Business context and reporting period
SLR Investment Corp. (NASDAQ: SLRC) is an externally managed business development company and regulated investment company focused on income and capital appreciation from lending to U.S. middle-market businesses. Its investments include senior secured loans, asset-based lending, equipment finance and life-sciences lending, with smaller unsecured-loan and equity positions.
This Form 10-K covers the fiscal year ended December 31, 2022. Although the request refers to 2022 Q4, the supplied filing does not provide a standalone fourth-quarter income statement; comparisons below are full-year unless noted.
On April 1, 2022, SLRC completed its acquisition of SLR Senior Investment Corp. (SUNS), issuing 12.5 million shares. The merger was accounted for as an asset acquisition. The adviser also permanently reduced its base management fee by 25 basis points, to 1.50% on gross assets up to 200% of net assets and 1.00% above that threshold.
Key financial metrics
| Metric | FY 2022 / year-end | FY 2021 / prior year-end |
|---|---|---|
| Total investment income | $177.5 million | $139.4 million |
| Net expenses | $101.1 million | $78.4 million |
| Net investment income | $76.4 million; $1.48 per average share | $60.9 million; $1.44 per average share |
| Net realized investment gain (loss) | $(36.5) million | $0.03 million gain |
| Net change in unrealized investment value | $(21.5) million | $(1.4) million |
| Net increase in net assets from operations | $18.3 million; $0.35 per average share | $59.6 million; $1.41 per average share |
| Net cash provided by (used in) operating activities | $91.1 million | $(135.1) million |
| Cash and cash equivalents at year-end | $428.3 million, including $417.6 million in cash equivalents | $322.9 million |
| Total assets / net assets | $2.538 billion / $999.7 million | $2.011 billion / $842.3 million |
| NAV per share | $18.33 | $19.93 |
| Total borrowings, face amount | $1.093 billion | $818.5 million |
| Asset coverage ratio | 191.5% | Not stated here |
At year-end, the investment portfolio had a fair value of $2.087 billion across 139 portfolio companies. The mix was 30.8% cash-flow senior secured loans, 30.0% asset-based senior secured lending, 23.7% equipment finance and 15.5% life-sciences senior secured loans. Of the income-producing portfolio, 77.7% was floating rate and 22.3% fixed rate. Two issuers were on non-accrual, versus one at December 31, 2021.
SLRC reported $401.8 million of unused capacity under its revolving facilities, subject to borrowing-base limits. Its $1.093 billion of borrowings comprised $393.0 million under the Credit Facility, $155.2 million under the SPV Credit Facility and unsecured notes. The filing states SLRC complied with debt covenants at year-end. Separately, it held $420 million par value of Treasury bills as cash equivalents.
Material changes versus the prior comparable period
- Investment income rose 27%, principally from the larger post-merger portfolio and higher loan reference rates. Net investment income rose 25%.
- Net expenses increased to $101.1 million from $78.4 million, including higher interest and credit-facility expense as borrowings and benchmark rates increased. Average annualized borrowing cost was 4.09%, up from 3.64%.
- Net realized and unrealized losses totaled $58.0 million, compared with $1.4 million in 2021. The filing attributes the 2022 realized loss primarily to the exit from PhyMed Management; unrealized depreciation included American Teleconferencing Services, RD Holdco, SLR Credit Solutions and SLR Equipment Finance.
- Despite higher net investment income, net assets from operations fell to $18.3 million from $59.6 million, and NAV per share declined by $1.60. The merger increased the share count; merger-related share issuance contributed $226.8 million to net assets.
- Investment purchases were approximately $610 million, versus $596 million in 2021; repayments, sales and prepayments were approximately $532 million, versus $468 million.
- Distributions declared were $1.64 per share in both 2022 and 2021. The filing classifies 2022 distributions as 59.2% ordinary income, 32.0% return of capital and 8.8% recognized in a subsequent year; tax classifications are estimates pending tax-return filing.
Outlook, risks and unusual items
- Outlook: The filing provides no earnings or portfolio-growth guidance. Management describes 2022 credit markets as pressured by high inflation, tighter financial conditions and recession concerns. It expects general and administrative expenses to rise moderately in dollars, with the ratio to assets varying with asset growth or decline.
- Distributions: The Board declared monthly distributions of $0.136667 per share for February, March and April 2023. Future distributions remain subject to Board approval, results, liquidity, asset-coverage requirements and debt covenants.
- Leverage and interest rates: Leverage magnifies gains and losses. A hypothetical 1 percentage-point increase in LIBOR and SOFR was estimated to increase annual net investment income by about $0.10 per average share; a decrease of the same amount was estimated to reduce it by about $0.10. The filing reports no interest-rate hedges outstanding at year-end.
- Portfolio valuation and credit: Most investments are private and classified as Level 3, requiring significant judgment and unobservable inputs. KPMG identified fair value of acquired and other investments as a critical audit matter. Credit deterioration, collateral shortfalls, defaults, illiquidity and refinancing difficulties could reduce NAV and income.
- Commitments: Unfunded portfolio commitments totaled $323.7 million at year-end, plus a separately disclosed $40.5 million remaining SLRC commitment to the new SLR Senior Lending Program. SLRC said it had sufficient cash or liquid securities to fund commitments; some commitments may expire undrawn.
- Other material items: A $50 million share-repurchase authorization was approved in May 2022; SLRC repurchased 217,271 shares for approximately $3.0 million during the year. The new joint venture, SSLP, began operations in December and had $19.1 million of assets at year-end, with no facility borrowings during the period.
- Governance and contingencies: SLRC reported no material legal proceedings. Management and KPMG concluded internal control over financial reporting was effective; KPMG gave an unqualified audit opinion on the financial statements.
Most important facts for investors to verify
- Confirm how the $75 million 2023 Unsecured Notes, due January 20, 2023, were repaid, refinanced or otherwise addressed after the reporting date.
- Review subsequent portfolio performance and non-accrual developments, particularly the two issuers on non-accrual and investments identified as sources of 2022 depreciation.
- Assess the assumptions and sensitivity behind Level 3 valuations, including the acquired SUNS assets, and compare later realizations with reported fair values.
- Track asset coverage, facility borrowing-base availability, covenant headroom, funding costs and the ability to meet the $323.7 million of unfunded commitments plus the separate SSLP commitment.
- Determine whether distributions are supported by recurring cash income: 32.0% of 2022 distributions was classified as return of capital, and accrued or PIK income may not generate cash when recognized.
- Consider the discount to NAV: the filing reports a 19.6% discount at February 22, 2023; the market price can diverge from NAV, which itself depends on estimates for illiquid investments.