SLR Investment Corp. (SLRC) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Solar Capital Second Quarter 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] And as a reminder, this conference maybe 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. Welcome to Solar Capital Limited’s earnings call for the quarter ended June 30, 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?

Of course. Thanks, Michael. I’d like to remind everyone that today’s call and webcast are being recorded. Please note that they are the property of Solar 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 undertakes no duty to update any forward-looking statements, unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at 212-993-1670. At this time, I’d like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. The second quarter saw continuation of recent trends with a leveraged loan market supported by capital inflows, low interest rate and stable issuer fundamentals. The lack of new money opportunities, combined with below-average default rates and slow but steady economic growth have extended the issuer-friendly underwriting environment. According to Thomson Reuters, middle market loan volume was up a modest 2% from Q1 with 50% of transactions representing refinancings and repricing. Since early 2016, middle market transactions have experienced a steady deterioration in pricing as lenders have been forced to incur higher risk with lower yields. Year to data 2017 returns have remained approximately at the same level but leverage has crept up in terms or loser. In this extended period of elevated repayments and frothy markets, Solar Capital has remained disciplined and focused on the strategic objectives. Our priorities have not changed. First and foremost is to preserve capital and protect their net asset value. Second, to use our available capital to source investments that meet our strict criteria and grow our net investment income. Third, is to expand our finance capabilities in niches that are less competitive, offer attractive risk-adjusted returns and have a low correlation to the liquid leveraged loan market. Fourth, is to enhance Solar Capital's role as a solution provider to middle market issuers through the creation of strategic partnerships and joint ventures that increases the scale of our platform and expect to result in more attractive senior secured investment opportunities. And finally, to invest those principals along with our fellow shareholders and focus on building long-term value. Further our strategic objectives, Solar Capital announced last night that on July 31, it acquired NEF Holdings LLC or NEF, an independent equipment finance company to provide senior secured financings -- equipment financing to companies in the U.S. Solar Capital invested approximately $210 million to effect the transaction. The acquisition expands our proprietary origination opportunities and provides differentiated source of growth for Solar. Pro forma for the NEF acquisition approximately two thirds of Solar's comprehensive portfolio is expected to comprised of specialty finance investments with the remainder from directly originated investments in senior secured cash flow loans to sponsor-owned companies. NEF was founded in 2010 by Former GE capital equipment finance professionals to fill a void in the marketplace, create a dislocation of traditional lenders. The acquisition offers a compelling opportunity for Solar to invest in an established business whose experienced management team has underwritten approximately $1 billion of equipment finance transactions and built a strong historical track record. The addition of NEF's sourcing channel enhances Solar's flexibility to originate across multiple business lines in order to find the best risk reward opportunities while also increasing the earning power of Solar. We expect our investment in NEF will generate approximately a 10% to 11% net cash yield, consistent with others specialty finance assets in our portfolio. NEF will distribute substantially all it's earnings to Solar on a quarterly basis. Based on NEF's current existing portfolio, the investment would currently generate quarterly net investment income for Solar of approximately $0.04 to $0.05 per share. Bruce will provide additional details on NEF's transaction. We've funded our investment with available liquidity including borrowing under Solar Capital's existing credit facility. At June 30, Solar Capital had approximately $300 million of debt outstanding. Had the acquisition of NEF closed on June 30, Solar Capital's pro forma leverage ratio would have been 0.55 times debt-to-equity. Accounting for the NEF's investment Solar has over $750 million of available capital under its credit facilities, subsequent borrowing base availability to finance portfolio growth. Our portfolio continues to perform extremely well as a result of the investment discipline maintained over the last several years of heated market conditions. We've constructed what we believe is a defensive portfolio of senior secured loans. We've largely avoided investments in company's operating and cyclical, consumer discretionary and energy or commodity based industries. Credit quality remains strong with no non-accruals in the quarter. On a fair market value basis, 100% of portfolio is performing at June 30 and net asset value at June 30 was $21.79 per share up $0.04 per share from Q1. In the second quarter, across all of our strategies, Solar Capital had originations of approximately $110 million and repayment of $226 million. As Bruce will discuss, over 90% of the originations were life science and crystal asset based investments. Net investment for the quarter is $0.38 per share. We chose not to reinvest in loans in our loans that were either repaid or repriced in Q2 based on tighter pricing elevated risk. Instead we focused our efforts on deploying capital into specialty finance investments NEF where we believe the current investment opportunity is more compelling. In addition, we continue to make solid progress in our partnership with PIMCO. As a