SLR Investment Corp. (NASDAQ:SLRC) Q4 2022 Earnings Call Transcript

SLR Investment Corp. (NASDAQ:SLRC) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good day, everyone, and welcome to today’s Fourth Quarter 2022 SLR Investment Corp. Earnings Call. . It is now my pleasure to turn today’s program over to Michael Gross, Chairman and Co-CEO. Sir, please begin.

Michael Gross: Thank you very much, and good morning. Welcome to SLR Investment Corp.’s earnings call for the fiscal year ended December 31, 2022. I’m joined today by Bruce Spohler, our Co-CEO; and Rich Peteka, our Chief Financial Officer. Rich, before we begin, would you please start by covering the webcast and forward-looking statements?

Richard Peteka: Sure. Thanks, Michael. I would like to remind everyone that today’s call and webcast are being recorded. Please note that there is a property of SLR Investment Corp and that any unauthorized broadcast in any form are strictly prohibited. This call is being webcast from the event calendar in the Investors section of our website at www.slrinvestmentcorp.com. Audio replays of this call will be made available later today, as disclosed in our earnings press release. I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in this 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. As 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. SLR Investor Corp. 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. With that said, I would like to turn the call back to our Chairman and Co-CEO, and Michael Gross.

Michael Gross: Thank you very much, Rich, and good morning again, and thank you for joining us. We are to report that for the fourth quarter of 2022, SLRC earned net investment income of $0.41 per share, which fully covered our distributions. Due to the realization of synergies, portfolio growth, rising interest rates and stable portfolio credit quality, we were able to reach this net investment income target faster than we had projected at the time of the merger of SLRC and SUNS. Additionally, as we continue to grow our portfolio from its COVID-19 lows, we expect further growth in net investment income per share during 2023. At December 31, 2022, our net asset value per share was $18.33 compared to $18.37 at September 30. Overall, our portfolio is performing well, and credit quality is very stable.

Enhanced by SLRC’s acquisition of SUNS, our portfolio is well diversified across cash flow loans in noncyclical industries and in asset-based loans. At December 31, 98.6% of our comprehensive investment portfolio was comprised of first lien senior secured floating rate loans. Of the 1.2% of our portfolio, which is allocated to second lien loans, only 0.2% is invested in second lien cash flow loans, and 1% is invested in second lien asset-based loans with defined borrowing basis. Based on a recent comprehensive stress test of our portfolio, we are confident in its credit quality. Our longstanding investments on first lien loans has resulted in a portfolio that is better equipped to withstand a continued higher interest rate environment than portfolios with second lien loans or equity exposure.

Additionally, with 78% of our comprehensive portfolio invested in specialty finance assets, which a borrowing basis supporting the first lien loans and full covenant structures, were positioned for a volatile economic environment. The current market conditions for new investments are the most attractive we’ve seen in several years. For Q4, the company originated $430 million of new investments and had repayments of $409 million, inclusive of commercial finance folio companies. Terms on sponsored finance loans have become more attractive, and our specialty finance business, which typically flourish during turbulent market conditions, are also seeing an attractive opportunity set and, importantly, have available capital to take advantage of this investment environment.

All 4 of our lending strategies had a strong fourth quarter, and we expect a positive portfolio growth to continue throughout this year. The banks on the sidelines through the volatility ESL market, lenders who’ve been hold investments of $200 million of the more such as the SLR platform are even more valued by borrowers, have greater pricing power and influence over terms. During the second half of last year, our investment adviser, SLR Capital Partners, secured an aggregate of $3.8 billion of additional vessel capital inclusive of anticipated leverage. This incremental capital will invest alongside SLRC, which will benefit from the additional scale. This additional capital comes at a time when many other BDCs are already at full investment capacity, giving us a distinct competitive sourcing advantage.

As a result of the reduced competition, we are seeing accretive investment opportunities with less leverage and higher yields on loans structured in the recent period of COVID-related government stimulus. The more recession resilient sectors in which SLR specializes continues to perform extremely well, with financial sponsors focused on deploying their dry powder into existing portfolio of companies via add-on acquisitions. During uncertain economic times, borrowers increasingly turn to asset-based lending strategy for working capital and liquidity management. We believe the structure and collateral supporting our loans provide our investors with greater downside protection across economic cycles. Our ABL businesses have historically outperformed during challenging market conditions when a company’s access to traditional lending sources is constrained, and we have the flexibility to allocate more of our capital to these strategies to take advantage of their attractive risk reward attributes.

