SLR Investment Corp. (SLRC) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Solar Capital Ltd., Q1 2017 Earnings Conference Call. 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, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Michael Gross, Chairman and Chief Executive Officer. Sir, you may begin.

Thank you very much and good morning everybody. Welcome to Solar Capital Limited’s earnings call for the quarter ended March 31, 2017. I’m joined here today by Bruce Spohler, our Chief Operating Officer; and Rich Peteka, our Chief Financial Officer. Before we begin, Rich would you please start off by covering the webcast and forward-looking statements?

Thanks, Michael. I’d like to remind everyone that today’s call and webcast are being recorded. Please note that they are the property of Solar 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’d also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today’s conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties. Additionally, past performance is not indicative of future results. Actual results may differ materially as a result of a number of factors, including those described from time-to-time in our filings with the SEC. Solar Capital Limited no duty to update any forward-looking statements, unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at 212-993-1670. At this time, I’d like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. The first quarter of 2017 marked yet another solid quarter for Solar Capital. As a result of the steadfast investment discipline we have maintained over the past several years during heated credit market conditions, coupled with a diverse strategic initiatives we have built. Our portfolio continues to perform extremely well. As evidenced by our stable March 31 net asset value of $21.25 and a continued low non-accrual rate of 64 basis points on cost. Equally important to our strong performance is our ability to originate attractive investment opportunities and what many managers are describing as a challenging underwriting environment. By many broad middle market measures the first quarter was challenging. Although, new issuers volume was up from the fourth quarter’s anemic levels much of it consisted of refinancings as new issuers spreads overall ground another 25 to 50 basis points tighter. Despite the pressures facing many lenders through our differentiated platform, we neither had to limit our investment activity nor sacrifice our stringent underwriting standards. On the contrary the first quarter was a very active quarter for Solar with $136 million of senior secured loans originated across our differentiated sourcing channels. We built our business to capitalize on market inefficiencies in niche middle market credit asset classes. While our sponsor backed cash flow channel focused on the upper middle market continues to source attractive senior secured loans that attach $1.1 of the capital structure, we are not exclusively reliant on it for portfolio growth. Our life science and asset-based loan verticals continue to source proprietary investments with attractive risk adjusted yields. Accordingly, to all fund used in the past our research analysts who covered us, the sun is shining inSolar Capital and our future looks bright. We remain confident in our quarterly run rate net investment income per share with ability to reach the upper 40's per share to the expansion of our SSLP's, our life science portfolio and Crystal Financial. Additionally, we expect our two recent platform initiatives to benefit Solar Capital of the coming quarters. As mentioned on our last earnings call in Q1, we finalized a new life science lending joint venture with a sister company Solar Senior Capital with Deerfield Management some of the affiliates the joint venture between Solar Capital Partners and PIMCO. Life Science Program LLC is expected to invest the majority of its assets in first lien loans to publicly-traded companies in the life science industry and will be incremental to our existing life science loan strategy. Aside from larger enterprise value of the target companies, the business model would be consistent with loans currently originated by Solar Capital Partners’ Life Science team. Solar has committed $50 million of the total $350 million equity committed to the joint venture. With anticipated leverage of 1:1 debt to equity, the venture is expected to have total investable capital of $700 million. Once fully ramped, this joint venture is expected to generate a mid-to-high-teens return on equity. In less than two months since the announcement, the JV has already developed a meaningful pipeline of potential investments. And our life science team is hopeful the program will commit to its first investment around the end of the second quarter. Additionally, we are benefiting from Deerfield Managements extensive industry knowledge. We are even more confident today that this top tier firm which specialized exclusively in healthcare investing is the optimal partner for our joint venture. Also as a reminder, at the end of 2015 our advisor Solar Capital Partners formed a joint venture with PIMCO. This initiative should provide significant benefits to Solar to an expected larger investable capital base across the Solar platform, Solar with more of a full solutions provider which we believe will result in greater deal flow for Solar Capital. For example with a larger capital base, we anticipate having access to more sponsor backed senior secured loan investment opportunities for the SSLPs and on Solar balance sheet portfolio. Furthermore, the partnership with PIMCO provides access to credit research resources of a world-class credit manager, which have invested $300 billion in corporate credit and currently employs over 50 credit research analysts. At quarter end, our differentiated activities including the senior secured loan programs, life science lending, and our asset base loan portfolio through Crystal Financial represented the majority of our comprehensive portfolio. Bruce will provide color on our strategic initiatives and portfolio activities in his remarks. During the first quarter, we completed our efforts to diversify our funding sources and term out our liabilities. We closed down an additional $100 million of five-year unsecured notes maturing in May 2022 bringing the total issuance to $150 million, with a weighted average fixed interest rate of a very attractive 4.53%. The issuance further diversifies Solar Capital’s funding sources and increases at attractive pricing our unsecured financing. Additionally, the notes pre-funded the repayment of our $75 million of five and seven, eight senior secured notes which mature next week. Repayment senior secured notes will decrease our average interest expense and the reduction in our secured debt will increase our flexibility. At March 31, the regulatory leverage of Solar Capital was 0.38 times net debt to equity. We intend to releverage our balance sheet toward our target leverage of 0.75 as we continue to invest in the SSLPs, Life Sciences, and Crystal Financial. We believe our history of asking in the best interest of our shareholders played a big role on our success over the last several years and our strong positioning in 2017 and for the future. Political, economic and corporate tax uncertainties have weighed heavily on middle-market M&A and sponsor activity resulting in a very competitive middle-market underwriting environment. We will continue to be patience in highly selectable new investments with our diversified originations engines, we anticipate meaningful portfolio growth throughout the remainder of 2017. Once we ramp our portfolio to target leverage, we expect to generate sustainable net investment income in the high-40s per share range. At this time, I will turn the call over to our Chief Financial Officer, Rich Peteka, to take you through the financial highlights.

