone.