Solar Capital Management Discusses Q2 2012 Results - Earnings Call Transcript

Solar Capital (SLRC)

Q2 2012 Earnings Call

August 01, 2012 10:00 am ET

Executives

Michael S. Gross - Chairman, Chief Executive Officer, and President

Richard L. Peteka - Chief Financial Officer

Bruce Spohler - Chief Operating Officer and Director

Analysts

Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

Jonathan Bock - Wells Fargo Securities, LLC, Research Division

Greg Mason - Stifel, Nicolaus & Co., Inc., Research Division

Casey J. Alexander - Gilford Securities Inc., Research Division

Justin Baker

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Solar Capital Ltd. Earnings Conference Call. My name is Chantilly, and I'll be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Michael Gross, Chairman and CEO. Please proceed, sir.

Michael S. Gross

Thank you, and good morning. Welcome to Solar Capital Ltd's earnings call for the second quarter ended June 30, 2012. I'm joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka, reporting on his first quarter as our Chief Financial Officer.

Prior to joining our team, Rich served as Apollo Investment Corp.'s CFO for nearly 8 years through February 2012. I have personally hired him back in June 2004 when I was a CEO of Apollo. Rich, I'd like reiterate how pleased we are to have you on the Solar Capital team, and before we begin, would you please start off by covering the webcast and forward-looking statements?

Richard L. Peteka

Of course. Thanks, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Ltd., and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replay of this call will be made available later today as disclosed in our earnings press release.

I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or future our performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. Solar Capital Ltd. undertakes no duty to update any forward-looking statements, unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at (212) 993-1670.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Michael S. Gross

Thank you, Rich. Although the broader capital markets have experienced quite a bit of recent volatility, our second quarter was a highly productive and accomplished one. We made several strategic advancement in positioning Solar Capital for continued long-term success. We originated a record volume of high-quality new investments in addition to expanding our investment portfolio by over $185 million or 18%. We significantly enhanced our liability structure by increasing our debt capacity, extending the maturity and reducing our average borrowing cost.

Expenses related to this initiative lowered our NAV modestly to 22.51 at June 30 from our first quarter end book value.

Sovereign debt crisis in Europe dominated headlines and cost broad market volatility but only had a muted effect on the middle market in United States.

Overall, the fundamentals of our portfolio companies remain strong. The fair value weighted average market of our portfolio excluding common equity was approximately 96.4% at June 30.

We continue to believe that there is excess realizable value as we monetize our existing portfolio.

During the second quarter, we originated over $190 million of investments in 5 new portfolio companies and in 1 existing portfolio company. We sourced the mix of financings for private equity sponsors, new acquisitions and for follow-on financings as even incumbent investor or private investor. Year-to-date, during June 30, we've underwritten over $250 million of new investments. Our redemptions for the quarter were less than $6 million, all of which contractual amortization repayments. Net origination for the quarter totaled over $185 million, both on a gross and net basis. This quarter marked a record origination effort for Solar Capital.

It is worth noting that a large portion of our second quarter investments funded late in the quarter and subsequent to quarter end. Therefore, the full benefit of our strong origination quarter was not reflected in the second quarter's net investment income. Based upon our current visibility, we expect third quarter recurring net investment income on a larger average investment portfolio to cover our third quarter dividend.

During the quarter, we made significant progress in optimizing our capital structure through 2 strategic transactions. First, we entered into a new 4 year, $485 million credit facility and issued $75 million of 5-year private replacement notes which increased our total borrowing capacity from $540 million to $660 million. These issuances extend our average debt maturity beyond expected duration of our average investment, thus, improving our asset liability match. In addition, we meaningfully reduced the borrowing cost of revolving debt and improved our terms in the facility overall.

With the addition of 5 new high-quality institutional investors in the private placement notes, we further diversified our lender base. We will continue to take advantage of opportunity and the liability side of the business.

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