Thank you, Michael. Solar Capital Limited’s net asset value at March 31, 2017 was $918.8 million or $21.75 per share. This compared to $918.5 million or $21.74 per share at December 31. At March 31, 2017 Solar Capital’s on-balance sheet investment portfolio had a fair market value of $1.32 billion in 61 portfolio companies across 23 industries compared to a fair market value of $1.30 billion in 63 portfolio companies across 25 industries at December 31. For the three months ended March 31, 2017 gross investment income totaled $34.4 million versus $36.6 million for the three months ended December 31. Net expenses totaled $18.1 million for the three months ended March 31, compared to $19.0 million for the three months ended December 31. Accordingly, the Company's net investment income for the three months ended March 31, 2017 totaled $16.3 million or $0.39 per average share compared to $17.6 million or $0.42 per average share for the three months ended December 31. Below the line, the Company had net realized and unrealized gains for the first quarter of 2017, totaling $0.8 million versus net realized and unrealized gains of $0.2 million for the fourth quarter of 2016. Ultimately, the Company had a net increase and net assets from operations of $17.2 million or $0.41 per average share for the three months ended March 31, 2017. This compared to an increase of $17.8 million or $0.42 per average share for the three months ended December 31, 2016. Finally, I'd say our Board of Directors declared a Q2 distribution of $0.40 per share payable on July 5, 2017 to shareholders of record on June 22, 2017. With that, I’ll turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich. Let me begin by providing an update on the credit fundamentals of our portfolio. Overall, the financial health of our portfolio companies remained sound, reflecting our disciplined underwriting and focus on downside protection. On average, the most recently reported LTM revenue for our portfolio companies and which we hold debt securities was up just over 3% and our LTM EBITDA was also up just over 3% year-over-year. Measured at fair value, the weighted-average interest coverage for our comprehensive portfolio companies was 2.7 times, and the weighted-average leverage to our investment security was 5.2 times. At the end of the first quarter, the fair value weighted-average EBITDA across our portfolio companies was just over $75 million, again indicating our focus on the upper mid-market. The U.S. economic environment was stable earnings and low defaults continues to remain favorable for credit investing. At March 31, the weighted-average investment risk weighting in our portfolio was 1.9 times based on our one to four risk rating scale with one representing the least amount of risk. Over 96% of the portfolio is rated two or better, reflecting the strong credit fundamentals. Measured at fair-value 100% of our portfolio is performing at March 31. However on a cost basis, our one investment on non-accrual accounted for 64 basis points of the portfolio. Excluding this one legacy investment from 2007, our portfolio is performing extremely well. The weighted-average yields on our fair value and current cost basis at the end of the first quarter are 10.2% and 10.5% respectively, modestly above the prior quarter. Although spreads further compressed during Q1, in the sponsor backed cash flow market, we were able to increase our weighted-average yield to further investing in our diverse asset measures such as Crystal Financial and Life Sciences. Now let me provide some color on the composition of our comprehensive portfolio, which includes Crystal Financials portfolio of assets-based loans as well as our senior secured loan investment program. At the end of the first quarter, our $1.48 billion portfolio included 90 different borrowers across 32 industries with no exposure to direct energy or commodities. The average investment per issuer is just over $16 billion or 1.1% of the comprehensive portfolio. At fair value just under 96% of the portfolio consisted of senior secured loans consistent with the prior quarter. The remainder of the portfolio was comprised of one unsecured investment, which actually was just repaid at par this quarter and 2.3% in equity securities. At the end of the first quarter 96.5% of our income producing portfolio was floating rate. Before I turn to our investment activity, let me provide a briefly update on our strategic initiatives. During the first quarter SSLP and SSLP II which I was our stretch senior secured loan investments. Collectively funded $44 million of senior secured loans bring the combined portfolio to $315 million. The SSLPs at loans to 15 different borrowers and both vehicles were 100% performance. Combined repayments in these vehicles including amortization totaled only $1.5 million. At quarters end the SSLPs at total equity of just over $175 million and $121 million drawn under their respective credit facilities. Equating to a combined net leverage of 0.65 times. The combined annualized ROE for the first quarter was just over 9%. We continue to expect to see that growth as we ramp the portfolio such that we achieve a low teens ROE once these vehicles are fully ramped. Now turning to Life Sciences. At the end of the first quarter our life science portfolio totaled approximately $213 million of first lien senior secured loans across 24 borrowers with an average investment size of just under $9 million. During the first quarter the team originated $38 million of senior secured loans and repayments and amortization total just over $28 million. The weighted average yield on our life science portfolio is 11.4% at fair value and 11.8% at costs. This exclude any potential exit fees or success fees or warrants. To date the blended IRR on our realized life science investments is 18.6% when we include realized warrants. We continue to believe that a target portfolio of $250 million to $300 million of diversified life sciences first lien senior secured investments is the right target for our balance sheet. In addition, we expect our new Solar Life Science Program JV with Deerfield to begin investing as early as late the second quarter. As Michael mentioned this JV enabled our life science team to include public later stage larger enterprise value companies in their target market. Our Life Science team frequently financed these companies while employed at GE Capital. In our opinion, these large companies present an attractive investment opportunity because of their more advanced product pipeline as well as their demonstrated access to public equity capital. Importantly, we are already seeing the benefits of Deerfield’s expertise in the public healthcare investing space. Your confidence in the JV’s ability to earn mid-to-high teens ROE once we fully ramp up. Now, let me turn to Crystal Financial, which is our secured first lien asset-based lending platform. At the end of the first quarter Crystal had a diversified portfolio consisting of approximately $347 million of senior secured loans across 24 borrowers with an average exposure of just over $14 million. During the first quarter, Crystal funded new loans approximating $25 million and had repayments approximating $49 million. 100% of Crystal’s investments are senior secured loans and approximately 99% are floating rate. Recently Crystal have seen an increase in its pipeline of new opportunities. And accordingly we expect growth in the Crystal portfolio during the remainder of 2017. For the first quarter, Crystal paid Solar a cash dividend of $7.9 million equating to an 11.3% yield on costs consistent with the prior quarter. Now, let me touch on our first quarter portfolio activity. During the quarter Solar originated approximately $136 million of predominantly senior secured floating rate loans across 14 companies. Investments repaid during the quarter total approximately $86 million. Now let me touch on a couple of those investments. We funded $17 million incremental investment into American Teleconference. As a reminder the Company has a global provider of audio conferencing and video collaboration solution. This add-on investment bring Solar’s total investment to over $37 million. Leverage through our investment is 3.5 times and the blended yield is just over 9%. Affiliates of Solar also invested in this opportunity bringing our franchises total exposure to just under $70 million. Additionally, we funded an incremental $15 million investment in accident care first lien term loan bring our total exposure to $30 million. In conjunction with this transaction, Solar was repaid on its $7.5 million investment in the second lien term loan of accident care at a premium to par. The add-on capital funded in acquisition. Net leverage to ourtranche is 3.3 times and our loan yield is 7%. As evidenced by both this investment as well as our incremental investment in American Teleconferencing, our existing and prior portfolio companies are an important source for new investments. Our familiarity with their past performance gives us an edge when underwriting these companies. Amongst our Life Science teams’ originations with a $10 million increased investment in the first lien term loan of Vapotherm which Solar acted as a sole provider. As a reminder, the Company manufactures high flow respiratory therapy products and carries a yield of just over 11%. Also during the quarter, Solar realized its $8.5 million Life Science investment in the term loan of Cardiovit and provided $6 million of new loan to Cardiovit in conjunction with its refinancing. The IRR on the realized investment was just under 12% and our new loan also carries a 12% yield. We were also repaid on our $6.5 million Life Science investment in [indiscernible] during the first quarter. And we reinvested the proceeds into a new $16 million investment in the company's first lien term loan. Our realized IRR on the prior investment was just over 23% and the new loan carries a yield of just over 12% before any success fees or warrants. During the first quarter, we were repaid on our $27 million investment in the second lien term loan of EMC or Emerging Market Communications. Our IRR realized in this investment was just under 14%. As Michael mentioned, the middle market environment remains extremely competitive given the muted sponsor activity. In the advance stages of the current credit cycle, we believe it is imperative to remain highly disciplined in our investment process and prudent in deploying our available capital into new investments that meet our strict underwriting criteria. Our strategic initiatives in both Life Science lending and asset-based lending through Crystal create attractive growth opportunities while our SSLPs allow us to be highly selective with stretch first lien senior secured sponsor backed cash flow transactions. Longer term, we believe the record amounts of private equity dry powder sitting on the sidelines as well as the retreat of banks from mid-market leverage lending as well as the approaching refinancing wave of existing borrowers creates a very attractive supply/demand dynamic for cash flow lending into the middle market companies. Now, let me turn the call back to Michael.