reminder, at the end of 2016, our advisor Solar Capital Partners formed a joint venture with PIMCO. This initiative to provide significant long-term benefits to Solar. Through an expected larger investor capital base across the Solar platform, Solar will be more of a full solution provider, which is expected to result in greater deal flow for Solar and the SSLPs. Furthermore, the partnership with PIMCO provide Solar with access to the resources of a world-class credit manager, which has invested $300 million in corporate credit and currently employed over 50 credit research analysts. We are confident Solar Capital's differentiated business lines together with our SSLPs and joint venture with PIMCO and the solar life science program give us the necessary tools, resources and flexibility to successfully navigate the current challenging investment environment. Solar Capital is well-positioned with available capital and diversified sourcing engines to prudently grow and drive an increase in our net investment income. At this time, I'll 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 June 30, 2017 was $920.9 million or $21.79 per share compared to $918.8 million or $21.75 per share at March 31st. At June 30, 2017, Solar Capital's on balance sheet investment portfolio had a fair market value of $1.22 billion in 57 portfolio companies across 24 industries compared to a fair market value of $1.32 billion in 61 portfolio companies across 23 industries at March 31. For the three months ended June 30, gross investment income totaled $33.9 million versus $34.4 million for the three months ended March 31. Expenses totaled $17.8 million for the three months ended June 30, compared to $18.1 million for the three months ended March 31, 2017. Accordingly, the company's net investment income for the three months ended June 30, 2017, totaled $16.1 million or $0.38 per average share compared to $16.8 million or $0.40 per average share for the three months ended March 31, 2017. This excludes the one-time financing cost related to the private placement for a $100 million in unsecured notes during the first quarter. Below the line, the company had net realized and unrealized gain for the second quarter of 2017 totaling $2.7 million versus net realized and unrealized gains of $0.8 million for the first quarter of 2017. Ultimately, the company had a net increase in net asset from operations of $18.8 million or $0.44 per average share for the three months ended June 30. This compared to an increase of $17.2 million or $0.41 per average share for the three months ended March 31, 2017. Finally, our Board of Directors declared a Q3 distribution of $0.40 per share payable on October 03, 2017, to shareholders of record on September 21, 2017. With that, I'll turn the call to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich. I'd like to begin by providing an update on the credit fundamentals of our portfolio. Overall the financial health of our portfolio investments remain sound, reflecting our disciplined underwriting and focus on downside protection. At quarter's end, the weighted average later 12 months revenue and EBITDA and interest coverage trends continue to be positive for our portfolio companies. The weighted average leverage to our investment was 5.2 times, consistent with the first quarter. The fair value weighted average EBITDA across our portfolio of companies was just over $65 million. The U.S. economic environment with stable earnings and low default continues to remain favorable for disciplined credit investors. At June 30, the weighted average investment risk waiting of our portfolio was two based on our one to four risk rating scale with one representing the least amount of risk. Approximately 96% of the portfolio is rated two or better, again reflecting the portfolio's strong credit fundamentals. Measured at fair value, a 100% of the portfolio was performing at June 30. On a cost basis, our one legacy investment in direct buy is on nonaccrual and accounts for only 0.7% of the portfolio. The weighted average yields on a fair value and current cost basis are 10.1% and 10.5% respectively, consistent with the prior quarter. Importantly, Solar was able to maintain its portfolio yield without compromising credit quality or taking on additional risk during this quarter. Now let me provide some color on the composition of our comprehensive portfolio, which includes Crystal Financials portfolio of asset-based loans, Life Science loans as well as our senior secured loan program. At the end of the quarter, our $1.4 billion comprehensive portfolio included 86 issuers across 34 industries, again with no direct exposure to energy or commodity sectors. The average investment per issuer is $16 million or 1.2% of our comprehensive portfolio. Almost 98% of the portfolio consisted of senior secured loans, again consistent with the prior quarter. The remainder of the portfolio was comprised of 2.3% of equity securities, primarily related to our debt investments. At June 30, over 96% of our comprehensive portfolio was floating rate. Before turning to our second quarter investment activity I'd like to provide some additional information on the NEF acquisition. By way of background, our team is very familiar with leasing industry overall having diligent key markets participants and independent lease financed companies in the context of evaluating potential debt and potential control equity investments. Our investment team continues to review and evaluate specialty finance companies that operate in very attractive lending market niches. Solar has followed NEF closely for a number of years given our investment activity in the equipment finance industry. In addition, senior members of our investment team have long-standing relationships with NEF's executives as a number of both Solar and Crystal Investment professionals trained under NEF's founder and CEO, Phil Carlson, while they were all together at GE Capital. NEF employs a team of approximately 40 professionals, which in addition to our 80 professionals on the Solar platform takes us to 120 dedicated