SLR Investment Corp. (SLRC) Q2 2020 Earnings Report, Transcript and Summary

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 have collective [Technical Difficulty] and how that progress has positioned us to successfully web the remainder of the storm. Solar Capital’s performance in the crisis thus far has supported our long-term investment thesis that asset based [Technical Difficulty] in niche markets and first [Technical Difficulty] market companies survive meaningful downturn protection during challenging economic periods. Solar Capital’s primary objective has been consistently [Technical Difficulty] portfolio is 100% performing at June 30, 2020. Overall, our portfolio companies are proving to be resilient business models and the access to liquidity that should enable them to successfully navigate this crisis. Solar Capital’s healthy portfolio is a result of our strategic efforts; second, its niche ABL verticals as well as our long-standing investment discipline continuing the philosophy that we always invest typically late in the credit cycle. Importantly, we’ve remained patient and potentially under-levered in order to preserve liquidity for market dislocation, where risk adjusted returns are generally more attractive. As a result of improving credit market technicals on the heels of massive fiscal and monthly results, as well as proactive steps taken by management teams and sponsors, Solar Capital’s June 30th fair value represents a 40% recovery of the underlying depreciation [Technical Difficulty] The company reported net asset value of $20.11 per share at June 30, a 4.5% increase or $0.87 per share in our net asset value quarter-over-quarter. At June 30, 92% of our $1.6 billion comprehensive investment portfolio at fair value was comprised of first lien loans over 80% [Indiscernible] investments, and our specialty finance strategies. These businesses have historically exhibited lower default and loss rates throughout business cycles compared to traditional capital lending. Importantly, ABL and Crystal Finance and Life Science teams have each managed through multiple cycles of their career spending 20 to 35 plus years. In the second quarter, Solar Capital originated investments of approximately $103 million and we had $180 million of repayment across our investment strategies. Bruce will provide additional detail on the portfolio activity during the quarter. Our [Technical Difficulty] cash flow loan portfolio essentially stayed flat quarter-over-quarter. For many years of frothy current market conditions, we've espoused the expected benefit of maintaining adequate dry powder in the event of a market dislocation. Speaking on the U.S. initial lockdown, we expect these financing opportunities to abound. However, the unprecedented level of government support created a sudden overheating of the market, translating into an under-pricing of risk given uncertainties and the steep contraction of economic activity. Simply put, price [Technical Difficulty] reflect the risk inherent in poorly structured loans to borrowers suddenly facing stress. Consistent with a conservative investment philosophy, we remain patient to avoid catching flameouts. [Technical Difficulty] focus on time and capital to support our portfolio companies, in negotiating amendments to existing facilities and contributing additional equity in the hopes to avoid dilution and ownership terms with rescue financing. With the focus on existing portfolio companies, there was very light M&A activity during the quarter. Our patience coupled with the flack of news activity resulted in modest ancillary cash flow investments during the quarter. As a country, it transitioned from a near universal quarantine to pockets of escalating COVID cases and the company stopped the activity. We have seen investment opportunities across our cash flow and maybe aligned increase. While many underwriting processes have been somewhat slowed the limitations of the virtual business landscape, we expect to see our portfolio expand meaningfully as we head into the second half of the year. As of now, we remain cautious in new investment opportunities we're seeing, carry higher expected returns and better structured protections, creating a more attractive environment to grow our income earning portfolio. That said, uncertainty and volatility are likely to remain elevated for the foreseeable future. We believe remaining disciplined and maintaining a senior secured and well diversified portfolio across cash flow [Technical Difficulty] and specialty asset classes is as important as ever. For the second quarter, Solar Capital’s net investment income per share totaled $0.34. The decrease in net investment income quarter-over-quarter resulted from a combination of yield compression, lower fee income and a smaller income producing portfolio. Since year end 2019, one in three months LIBOR declined by 160 at minus 61 basis points respectively. Triggering a number of LIBOR floors across our company portfolio. We experienced over $300 million of repayments to-date. We intend to grow our portfolio only when new investment opportunities meet our strict underwriting criteria, even if it means, operating the portfolio at a size where the manager is not [Technical Difficulty] in the second quarter. We believe it's the right decision and is in the best interest of our long-term fellow shareholders. Yesterday, our Board of Directors declared a $0.41 per share distribution payable in third quarter. The net investment [Technical Difficulty] is a direct result of being significantly and purposely under leverage and down due to the underperformance of our portfolio. We view this as a temporary condition that will continue for two more quarters, but will not necessitate a dividend cut. We remain -- we will maintain our discipline and patient investment approach during this period of economic uncertainty and remain confident in our niche growing investment income. At quarter end, our leverage was just 0.59 times net debt-to-equity. Our decision to run the business under-levered was founded on our conservative approach and belief that markets will [Technical Difficulty] for a period of time. Only when this economic crisis