Thank you, Bruce. In conclusion, while we are pleased with our first quarter results, we are even more optimistic about the remainder of 2017 and beyond. Our diversified 90% plus performing portfolio provides us with a solid foundation for future growth through our strategic initiatives. We believe that our net asset value at March 31 which is an increase from the time of our IPO seven years ago validates our search that we maintained the most of its and focus our efforts on niche markets with less competition. Additionally, the flexibility that we have built in our lending platform provide diversified sources of growth and allow Solar to be less reliant on sponsor transactions when risk levels are elevated and structures compromised. At March 31 investments resulting from our differentiated sourcing channels comprised majority of our comprehensive investment portfolio. Our alignment with shareholders in Solar Capital’s conservative investment philosophy has enabled to attract and retain high-quality investment professionals, diversified strategic partners and distinguished institutional investors. The strategic developments for the recently announced joint ventures PIMCO and Deerfield, expanding the opportunity set for both Solar Capital’s on-balance sheet and SSLP investments in asset classes, we believe offer the most attractive risk-return profile in the current market environment. At March 31, our portfolio is defensively positioned. We feel confident that through our proprietary sourcing channels and strategic initiatives that we can use our available capital to opportunistically expand our comprehensive portfolio to the remainder of 2017. As we invest and move closer to our target leverage, our quarterly net investment income should increase into the highest 40s per share range. At that time, we’ll evaluate increasing our quarterly distribution. At 11 O’clock this morning, we’ll be hosting an earnings for the first quarter 2017 results of Solar Senior Capital or SUNS as we call it. Our ability to provide traditional middle market senior secured financing through this vehicle continues to enhance our origination team’s ability to meet our clients’ capital needs and we continue to see benefit of this value proposition in Solar Capital deal flows. At this time, we’d like to open the line for questions, operator. Thank you.