professionals focused on mid-market finance. As Michael mentioned, since their inception, NEF has directly originated approximately $1 billion of equipment financings. Their portfolio is highly diversified with an average funded exposure per borrower of just over $2 million. Collateral security NEF portfolio consists of long-lived essentially used assets such as trucks, trailers, machine tools and equipment, all of which can be readily liquidated. Advance rates are typically less than liquidation value of the equipment and the lease term is typically three to seven years with an average life of just over four years. The typical customer of NEF is a privately-owned midmarket business with a high investment in fixed assets. Solar Capital acquired NEF for a modest premium to tangible book value. We believe the purchase price represents a very attractive entry point and further expands Solar's product offering as a diversified specialty finance company. With its 100% collateralized loan portfolio, the addition of NEF complements our existing cash flow, asset base and life science senior secured lending businesses. We believe NEF's platform is highly scalable and provides Solar access to a midmarket asset class that offers attractive risk-adjusted returns. Pro forma for the acquisition of NEF, we expect approximately two thirds of Solar's comprehensive portfolio to be comprised of our specialty finance businesses and the remaining third comprised of our cash flow lending business to sponsor our own companies. Now let me provide a brief update on these strategic initiatives. At quarter's end, our life science portfolio totaled approximately $215 million of first lean senior secured loans 24 borrowers with an average investment of $9 million. In the second quarter, the team originated $9 million of senior secured loans and had repayment optimization totaling just over $8 million. The weighted average yield of our life science portfolio maintained at 11.5% return at fair market value and 12% at cost and this excludes any potential exit and success fees for warrants. The blended realized IRR on our life science investment through quarter end is 18.4% including realized value of warrants. Now let me update you on Crystal, our asset-based lending platform. At June 30, Crystal had a diversified portfolio which consisted of approximately $370 million of funded senior secured loan across 24 borrowers with an average loan of just over $15 million. In the second quarter, Crystal had new investments of approximately $90 million and has portfolio reductions totaling approximately $64 million. 100% of Crystal's investments are senior secured loans and approximately 99% are floating rate. For the second quarter, Crystal paid Solar a cash dividend of $7.9 million equating to an 11.3% yield on cost, which is consistent with the prior quarter. And finally, a quick update on our Senior Secured Unitranche Loan Program or SSLP. In the second quarter, SSLP and SSLP2 collectively funded $14 million of senior secured loans, bringing the total portfolio to $285 million of investments. SSLPs have senior secured loans of 15 different borrowers with an average investment of just under $20 million, both vehicles were 100% performing. Combined repayments including contractual amortization totaled approximately $44 million. The SSLPs are currently earning approximately a 10% return on equity and we continue to expect that to creep up into the low teens as the vehicles are fully ramped. Now let me turn to our second quarter activity. Including investments and repayments in the SSLPs, we originated approximately $20 million of senior secured floating rate loans across nine companies. Investments repaid are sold during the quarter totaled $162 million. When considering the second quarter activity across all of our strategies, originations were $110 million and repayments were $226 million with 90% of the new originations being in Crystal asset-based lending and life science investments. With the NEF acquisition post quarter end, we've especially more than replaced the cash flow loans that were repaid during the second quarter with investments in our specialty finance businesses where we believe the current market is extremely compelling. We invested $5 million into SE Pharma, a clinical stage biopharma company that has developed a combination drug and delivery device to treat a condition related to heart failure. The loan has a yield to maturity of approximately 11%, which excludes any warrants or final fees. We also funded ad-on investments into portfolio of companies for aTyr Pharma and Siena Medical. During the second quarter, we repaid at par on our $28 million subordinated investment in Allegis Technologies earning an IRR of 14%. Allegis was our last remaining unsecured investment in the Solar portfolio. We were also repaid on our $34 million investment in the second lean term loan of aTyr Point. We realized an IRR on this investment of approximately 11.5% and in addition, we were repaid on our $30 million investment in the second lean term loan of US Anesthesia Partners as part of the refinancing. We realized an IRR on this investment of over 10.25%. Finally, Solos was repaid on its investment in the stretch first lien term loan of CIBT Holdings. Here we realized an IRR of just over 8% and decided to pass on participating in a new cup like first second structure for the company. As Michael mentioned, the middle market environment remains frothy given the market technicals. We are blessed to have diversified origination sources and will continue to be disciplined and prudent in deploying our capital. Our SSLPs allows to be highly selective with the stretch first lean senior secured sponsor owned cash flow transactions. Longer term, we believe the record amounts of private equity dry powder, the retreat of banks from midmarket leverage lending and the approaching refinancing wave of existing sponsor-owned leverage companies create an attractive supply-demand dynamic for cash flow lending to middle market companies. Now I'll turn the call back to Michael.

