Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Solar Capital Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Michael Gross, Chairman and CEO. Thank you, and please go head.

Thank you, very much and good morning. Welcome to Solar Capital Limited earnings call for the quarter ended June 30, 2020. I'm joined today by Bruce Spohler, our Co-CEO; and Richard Peteka, Solar Capital's Chief Financial Officer. Rich before we begin, would you please start covering the webcast and forward-looking statements.

Thank you. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Limited and that any unauthorized broadcasts in any form are strictly prohibited. This conference call is being webcast on our website at www.solarcapitalltd.com. An audio replay of the call will be made available later today as disclosed in our earnings press release. I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties, including the impact of COVID-19 and related changes in base interest rates and significant market volatility on our business, our portfolio companies and the global economy. Additionally past performance is not indicative of future results. Actual results may differ materially as a result of a number of factors including those described from time-to-time in our filings with the SEC. Solar Capital 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. Good morning and thank you for joining us today. We hope this find you and your family, friends and colleagues healthy and safe. Our thoughts continue to remain all of our stakeholders including the dedicated employees across Solar Capital and the company’s investment advisor Solar Capital partners. We would also like to express our gratitude to all the healthcare and other frontline and essential workers and our sincere condolences to those families who have lost loved ones. Before turning to our second quarter results, I’d like to take a moment to reflect back on the initial months of this public healthcare and economic crisis which have tested us as a nation and the global community, closing upon the investment and historic backlog and its [Technical Difficulty] management teams and financial sponsors. On a human level, the collaboration and dedication of our employees and counterparty to support our portfolio of company through crisis have previously [Technical Difficulty] but nothing short of that taken, while investment professionals and the sponsors and management teams [Technical Difficulty]. This involves a number of cycles, the added emotional toil of this health crisis has been a first for everyone. Here, despite the added stress of certain implications [Technical Difficulty] working from home and carrying for young ones certainly home bound, our colleagues internal and external across our portfolio are working tirelessly to ensure financial soundness of our borrowers. The quick constructive actions of our portfolio companies took at the beginning of this crisis to preserve liquidity and sharp the balance sheet are testament of the high quality of the management teams and sponsors. Their experts of the employee dedication speak to the resilience of the human spirit. And the year has been dominated by negative news, we believe it’s important to recognize we…

Thank you, Michael. Solar Capital Limited’s net asset value at June 30, 2020 was $849.8 million or $20.11 per share, compared to $813.1 million or $19.24 per share at March 31, 2020. At June 30, 2020, Solar Capital's on balance sheet investment portfolio at fair market value of $1.36 billion in 108 portfolio companies across 27 Industries compared to fair market value of $1.28 billion in 105 portfolio companies across 26 industries as of March 31, 2020. At June 30, the company had nothing drawn on its $545 million and $15 million revolving credit facilities and had $18 million of cash on hand. The company has full access to this undrawn capital. As of June 30, 2020, Solar Capital also had $446 million unsecured notes. Ultimately, the marginal cost of incremental debt from our revolving credit facilities is currently less than 200 basis points, which should enhance operating leverage as we grow our income producing portfolio and move towards our target leverage. At [Technical Difficulty] the company has [Technical Difficulty] debt maturities and is investment grade rated, which would provide us with continued access to unsecured debt markets. Since inception, Solar Capital is taking a conservative approach to leverage and has consistently operated well below its stated target range. On June 30, 2020, the company's net debt-to-equity ratio promoted to 0.59 times net debt-to-equity. Solar Capital's liquidity therefore remains strong with over $800 million of available capital including non-resources credit facilities of Crystal and NEF Holdings, subject to their borrowing base availability. So as of June 30, 2020 Solar Capital had limited unfunded revolver commitments of only $17 million that could be fully drawn by borrowers. Ultimately, moving to the P&L, for the three months ended June 30, 2020, gross investment income totaled to $28.6 million versus $32.9 million for the three months ended March 31. Expenses totaled $14.4 million for the three months ended June 30, 2020. This compares to $17.1 million for the three months ended March 31, 2020. Accordingly, the company's net investment income for the three months ended June 30, 2020 totaled $14.2 million or $0.34 per average share, compared to $15.9 million or $0.38 per average share for the three months ended March 31, 2020. Below the line, the company had net realized and unrealized gains for the second quarter totaling $39.8 million versus net realized and unrealized losses of $91.3 million for the first quarter of 2020. Ultimately, the company had a net increase in net assets resulting from operations of $54 million or $1.28 per average share for three months ended June 30, 2020. This compared to the net increase of $75.5 million or $1.79 per share -- average share for the three months ended March 31, 2020. Now with that, I turn the call over to Bruce Spohler for a portfolio update.