has run its course, we will be able to quantify the benefits to our shareholders of that conservatism. But we are confident that the credit quality of our current portfolio, and our low leverage will translate into net asset value preservation mostly leads to higher net investment income. As the economic recovery continues and markets stabilize, our investment pipeline has increased across our investment businesses, including an active pipeline of platform and portfolio acquisition opportunities in specialty finance. We expect the next 12 to 18 months to present an abundance of compelling investment opportunities as higher expected returns, and better structure protections and is an ideal time to promote our specialty finance platform and increase our income producing portfolio. Our diversified investment platform positioned Solar Capital solutions provider to borrowers. It also enables us to originate attractive risk that is unavailable to firms, which are only positioned to underwrite cash flow loans. We expect portfolio growth in the coming quarter becoming higher yielding assets with more friendly lender terms which will ultimately drive net investment income higher in future quarters. Finally, our investment advisor [Technical Difficulty] of the company's stakeholders has been one of our guiding principles. Through significant SLRC share purchases since inception, and including recent purchases by all of our executive officers, our senior management and investment team now own approximately 7% of our outstanding common stock. Additionally, all members of the key investment team have a significant percentage of the annual compensation invested in our stock. We believe our management and investment teams recent share purchases in the face of this crisis demonstrates our confidence in the company's defensive portfolio, stable funding, strong liquidity in federal position to make new investments. At this time I'll turn the call over to our CFO, Richard Peteka to give you second quarter highlights.

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 commercial finance verticals, we've been able to maintain asset level yields of approximately 10%. And that's despite 160 basis points drop in LIBOR since the beginning of the year. Approximately 77% of the company's portfolio is floating rate based, of which 85% of these loans have a LIBOR floor with a weighted average floor of 1.1%. The 23% of the portfolio invested in fixed rate loans are predominantly equipment financings. Including activity across our four business lines, originations for the second quarter totaled just over a $100 million, and repayments were approximately a $120 million, resulting in a modest net portfolio reduction of $15 million. Originations for the quarter were a mix of new deals and upsizing to existing borrowers. And they were focused on the ABL and Life Science strategies. Now, let me provide an update on each of our four verticals. Cash flow, we believe our cash flow portfolio is well positioned given the limited direct exposure to cyclical industries, such as energy, commodities, travel, retail, these are heavy manufacturing or consumer discretionary sectors. We are in a consistent dialogue with a management team and sponsors of a portfolio companies regarding their business prospects during COVID and are extremely encouraged by the steps that they have taken to preserve liquidity as well as the strong sponsor support. In fact, many of these portfolio companies are performing ahead of their post COVID revised budgets, as a rebound in revenues, as well as cost cuts have had a positive impact on their financial performance. Our predominately first lien portfolio relatively modest first lien leverage at 5.4 times and significant junior capital cushion together with strong sponsor support positions us well to withstand prolonged economic headwind. Review the majority of our cash flow loan portfolio companies as providing essential services in non-cyclical sectors that will continue to be essential during periods of stay in place mandates. As a reminder, our evaluation framework incorporates sector specific markets spread movements in the quarter, adjusting for the existence of LIBOR floors, expected weighted average life, existence of covenants, and other issuer specific factors such as liquidity profile sponsor support, and our investment position in the capital structure. The majority of the increase in our portfolio marks this quarter reflective of market spread movements. To provide further context, market spreads for the LCB first lien single B index tightened approximately 300 basis points or 68% from March 31 to June 30. Given the fundamental strength of our portfolio, we expect to recoup the remaining unrealized depreciation over the coming quarters. At quarter end, our cash flow portfolio was just over $300 million, or close to 19% of the total portfolio to invest across 17 borrowers with an average investment of $18 million. These companies had a weighted EBITDA of $60 million, which highlights our focus on financing larger businesses, which we believe are better positioned to withstand a downturn. The weighted average yield of our cash flow portfolio was 8.6%. And our cash flow loan segment contributed just under $7 million to gross income, representing 24% of the total Q2 gross income. Out of our 17 cash flow borrowers, two loans had a short-term covenant waiver during the quarter to support the decline in revenues as a result of stay home orders. We are encouraged with these companies’ recent performance, with revenues recovering strongly greater than 80% in both cases. Overall, we are confident in our portfolio, which is required no capital support from Solar despite the severe disruption caused by the pandemic. During the second quarter, we originated just over $6 million of first lien cash flow loans and experienced repayments of approximately $7.5 million. Our investments during the second quarter were upsizing to existing cash flow credits. We are thrilled by our available liquidity at SLRC that will allow us to take advantage of the market dislocation, which we expect to persist for some time. As Michael mentioned, we opted to shrink our