We have ample dry powder to capitalize on investment opportunities, which are terms that we believe are more favorable than were available to us a year ago. Our funding profile is in a strong position to weather a rising rate environment, with half of our $1.1 billion of funded debt comprised of senior unsecured fixed rate notes at a weighted average annual interest rate of just 3.9%. At December 31, SLRC’s leverage was 1.8x net debt to equity, up from our low during the COVID-19 pandemic of 0.56x and comfortably within our target leverage range of 0.9 to 1.25x. On the repayment of our $75 million of senior unsecured notes in January, our next term debt maturity is until the end of 2024. We’re in the fortunate position of not needing to refinance any of our term debt in the near term at current higher rates.

December 31, including available credit facility capital at our specialty finance portfolio companies and subject to borrowing base limits. SLRC had over $650 million in available capital to take advantage of the current attractive investment environment. As a reminder, during the pandemic, our credit quality remains strong. However, we did lose earnings power through outside loan repayments, as many of the borrowers paid down their debt with capital from government stimulus programs. This year, we expect to continue to grow our portfolio, where we expect to be a very attractive vintage for both cash flow and specialty finance loans, which should drive further increases in our earnings. In December, we began contributing portions of lower-yielding first lien cash flow loans originated by SUNS to our recently announced SLR senior lending program for SSLP.

SLRC and our strategic investment partner have made equity commitments of $50 million. At December 31, the SSLP held $18 million of first lien loans. We’ve continued to contribute sufficient additional loans to SSLP during Q1. The target size of this portfolio once ramped is $300 million. Importantly, SSLP provides us full capacity for expanding our portfolio and earnings power. During the fourth quarter, we were active in our share repurchase program, resulting in approximately $3 million of shares we purchased at quarter end at an average price of $13.98. We intend to continue to utilize this program to repurchase shares at levels that are accretive to shareholders. I’ll now turn the call over to our CFO, Rich Peteka, to take you through fourth quarter financial highlights.

Richard Peteka: Thank you, Michael. SLR Investment Corp.’s net asset value at December 31, 2022, was up $1 billion or $18.33 per share compared to $1.01 billion or $18.37 per share at September 30, 2022. At December 31, 2022, SLRC’s on-balance sheet investment portfolio had a fair market value of approximately $2.1 billion in 139 portfolio companies across 45 industries compared to a fair market value of $2.2 billion in 135 portfolio companies across 44 industries at September 30, 2022. At December 31, the company had approximately $1.1 billion of debt outstanding with leverage of 1.08x net debt to equity. By considering the available capacity from the company’s combined credit facilities, together with the available capital company and significant subsidiaries, SLR Investment Corp.

has significant available capital to fund future comprehensive portfolio growth, while remaining within its target leverage range of 0.9 to 1.25x net debt to equity. Moving to the P&L. For the 3 months ended December 31, 2022, gross investment income totaled $54.1 million versus $47.6 million for the 3 months ended September 30, 2022. Net expenses totaled $31.6 million for the 3 months ended December 31, 2022. This compares to $27.5 million for the 3 months ended September 30, 2022. Accordingly, the company’s net investment income for the 3 months ended December 31, 2022, totaled $22.5 million or $0.41 per average share compared to $20.1 million or $0.37 per average share for the 3 months ended September 30, 2022. Below the line, the company had net realized and unrealized loss for the fourth fiscal quarter totaling $3.5 million versus realized and unrealized losses of $6.5 million for the third quarter of 2022.

Ultimately, the company had a net increase and net assets resulting from operations of $19 million or $0.30 per average share for the 3 months ended December 31, 2022. This compares to a net increase of $13.5 million or $0.25 per average share for the 3 months ended September 30, 2020. Finally, the Board of SLRC has declared a monthly distribution of $0.136667 per share payable on April 4, 2023 to stockholders of record as of March 23, 2020. And with that, I’ll turn the call over to our Co-Chief Executive Officer, Bruce Spohler.