Thank you, Rich. First and foremost, we are extremely pleased with how well our portfolio has weathered this crisis so far. This supports our underwriting thesis of minimizing the risk of loss by investing at the top of the capital structure in cash flow loans to non-cyclical industries, and allocating a majority of our exposure to collateralize loans to our specialty finance lending verticals. At quarter end, just under 20% of our comprehensive investment portfolio was invested in senior secured cash flow loans, with the remaining 80% invested in our senior secured asset based, equipment finance, and Life Science lending strategies. The weighted average investment risk rating of Solar’s portfolio was 1.9 based on our one to four risk rating scale, with one representing the least amount of risk. 100% of Solar’s portfolio on a cost and fair value basis was performing at quarter end. At June 30, our $1.6 billion investment portfolio was highly diversified, encompassing over a 180 borrowers across 80 industries. Our largest industry exposures are healthcare, pharmaceuticals, and diversified financial services, all defensive sectors. The average investment was $8.6 million or 0.5% of the portfolio. For June 30, 99% of the portfolio comprised of senior secured loans with 92% in first lien, and just over 7% in second lien secured loans. Up to 7% second lien investments, approximately half or 4% of our total portfolio were invested in cash flow and the remaining were invested in asset base second lien loans subject to borrowing basis. We believe that our portfolio of predominantly first lien loans, which carry less risk than second lien and subordinated investments will result in greater capital preservation during this crisis. At quarter end, our weighted average asset monthly yield was 9.9% compared to 10.6% in the first quarter. By focusing on our…

Thank you, Bruce. In closing, we would like to thank Solar Capital shareholders for the support during this difficult time. From inception, we've endeavored to make the right decisions to preserve and enhance long-term shareholder value. Our priority has been to construct and maintain a portfolio that will generate steady income for our shareholders and protect their capital. We have remained disciplined in the face of significant spread compression, higher leverage and loose structures, all of which have elevated the risk from principal loss. Accordingly, we have positioned Solar Capital defensively, diversified portfolio across cash flow and especially finance predominately in first lien senior secured loans to manage downside risk. And we've operated well under target fund leverage and have preserved liquidity. We believe, we have taken the appropriate steps to navigate through what we anticipate to be a prolonged and uneven recovery. Throughout, we have maintained alignment for ownership of Solar, alongside our fellow shareholders. Our decisions to prioritize capital preservation rather than leveraging the portfolio and taking on more risk at the wrong time, this cycle have allowed us to enter into this dislocation in a position of relative strength. Importantly, we have confidence that our team's expertise and ability to provide financing across cash flow, and specialty finance solutions should enable Solar Capital continue to support the existing portfolio companies and make new investments with attractive risk reward profiles during this period of turmoil. Earlier this year, we added seasoned professionals to our origination team to broaden and integrate our coverage across asset classes. We are already seeing the benefit of these additional resources in the form of a more robust investment pipeline. In addition to providing attractive risk adjusted returns for SLRC, our lender finance team is a growing source of investment opportunities for providing growth…

Certainly. [Operator Instructions] Your first question comes from the line of Finian O'Shea.

Hi, good morning. Thanks for taking my question. First on Crystal, the income is still down. I know you touched on that last quarter, where the income was down related to lower leverage and lower perhaps prepays. Can you give an updated outlook on that? Should we expect to return to sort of previous levels on Crystal Finance of income that is?

Yeah, I think the outlook for Crystal is, they're seeing a tremendous amount of activity as we mentioned, Finian. The income as you may recall, is a little bit lumpy and is sometimes driven by repays given the short duration of the loans together with the fact that we don't recognize upfront fees, we accrue them over time and then accelerate them on repay. So you will see pops in their income and we try to smooth that out. We feel very good about the prospects but it's really, you should assume that this income will be sort of a steady state for the moment until we get a better sense on what repays look like.

Okay, that's helpful. Thank you, and a question for Michael perhaps on longer term leverage and portfolio potential. You noted that you expect a very strong pipeline with compelling opportunities. But you've also -- obviously Solar has disliked the middle market or cash flow market for years. And with capital still on the sidelines, capital still coming into the market or the asset class that, that might mean that the investment opportunity will be short lived. So, do you think solar might have a really good 2021? And then revert back to being under invested? Or are you more confident in the outlook to grow your company's place in the market?