cash flow portfolio over the last several years, holding to frothy market conditions that resulted in highly leveraged deals with loose documentation. We've begun to see opportunities to finance larger upper mid-market companies, have lower leverage levels and with better covenant predictions, and at wider spreads. We will continue to maintain our discipline of investing in non-cyclical sectors focused on the upper end of middle market. Now, let me turn to asset-based lending. Overall, our portfolio companies in this asset class continue to perform according to our expectations. As a reminder, our ABL platform Crystal Finance specializes in financing companies in transition, who have reduced access to traditional financing options. Their ABL loans are underwritten at a discount to net liquidation value. As a result, they have historically been very active in challenged sectors, but significant working capital assets such as retail and consumer goods. Accordingly, we believe their business is exceptionally well positioned for the current environment, and believe the opportunity set for this strategy will only grow over the coming months. At quarter end, the senior secured asset base portfolio totaled approximately $585 million, representing over 37% of our total portfolio invested in 35 borrowers with an average investment of just under $17 million. The weighted average asset level yield of this portfolio was 10.2%. And for the second quarter, this segment contributed $9 million to gross income, contributing over 31% of our total gross income. For GAAP reporting, we list our equity position in Crystal on our schedule of investments, and fair value it on a quarterly basis. At quarter end, the fair value of our investment in Crystal was marked up 5%, recovering approximately two-thirds of the unrealized depreciation from the first quarter, and in line with improved valuations of comparable finance companies. In the second quarter, we funded $56 million of new asset-based investments and had repayments of just under $92 million. Credit challenges facing several of our ABL peers allowed us to upsize our exposure to existing companies on an opportunistic basis. In addition, we're encouraged that the liquidation market for underlying collateral is reopening after being completely shut down at the start of the pandemic. Our ABL capacity through Crystal with its senior team who has expertise in financing stress companies over the course of 30-years together provides us with an extremely valuable capability during the current economic disruption. Not only has their opportunity set increased, but we're able to work with our cash flow plans to create structured solutions for their liquidity strapped portfolio companies. We're currently focusing our origination efforts on companies that have stable asset values and defensible business models. Conversion of these opportunities into portfolio investments will take longer than normal, given a more cumbersome due diligence process in this COVID environment. As a result, we expect to see portfolio growth over the coming quarters. Now let me turn to equipment finance. Our equipment finance business is led by a team of seasoned professionals who average close to 30-years of experience, which includes managing through multiple economic cycles. A large portion of our equipment finance portfolio is invested in industries that have been deemed essential businesses, such as construction and machinery, which are our largest exposures. Those issuers are showing stability. However, best historically performing segment transportation has been the sector most impacted providing buses to schools, tours, and charter bus leasing. While the majority of our equipment finance borrowers have been beneficiaries of PPP, stimulus funding, and other government assistance programs, the unprecedented decline in economic activity requires us to take a long-term view and patience in working with our borrowers to help them get through this crisis. We are already seeing signs of recovery and encouraged by both the return of the liquidation market and the health of our underlying borrowers improving. It's important to remember, we provide financing on specific equipment. The financings are at low loan to values typically 70% or so, and well within the borrowing base in normal market conditions. In addition, a large portion of our investments have personal guarantees and other forms of credit support. At quarter end, nation’s equipment had a total portfolio of approximately $350 million of funded equipment loans. Our portfolio has invested across a 113 borrowers, with an average exposure of approximately $3.1 million. As a reminder, included in this business, our equipment finance facilities held directly on Solar’s balance sheet, as well as those held in NEF Holdings, a portfolio company that for tax efficiency purposes hold certain NEF investments. Our valuation framework for NEF incorporates both a comparable company analysis of other equipment finance companies, as well as an analysis of NEFs underlying loans, including the company's fundamentals, as well as the specific structures around the loan and their covenants and other protections. In accordance with this framework, at quarter end, we marked our aggregate investments in equipment finance upwards just over 5% from Q1. The equipment finance asset class represents over 22% of our portfolio. 