Thank you. [Operator Instructions] And our first question comes from the line of Arren Cyganovich from D.A. Davidson. Your line is open.

Thanks. The interest income came in a bit later than what we had expected. Is there anything in particular that drove that timing of investment activity or perhaps any fee income that was included in the prior quarter?

Hi, Arren, this is Rich. It is exactly the timing. So it was timing both in this quarter and in Q4. Q4 we had some contributions of some assets for most of the quarter that came out in the end of Q4. And for Q1, we will have some access early in the quarter, and then when we put the assets back on it was really the combination of the [indiscernible] work and those assets came on at end of the quarter. So it’s just timing for both Q4 and Q1 that impacted the change in income.

Okay. Thank you. And then in terms of the overall balance sheet leverage, you clearly had a good comprehensive investment opportunity amongst your off balance sheet vehicles this quarter, but in terms of getting that overall leverage higher in reaching the goal or the expectation in terms of NII growth. Have you considered doing some buybacks? I think the portfolio is down like 11% since the second quarter last year and you’re still seeing somewhat under leverage from overall balance sheet perspective?

No, we've not been doing, but our stock has been trading fairly consistently at book or above book and buying back shares frankly at a 7% dividend yield is frankly dilutive to the future of this business.

Okay, thank you.

Thank you. And our next question comes from the line of Chris York from JMP Securities. Your line is open.

Good morning, guys and thanks for taking my questions. So I just wanted to clarify a comment in your prepared remarks is you stated you expect to generate net investment income in the high 40’s. So is this guidance appears to be up quarter-over-quarter. So one is that increased cracked and then do you expect to achieve this guidance by the end of 2014, so kind of maybe fourth quarter?