Thank you, Bruce. From the inception of Solar Capital 11 years ago, our investment and management decisions have been focused on building long-term value, protecting capital and maintaining alignment with our shareholders. As credit market conditions have steadily deteriorated, we consciously migrated Solar's portfolio to one that is comprised of 98% senior secured loans. We form the SSLPs and strategic partnerships with institutional investors allowing us to invest in lower risk, first lien and stress first lean senior secured loans while utilizing modestly higher leverage in the vehicles to generate attractive return on equities. We established joint venture with PIMCO and other partners to enhance origination opportunities and create additional scale and importantly we diversified into specialty finance verticals for this asset based lending through Crystal, life sciences and equipment finance with the recent acquisition of NEF. All these steps were taken to maintain a defensive, lower risk and high-quality portfolio while building a broader origination platform. The acquisition of NEF is a significant event. Today we are diversified specialty finance company, providing solutions across the capital structure to middle market businesses. Our origination engines are broad and provide us the opportunity to source loans in specialty niches focused on collateral and loan-to-value lending that are lot less competitive than traditional cash flow lending. In addition, the specialty finance strategies are less correlated to the liquid credit markets and have a differentiated risk return profile that is complementary to our cash flow lending. They afford us the greatest flexibility to stick to our investment discipline and avoid pursuing cash flow transactions in a frothy market environment. Unlike many of our BDC peers who are facing declining net investment income, given the spread compression and cash flow lending and are contemplating dividend cuts, we are not. The investment in NET now gives us engines of growth and enhances our earning power. We have a solid foundation with a diversified portfolio of strong credit quality. The combination of our specialized businesses, our available capital places us in a unique position of having the flexibility and opportunity to grow net investment income and potentially increase our dividend in the future. At 11 'O clock this morning, we'll be hosting an earnings call for the second quarter 2017 results of Solar Senior Capital or SUNS. Our ability to provide traditional middle market senior secured financing, through this vehicle continues to enhance our origination team's ability to meet our client's capital needs and we continue to see benefits of this value proposition in Solar Capital's deal flow. Thank you very much for your time this morning. Operator, could you please open up the line for questions at this time?

