SLR Investment Corp. (NASDAQ:SLRC) is a leading closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940. The company's investment objective is to maximize both current income and capital appreciation through debt and equity investments, primarily in the form of senior secured loans, financing leases, and to a lesser extent, unsecured loans and equity securities.
SLR Investment Corp. has a long and successful history, having been in existence since before the Great Financial Crisis. The company has navigated a variety of market environments across credit cycles over its 20-year history, demonstrating its ability to adapt and thrive in different economic conditions.
Business Overview
SLR Investment Corp. employs a multi-strategy approach to private credit investing, with four primary investment verticals: Sponsor Finance, Asset-Based Lending (ABL), Equipment Finance, and Life Sciences Lending. This diversified model provides the company with the flexibility to capitalize on the most attractive lending opportunities across these strategies, allowing it to shift capital allocation based on relative value.
In the first quarter of 2024, the company's specialty finance investment verticals (ABL, Life Sciences, and Equipment Finance) accounted for approximately 80% of total originations, while Sponsor Finance originations comprised the remaining 20% of the total. This represents a sharp reversal from the prior year, where Sponsor Finance originations made up close to half of total originations in the first quarter of 2023.
The company's ability to adapt its investment strategy based on market conditions is a key competitive advantage. As management teams and sponsors explore ways to raise new capital to support owning assets over a longer time frame, SLR Investment Corp. has seen an increasing opportunity for asset-based loans and liquidity solutions. In the first quarter, the company originated over $50 million in ABL investments, and the pipeline remains strong.
In the Life Sciences vertical, the company originated $24 million in new investments and DDTL draws in the first quarter, exceeding the originations for the first half of 2023. This reflects the improving credit investment opportunities in the life sciences market, as equity valuations for both private and public life science companies have begun to stabilize.
The company's Equipment Finance business continues to benefit from the transition from banks to non-banks, with the team's deep industry expertise allowing it to be a solution provider for both large and small companies.
Financials
For the first quarter of 2024, SLR Investment Corp. reported net investment income of $23.9 million, or $0.44 per share, representing year-over-year growth of 7.7%. This marked the sixth consecutive quarter of net investment income per share meeting or exceeding the quarterly dividend.
The company's net asset value per share increased to $18.19 as of March 31, 2024, from $18.09 per share at December 31, 2023, a sequential increase of 0.6%. SLR Investment Corp. had a net increase in net assets resulting from operations of $27.9 million for the first quarter of 2024, compared to a net increase of $23.6 million for the fourth quarter of 2023.
At the end of the first quarter, the company's comprehensive investment portfolio had a fair market value of approximately $2.1 billion, invested across 145 portfolio companies in 41 industries. The portfolio's weighted average asset-level yield was 11.8%, up from 11.6% in the prior quarter.
Liquidity
As of March 31, 2024, SLR Investment Corp. had approximately $1.2 billion of debt outstanding, with a leverage ratio of 1.16x net debt to equity. The company expects its leverage ratio to remain in the middle of its target range of 0.9x to 1.25x.
The company's funding profile is well-positioned to weather the current interest rate environment, with its existing $470 million of senior unsecured fixed notes having a weighted average annual interest rate of only 3.8%. SLR Investment Corp. plans to opportunistically access the investment-grade debt market and maintain an ongoing dialogue with investors in the fixed income community.
At the end of the first quarter, including available credit capacity at SSLP and the company's specialty finance portfolio companies, SLR Investment Corp. had approximately $800 million of available capital to deploy.
Diversified Portfolio and Credit Quality
SLR Investment Corp.'s diversified portfolio construction positions the company well for potential economic weakness. At the end of the first quarter, 99.3% of the portfolio consisted of senior secured loans, with 97.8% invested in first lien loans, including investments in the SSLP. Only 0.3% was invested in second lien cash flow loans, with the remaining 1.2% in second lien asset-based loans.
The company's specialty finance investments accounted for approximately 75% of the comprehensive portfolio, with the remaining 25% invested in senior secured cash flow loans to upper mid-market sponsor-backed companies. This defensive portfolio composition provides a differentiated risk-return profile for shareholders compared to cash flow-only portfolios.
SLR Investment Corp.'s portfolio credit quality remains strong, with over 97% of the portfolio rated at 2 or higher on the company's 1 to 4 risk rating scale (with 1 representing the least amount of risk). At the end of the first quarter, only 2 investments were on non-accrual status, representing 0.8% and 0.6% of the investment portfolio on a cost and fair value basis, respectively.
The company's cash flow borrowers have a weighted average EBITDA of approximately $125 million, carry low loan-to-value ratios of approximately 40%, and have interest coverage of approximately 1.7x. Additionally, only 1.8% of the company's gross investment income in the first quarter was in the form of capitalized payment-in-kind (PIK) income, which is significantly below the peer group.
Outlook
Looking ahead, SLR Investment Corp. expects origination opportunities to be driven by a combination of increased M&A activity, refinancings, and the impact of regional bank failures on the direct lending market. The company's specialty finance teams also continue to seek tuck-in acquisition opportunities, leveraging their resources and experience to acquire portfolios.
The company believes that its diversified portfolio approach across sponsor and commercial finance assets is the most effective way to generate income and manage risk across economic cycles. While the current market expectations are for rates to stay higher for longer, SLR Investment Corp. expects its specialty finance assets to be less volatile than cash flow sponsor finance investments, with yields not contracting to the same extent as the sponsor finance market when base rates move lower.
Conclusion
SLR Investment Corp. trades at a 10.5% dividend yield as of the latest market close, which the company believes presents an attractive investment for both income-seeking and value investors. The alignment of interest between the management team and shareholders, with the SLR team owning over 8% of the company's stock, further demonstrates the team's confidence in the company's portfolio, stable funding, and earnings outlook.
Overall, SLR Investment Corp. has demonstrated its ability to navigate various market environments and credit cycles, leveraging its diversified private credit investment model to deliver consistent income to shareholders. The company's defensive portfolio construction, strong credit quality, and flexible investment approach position it well to capitalize on the most attractive lending opportunities across the current market landscape.