Bruce Spohler: Thank you, Rich. Let me begin by providing an overview of portfolio. At year-end, on a fair value basis, the combined comprehensive portfolio consisted of approximately $2.9 billion of senior secured loans to approximately 800 distinct borrowers, across over 120 industries, with an average investment exposure of $3.7 million. At quarter end, measured at fair value, 99.8% of the comprehensive portfolio consisted of senior secured loans, with 98.6% in first lien loans, including investment in the SSLP attributable to SLRC, and only 0.2% invested in second lien cash flow loans with the remaining 1.2% invested and second lien asset-based loans, with full borrowing base governors. Our specialty finance investments account for approximately 78% of the comprehensive portfolio, with the remaining 22% invested in senior secured cash flow loans to upper mid-market sponsor-owned companies.

We believe that this defensive portfolio construction and investment strategy diversification positions us extremely well for pending turbulence and provides a differentiated return profile for our shareholders. At year-end, our weighted average asset level yield was 12.2%, up from 11.3% at the end of the third quarter. At year-end, the weighted average investment risk rating of our portfolio was under 2 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. Now let me turn to our investment strategies. As a reminder, we segmented the portfolio into 4 distinct asset classes. The first is cash flow loans to upper mid-market private equity-owned companies, which we refer to as sponsor finance. The second is asset-based loans.

The third, life science loans which are made to venture capital back to late-stage drug and device companies, and the fourth is equipment finance. Now I’ll touch on each of these 4 investment verticals. We start with sponsor finance. In this segment, we originated first lien senior secured loans to upper mid-market companies in noncyclical industries, with our largest industry exposure being health care provider services and diversified financials. Our Sponsor Finance segment is benefiting from banks retrenchment from private financings, a slowdown in the CLO issuance market and sponsors and management teams increasing preference to partner with direct lenders during a time when sponsors have record dry powder and the desire to put it to work in new platforms and add-on acquisitions, which are available at increasingly attractive valuations in this environment.

The ongoing market turmoil caused by aggressive Fed tightening has resulted in a widening of yields in the syndicated bank loan market and a sharp reduction in bank’s willingness to assume syndication risk. This has led to an increased opportunity set for direct lenders like us. As a result of the diminished supply of capital available to borrowers and the sell-off in the liquid credit markets, we have seen 100 to 300 basis point increase in yields on private loans issued relative to a year ago. Additionally, total leverage levels on new issuance has decreased, which translates into a lower risk profile for our investments. We expect 2023 to be a great vintage for sponsor finance and for our pipeline to continue to build throughout this year.

At year-end, our sponsor finance portfolio was $643 million, including senior secured loans in the SSLP attributable to us, or just under 22% of our total portfolio, and this was invested across 44 companies. The average EBITDA of our cash flow portfolio was $129 million at year-end up from $113 million at the end of the third quarter. During the fourth quarter, we originated $58 million and experienced repayments and amortizations of $118 million. The weighted average yield on our cash flow portfolio was 11.2%, up from 9.6% in the prior quarter, with approximately 99% of our cash flow loan portfolio invested in first lien loans and a weighted interest coverage ratio above 2.3x. We believe that our investments are well positioned to withstand any pressures borrowers may be facing from rising interest payments.

Now let me turn to our ABL segment. Historically, our ABL business has outperformed during periods of market volatility and economic contraction. Borrowers which are asset rich, but have cash flows pressured by rising rates and slowing demand are forced to raise capital by their liquid — backed by their liquid collateral. Our team’s deep 20-plus average years of expertise in valuing this collateral gives us an advantage in underwriting deals that are backed by strict borrowing bases against the collateral of the borrowers. This business segment is currently seeing heightened demand towards capital, translating into increased deal volume that we believe will continue throughout this year. In particular, slowing consumer spending is a positive for our ABL business, which has extensive experience providing working capital loans to asset-rich retail companies.

At year end, the senior secured asset-based loan portfolio totaled $1 billion, representing 35% of our total portfolio. It was invested in over 170 borrowers. Average asset level yield of the ABL portfolio was 14.1%, up from 12.3% in the third quarter. During the fourth quarter, we originated approximately $141 million of new ABL loans and had repayments of $71 million. Now let me turn to Equipment Finance. Our Equipment Finance segment provides customized equipment leasing solutions businesses in North America with significant capital equipment needs. Our borrowers range from privately held family-owned middle market businesses to large investment-grade companies. Our leasing capabilities span a broad spectrum of industries, including warehousing, manufacturing, transportation, information technology and health care.

