Filing summary: Silver Spike Investment Corp. (SSIC), Q3 2023
Issuer identity discrepancy: The request identifies Chicago Atlantic BDC, Inc., but the supplied Form 10-Q is for Silver Spike Investment Corp. This summary covers the filing provided, not Chicago Atlantic.
Business context and reporting period
This unaudited quarterly report covers the three and nine months ended September 30, 2023. Silver Spike is an externally managed BDC focused primarily on lending to cannabis-related businesses; it also elected RIC tax treatment. Its fiscal year ends December 31.
Financial performance and position
| Metric | Q3 2023 / September 30, 2023 | Comparable period / prior year-end |
|---|---|---|
| Investment income | $2.92 million for Q3; $8.27 million for nine months | $1.18 million for Q3 2022; $2.00 million for nine months 2022 |
| Net investment income | $1.62 million for Q3; $4.89 million for nine months | $0.55 million for Q3 2022; $0.56 million for nine months 2022 |
| Net change in assets from operations | $1.27 million for Q3; $4.84 million for nine months | $0.56 million for Q3 2022; $0.56 million for nine months 2022 |
| Net asset value per share | $14.06 | $13.91 at December 31, 2022 |
| Cash and cash equivalents | $29.82 million | $35.13 million at December 31, 2022 |
| Investments at fair value | $57.38 million | $50.25 million at December 31, 2022 |
| Total assets / net assets | $89.19 million / $87.40 million | $86.97 million / $86.48 million at December 31, 2022 |
| Indebtedness | None | None at December 31, 2022 |
| Cash flow, nine months | Operating activities used $1.39 million; distributions used $3.91 million in financing; cash decreased $5.30 million | Operating activities used $24.22 million; IPO proceeds drove $85.27 million of financing cash inflow in 2022 |
Q3 operating expenses were $1.30 million, including a $0.41 million income-based incentive fee; nine-month expenses were $3.38 million. The filing does not present a conventional operating margin. At November 6, 2023, the reported share price of $9.68 was about 31.2% below September 30 NAV.
Material changes versus comparable periods
- Investment income and net investment income rose substantially year over year, primarily as the loan portfolio expanded and interest rates increased. Management attributed roughly $1.2 million of the nine-month investment-income increase to rates and $3.8 million to increased debt investments, with the remainder principally related to investment timing.
- Investment fair value increased to $57.38 million from $50.25 million at year-end 2022. The portfolio expanded from five to six companies, with approximately $8.44 million of purchases and $1.78 million of repayments or sale proceeds during the first nine months.
- Operating expenses rose from $1.44 million to $3.38 million for the nine-month comparison, mainly reflecting incentive fees and higher management fees as investments grew.
- Nine-month results included a $0.21 million realized investment loss and $0.17 million net unrealized appreciation. Q3 alone had $0.34 million of unrealized depreciation.
Portfolio, liquidity, outlook, and risks
- The $57.38 million investment portfolio consisted entirely of secured debt in cannabis-related wholesale trade businesses. Six companies held investments; first-lien loans were 86.3% of portfolio fair value. Two borrowers represented 71.8% of portfolio fair value, and the largest represented 35.9%.
- All investments were Level 3 fair-value assets, valued using significant unobservable inputs. The filing cautions that estimates may differ materially from realizable sale values. No loans were on non-accrual, and all investments were rated Grade 2 under the company’s internal system.
- Cash was $29.82 million and the company had no borrowings. Management said it may establish a credit facility in the future and is targeting debt-to-equity of 0.50x, but gave no timetable or firm borrowing guidance. It reported an active pipeline of more than $449 million of potential investments at various underwriting stages.
- Floating-rate exposure was significant: approximately 85.3% of debt investments by outstanding principal was floating rate. Higher rates may support loan income, while future borrowing at floating rates could raise funding costs if leverage is introduced.
- Key risks include borrower credit deterioration, cannabis-sector concentration and regulatory uncertainty, illiquidity and valuation uncertainty, prepayments, and potential limits on collateral rights under cannabis laws. Non-qualifying assets were 27.6% of total assets at quarter-end, making BDC asset-composition compliance important to monitor.
- The company declared Q3 distributions of $0.23 per share quarterly and $0.40 per share special. Subsequent to quarter-end, the board approved a $0.25 regular and $0.45 special dividend, payable December 29, 2023. Distributions may exceed taxable earnings and could be treated partly as return of capital; final tax character was not yet determined.
- The Adviser receives a 1.75% base management fee and an income incentive fee generally equal to 20% above a 7% annualized hurdle, subject to a catch-up. The Adviser also holds approximately 72% of voting stock and may sell shares; substantial sales could pressure the share price.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material legal proceedings, identified contingencies, or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is Silver Spike Investment Corp. (SSIC), not Chicago Atlantic BDC, Inc.
- Review borrower-level performance, concentration, collateral coverage, and subsequent developments, particularly for the two largest exposures.
- Assess the assumptions supporting Level 3 valuations and whether they remain consistent with current borrower conditions and market discount rates.
- Verify the tax character and earnings coverage of declared distributions, including the November 2023 distributions, when final information becomes available.
- Monitor RIC qualification and the BDC qualifying-asset test, as well as any future credit facility, leverage, and associated borrowing costs.
- Compare the market price with NAV and monitor the potential effect of sales by the Adviser, which controls approximately 72% of voting stock.