[Operator instructions] And the first question will come from the line of Ryan Lynch with KBW. Your line is now open.

Hey, good morning and thank you for taking my questions. First off congratulations on the NEF acquisition. I did have a couple questions on NEF. First the $200 million -- $210 million you guys paid, what was the actual size of the portfolio purchased and also how will that be structured on your balance sheet? Would you guys place a portion of those strike on your balance sheet or will they be placed into some sort of like wholly-owned sub and if you guys are going to split those up, what percentage of the portfolio would go in the balance sheet versus what will be placed into a wholly-owned sub?

Sure, Ryan is both. We'll have assets on the balance sheet as well as in a wholly owned sub. I think you should expect the -- and we'll take you through this when we release the third quarter queue, but our intention is to probably have the assets on balance sheet will grow faster than the assets in the sub, but we'll be reporting this as a line of business as a equipment finance segment. So effectively you'll see the collapse view as to how the business is operating.

Okay. And big will the portfolio be from the initial purchase?

It's just about $340 million.

Okay. And then will these assets whether you put them in the sub or whether you put them on the balance sheet, will they be qualified or nonqualified assets and if they are going to…

This entire investment in a qualified investment regardless if it's on balance sheet or in the leasing company.

Okay. As far as it's in the leasing company, why would this transaction be qualified assets versus the transaction or the investment in Crystal being a nonqualified transaction.

Because the company we required originates and manages equipment financings and the majority of this portfolio is operating true leases where NEF actually owns the equipment and generates rental leasing payments from its clients. And given this business model, they're not considered securities under the 4D Act and therefore it's nonqualified asset.

It's similar to how some people have invested as you know in our sector and airplane leasing businesses. If the airplane gets old out there that you can look at.

Okay. That makes sense. And then you mentioned post the NEF transaction about two thirds of your comprehensive portfolio is not going to be in the specialty finance investments versus the directly originated cash flow back loans to sponsors. And you guys have done a great job of expanding this and diversifying your portfolio. Is this where you want to be this kind of breakdown of two thirds specialty finance and then one third sponsored back or would you guys be looking to potentially grow the specialty finance segment in the future?

I think the short answer is as we have in the past, we expect to grow both. We had no specialty finance businesses going back at the beginning of 2012 and then we were fortunate to bring on the Crystal asset base lending team, the Life Science team and now the NEF team, but we've also as you know expand our capital lending business with our SSLP joint venture partners such as Voya as well as our additional capital that we hope to have during to our JV with PIMCO dedicated to the cash flow business. So, the mix will vary from quarter-to-quarter based on where we see the best investment opportunity. But what we find so compelling is that our intention to grow all four verticals, and have that diversification cross-platform to your point.

And importantly as we mentioned, we’re sitting on roughly $750 million of dry powder. So, to the extent we do get some volatility in the cash flow lending business, we don't have to rely upon repayments, which won't happen in a volatile the market, kind of to invest further in the cash flow lending product.

And then just one final question. It didn’t look like there was any growth or anything fund in the life sciences JV. Can you just talk about, why there were no findings in there and what is the outlook for growth in that JV?

I think that we continue to expect to see some funding either late Q3 or in Q4. It just been little bit slower to ramp, and I think that’s just more broadly. The good news is, there have been a fair bit of BC capital raised for life sciences, but that takes a little bit of time to get deployed and then to get late stage enough in that deployment, development of the company, so that we’re comfortable lending because as we’re often shown opportunities in the early stage of BC investing and we’ll say no, let’s look at in pipeline, we visit next year. So, we’re seeing the opportunities set build, but there's been a little bit of a delay just as that capital gets deployed by the BC community.

Okay. Makes sense. That’s all the question for me. Thank you.

Thank you.

Thank you. And the question will come from the line of Rick Shane with JPMorgan.

Thanks, guys. Ryan asked a lot of million questions, but I really do wanted to drill back into the NEF acquisition a little bit. And part of it is the language in the press release as you invested approximately $210 million. Did you find equity or did you find assets, and I’m sort of curious again, circle back to Ryan’s question. How does this appear on the balance sheet? Will there be a new $340 million of assets? And then, $130 million of financing associated with that to sort of net out to that $210 million of equity?

So, it will be a mix. You will see on a set of investments, you will see a lot of small leases. The average investment is $2.2 million. You'll see a bunch of those. Then you'll see an investment in NEF leasing company, that will carry out as an equity investment. But as we said that, we’ll be distributing all the earnings out, so that will be similar Crystal in structure in that regard. So, it’s a hybrid. And there will be some financing at the leasing company and they will be financing the leased on our balance sheet under our resolver as we funded it.

And does your existing revolver allows for to contribute assets of this type. And is there any difference in advance rates or is your pricing grid any different related to small ticket leasing? Is in small ticket?

Right. It’s large ticket, and the one that makes our eligible collateral on same advance rate and pricing as any of the first lean month.

Okay, great. Thank you, guys.

