SLR Investment Corp. (NASDAQ: SLRC) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. SLR is an externally managed business development company (BDC) investing mainly in debt and equity of U.S. middle-market companies. Financial statement amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $56.3 | $42.8 | $109.9 | $75.8 |
| Net investment income | $22.7 | $20.3 | $44.8 | $33.8 |
| Net realized gain (loss) | $0.5 | ($0.1) | $1.2 | ($0.1) |
| Net unrealized gain (loss) | ($4.2) | ($35.8) | ($20.2) | ($47.9) |
| Net increase (decrease) in net assets from operations | $19.0 | ($15.6) | $25.8 | ($14.2) |
| Earnings (loss) per share | $0.35 | ($0.29) | $0.47 | ($0.29) |
- Q2 net investment income was approximately 40% of investment income, versus 47% a year earlier; the difference reflects expenses, including financing costs. These are simple ratios of reported amounts, not a company-reported margin measure.
- For the six months, cash used in operating activities was $154.5 million, versus $79.2 million provided in the prior-year period. Financing activities provided $73.8 million. Cash and cash equivalents ended at $347.6 million, including $333.2 million in Treasury-bill cash equivalents.
- Total assets were $2.553 billion and net assets were $980.8 million at June 30. NAV was $17.98 per share, down from $18.33 at December 31, 2022.
- Debt face amount was $1.219 billion, up from $1.093 billion at year-end; carrying value was $1.213 billion. The six-month average annualized borrowing cost was 5.60%, versus 4.09% for 2022. Interest and other credit facility expenses rose to $33.1 million from $18.7 million in the six-month comparison.
- Asset coverage was 180.4%; the company reported compliance with its financial and operational debt covenants. Unused capacity under the two revolving facilities was $200.8 million, subject to borrowing-base limits.
Portfolio and changes versus prior periods
- At June 30, investments had fair value of $2.181 billion, compared with $2.087 billion at December 31, 2022. The portfolio included 156 companies; 78.0% of income-producing investments were floating rate. Three issuers were on non-accrual, versus two at June 30, 2022.
- Q2 investment income increased 32% year over year, which management attributed primarily to net growth in the income-producing portfolio and higher benchmark rates. Net expenses also increased, primarily from higher management and incentive fees, larger debt balances following the 2022 merger, and higher borrowing-rate benchmarks.
- Q2 unrealized depreciation was substantially lower than a year earlier. For 2023, depreciation included SLR Credit Solutions and, for the six-month period, AmeriMark; appreciation in other holdings partly offset these declines. The six-month results nevertheless included $20.2 million of net unrealized losses.
- Investment purchases were $368.9 million and proceeds from investment dispositions were $267.2 million for the first half. The cash-flow statement’s operating cash use also reflects investment activity and changes in settlement payables.
Outlook, risks, contingencies and unusual items
- Distributions: The board declared monthly distributions of $0.136667 per share for August 2023. Management said the board intends to move from monthly to quarterly declarations and payments starting in Q4 2023; future distributions remain subject to board determination and are not guaranteed.
- Rate sensitivity: Holding the June 30 balance sheet constant and assuming no new defaults, a 1 percentage-point change in LIBOR and SOFR was estimated to change annual net investment income by approximately $0.08 per share in the same direction. No interest-rate hedges were outstanding at June 30.
- Valuation and credit risk: Nearly all investments are Level 3, requiring significant unobservable valuation inputs. Non-qualifying assets were 24.5% of total assets on a fair-value basis, which can constrain future investment flexibility under BDC rules. The portfolio also includes PIK income; $6.2 million was capitalized in the first half. PIK is non-cash when accrued and may not ultimately be collected.
- Commitments: Unfunded debt and equity commitments totaled $325.9 million, excluding the separate $29.25 million remaining company commitment to SSLP. The company said it had sufficient cash and liquid securities available to fund commitments; some commitments may expire unused, and certain subsidiary commitments are subject to company control.
- Other risks: Management highlighted leverage, interest-rate and credit-market volatility, economic weakness, financial-sector liquidity concerns, and uncertainty in the transition from LIBOR to SOFR-based rates. It also cautioned that falling asset values could pressure BDC asset-coverage requirements. No material legal proceedings were reported.
- Unusual portfolio/subsidiary results: SLR Credit Solutions reported a $2.9 million net loss for the first half despite higher gross income; SLR Equipment Finance reported a $1.0 million net loss. Management cautioned that subsidiary GAAP income may differ materially from cash available for distributions to SLRC.
- The interim financial statements received a review by KPMG, which reported that it was not aware of material modifications needed for GAAP conformity; this was a review, not an audit. Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Most important facts for investors to verify
- Whether credit quality, non-accrual count, and fair values of the largely Level 3 portfolio have changed since June 30, particularly at SLR Credit Solutions and AmeriMark.
- Whether rising funding costs, floating-rate income, and any borrower stress are affecting net investment income and the sustainability of distributions.
- Current debt balances, available borrowing capacity, asset coverage, covenant compliance, and refinancing needs as maturities approach.
- Actual funding needs under the $325.9 million of unfunded commitments and the separate SSLP commitment, alongside liquidity and cash deployment.
- The board’s implementation of quarterly distributions from Q4 2023 and the amount and tax character of any future distributions.