SLR Investment Corp. (NASDAQ: SLRC) — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. SLRC is an externally managed business development company investing primarily in middle-market debt, equipment finance and equity. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Investment income | $47.6 | $32.2 | $123.4 | $103.6 |
| Net expenses | $27.5 | $17.2 | $69.5 | $57.6 |
| Net investment income | $20.1 | $15.0 | $53.8 | $46.0 |
| Net realized and unrealized gain (loss) | ($6.5) | ($1.6) | ($54.5) | $7.5 |
| Net increase (decrease) from operations | $13.5 | $13.4 | ($0.7) | $53.4 |
| Earnings (loss) per share | $0.25 | $0.32 | ($0.01) | $1.26 |
Q3 investment income rose 48% year over year, while net investment income increased 34%. For the nine-month period, higher investment income was more than offset at the operating-result level by investment losses. The filing attributes higher income principally to the larger post-merger portfolio and organic growth, as well as higher LIBOR and SOFR. Interest and credit-facility expense rose to $12.8 million in Q3 from $7.1 million and to $31.5 million year to date from $21.5 million.
Balance sheet, liquidity and portfolio
- At September 30, total assets were $2.455 billion, total liabilities $1.449 billion, and net assets $1.006 billion. Net asset value was $18.37 per share, down from $19.93 at December 31, 2021.
- Investments had a fair value of $2.155 billion; cash and cash equivalents totaled $276.9 million, including $268.9 million in Treasury bills.
- Debt was $1.156 billion at face value ($1.148 billion carrying value), compared with $818.5 million at face value at year-end 2021. Asset coverage was 187%; the company reported compliance with debt covenants.
- Unused capacity under the company’s revolving facilities was $334.8 million, subject to borrowing-base limits. The facilities had $590.2 million outstanding in aggregate at quarter-end.
- For the nine months, operating cash flow was negative $148.7 million and financing cash flow was positive $102.7 million. Cash and cash equivalents declined by $46.0 million from the beginning of the period.
- The portfolio comprised 135 companies. By fair value, 79.7% of income-producing investments were floating rate and 20.3% fixed rate. Three issuers were on non-accrual, versus one a year earlier. Non-qualifying assets represented 22.7% of total assets.
Changes, transactions and distributions
- The April 1 SUNS merger added net assets of $244.7 million; SLRC issued 12.5 million shares as consideration. The acquisition materially affects year-over-year comparability and expanded the portfolio and borrowing base.
- Net realized losses were $37.4 million for the first nine months, primarily from the exit of PhyMed Management. Unrealized changes were a loss of $17.1 million year to date, including depreciation in several holdings; Q3 unrealized gains of $30.8 million partly offset realized losses.
- Distributions for the first nine months totaled $62.2 million, including $53.8 million from net investment income and $8.4 million classified as return of capital. Monthly distributions declared for November and December were $0.136667 per share.
- The adviser agreed to a permanent 25-basis-point reduction in the base management fee rate for gross assets up to 200% of net assets. A $50 million share repurchase authorization was approved in May; no shares had been repurchased by quarter-end.
Outlook, risks and unusual items
- The filing provides no numerical earnings or investment guidance. Management says results depend on investment activity, market conditions and portfolio-company performance; interim results are not necessarily indicative of full-year results.
- Interest-rate movements affect both floating-rate investment income and borrowing costs. The company estimated that, with no balance-sheet changes or new defaults, a 1-percentage-point rate increase would raise annual net investment income by about $0.12 per share, while a decrease would reduce it by about $0.11 per share. No interest-rate hedges were outstanding.
- Unfunded investment commitments were $310.2 million, up from $226.7 million at year-end. Management reported available cash or liquid securities to fund them; commitments may expire undrawn, and certain commitments are subject to conditions.
- Key risks include portfolio-company credit deterioration, higher funding costs, valuation uncertainty for predominantly Level 3 investments, leverage and covenant constraints, and possible adverse effects from COVID-19, market disruption and the Russia-Ukraine conflict. The filing also notes that PIK income is non-cash and may not ultimately be collected.
- After quarter-end, SLRC agreed to a joint venture with SunStone Senior Credit, with each party committing $50 million of initial equity; the venture intends to seek leverage and was expected to begin investing before year-end 2022.
Most important facts for investors to verify
- Whether portfolio credit quality and non-accrual exposures deteriorate, and the recovery prospects for PhyMed and other marked-down investments.
- How the SUNS merger affects per-share income, NAV, portfolio risk and the comparability of reported results.
- Debt capacity, borrowing costs, asset coverage and upcoming maturities, including the 2023 unsecured notes and 2022 Tranche C notes.
- Whether investment cash flows can support distributions, particularly given the return-of-capital component and sizeable unfunded commitments.
- The assumptions behind Level 3 valuations and the funding, leverage and investment activity of the planned joint venture.