And importantly, the financing at the leasing company is comparable to our cost of financing on our corporate balance sheet today. These loans are highly attractive for banks to lend against given the diversification, and surprisingly to us, as dealt in the business, it definitely gets accretive investment-grade debt from lenders perspective.

And again, I’m not commenting on the risk adjusted margin of this in any way. But from a - at least superficial ignoring credit perspective, this allows you to put assets on, that are probably earning 200 or 300 bps over cash flow loans and finance them comparably. Is that the way, we should think about this at least from a P&L perspective?

I think we expect kind of at the level of returns here, 11% or 12% and that’s net of expected losses. This business will have small off here or there given the nature of the collateral lending again. The expectation historical experience is about 1% loss rate. And so, the state of returns are closer to 13. The net returns are before expense, 11% to 12%. And Yes. And then we can finance those at similar advance rates and cost as a cash flow loans. And get as you mentioned more like 3 to 4 basis points of premium return today, what we’re seeing in cash flow.

Again, just the core collateral yellow metal in trucks.

It’s trucks and trailers. It is yellow metal. It’s a transportation equipment. If some aircraft, it’s highly diversified given the 2.3 million average investment, but yes, it’s heavy equipment.

Okay. And I was going to end questions here. But you said aircraft. What type of aircraft, commercial or civilian?

There is some civilian, but very small.

Okay. Thank you.

Thank you. [Operator Instructions] And the next question comes from the line of Casey Alexander with Compass Point Research and Trading. Your line is now open.

Hi, good morning. Congratulations on the acquisition. Most of my questions have been answered. But knowing that, and usually this is in the release, maybe I missed it. But knowing that a certain amount of these equity investments are really representing senior securities. At the end of this third quarter, what were the breakdown be between senior secured securities versus equity. Is it like 96 and 4?

We have really no equity.

It was about 2% of that.

Okay, great. Awesome. All right. That’s my only question. Thank you. Again, congratulations on the acquisition.

Thanks, Casey.

Thank you. And the next question comes from the line of Jon Bock with Wells Fargo. Your line is now open.

Good morning and thank you for taking my questions. Certainly, I would appreciate, Rick Shane’s comment on loan growth absent worrying about any type of credit losses. So, I always love hearing that. I want to start with one quick question, just to make sure. I’ve got it correct because Bruce you mentioned that the slits ROE's are around 10% and I see that yet, that perhaps is one of the most difficult categories to compete in and when I think of your originations, I think the largest one being pet vet, which I believe is a gall-up deal and several others. Syndicated markets continue to drive down spreads. Do you truly believe that that 10% ROE is going to be maintained in an environment where there is just a significant amount of competition?

Yes, we do. Remember, we’re not fully levered there yet. So, we have a little cushion there to take some of the spread compression that you are referring to. But as you saw in the second quarter, we were pretty disciplined about what we put into the SSLPs given the environment and given that we have alternative investment channels. So, we think in capital lending John that’s the best place to be from a risk perspective. You know us, we can handle a little spread compression should it continue because we do have these outsized of returns in the specialty finance business. So, it’s not - we’re more concerned about some of the elevated risk we’re seeing in the structures. Unit cost is phenomenal, but when start to push them to seven times just because a part of PE firm takes more key times. We all know that it’s not worth 14 at the time it needed to be. So that’s what we’re really conscious. If you are watching the spread compression. I think the fact that you see a ove3rall portfolio maintain its yield, is really our critical focus across these verticals. And while they now total two-thirds of our portfolio and out themselves, they give us a little extra returns to balance out spreads compression we see in cash flow business.

Got it. And Michael, I wan to just make sure I repeat what I believe you said in terms of this being a good asset because that generated a lot interesting discussion and I imagine will continue to do so with investors. So, you are saying the fact that NEF owns the equipment itself, right, is what causes this to be looked and I get it Rick said to look at aircraft, I get it. But the fundamental basis is, they own what they are leasing and that is what makes it qualified. I just want to get to the core grid.

So, to contrast it, Crystal’s loans are securities for 4-D act purposes and that’s why Crystal, even though the loans are good load - good assets on our books. Investment Crystal is a bad asset because they own securities. The leasing company we acquired does not own securities.

And I think it’s just helpful that it’s mentioned on the record that, we do have compliance and legal folks that work with Solar and help Solar out each and every day. So, we definitely work with them and they help us with any interpretations or in fact.