The team has extensive experience in valuing fixed assets and structuring loans, allowing us to provide our customers with quick creative solutions to their financing needs, which is especially valued during periods of market volatility. This segment’s portfolio grew during the fourth quarter, and we are expecting that trend to continue this year. At year-end, the equipment finance portfolio totaled $900 million, representing approximately 32% of our total portfolio, and it was invested across 500 borrowers. The weighted average asset level yield of the portfolio was 10.7%. During the fourth quarter, we originated of equipment finance loans and had repayments of $130 million. Finally, let me provide an overview of our Life Science segment. For Life Sciences, the current market volatility and economic uncertainty has not impacted the interest in and ultimate need for new drugs and medical devices.

This has been bolstered by additional venture capital activity in recent years and, ultimately, reinforces the need for the type of first lien senior secured loans that we offer. Record amounts of venture capital coupled with improved valuations are continuing to drive this opportunity set. We expect the recent trend of higher yields to continue. Additionally, the extremely low loan to values, which are typically less than 20%, provide significant downside protection for our investments. We continue to remain disciplined in our underwriting standards. At year-end, this portfolio totaled $322 million across 14 borrowers. Over 85% of our Life Science portfolio is invested in loans to borrowers that have over 12 months of cash runway, an important metric in this segment.

Life Science loans represented approximately 11% of our portfolio and contributed 20% of our gross investment income for the fourth quarter. During the quarter, the team originated $110 million of new loans and had repayments of $90 million. At year-end, $121 million of Life Science unfunded commitments exist, which may be drawn based on borrowers hitting certain milestones. Additionally, the Life Science team currently has a robust pipeline of new opportunities, which we expect to fuel portfolio growth over the next several quarters. At year-end, the weighted average yield on this portfolio was 12.5%. However, that excludes success fees and warrants, which typically take our returns higher. In conclusion, we are optimistic about the performance of the loans within each of our 4 investment strategies as well as the prospects for additional portfolio growth this year and what we anticipate will be an attractive vintage for each of our segments.

At this time, let me turn the call back to Michael.

Michael Gross: Thank you, Bruce. In closing, we believe that our time-tested conservative underwriting approach, resulting in a defensively constructive portfolio comprised of both first lien cash flow loans to borrowers in noncyclical industries and asset-based loans with significant collateral coverage position us well for a recession and any continued market volatility. All 4 of our asset classes are exhibiting overall strong quality and attractive investment pipelines. We’re anticipating further portfolio growth across the board in 2023, which should drive further increases in our net investment income per share. As I mentioned in my opening remarks, our fourth quarter net investment income fully covered our first quarter 2022 distributions.

And based on current pipelines, we expect to continue to build our earnings power this year as we deploy our available capital into higher-yielding assets. However, please note that the amount and timing of past dividends and distributions are not a guarantee of any future dividends or distributions or the amount thereof, the payment timing and amount of which be determined by the company’s Board of Directors. Our investment buyer’s alignment of interest with the company’s shareholders continues to be one of our guiding principles. The SLR team owns approximately 8% of the company’s stock, including having a significant percentage for annual incentive compensation invested in SLRC stock. The teams invest in alongside fellow SLRC shareholders demonstrates our confidence in the company’s defensive portfolio, stable funding and favorable positions.

We thank you for your time today. Operator, will you please open the line for questions?

Q&A Session

Operator: . And our first question will come from Casey Alexander with Compass Point.

Casey Alexander: My questions are centered around equipment finance, which used to be one of the most attractive yields in the portfolio. But because as I recall, it’s shorter-term loans that are fixed rate, kind of the yields on some of your other verticals have moved on past it. And so I’m kind of wondering, how long does it take for that portfolio to turn over? And what kind of onboarding yields are you getting now relative to the weighted average yield of 10.7%?

Bruce Spohler: Casey, thanks. Great question. So yes, as you know, it is a high churn portfolio. As you look at the year, Equipment Finance had 476 of originations and repays of 4.49%. So it is a high churn. But to your point, we are burdened fixed rate loans. So I can’t put a precise time, but, yes, we are putting new assets on above that 10.7%, or else we wouldn’t be deploying capital to that segment by definition given what we’re seeing in other segments. So we expect it to catch up over the next 12 to 18 months.

