SLR Investment Corp. — Q1 2023 Form 10-Q
Business context and reporting period
For the quarter ended March 31, 2023; filed May 10, 2023. SLR Investment Corp. is an externally managed business development company (BDC) focused on middle-market lending and related investments. It seeks current income and capital appreciation, primarily through senior secured loans, equipment financing and, to a lesser extent, equity investments. The year-over-year comparison is affected by the April 2022 merger with SLR Senior Investment Corp. (SUNS), as well as changes in benchmark rates.
Financial performance and position
Amounts below are in millions, except per-share data.
| Metric | Q1 2023 / March 31, 2023 | Comparable / prior period |
|---|---|---|
| Investment income | $53.5 | $33.0 in Q1 2022 |
| Net expenses | $31.4 | $19.5 in Q1 2022 |
| Net investment income (NII) | $22.1; $0.41 per average share | $13.5; $0.32 per average share in Q1 2022 |
| Net realized gain | $0.7 | $0.03 in Q1 2022 |
| Net unrealized loss | $16.0 | $12.0 in Q1 2022 |
| Net increase in net assets from operations | $6.8; reported earnings per share $0.13 | $1.5; $0.04 per share in Q1 2022 |
| Operating cash flow | $9.5 | $304.2 in Q1 2022 |
| Investments at fair value | $2,088.5 | $2,086.7 at December 31, 2022 |
| Total assets / total liabilities | $2,556.2 / $1,572.0 | $2,537.7 / $1,538.0 at December 31, 2022 |
| Debt, face amount | $1,122.2 | $1,093.2 at December 31, 2022 |
| Net assets / NAV per share | $984.2 / $18.04 | $999.7 / $18.33 at December 31, 2022 |
| Cash and cash equivalents | $444.4 | $428.3 at December 31, 2022 |
The portfolio comprised 145 companies. Of the income-producing investment portfolio, 77.7% was floating-rate and 22.3% fixed-rate; two issuers were on non-accrual. Senior secured loans were the largest investment category. The filing does not present a conventional operating margin; it reports expenses equal to 3.14% of average net assets, including interest and credit-facility expenses of 1.53%.
Quarterly distributions were $0.41 per share, matching reported NII per average share. Net cash from operations was $9.5 million, while financing activities provided $6.6 million; cash and cash equivalents increased by $16.1 million during the quarter. The cash flow comparison with Q1 2022 is affected by a much larger increase in investment-purchase payables in that prior-year period.
Material changes versus comparable periods
- Investment income rose 62% year over year, which management attributed primarily to the SUNS merger and higher index rates. NII rose from $13.5 million to $22.1 million.
- Net expenses increased from $19.5 million to $31.4 million, mainly due to the larger post-merger portfolio, higher interest expense and higher management and incentive fees. Interest and other credit-facility expenses increased to $15.3 million from $8.3 million.
- Despite higher NII, unrealized investment losses widened to $16.0 million from $12.0 million. Management cited depreciation in AmeriMark and SLR Credit Solutions, partly offset by appreciation in other holdings.
- NAV per share declined to $18.04 from $18.33 at year-end 2022. At March 31, the market value per share was $15.04; reported quarterly total return was 11.01%.
- Investment purchases totaled approximately $156.0 million across 40 portfolio companies, versus $67.5 million across 14 companies in Q1 2022; sales, prepayments and repayments were approximately $144.2 million versus $101.0 million.
Liquidity, debt, outlook and risks
- Outstanding debt had a face amount of $1,122.2 million. The company reported asset coverage of 187.7% and compliance with financial and operational debt covenants at March 31, 2023. Available capacity under the main and SPV revolving facilities was $297.8 million, subject to borrowing-base limits.
- The average annualized borrowing cost was 5.39% in Q1 2023, up from 4.09% for full-year 2022. Management’s sensitivity analysis estimates that a 1 percentage-point increase in LIBOR and SOFR would increase annual NII by about $0.10 per share; a comparable decrease would reduce it by about $0.09 per share, assuming no balance-sheet changes or new defaults.
- Unfunded debt and equity commitments totaled $336.3 million, up from $323.7 million at year-end. Separately, the company had a remaining $40.5 million equity commitment to SLR Senior Lending Program LLC (SSLP); the filing says it had sufficient cash and/or liquid securities to fund commitments. Certain commitments are subject to conditions or are controllable/cancelable.
- No specific earnings or distribution guidance was provided. The Board declared monthly distributions of $0.136667 per share for May and June 2023. On May 9, 2023, it extended the discretionary $50 million share repurchase authorization through May 10, 2024; approximately $3.048 million had been repurchased under the program to date.
- Key risks include portfolio-company defaults and weaker economic conditions, higher funding costs and interest-rate volatility, constrained credit-market access, valuation uncertainty in predominantly Level 3 investments, and liquidity or counterparty issues in the financial-services sector. Non-qualifying assets were 24.3% of total assets at March 31, 2023; exceeding applicable BDC limits could constrain follow-on investments or require asset sales.
- Unusual or notable items: SLR Credit Solutions reported a Q1 net loss of $9.7 million despite gross income of $14.6 million; management cautioned that subsidiary GAAP earnings may differ materially from cash available for distributions. The CFO resigned effective April 3, 2023, and Shiraz Y. Kajee was appointed to the role. The interim financial statements received a review, not an audit; the auditor reported no material modifications identified.
Important facts for investors to verify
- Whether portfolio marks, especially the unrealized losses and material Level 3 valuations, remain supportable; most investments require significant unobservable inputs.
- Credit quality and performance of non-accrual holdings, including whether the two non-accrual issuers and SLR Credit Solutions’ loss affect future income or distributions.
- Ability to fund $336.3 million of commitments plus the separate SSLP commitment while preserving liquidity and meeting borrowing-base and asset-coverage requirements.
- How the merger-driven increase in scale, higher interest costs and incentive fees affect recurring NII and the sustainability of monthly distributions.
- Exposure to floating-rate assets and liabilities, and the effect of future benchmark-rate changes, defaults and refinancing conditions on NII and NAV.