Yes, so the guidance should be pretty consistent, but as you know, we put the Deerfield joint venture in place just within the last quarter. So that might give us the ability to get there a little bit faster. But we still think that the high 40’s is a very good targeted to run the math would be ramping up the various joint ventures between the SSLPs, Crystal’s continued performance and the ramp of the Deerfield and Life Science joint venture. I think as you know it's a little bit difficult in our business to pick the quarter, but I think you will see us heading in that direction to your point over the course of 2017.

Okay. So the trajectory is into the high 40’s, but the timeline isn’t defined, is that correct?

Yes, correct.

Okay. And then maybe subsequent to quarter end, how does the pipeline look and what has the investment activity been thus far?

As you can see in Q1, the activity was high. We just allowed certain investments to move on because as Michael mentioned there's a fair bit of refinancing activity across the platform, but particularly in the sponsor vertical as contrast with the Life Sciences and Crystal’s asset-based portfolio. As things came to market, we are opportunistic and refinancings where we want to stay in the investment based on the risks return equation, but let a lot of them go through. So the activity has actually been high and it continues to be that way in Q2, but the wildcard is also where we decide to let investments go given the pressure we have on the refinancing side.

Okay. That's helpful. And then maybe could share with us your thought process and choosing that not wait to use in this quarter to cover the dividend shortfall, but choosing the way fees in the prior year period to cover the shortfall?

Yes, I think we kind of view it as a vote of confidence in our future. I think last year, we earned $1.73 relative divided of $1.6 so we covered it very nicely we're very confident that for the full-year we will more than cover dividend as well. So we see no need to waive dividends to make that up as we expect to make it for the full-year.

Got it. Got it. And then maybe lastly one here Rich how much OID in prepayment fees are in the quarter and then maybe relative to prior years? And then whether any execute or success fees in the quarter as well?

In every quarter there is different types of fees some were being accreted in, some come out via the exits. Every quarter is a little bit different, I would say, quarter-over-quarter we're probably a penny or penny and a half lower than we were in Q4. But it is timing and close to Bruce’s point about where we decide to use our legacy position to stay and verses exit of credit given whether it be pricing and or terms or just terms. So I would say about almost $0.02 or maybe $1.50 like that with regard to the difference in peace quarter-over-quarter.

And then do you think so that penny and a half to $0.02 what we will call maybe non-recurring income is consistent on a quarterly basis?

No, what Rich is saying that we have penny and a half with less in Q1 and Q4.

Okay.

Yes, keep in mind our fees given our conservative accounting or not recurring where others companies were taken fees upfront they may be more [indiscernible] to non-recurring fees where in our case because we are amortizing those fees over the life of every loan. We don't have the same type of – it's not necessary recurring for us given our change for our difference in accounting.

Okay. That’s it for me. Thanks guys.

Thank you. And our next question comes from the line of Casey Alexander from Compass Point Research & Trading. Your line is open.

Hi, good morning. This is a little bit higher level, but you said first to clarify you said that you’ve seen spreads compress 25 to 50 basis points kind of over what timeframe is that? Because 50 basis points I mean if that was quarter-to-quarter would be an awfully high number historically.

I would say in the quarter roughly an additional 25 basis points and you can see that in terms of the liquid loan market and where the index moved during the course of Q1. So I would say for that quarter it was roughly 25.

So then from a higher level perspective, fear that the compression of rates is going to increase the velocity of your portfolio to the extent that it makes it very, very difficult for you to get to that fully levered figure?

I think that’s a great question. I think we were just in the sponsor base, second lien investing business. We would probably leave a little less well as [indiscernible], but as Michael mentioned because we have the differentiate engine with our asset-based lending platform at Crystal as well as our Life Science platform, you heard as we talk to some of our deals there the yields, realize IRSs over 18% and yields currently in the 11% to 12% before we consider exit fees or warrants. It allows us to absorb a little bit of this compression, but we're focused on and the sponsor business today is mostly on the stretch senior loans where there is some spread compression, but not nearly as much.

Okay. This next question I promise you I'm going to ask it badly. Because I’d have to sit down and write it out for a while to ask it goodly. But you have these various platforms and all of them are going to have excellent ROAs when fully ramped. None of these platforms necessarily operate on the same sort of economic timeline. For instance Crystal Financial is almost counter cyclical to the rest of the portfolio. Does it make it very difficult to get the entire platform operating at a high level when you have these various platforms that don't reach target ROAs until they're fully ramped, but they're asymmetrical to each other?