Casey Alexander: Okay. And one other question, just simply because it’s become sort of relevant to the equipment financing universe. Does your equipment financing portfolio include any loans to — that are backed by crypto mining machines?

Michael Gross: No. Great question, but no.

Operator: Our next question will come from Erik Zwick with Hovde Group.

Erik Zwick: One just wanted to say I appreciate all the commentary that Bruce gave kind of breaking down some of the current characteristics and within the forward distinct asset cost is helpful. And I guess I’m curious, as you look at the pipeline today, and I’m sure the next 1 to 2 quarters, the visibility is probably good beyond that, maybe not quite as clear. But just curious, as you look at that and think about the relative attractiveness of the 4 sectors, it sounds like you’re positive on growing all 4 of those. But is there 1 that — 1 or 2 that look relatively more attractive or just based on the mix in the portfolio, you would expect to be exit stronger originations here, maybe the first part of the year?

Bruce Spohler: Yes. I think If you can just look at ’22 as a proxy, ABL for the year was $400 million of the $1.2 billion that we originated last year. And I think we would expect that to continue sort of out originate the other segments. As we just touched on with , Equipment Finance is kind of a steady drip of — a steady drip of repayments. But I think ABL in general, in addition to Equipment Finance, but ABL more broadly is going to be more active in this environment. We’re still seeing steady originations in our Sponsor Finance and Life Science segments. But I think ABL will be a little bit heavier because, as we mentioned in our comments, in this environment, cash flow market is only open to certain borrowers in certain industries, such as health care, which is extremely defensive and recession resilient.

And so if you are in capital-intensive businesses or cyclical businesses, your only access to capital is really using your assets since the cash flow market is in dislocation. So ABL will be heavier. We see that out driving everything else this year, but a steady activity in the other segments, which is what we find very attractive. And to Casey’s comments earlier, what you see is the yields are very attractive across all segments and more consistent with each other, and you see periods of economic benign periods.

Erik Zwick: That’s helpful. And then just another question on the comments about expecting further growth in a high per share throughout 2023, and you mentioned there’s opportunity for portfolio growth. And certainly, you have got some room there with leverage to take that higher. I assume a part of that expectation is also just the outlook for higher rates. So kind of curious if you could maybe kind of weigh out the benefits of the 2 of those and then just what you’re expecting in terms of additional kind of Fed funds increases, which would likely take LIBOR and SOFR higher as well.

Bruce Spohler: Yes. I think we were enough to predict the curve. We obviously are following what the Fed is saying. And so rates will be targeted upwards, at least in the first half of this year. We benefit from the fact, as Michael mentioned, that we’ve termed out our liabilities, have a nice 50-50 structure and don’t need to go back to the funding markets until the end of ’24, beginning of ’25. So we’re going to be opportunistic on that side. And I think on the asset side, given the strength of our portfolio and the first lien dominance, we are very comfortable deploying our over $650 million of available capital in this environment.

Operator: . Our next question will come from Mickey Schleien with Ladenburg.

Mickey Schleien: First question is about the 2.3x interest coverage ratio you mentioned. I just wanted to clarify, is that on the last 12-month basis? Or is that the fourth quarter rate annualized? .

Bruce Spohler: That is the fourth quarter annualized.

Mickey Schleien: Okay. Good to hear. And are you seeing signs of stress on average among borrowers in cash flow and their ability to service their debt given how much rates have increased?

Bruce Spohler: That’s a great question and, obviously, why we did the recent stress test on not just interest coverage, but fixed charge coverage. And for us, as you know, our cash flow book, while it’s only 22% of the portfolio, it is bigger in our other portfolios that we manage than it is in the BDC. So all of our other portfolios co-invest with the BDC and own similar cash flow and securities. And as we look at those investments, because, Mickey, we’re in high free cash flow in companies, defensive sectors and large companies, we mentioned the average EBITDA being up above $110 million, we just find bigger is safer in environments like this and obviously first lien. There is not much in the way of junior capital beyond equity.