And then just one reason for consistency because could you explain why - I mean how are you going to pick what goes on your balance sheet versus what stays hidden in the sub?

The main motivation or driving factor, what goes as sub is tax. So, we need to put certain assets in there for tax reasons with a block of corp so we don’t tapped at the parent.

Okay. That makes sense.

But importantly Jonathan, we own the 100% of all of it. So, we’re in different from return otherwise where it goes because we sold BC on 100% of all the loans.100% of the leasing company. So, all the way it goes up to our shareholders.

I guess the question would be - is it at a leasing company, would you be able to either better or worse financing terms. So, if NEF Co or is it all the same. You will be borrowing at the same rate you do on your current balance sheet?

Similar, so they are borrowing at 250, we are borrowing it out 200, on the margin right. But we also have a fixed rate debt. So, our average cost of capital is pretty similar. And somebody asked earlier, so where are going to grow, the answer is in both places, it’s a different product that would result in an asset that would want to go for tax purposes and lease co versus on balance sheet. But we’re in different methods and different, it’s just a structuring issue for tax efficiency.

So, would you say the real risk that we’re going along is effectively construction and residential/ commercial real estate in light of the fact that these trucks - these trucks are majority of the portfolio and that - that’s what you used this equipment for?

Remember too, there is a lot of maintenance right. I mean, transportation equipment is also just delivery of goods. So, there is an inherent cyclicality, but underlying this is collateral. We’re not lending just on the cash flows of these borrowers. And so, the key is very similar to the Crystal team. NEF has it’s long track record of making sure that they are within collateral value, liquidation collateral value so that if they need to take and liquid that collateral. That’s a key source of repayment/

Got it. It’s all about picking those collateral values at a point in the cycle, when everyone is trying to sell all the same stuff. So, thank you so much for answering my questions. I appreciated it

Thank you. And the next question comes from the line of Christopher Testa with National Securities Corporation. Your line is not open.

Hi, good morning. Thanks for taking my questions. Just curious on the equipment financing segment during times back stress specifically 2008, 2009, just with the loss rates and the recovery rates on this type of loans were?

It’s actually been very consistent over time. The 1% annual average loss rate has been consistent the cycle.

What type of financing are you getting on NEF?

We have a the combination of a credit facility at held 250 as we mentioned as well as they have some securitizations that are winding down.

I appreciate your comments around the SSLP’s and obviously the uniform market being floppy. I guess the question is, how much do we have to see spreads kind of back up before it becomes palatable to allocate more capital here some leverage to get the ROEs that you are looking for?

Yes. We’re very comfortable at the 10% ROE, 11 or 12 would be better. But because we’re still under levered in those SSLP’s we have the trends to continue to drive what we think are pretty attractive ROEs. We’re less focused on what’s happening from a spread perspective to the dialogue we just have with Jonathan. And more focused on some of the elevated risk that we see creeping into the structures. Covenant like unit tranches, they are the exceptions. But we’ve seen a couple of them, in elevated leverage levels. So, we’re more focused on risk. In terms of driving our desire to continue to invest there, we had $285 million in the portfolios. We see growth this quarter, but we’re being highly selective, but fortunately the yield on our overall business has held up reasonably well in this environment spread compression across cash flow business because we do have these other engines that are delivering outsized returns. So, when you think about from a portfolio construction perspective and that as you know first and foremost in any asset class what's the risk level that we're comfortable with, 25 bps, 50 bps of spread one way or the other is not what's going to drive our portfolio of yield because we do have the ability to put leverage in the SSLPs.

Right. And are you seeing any acceleration of kind of the covenant like traditional middle market winding from broadly syndicated?

Acceleration no, but we just it episodically, yes.

Okay. Got it. And just curious in terms of Life Sciences I know that JV hasn’t made investments yet. I was just curious if you could talk about the timing when you expect that to begin and also how you view the opportunity set in JV versus your regular Life Sciences platform?

The opportunity just for everyone's benefit and I know you know this is the same company. It's just even a legal later stage in the JV because they will have mostly gone public because again this is our way to invest in the nonqualifying assets in Life Sciences because they may have a greater than $250 million market cap. So, it's the same line of business that our team lead at GE Capital. We just because of that BDC construct have divided the business into two segments, but that's an artificial designation as the team looks at it. So, they have a similar pipeline in both, but I think that as I mentioned earlier, the capital has been performing and so the equity comes in first before our credit and so we're starting to see that pipeline built.