Well, let’s go campaign by business, so Crystal is currently generating 112% in ROA that was our target. So for us if the environment shifts to you point and becomes more distressed those returns will go up significantly from there because we'll be able to deploy a lot more capital. So we're very comfortable at that level. Life Science is kind of [indiscernible] completely and they're not really correlated to anything we do. So we don't feel there's any risk to that ramping, all things point towards be able to continue to grow our portfolio on balance sheet as well as to ramp the JV that we put in place. And I guess the wild card is the sponsor cash flow senior secured business. Look we believe that over the medium to long-term there is still a tremendous amount of unspent private equity capital that eventually to sponsors they are going to get impatient and they're going to start to deploy again. And we're poised particularly with the additional joint venture with PIMCO to play a major role in that growth new transactions because the average check size that we can write across the platform is now – will be significantly margin and puts us within a small group of people who can do that.

And just to put some numbers behind that. Michael's comments on the stretch senior loans where we think the JV with PIMCO will provide us additional strategic scale. We have taken our SSLPs from zero to $315 million of loans at quarter end. At Life Sciences, we've been in that business for about three years. We've taken that portfolio from zero to just over $210 million. So these businesses are not going to be built out in a quarter, but we feel we've made significant headways in a challenging investing environment and are well on the way to moving those to fully ramp.

Bruce it’s a fair point. Lastly, and I think every investor appreciates your focus on credit and I think it's commendable. It does allow the owners of the stock to sleep well at night. Does it also narrow your opportunity set of deals and therefore has it become more competitive spread wise in that narrower set of deals that meet your specific credit criteria?

Well the good news is that a narrow set of deals are fine for you given the size of our platform. If we were sitting here with $12 billion portfolio, we would be really struggling to kind of keep that portfolio inside because you would have to do that much more transactions with $1.5 billion comprehensive portfolio, it doesn't take a lot moving needle for us, so we can afford to be extremely picky and still generate $150 million, $200 million of new originations every quarter.

And I think as Michael mentioned when fully ramped NII would be up in the high 40's, but there is a big distance between 40 and high 40's and so it doesn't take a lot for us to make a significant progress on that growth in NII. As you know last year we were doing $0.46, $0.45 a quarter that come down, but we see that getting back up there pretty quickly.

Great. Thanks very much for listening to my discombobulate questions. I appreciate it.

Great questions. Thank you.

Thank you. And our next question comes from the line of Jonathan Bock from Wells Fargo. Your line is open.

Good morning and thank you for taking my questions. Curious if we look at the unit tranche assets just for a moment. Bruce can you tell me which of those deals you sole agented and originated, sole agent not admin, not just sole, which ones of those did you solely agent?

I would say everything we're doing is club, club oriented in our senior deals.

Okay. So club orientation and so if would that mean that are you brought in at a point after, which the loan has effectively been structured and made and you're willing to hold a piece of that tranche or you brought in at the point of actual origination with the sponsor?

It’s better than that. Our D&A is that we're control freak. So we are brought in typically by the sponsor and then married up with a partner, no different from years ago when we got started and the big mess deals were club oriented also. So we are to your question doing direct origination – direct on the writing, we're not buying syndicated paper in that regard. But as you know if the unit tranche product has moved up market in terms of large EBITDA businesses, the sponsors have realize, they need a lending partner that not only can provide the capital for the initial acquisition, but for the add-on acquisitions. So this delayed draw term loan, which I know you're familiar with, has become a big part of these transactions, which are basically standby funding commitments to certain conditions being met by the borrower. And so the capital need is growing for these larger companies and so typically they're clubbing us up and I might have a better relationship than one of our club partners with XYZ sponsor. They might have a better relationship with somebody else, but we're working very closely with some of our peers out there to club these transactions on a direct basis and at the end of the day, the sponsor picks who the borrowers are.

Got it. So then I guess the question that would in terms of club deal typically the one there originates, at admin agents, I mean what percentages of the tranche are you effectively taking? So if we look at a set care, how much of a set care do you own relative to the other club partners that participated?

I don't have that number in front on me. I can get back to you. But I would say that that percentage is increasing, and so but also the tranche size is increasing. As I touched on in some of my comment, we're investing dollars in Solar, but we're also has as you know exempt to release co-invested for us to platform. So we very often will also put some the risk is appropriate in Solar Senior as well as in some other private managing account that we have a platform and then eventually in the joint venture that we're raising with PIMCO. So that size is increasing in the stress senior loan product.