We don’t have big second lien structures that we’ve invested in. But as we look at it, our companies just need to run in place from an earnings perspective, in spite of the increased interest burden that they’re facing because they don’t have many other fixed charges, because we don’t go into capital-intensive businesses that have CapEx and big working capital investments. And so what we find is steady earnings, we can still generate substantial free cash flow, which is what we care about and derisk our credits. We are hearing from others, peers who are in more broad across the industries, cyclicals, et cetera, that they are starting to feel some pressures. And some people who own second liens are having to defer some cash interest. We’re just not seeing it systemically in our book given the sectors that we’re invested in.

Mickey Schleien: That’s good to hear and helpful, Bruce. On the $75 million repayment of the 4.5% unsecured notes in January, could you clarify what was the source of the funds to make that repayment?

Bruce Spohler: Sure. So as you know, capital is fungible. But last year, we had — before rates went up, we had pre-refinanced in January and December ’21 maturities that we had last spring. And we also did a little bit extra. So we had $30 million more that we took on at 3.3% before rates went up. So you could argue that $30 million of that went to the $75 million repayment, and then the rest came from our revolving credit line.

Mickey Schleien: Okay. I was curious whether you’ve shrunk the balance sheet to make that payment. And lastly — I’m sorry?

Bruce Spohler: The other thing I would just highlight, Mickey, is, as you recall, when we merged with SUN, — we — there, $85 million of senior unsecured notes that were at 3.9%, and we also pick up their undrawn revolver. So we expanded our credit capacity, and Rich and the team have been very successful in actually adding to our credit facility. So we have ample — we can easily get to the 1.25% with our existing balance sheet.

Mickey Schleien: Yes, I agree and understand. Just my last question in regards to stock repurchase program. I was glad to see some repurchases during the quarter. If I’m not mistaken, that was the first quarter during the existing program, which would appear to be expiring this May. Given the stock price and how accretive it would be, how does the Board feel about extending that program beyond this May?

Bruce Spohler: We will likely extend it. And with our window period open at the appropriate price, we move back to the market, but we’re going to definitely extend it. So we have the flexibility to take advantage of it during volatility.

Mickey Schleien: Good to hear. And Michael, it’s a 10b5-1 plan, if I’m not mistaken, is — I know there’s a lot of constraints in terms of your ability to make those repurchases. But is there scope to increase the quarterly amount that you’re repurchasing?

Michael Gross: It depends on the price is the answer. So we’ll see, and it depends kind of on the investment opportunities in front of us in terms of measuring the accretiveness of new investments versus buying back stock.

Bruce Spohler: Last quarter, we would have booked all $50 million at that price. It just wasn’t available to us.

Operator: Our next question will come from Paul Johnson with KBW.

Paul Johnson: Most of it have been asked, but kind of adding to Mickey’s questions a little bit. I mean, obviously, credit quality for you guys is pretty good, and it sounds like the portfolio is performing pretty well. Just curious if you’ve observed any sort of pickup in amendment activity, either in your portfolio or amendment request activity, I should say, in your portfolio or even just more broadly across anywhere else in the platform. And I’d also be curious, just of your cash flow portfolio, what percent of loss, I guess, would you say you’re in a controlling position?

Bruce Spohler: Yes. So I would say first question around amendment trends, they have come down. Peak amendments were sort of during lockdown Q2, Q3 of 2020, where we had 5 or 6 amendments. That has come down and sort of got back to the steady level of, call it, 2 to 3. That’s where we sit today. So no change in trends over the last 2 years since lockdown. And I would say as you…

Michael Gross: Second question, given that the average EBITDA on our cash flow book is north of $100 million, we are not in a controlling position. We are part of generally of clubs, but we do have and make sure where it’s not happened to be there are sacred rights that cannot be amended without our consent. And generally speaking, in the clubs we’re in, we are with lenders where in mindsets. And so we’ve never really been in a position where momentum and brought forward, and we’ve had 5 months later to get them when we get done.

Bruce Spohler: We generally have a blocking position.

Paul Johnson: Got it. That’s very helpful. Just one more question. Just on the ABL portfolio, I think you talked about this in the past. But just remind me, what’s sort of like the average life of the assets in that portfolio? And what is sort of the typical credit rating of the underlying — or I guess, the risk of the underlying borrower in that portfolio as well? .