I think we're pretty comfortable our longer-term outlook. I think some of our businesses kind of okay from traditional cash flow lending, are a little more sticky. For example, when you put out a lease for nation's equipment [Technical Difficulty] don't get called out early for example. And we expect that we put [Technical Difficulty] we're going to get better call protection and things of that nature. So and lastly, we know we highlight a little bit the lender finance business, those loans tend to be extremely long term. And probably out of any acquisitions we do become permanent parts of our platform. So, I think we're truly confident that, we can get to our target leverage sometime next year.

Okay, that's helpful. Thank you.

Thank you.

Your next question comes from the line of Paul Johnson.

Yeah. Hey, good morning, guys. Paul on for Ryan here. Thanks for taking my questions. I wanted to ask so, as I look at earnings today are about $0.34 for the quarter. And that's with no incentive fee this quarter. And I think you touched on this a few ways with the near expectation for possibly some good deal activity in the second half of this year. I'm just curious I mean, do you see pathway just with the current environment tightening spreads low interest rates to getting income possibly back above that hurdle rate this year? Or do you think you would need some pretty, significant deployment to get there?

Yeah, I think that we expect to approach that $0.41 dividend over the next couple of quarters, a little too soon to say whether it's Q4 or Q1, Q2 but definitely over the next couple of quarters. To Michael's point, I think the combination of the diverse asset classes that we have to originate in so therefore, we're not dependent on activity in any one strategy, such as cash flow, as well as the very strong pipeline we're seeing in acquisitions of potential spinet, especially finance platforms positions us well. It's hard to pin it down to a specific quarter as you can imagine.

Sure, that's a very helpful insight. And then secondly, just on the interest income line, I'm just curious with just a big drop quarter-over-quarter, and I'm guessing, interest rates were driving a big part of that. But do you expect the current kind of $22 million or so to be a good sustainable number sort of all else equal without any kind of minimal growth? Or would you expect that to possibly increase a little bit?

Yeah, just to clarify, the big drop off from Q1 to Q2 was the fact that we had $200 million repayments in Q1 and saw the full impact in Q2. So, I think it's fair to say that, assuming no portfolio growth is shrinking. So, that's a good run rate for now for where we are given where interest rates are because they're pretty much zero today. But clearly, any portfolio growth will drive that number higher.

Okay, thanks for that. And then I'm just curious, I think you mentioned two loans during the call that you provided some cash flows that you provide some amendments or covenant waivers to. Were those the only two loans that you provided any kind of relief for during the quarter?

These are the only ones in cash flow. We did something similar for just a couple of names in Life Sciences, where they had short term amendments to address short term revenue shortfalls. And then in the equipment finance segment, we do give relief from time to time that's been greater during COVID then historically, that actually has slowed in Q2 versus what we saw at the onset of the pandemic, and tends to be very short term in nature, a month or two.

Okay, those are, those are all my questions. Thanks for taking my questions today. And I think you guys deserve a lot of credit for slowly growing the portfolio and designing the way it is today.

Thank you. Thanks for the support.

Your next question comes from the line of Chris Kotowski.

Hey, good morning. Thank you.

Good morning, Chris.

I guess. I was just wondering, you talked about the kind of cumbersome due diligence process, certainly for cash flow loans, I imagine the same as for you when you're looking at other M&A opportunities for specialty finance companies. And I'm wondering, is that right or have you been kind of had ongoing due diligence pre-COVID that that you can piggyback on so that there are opportunities in the next couple of quarters? And then I guess also related to that. I think you're at 23% or there about utilization of your 30% bucket. And should we think of that 30% of current assets, is that kind of the hard cap? Or are there ways to manage the 30% bucket that would enable more significant acquisitions?

Sure, well, we definitely have the ability to make more specially finance asset acquisitions in just the 30% will comply, because not all assets are 30% assets. As you know, our equipment finance assets, for example, are not using that 30% bucket. So, we have flexibility there. Additionally, to your first question, it is difficult to conduct due diligence remotely, although specialty finance platforms are effectively asset-based acquisitions. We're underwriting pools of loans for various ABL assets, and that is actually easier to do remotely with teams that are used to going in and doing that type of due diligence on a collateral basis as opposed to a pure casual loan that is based upon more qualitative factors exclusively.

Okay. All right, that's it for me. Thank you.

Thanks, Chris.

Your next question comes from the line of Rick Shane.