Great. That's all for me. Thanks for taking my questions.

Thank you.

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

Good morning, guys and thanks for taking my questions. So most of my questions on NEF have been asked, but are there opportunity to earn syndication fees in these types of financing transaction either at the sub or your income statement at Solar?

Sure. That's a great question. NEF actually has done that in the past where they have underwritten larger transactions and then syndicated to some of the other independent leasing companies out there. It is something that we will evaluate because the flipside is NEF now has a much bigger balance sheet and so to invest off of given the ownership by Solar versus as an independent entity. So, we'll evaluate transaction by transaction what's the best risk adjusted return? Do we sell down a little bit or do we take more of the asset, but I think it's the high class from our perspective and the NEF team.

Yeah, and to Bruce's point I think given the size of our combined balance sheet, our potential buy side is more than the $2.3 million even averaging historically and as we shared earlier, one of the big attractions of the NEF platform and the equivalent leasing platform is the growth opportunity. This is an asset class that we think is incredibly scalable, plus when you compare it to our Life Science business or our Crystal business, the addressable market here is $275 billion and with a portfolio of $330 million, we have a lot of room to grow. And so, I think our expectation that we will growth this portfolio and see a higher contribution of earnings from it.

Got it. It's makes a lot of sense. And then quick question here on Crystal. I saw that [Warden Luis] announced his retirement as CEO of Symphony, so consequently do you expect any changes to occur at Crystal, not maybe operationally as a result of the change?

Yeah, great question. So, no Warden is the founder of the business alongside my Mike our Chief Risk Officer headed up on the origination side, but the team will remain intact. Warden is going to be still an active member of the Board and an advisors. So, we look forward to having him continue to be involved in the business but the team has been as a unit working together for many, many years. So, it's business as usual.

Got it. I want to spend a couple of minutes on Rug Doctor, so could you comment on the performance there. You've seen some equity valuations declines for the last couple of quarters. So, may be some color on EBITDA maybe on a quantitative perspective and then maybe qualitative with just in terms of operating conditions?

Yeah, I think for those of you that don't know Rug Doctor, it's a rent back, although they also sell machine. The bigger part of the business has been machine rental and the business to some extent has been feeling pressure from the traditional retail outlets where their machines are available. The secular headwinds being faced by all retailers reduces foot traffic and therefore had some effect on Rug as well. They’ve done a phenomenal job of transitioning some large customers such as Walmart and Home Depot over the last couple of years, but it is definitely a business in transition. Our valuation looks at market comparables on a quarter-to-quarter basis. So, you'll see some volatility there, but we're sort of evaluating the business runs in place a little bit, sort of what the growth opportunity is and what's the best way for us to maximize our value there.

Okay. Fair enough. Then a maintenance question maybe here for Rich, so what was the gross amount of OID and prepayment fee in the quarter and then were there any exit fees or successes in the quarter?

Hold on a second, I have it here. There was some I think it was really in our Tier point was primarily but I would say it was probably a $0.01, $0.015 in total across the business.

And then what was that maybe versus the prior period then I can take this offline with you?

The prior year period was substantial. I am not sure if you recall, but we had a very successful exit with Robins where we received $4 million in fees at the end, which really drove the earnings a year ago June. So, it's really not a comparison contrast, but this was more the normal though we've had a little bit in and out each quarter and this was a regular quarter and again the year ago was really driven by Robbins of almost $4 million.

Okay. And then last just kind of a curiosity-related question. So, in the number of this sponsored finance deal that you passed on either due to competition or your discipline can you share some details of where the financing is coming from for this new transaction to take out?

Well maybe we'll disclose the next week or so if people need, but our sense is that a lot of these loans and this is just speculation are going to a lot of these newly formed private credit funds who are looking to ramp quickly.

Cool. That's it for me. Thanks guys.

Thank you. Appreciate the questions.

This does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Michael Gross, Chairman and Chief Executive Officer for closing remarks.

Thank you all very much for your time and attention this morning and your questions. We look forward to talking to you soon, bye, bye.

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