Bruce Spohler: So the borrowers are no different from what we see in our cash flow business, which is typically we’re talking about single-B, weak double-B, is what I would say. And remember, we’re first lien and secured. So we tend to be strong single-B, weak double-B, again, similar to where we are in the cash flow book. And the underlying collateral is long live because, again, we’re going to lend against and underwrite the liquidation value of that collateral. And we’re not going to invest in commodities or short sense.

Michael Gross: With the average duration of our loans, the same maturity is typically 5 years. The average duration is closer to 2.

Operator: . Our next question will come from Robert Dodd with Raymond James.

Robert Dodd: A couple of themes I’ll say the inflation market. On the JV, you talked about you’ve made a €15 million equity commitment so upon a max target or target size 300, which is Tier 1 leverage. Is that 300 the max? Obviously, it’s the max based on the 50 that you’ve initially committed, but would you consider expanding that even further given how attractive the environment is? And what kind of time frame would you be expecting to get to that size given, again, you talked about the cash flow pipeline and the 2023 vintage be extremely attractive?

Bruce Spohler: Sure. Great question. So first question, yes, that is the initial commitment. I would say that the JV partner has other capital committed to us across our platform in the form of SMAs. So we know that they have a desire to grow with us should the market opportunity continue. And then as it relates to timing, we actually — because of the merger with SUN, really, what was the catalyst for thinking about setting up an SSLP again because, as you know, we had them a few years ago, so we have those assets on balance sheet. We are cycling them down as we redeploy on-balance sheet, so that we can make sure that we’re continuing to generate the appropriate earnings and grow the portfolio prudently. So I think what you’ll see is a rotation of the on-balance sheet cash flow loans that were acquired with SUNS, together with new originations direct into the SSLP.

We’re already doing that. And I can’t pick the quarter, but our best guess, Robert, is that by the end of this year, you’ll see that have been fully ramped to that $300 million target portfolio.

Robert Dodd: Got it, got it. And then the others, when you look at ABL or equipment, I mean, in both cases, I mean, prices are rising, right? I mean, that’s in place. How is that impacting a demand, right? Because somebody might be inclined buy a new piece of equipment before the manufacturer takes the price up. And b, when you underwrite it, assessing — are you taking into account the inflation when you’re assessing collateral value? Or are you just assuming flat line collateral value and not pricing equipment prices in terms of how you want the right currently?

Bruce Spohler: Yes. So on the ABL, we’ll segment into ABL from a fan. So on the ABL business, as we discussed, those are short — their long-lived assets, short-duration loans, and we are constantly monitoring and updating our borrowing base to the extent that the underlying collateral changes in value. We control that and in terms of determining our advance rate. But if you’re lending to a retailer and they sell jeans and t-shirts, there’s not going to be a lot of volatility in the cost of those goods. And we lend against cost, liquidation value against cost, not against market or retail. So we have a tremendous amount of cushion built in there and not much in the way of volatility from an inflation perspective, affecting the underlying cost of the goods that we’re lending against.

And it’s finished goods or raw. We’re not lending against work in process. So — and then on the equipment finance side, what we’re seeing is a dynamic where — yes. As you may recall from prior conversations, the — there was a pent-up pipeline of orders that have been placed, but because of supply chain disruption, goods did not arrive. So they weren’t drawing down on our facilities. So we’re benefiting from a funding of the past pipeline almost in as to a DDTL over in cash flow land. So we’re funding that pipeline, and supply chain has loosened up. So we’re funding past investments. We are seeing, which is typical in periods of inflation, where the purchase versus lease decision is leaning towards leasing and extending existing leases, which provides good income for us because it extends the maturity of those fixed rate leases that we had offered.

And that’s very often how they get the excess income into our portfolio. So as you can see from the results, it’s a steady drip of originations and a steady drip of repayment, But albeit net portfolio growth, and we think that trend will continue. We’ve yet to see a dramatic spun in new orders. But again, we do have a strong backlog that we’re still funding.

Operator: At this time, there are no further questions in the queue, so I’d like to turn it back over to Michael Gross for any additional or closing remarks.

Michael Gross: Just thank you very much, and thank you all for your great questions. If you have anything else, please feel free to reach out to us. And otherwise, we’ll speak to you in 2 months on our Q1 call. Thank you. Bye-bye.

Operator: Ladies and gentlemen, this does conclude today’s teleconference, and we appreciate your participation. You may disconnect at any time.