SLR Investment Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. SLR is an externally managed business development company (BDC) investing primarily in middle-market loans, equipment financings, and equity interests. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $59.6 | $47.6 | $169.5 | $123.4 |
| Net expenses, after incentive-fee waivers | $36.3 | $27.5 | $101.3 | $69.5 |
| Net investment income (NII) | $23.4 | $20.1 | $68.2 | $53.8 |
| Net realized and unrealized investment gain (loss) | $3.6 | $(6.5) | $(15.4) | $(54.5) |
| Net increase (decrease) in net assets from operations | $26.9 | $13.5 | $52.8 | $(0.7) |
| Earnings (loss) per share | $0.49 | $0.25 | $0.97 | $(0.01) |
- At September 30, total assets were $2.539 billion, total net assets were $985.4 million, and NAV was $18.06 per share, compared with $999.7 million and $18.33 per share at December 31, 2022.
- Portfolio investments at fair value were $2.171 billion. The largest industry exposures were diversified financial services (21.6% of investments), multi-sector holdings (16.6%), and healthcare providers and services (11.8%). Two issuers were on non-accrual, unchanged from September 2022.
- Reported debt face value was $1.198 billion, versus $1.093 billion at year-end 2022. Asset coverage was 182.3%. The average annualized borrowing cost rose to 5.79% for the nine-month period from 4.09% in 2022.
- Cash and cash equivalents were $342.8 million, including $332.6 million in Treasury bills; cash alone was $10.3 million. The company reported $200.8 million of available capacity under its credit facilities, subject to borrowing-base limits.
- Cash used in operating activities was $115.1 million for the nine months, compared with $148.7 million used in 2022. Cash distributions paid were $74.6 million; cash and cash equivalents declined $85.5 million to $342.8 million.
Changes versus comparable periods
- Investment income increased 25% year over year in Q3 and 37% for the nine months. Management attributed the Q3 increase mainly to portfolio growth and higher benchmark rates.
- Expenses rose faster than income: Q3 net expenses increased about 32%, and nine-month expenses about 46%. Management cited the larger portfolio, higher management and incentive fees, higher borrowing balances, and higher borrowing rates.
- NII increased to $0.43 per average share in Q3 from $0.37; nine-month NII per average share rose to $1.25 from $1.06.
- Q3 unrealized appreciation of $34.5 million more than offset $31.0 million of realized losses. Nine-month results still included a $29.8 million realized loss and $14.4 million of net unrealized appreciation, producing a $15.4 million net investment loss.
- NAV per share declined $0.27 from December 2022. Nine-month distributions were $67.1 million, compared with NII of $68.2 million; 2023 distributions were reported as income, with no return of capital in the period.
Outlook, risks and notable items
- No numerical earnings or investment guidance is provided. The board declared a $0.41-per-share quarterly distribution on November 7, 2023, payable December 28 to holders of record December 14.
- Interest-rate sensitivity: assuming no balance-sheet changes or new defaults, a one-percentage-point rate decrease would reduce annual NII by about $0.07 per share; a one-point increase would raise it about $0.08. No interest-rate hedges were outstanding at quarter-end.
- Credit and valuation risks include potential deterioration at portfolio companies, reliance on fair-value estimates, and illiquidity. Nearly all investment fair value was classified Level 3, which uses significant unobservable inputs. The company reported non-qualifying assets at 25.1% of total assets, up from 24.2% at year-end.
- Unfunded debt and equity commitments totaled $367.3 million, up from $364.2 million at year-end. The company said it had sufficient cash or liquid securities to fund them; some commitments are cancellable or may expire undrawn.
- Other risks highlighted include leverage and covenant constraints, rising or volatile rates, financial-sector liquidity stress, and the potential for SOFR or CME Term SOFR to produce different economics from LIBOR. The company said it was compliant with debt covenants at quarter-end.
- Unusual credit and valuation items: Q3 realized losses were primarily associated with American Teleconferencing Services; unrealized gains included reversal of prior depreciation on that investment. Nine-month PIK income capitalized was $8.9 million. SLR Equipment Finance reported a $2.2 million nine-month net loss, while SLR Credit Solutions’ nine-month net income fell to $1.4 million from $8.6 million.
- The independent accountant performed a review of interim financial information, not a full audit, and reported no material modifications needed for GAAP conformity. Management reported effective disclosure controls and no material Q3 change in internal control over financial reporting. No material legal proceedings or defaults on senior securities were reported.
Important facts for investors to verify
- Review portfolio-company credit quality, the two non-accrual investments, realized losses, and the valuation assumptions behind the predominantly Level 3 portfolio.
- Assess whether higher investment income can continue to outpace rising interest, management, and incentive expenses, and monitor floating-rate exposure and refinancing needs.
- Reconcile reported facility availability: MD&A cites $200.8 million available subject to borrowing-base limits, while another disclosure states $232.3 million of unused revolving commitments; the filing presents these on differing bases.
- Monitor distribution coverage, the $367.3 million of unfunded commitments, asset coverage, and the effect of debt covenants or market stress on liquidity and future distributions.
- Consider that management warns subsidiary earnings may differ materially from cash available for distributions, and that future distributions and share repurchases are not assured.