Good morning, guys. This is Marisa [ph] on for Rick today. Lot of our questions have been asked and answered, but wondering about your comments about portfolio growth and expecting that to ramp. And I think you said in the second half of this year, I'm wondering if that's a function of lower expected repayments, the acquisition of another specialty finance vertical or some combination of the two? Thanks.

Well, I think in general, we're not expecting much repayments at all in this environment. We have the bulk of prepayments in Q1 before COVID hit. We had some repayments this past quarter about $100 million. We don't expect that much repayments through the balance of the year. So we expect just pure hopefully net growth. And that will come from a variety of sources. We think the cash market will be a little more active and it's been, as we shared our backlog for critical type ABL deals, is extremely strong right now. And as you highlighted the potential for a new acquisition, would kind of move the needle fairly dramatically.

Great, thank you.

Thanks.

Your next question comes from the line of Matt Jaiden.

Hey, everyone, good morning and thanks for taking my questions. Just to start off, I guess on kind of a simple one, it looks like pick income was up quarter-over-quarter. Could you give any color as to the source of that?

There was not a significant change impact. We have been blessed that we have not had to convert cash paying loans into pick loans, there are some cases I mentioned we had to covenant waivers. There are some cases where we will for doing that, take additional yield and we'll take that in the form of pick over and above our existing cash coupons. But again, it hasn't been a conversion of cash to pick. It's been more of a yield enhancer.

Okay, and then I guess on the acquisition front, so some great color there. Is there anything, if you're willing, within the specialty finance vertical, is there any niche vertical that looks more favorable or more interesting than others?

No, I think, look, we are both a strategic buyer in terms of evaluating add-on acquisitions to the existing platforms that we have, as well as new platforms that we have been evaluating as an asset class for some time. But as we're coming into this environment, what we're finding, obviously, is that management teams and sponsors are looking for partners to add capital either on a lending or on an equity basis. And so, we're just finding across the specialty finance spectrum the asset-based lending, broadly leasing, financing, et cetera, just an increase in opportunity and less competition for those opportunities.

Great. I guess and then kind of just a last one that's a little more broad. On a general competitive environment, since kind of COVID has started, spread widening documentation improvement, but with record amounts of capital kind of coming into the direct lending space. Do you think both of those are kind of here to stay in the near to mid-term?

Look, we have seen improvement, but it's been improvement in structure and on the margin price and it's been on a very small selection sample size of new deals. So, the activity just hasn't been there to call it the norm yet. So I think everything we're hearing from our conversations with sponsor community has increased activity over the next few months heading into the fall and winter. A lot of that on acquisitions as people are looking to make acquisitions at lower purchase prices than they had pre COVID. But it's just too soon to be able to say what sustainable structure and pricing books like. I will say that there is an increased focus on clubbing, both from the sponsor and from the lender community. And so we think that, that also will help the competitive dynamic longer term.

That's it for me. Thanks, guys.

Thank you.

[Operator Instructions] Your next question comes from the line of 5Tom Romero.

Hey guys. Thanks for taking my questions and congratulations on a solid quarter. My question is, I’d like to focus on the Life Science sector. Could you give us sort of an overview or a sample of one or two of the credits that you have there? And just in general, I'm assuming that you're secured against patents and intellectual property. And how do you look at the sort of warrant component when you're underwriting it? And then lastly, same question on Life Sciences. Could you give us sort of a competitive matrix of who you're competing against in that space?

Yeah, thanks for the questions. That's a mouthful. And what I would suggest is, we'd love to have a follow up call, we can take you through it in more detail and have the head of the team on it as well to take you through our strategy. But high level, our Life Science business is focused on very late stage. As I mentioned, that's either pre-commercialization or in commercialization. We're exclusively focused on developmental drugs or devices. And the team has an incredible track record predating their experience at Solar, going back to when I founded the business at GE Capital. It's been incredibly consistent because of the discipline in underwriting. It's really a focus on first lien loans, return of principal in all cases. And to your question, looking at warrants, or in some cases, what we call success fees, which is just a fixed price warrant as a way to enhance our yield as opposed to some of our peers who are out there. So in a little bit earlier stage, also having phenomenal track records, but taking a little bit more credit risk and compensating for that with more of an equity type return. But I think, it would be best and we would greatly appreciate the opportunity to follow up with you have a more fulsome conversation.

Super. I'll do that, and again, congrats on the solid quarter.

Thank you very much.

[Operator Instructions] There are no further questions at this time.

We appreciate your time this morning. And for those of you who participated in the Solar Senior call, we'll speak to you in half an hour. Thank you. Bye-bye.

This does conclude today's conference call. You may now disconnect your lines.