Okay. And so one additional question because the JVs are such an important part of the earning story and certainly that the part I would want to highlight in today's relatively difficult environment. At the current portfolio size, you also utilized the purchase of T-bills on repro in order to I don't want to say artificially, but effectively increase your total asset size, so that you do not run afoul of the 30% non-qualified limitation? And so to the point right now, where you are looking at it if those hadn't been added you'd be at about a 35% non-qualified ownership bucket. Michael and Bruce, and Rich, Rich I know you also did this at [Palo]. At what point do you start thinking about the spirit of the law as opposed to the letter of it. Because the spirit is to limit exposure here to effectively 30% and this might not have any bearing on all of the assets or equity investment that you funded, but I'm curious about the $50 million in Life Sciences funding that would only likely assuming the portfolio remains stable, on the likely increase your exposure to non-qualified asset, albeit that's a good thing, but still running afoul of a rule every other BDC as to navigate?

Jonathan, we've talked about this for quite some time now and I disagree with your assumption there. You have to understand that we are far less levered than all the other BDCs out there. So in BBC that you’re looking at have 0.8 times leverage and we're sitting at 0.3. We can use that basket that 30% basket, unless we were fully leveraged. So all the Treasury bills are doing is effectively and to look at not just are in to, but if you look at everybody he's into their sections for temporary investments. And it's meant for just that purposes but this goes back to 1980 I know you're not that old, but back in 1980 with David Gladstone what he is to do in plenty of BDCs are doing similar things, but some do it less effectively than others, some do it more effectively, or choice of method to basically relever our balance sheet towards our target leverage. So that we can portfolio manage without having to manage the timing of closings from one deal to the other is all that that Treasury bills. And as you know we don't through our management fees on that. So this is not anything to really go with the spirit.

Yes, just to reiterate that what we don't think we're crossing the spirit of the law at all our financial overviewed every year by the SEC. Our shelters are declared affected by see yesterday we are very transparent what we do so we're very comfortable with what we've been doing from day one.

Got it. The reason this becomes just a focal point is simply because Rich your ability to get to target leverage today on the 70% other parts of your book that we know fairly difficult to effectively grow in this environment to your points. It might cause us to rethink ones ability to get to that target leverage and effectively draw on the JV’s that are out there. And so again definitionally speaking its 30% exposure to non-qualified assets. How we want to define the denominator will leave up to the regulators and those guys have already opined. But it's certainly a question of if one can't deploy the way you're looking because of your stringent credit policy today. One might also ask well, how can you be able to access non-qualified assets today if we're really not going to see much portfolio growth either.

I think Jonathan we actually don't believe we're not to see much portfolio growth because if you look at things like Life Sciences which is predominately on balance sheet apart from the new joint venture with your - yes start to ramp which we respect next quarter. As well as you know Crystal we can come and invest with Crystal on balance sheet and have done so rather successfully in the past. As well as the loans that are stretch senior units tranche loans in our SSLPs we also do put some of those on balance sheet and this so last quarter. So we don't feel is constrained in our ability to grow that nor do we feel any constraint in funding our joint ventures.

Yes again no, everyone understands you can - you have the ability to fund them it's whether or not one should and I do appreciate the color around. And then the last point just as an item most folks continue to focus in on BDCs in kind of tighter spread environment. Michael you've made a conscious decision to support the shareholders in other ways through stock buybacks as well as fee waivers? How do you look at a 2 and 20 management fee in light of a current ROE and book it about 7.5 and slightly going potentially higher some might argue that that would be considered a higher or in some cases highest cost producer of your current [indiscernible] relative to others. And I just - in light of the new fee structure dynamics that are aligning via incentive fees and lower base fees this is nothing you've not heard before, but tighter spread environments cause shareholders to start to look inward it through costs…?

And we always do I think we feel confident comfortable as at the board that if you look at our overall expense ratio taking over the consideration were amongst below it even with the structure and importantly our business is not a simple business we have very complex businesses with life science is in Crystal we're not buying the people syndicated loans. Those cost money people like and to do that with the talented team we have.

When you say amongst the lowest Michael are you referring to the fact that like your total fees and G&A as a percentage of average assets is that what you're referring to?

You can look at in many different ways as the percentage of revenue, net assets, and gross assets. Jonathan if you look at all expense all in not just any individual line item on a P&L, but all expenses all in relative across the board of course all the BDCs were actually among one of the lowest expense rations.

Okay, guys. Thank you so much.

Thanks Jonathan.

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

Good morning, everyone. I realized you need to get on another call, so I’ll try to be quick. Michael and Bruce with spreads compressing about as fast as LIBOR has been going up, we've seen hampering effect on yield. Given that trend and vintages of your investments, how do you feel today about the portfolios refinancing risk on a go forward basis?

