SLR Investment Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. SLR is an externally managed business development company focused primarily on debt and equity investments in leveraged middle-market companies. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Investment income | $58.1 million | $53.5 million in Q1 2023 |
| Net expenses | $34.2 million | $31.4 million in Q1 2023 |
| Net investment income | $23.9 million; $0.44 per share | $22.1 million; $0.41 per share in Q1 2023 |
| Net realized and unrealized gains | $4.0 million | Loss of $15.3 million in Q1 2023 |
| Increase in net assets from operations | $27.9 million; $0.51 per share | $6.8 million; $0.13 per share in Q1 2023 |
| Net assets / NAV per share | $992.1 million / $18.19 | $986.6 million / $18.09 at December 31, 2023 |
| Total assets / total liabilities | $2,468.5 million / $1,476.3 million | $2,523.9 million / $1,537.2 million at December 31, 2023 |
| Debt, face amount | $1,162.3 million | $1,183.3 million at December 31, 2023 |
| Cash and cash equivalents | $308.1 million | $344.2 million at December 31, 2023 |
| Operating cash flow | $7.3 million | $9.5 million in Q1 2023 |
Reported ratios to average net assets were 2.42% for net investment income, 1.63% for operating expenses, 1.84% for interest and other credit facility expenses, and 3.47% for total expenses; quarterly ratios are not annualized. The average annualized interest cost on borrowings was 6.05%, compared with 5.88% for 2023.
Portfolio, liquidity and capital
- Investments at fair value were $2.134 billion, down from $2.155 billion at year-end; the company also held $292.9 million in Treasury-bill cash equivalents. Its 145-company portfolio was 33.3% cash-flow senior secured loans, 28.2% asset-based senior secured loans and affiliated finance businesses, 22.6% equipment financings and related businesses, and 15.9% life-science senior secured loans.
- Of the income-producing portfolio, 81.3% ($1.71 billion) was floating-rate and 18.7% ($393.6 million) was fixed-rate. Two issuers were on non-accrual, unchanged from the prior-year comparison.
- Operating activities provided $7.3 million of cash; financing activities used $43.4 million, including $22.4 million of distributions. Cash and cash equivalents declined by $36.0 million during the quarter.
- Unused capacity under the company’s revolving facilities was $267.8 million, subject to borrowing-base limits. The company reported 185.4% asset coverage and compliance with all debt covenants at quarter-end.
- Unfunded investment commitments totaled $226.9 million, down from $248.7 million at year-end. Management stated that cash and liquid securities were sufficient to fund them; some commitments are cancellable or may expire undrawn.
Changes, outlook and risks
- Investment income rose 8.5% year over year, which management attributed primarily to average portfolio growth and higher index rates. Net expenses increased, principally from higher management and incentive fees, borrowing costs and index rates.
- Results benefited from a $3.9 million net unrealized gain versus a $16.0 million unrealized loss in Q1 2023. Management cited appreciation in several life-science and affiliated finance investments, partly offset by depreciation in SLR Equipment Finance and SOINT.
- Investment purchases were approximately $100.2 million across 24 companies, compared with $156.0 million across 40 companies a year earlier. Sales, prepayments and repayments totaled approximately $131 million, versus $144 million.
- The Board declared a $0.41-per-share distribution payable June 27, 2024. It also extended the authorization to repurchase up to $50 million of common stock through the earlier of May 7, 2025 or completion of the program; repurchases are discretionary. No shares were repurchased in Q1.
- No specific earnings or investment guidance was provided. Management cautioned that results depend on portfolio-company performance, investment timing, funding access and market conditions, and that interim results are not necessarily indicative of full-year results.
- Key risks include borrower credit deterioration and defaults, interest-rate and credit-market volatility, leverage and refinancing needs, fair-value uncertainty in largely Level 3 investments, and constraints on distributions under asset-coverage, debt-covenant and RIC requirements. A 1-percentage-point SOFR decrease was estimated to reduce annual net investment income by $0.07 per share; a 1-point increase was estimated to raise it by $0.08, assuming no balance-sheet changes or new defaults.
- Unusual or notable items: $2.8 million of capitalized payment-in-kind income (non-cash); $125 million of 4.20% unsecured notes mature in December 2024. Non-qualifying assets were 24.8% of total assets on a fair-value basis, within the BDC’s regulatory framework but relevant to investment flexibility.
Most important facts to verify
- Whether portfolio-company credit quality, non-accruals and payment-in-kind accruals remain stable, and whether Q1’s valuation gains are sustained.
- How the company plans to repay or refinance the $125 million notes maturing in December 2024 and maintain borrowing capacity and covenant compliance.
- Whether the $0.41 quarterly distribution is supported by recurring cash income, given that Q1 operating cash flow was $7.3 million and distributions paid were $22.4 million.
- How much of the $226.9 million in unfunded commitments may be drawn, and the extent to which available liquidity remains sufficient.
- Whether the extended share-repurchase authorization is used, and how changes in rates affect net investment income and financing costs.
KPMG reported that its interim review identified no material modifications needed for GAAP conformity; it was a review, not an audit opinion on the interim statements.