100% of NEFs investments are first lien loans. At quarter end, the weighted average asset level yield was approximately 10.4%. Additionally, 98.5% of this portfolio is fixed rate and is not impacted by the drop in LIBOR. For the second quarter, the equipment finance segment contributed just over $4.5 million to gross income, representing 16% of the total gross income. During the second quarter, our equipment finance strategy invested just under $8 million in new investments and has portfolio repayments of just over $17.5 million. Our equipment finance team remains focused on managing the existing portfolio and helping borrowers through this challenging time. As we sit here today, the pipeline has increased and continues to work with our broader origination team to offer equipment financing solutions to sponsors and their portfolio companies. Finally, let me provide an update on our Life Science business. Overall, our Life Science portfolio has been largely insulated from short term market and economic dislocations, given the long-dated equity investment periods and product development cycles of this asset class. The impact of COVID has had a de minimis impact on this portfolio. As a reminder, we have never realized a loss in our Life Science portfolio. Currently, 96% of our Life Science portfolio companies have more than 12 months of cash runway, with none of the portfolio investments having less than three months of cash runway. This is largely a result of our investment focus on both public and VC backed late stage multiproduct pharma and medical device companies that are close to entering or in commercialization. It's important to remember, that our Life Science investments are made at a very low loan to value, typically less than 20%. Where value is defined as actual cash invested in the business and not the enterprise value post the most recent round of EC funding or some public market capitalization. While the FDA may have slowed trials in favor of fast tracking COVID treatments or vaccines, and patients may be reluctant to participate in trials given the pandemic, the projected three to nine month potential delays for some companies is short in relation to the five to 15 year development process, as well as the significant capital invested in these companies relative to the size of our loan. In addition, there are some late stage companies whose revenues may be delayed as a result of delays in procedures or elective surgeries. Financial viability of many hospitals, doctors and healthcare providers rely on these sources of revenues associated with elective surgeries, and we are extremely encouraged by the resumption of these services over the last couple of months. At quarter end, our Life Science portfolio totaled just under $320 million. The portfolio consisted of 17 borrowers with an average investment of approximately $19 million. Life Science loans represented 20% of our total portfolio and contributed $8 million of our gross investment income, equating to approximately 28% of the total gross investment income. The weighted average yield on our Life Science portfolio was approximately 9.8%, however this excludes any success fees or warrants. Our valuation framework for Life Science investments is based on making -- marking each investment close to its amortized costs including the final fee, that is contractually due repayment. In addition, the cash liquidity of a specific borrower is a significant valuation input. There is no liquid market for private Life Science venture debt investments, and we do not use equity benchmarks for determining fair value. During the second quarter, the Life Science team originated proximately $32 million of new investments and had prepayments of $1.5 million. The healthcare sector in general continues to be attractive and we are not seeing any slowdown in new Life Science opportunities. Moreover, the increased scale of the Solar platform enhances the opportunity set for investing in later stage public pharma and medical device companies, that often require larger hold positions. We will continue to be highly disciplined in evaluating new investments. In conclusion, we believe SLRC's portfolio is extremely well positioned to weather this crisis. As we continue to navigate this challenging environment, we remain in close contact with our portfolio companies, their management teams, and their sponsor teams who have supported them. We are also working closely with our extensive network of relationships to source new investment opportunities. Solar's commercial finance platform and significant dry powder enables us to provide structured solutions including both cash flow and asset-based loans for capital constrained companies. SLRC will participate in these financings alongside the rest of the platform, while maintaining significant diversification. Now, let me turn the call back to Michael.

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 capital, making portfolio purchases, and evaluating platform acquisitions. As a provider of capital, blended finance business provides unique opportunity to get to know and understand different commercial lenders and their niche markets. We have a long history of lending to and acquiring specialty finance companies, and we believe the current environment is extremely attractive for lender finance transactions given the market dislocation. Our pipeline is expanded and we're actively pursuing acquisition opportunities that can enhance and further diversify our specialty finance platform. With approximately $850 million of available capital, a strong portfolio foundation and low leverage, Solar is positioned to originate attractive new investments and grow net investment income. Our patience and willingness to remain under invested allows us to be opportunistic. We believe that the improved investment opportunity set will persist for some time. In conclusion, we are confident in our ability, in our defensively position portfolio, stable funding sources, strong liquidity and potential to make new investments. As a result, we have no anticipated need for additional liquidity or capital. And accordingly, we have no plans to issue dilute of equity. Each year for the past nine years, our shareholders have granted us approval to issue shares below NAV subject to Board's approval at time of issuance. We've always viewed this trust in us as a great responsibility and have managed the business accordingly. At 11:30 this morning, we'll be hosting an earnings call for the second quarter results for Solar Senior Capital or SONS. Our ability to provide traditional middle markets senior secured financing through this vehicle, continues to enhance our origination team's ability to meet our client's capital needs. We'll continue to see benefits of the value proposition in Solar Capital's deal flow. We very much appreciate your time this morning. Operator, could you please open the line for questions?

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.