New York-based business development companies Solar Capital (SLRC) and Solar Senior Capital (SUNS) both posted overall stable returns for the end of the fourth quarter and the year.
The BDCs are backed by Solar Capital Partners (SCP), an investment advisor formed in 2006 that has deployed more than $9.9 billion since inception. Here are five key takeaways from their fourth-quarter earnings presentations:
Both BDCs had stable NII and troubled NAV
Both vehicles experienced losses to their net asset value per share during the fourth quarter and across 2018, while keeping their net investment income rates relatively constant.
SLRC reported a NAV per share of $21.75, which is down $0.20 from the end of the third quarter ($21.95) and down 1 percent from the end of 2017 ($21.81). The BDC’s NII remained even across all four quarters of the year, landing on approximately $0.35 a share and falling short of covering its $0.41-a-share dividend.
SUNS ended the quarter with a NAV per share of $16.30 – down from $16.81 at the end of the third quarter and $16.84 at the end of 2017. It also maintained a steady NII across the year, only straying by $0.01, and rounded out the year at $0.35.
Solar Capital Partners will expand its role
Michael Gross, the chief executive officer and chairman of the board for both SUNS and SLRC, said on the BDCs’ respective earnings calls that both expanded SCP’s role as their advisor in 2018. SCP can co-invest up to $200 million on any given transaction for each vehicle.
SCP closed on more than $2.3 billion in capital to invest alongside SUNS and SLRC, which included a $1.9 billion drawdown fundraise that wrapped up in October. Bruce Spohler, the chief operations officer of both SUNS and SLRC, said that this advisory expansion will allow them to increase their exposure to upper mid-market loans.
Gross said that it will help both vehicles ramp up their asset-based loan strategies, and that it will help SLRC expand its life sciences strategy. He said the same about SUNS and its cashflow business.
Both BDCs reported losses
Both BDCS experienced multi-million-dollar losses over both the quarter and 2018.
SUNS experienced a net realised and unrealised loss of $8.2 million during the fourth quarter, compared to $400,000 during the third quarter. Because of this, the BDC experienced a net decrease in total assets, ending the quarter at $261.4 million, down from the third quarter’s $269.7 million. The year-end number is also down from $270.1 million at end of 2017.
SLRC had net realised and unrealised losses of $9.5 million during the fourth quarter compared to $300,000 of losses during the third quarter. SLRC ended the year down, with $919.2 million net assets, compared to $921.6 million at the end of 2017. The vehicle had $927.6 million in net assets at the end of the third quarter.
The vehicles upped their loan commitments amid a turbulent quarter
Both BDCs reported higher amounts of loan commitments during the fourth quarter compared to the third. SUNS committed $83.3 million to portfolio companies, which is more than double the $40.7 million committed during the three months ending 30 September.
SLRC also posted an increase for its quarterly investment commitments. The vehicle made $284 million in new capital commitments, which is a 29 percent increase from the previous quarter, when it committed more than $202 million.
Gross said that the BDCs are committed to lowering portfolio risk and shifting toward a strategy of investing in senior-secured first-lien loans exclusively.
SUNS’ portfolio at the end of 2018 was comprised of 98.5 percent senior-secured first-lien loans, with the remaining 1.5 percent being second-lien loans. SLRC’s portfolio is comprised of 89 percent senior-secured first-lien loans and 11 percent second-lien loans. Neither vehicle has deployed a second-lien loan for more than four years.
Both BDCs adopt a change in leverage
During the fourth quarter, both vehicles successfully voted to increase their respective allowable debt-to-equity ratio from 1:1 to 2:1, allowing them to take on additional leverage. Gross said that SLRC will be working toward a target leverage range of 0.9x to 1.25x. SUNS is looking to target a leverage range of 1.25x to 1.5x, and currently sits at 0.63x.
“Importantly, we want to reiterate that the asset coverage modification will not change our investment strategy,” Gross said on both earnings calls. “It will, however, enhance Solar Capital’s ability to further expand our specialty finance lending platform.”