We always say that we feel like it's behind us because of the recent vintage of our portfolio Mickey and usually we don't give a lot of visibility unless there's a sale process going on that you know about. So we do feel like it's somewhat muted. Although, I did mention in my remarks that we just got refinanced on our last unsecured investment in the Solar portfolio of $27 million loan, we just came out of ballpark. We think that's a good thing while we love the investment we've been in it for few years and it's actually a time to get re-buy it and reevaluate whether we want and have the opportunity to reinvest. So I think it’s restatement with somewhat muted, clearly nothing like what we had experienced a couple of years ago when we were averaging $500 million, $600 million a year.

I appreciate that. My next question regards healthcare, you have a team there were access to a lot of individuals with expertise in that field. How do you feel about the reimbursement risk in all your healthcare investments given all the uncertainty as to what the federal government may or may not do with Affordable Care Act?

Sure. Great question. It's something that to your point we are blessed with a very deep industry expertise between our team at Gemino who understand how to underwrite reimbursement risk code by code, receivable by receivable that is their collateral. And so that's a great resource for our cash flow lending team to tap into as well as obviously Anthony Storino on our Life Science team. Importantly though our Life Science exposure, which is a meaningful part of our healthcare exposure at Solar, as you know these are late stage healthcare companies focused on drug or device development. And so we're not yet – in most cases at the point of commercialization, so that it's not about reimbursement risk, it's about the viability and the future potential of that intellectual property drug device et cetera. So it is something we are extremely focused on. I’ll give you an example [indiscernible] one of our portfolio companies, which we felt very good about did have some modification downward of the reimbursement codes about a year and a half, two years ago, went down about 40%. The Company had negotiations with the authorities and the regulators and they just increased reimbursement back up another 25%. So these are things you have to monitor, but we feel very good and it's something we have to look at investment by investment.

I appreciate that Bruce. Just a couple of housekeeping questions. Could you repeat how much total available capital you said you have and what caused G&A to decline so much quarter-to-quarter? And that's it for me.

Sure. The available capital, we actually did say that it’s rather substantial when you look at our credit facilities $800 million, $900 million.

In G&A, lower insurance, professional fees, debt issuance costs, so you still see the G&A can back up couple $100,000 next quarter to access usual run rate.

Okay, thank you.

Thank you, Mickey.

Thank you. And our next question comes from the line of Steve Masarik from Cliffwater. Your line is open.

Good morning. Thanks for taken the question. It's a very high level housekeeping one and I apologize if you already mentioned. But what percent of the portfolio is in sponsored deals currently as the new JV ramps up? Do you expect that to change materially?

So in our cash flow lending [indiscernible] business about 100% is sponsor. And then Crystal is largely not sponsor. And then Life Sciences is a fact that all sponsor be console venture capital of that.

And the new joint venture on the Life Sciences side will continue to be venture capital back as well as public equity backed companies.

Okay. Thank you.

Thank you.

Thank you. And our next question comes from the line of Christopher Testa from National Securities. Your line is open.

Hi, just wondering obviously the JVs or unit tranche heavy, just curious given the popularity of that product whether we should expect more unit tranche owns on balance sheet as well as or whether you're trying to keep the overall leverage of the comprehensive portfolio in check?

I think after if I ask that you will see us, but some of the unit tranche loans on balance sheet as well as the SSLPs, depending on the underlying return profile.

Got it and when you talk about the potential take on large bite sizes given the partnerships you have via the joint ventures. Just curious how much you think you can kind of scale up in terms of either the average the loan size or the average EBITDA for the borrowing?

The average EBITDA won't change much. We would be looking to taking a larger piece of the same deal. So across the platform to – 75 to 100 across the various accounts and beliefs we have and I'm with the PIMCO JV that could easily double.

Okay, great. And I’m just curious obviously much of the volume across the market was all refinance and the first quarter just wondering second quarter to date where you're seeing the use of capital kind of break out?

Yes, I think you look refinancing to continue to second quarter, but we are selectively getting involved in some of those as we did the first quarter and continued medically on the sponsor side to see more add-on acquisitions to existing portfolio companies. So we have room to grow, and are deploying more capital are sponsor are growing their portfolio company, so lot of that on acquisitions.

Got it. Is it safe to say that year-to-date that the majority of your originations have been exciting portfolio companies?

Yes.

Okay, got it. And just curious, this is the first quarter and quite some time that would be NII fall short of the dividend. If this happens, because the portfolio shrinks, due to have your prepayments or what not, just curious if the management company will step into some way feet if there's a shortfall again?

I think if you had to pull long shortfall like we did in the past we would.

Okay, great. That’s all for me. Thank you.

Thank you. End of Q&A

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Michael Gross, Chairman and Chief Executive Officer for closing remarks.

Thank you very much for your time and your good question this morning. If there is anything else you need, we want to able to address, limited time please feel free to follow-up with us. We’ll get back to you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.