SLR Investment Corporation (SLRC) オプション

My back of the napkin 2012/2013 numbers:

NAV increased from $22.70 (12/31/12) to $22.77 as of 1/13 secondary (priced substantially above NAV). Does not factor in Rug Doctor subsequent event.

Backing Crystal out, portfolio grew from 1,045m to 1,120m, YOY.

2012 NII was $82m. Adding in Crystal's contribution (11% net on $400m portfolio, per CC; $44m) increases NII in 2013 to $126m or $2.80 share (new share count of 45m after 2013 secondary). Even though the CC stated Crystal's contribution was 11% net after expenses and leverage based on portfolio value, I suspect this is actually the net after SLRC's portfolio value ($275m) for Crystal, not the $400m value of Crystal's portfolio. This is a good question for IR.

Interestingly, there were no questions during the CC about the $18m "blue sky" premium that we paid for Crystal ($275m plus liabilities of $143m, less $400m portfolio value). So are we paying $18m to the seller's of Crystal, for the blue sky, plus paying Solar a fee for paying a premium to the sellers? Hummmmm ...

I would add that SLRA is not a preferred, but a note which pays interest, thus not subject to the (current, as of 12/31/12) preferential treatment of qualified dividends. If one is merely looking for better interest than a bank, etc., this is one of many notes available to investors. However, with many true preferreds paying similar interest rates, and eligible for preferential treatment as a qualified dividend at lower tax rates (for most taxpayers), all else being equal, the after tax yield is actually greater on the preferred stock than the note.

To t2four4:
Yes, the SLRC 6.75% senior notes (Symbol SLRA) are higher on the SLRC capital structure, but if an investor is confident in the SLRC management team why not take the much higher dividend yield of the common over the interest yield on the notes. We buy BDC's for the high dividend yields coupled with the expectation of capital gains from an increase in price of the stock. Just my opinion.

To all:
On an unrelated subject, I put some words on TCPC over on the Yahoo board if anyone wants to go over there and take a look.
Also I looked at the four new BDC's that recently came public in the last three months and considering size, investment advisor, underwriting team, initial dividend declaration, pro forma price to book, etc., I found WhiteHorse Finance (WHF) to be most interesting. And this morning, five analysts came out with initial coverage on the stock. They were all "buys" and the target prices averaged $15.90. (stock is at $14.75). If anyone is interested I can tab the ratings of each analyst and each target price.

Happy New Year.
Jan

SLRA (pfd) looks interesting, it below par and paying 7.3%
any thoughts?

tia

Jan: Thanks for the workup.

I have thought for quite a while that if SLRC started earning NII that covered the dividend, we would see a $27 stock. I'm sure there is more to the languishing stock price than that, but now that SLRC is finally covering the dividend with NII (pre-Crystal acquisition), and has dramatically increased the portfolio size in an immediately accretive way (but I do agree Q4 may be pretty dismal with acquisition costs and presumably a much higher mgmt fee based on gross assets without a corresponding quarter of earnings from the Crystal acquisition), I think we are positioned to see some meaningful capital appreciation. I am not as courageous as you about predicting Crystal's possible contribution to NII and dividends, so am not yet willing to try to predict a new price target.

I also agree that a modest equity offering is likely in Q1, perhaps along with some intermediate term debt financing. The former to reduce the debt/equity at hopefully above NAV prices, and the latter to replenish dry powder, although at 60% debt/equity, there isn't really a compelling reason to increase equity.

GLTA.

Concerning the acquisition of Crystal Financial by SLRC, it is difficult to evaluate the buyout because Crystal is a private company and we know little about the terms of the merger and less about the Crystal portfolio of investments. So judge carefully my comments that follow.

On the other hand, Mike Gross (CEO) and Bruce Spohler (COO) have proven track records and both have been in the leveraged lending business for twenty five years. We have to believe this buyout will serve SLRC well.

We think we know that SLRC will pay the $275 million acquisition cost from available liquidity including draws on its credit facility, possibly increasing its total borrowings to about $526 million or a debt to equity ratio of around .60 from the recent .28. Note that one analyst suggested that SLRC could add about $.10 per share to its' quarterly NII if it increases its debt to equity to .65.

Also, in the news release, SLRC said: "Solar Capital expects its investment in Crystal Financial to generate a cash yield consistent with other assets in its portfolio". The words "cash yield" may have a primary affect on the "investment income" level, while the "investment cost" levels between SLRC and Crystal may differ somewhat. The operating costs could be higher at Crystal, but also could be lower. So we may not be able to say that the NII brought to SLRC from Crystal will be brought at the same rate of return that SLRC earns NII. Nevertheless, and because Crystal earns higher loan yields than does SLRC, I am going to present some numbers which assume Crystal can deliver NII to SLRC at the same return rate on portfolio size. Because this may not be the case, I will call it the "maximum maybe" theory.

We know that in Q3, SLRC brought 1.9% of the loan portfolio value to NII. ($22.258 million NII divided by $1171 million portfolio value = 1.9%). If the $400 million Crystal loan portfolio brings a similar 1.9% to NII, it will add $7.6 million to the quarterly NII ($400 million x 1.9% = $7.6 million) or about $.20 on a F/D 38.7 million shares. Using the SLRC current price of $23.66, the dividend yield with a $.80 quarterly dividend is 13.52%. To match the recent run rate average yield (10.5%), the stock would have to move up to $30.48 or 29% higher than $23.66.

But let's switch from the "maximum maybe" theory and get conservative and say that SLRC will add just $.10 per share from this merger and in time increase the dividend by $.10 to $.70 per share. Then the yield based on the current price of $23.66 would be 11.83% ($.70 x 4 divided by $23.66). More importantly, if the stock price moves up to reduce the SLRC dividend yield to its average run rate (again 10.5%) then the price will have to advance to $26.67 ($.70 x 4 divided by .105) or 12.72% above the current $23.66. That kind of a potential capital gain coupled with a ten per cent plus dividend yield, will make for an extraordinarily attractive investment.

I find a great deal of comfort with the positive aspects of this acquisition when I read things from the SLRC news release like:
a) Solar Capital expects the acquisition to be immediately accretive to NII.
b) "We expect that our Crystal Financial investment will move us toward our target debt-to-equity ratio while increasing Solar Capital's net investment income."
c) Solar Capital expects its investment in Crystal Financial to generate a cash yield consistent with other assets in its portfolio.

Also, following the news release, Ladenburg Thalmann reiterated their "Buy" rating and increased the target price from $23.50 to $25.00.

Evercore Partners, while reiterating their "Overweight" rating and increasing their 2013 earnings estimate to $2.55 per share, made the following comments:
a) Large Accretive Deal Supports Dividend Growth.
b) The deal will 1) increase leverage to enhance SLRC's profitability; 2) be accretive to earnings immediately; 3) support our above-consensus NII estimates; and 4) indirectly diversify SLRC's investment portfolio towards senior secured lending from a sub debt focus.
c) Crystal is an asset-based lender to private middle market companies, but commands higher than normal yields due to its market focus and structuring.

My notes to the Evercore comments: 1) The FY 2013 $2.55 estimate takes into account the cost of the November $100 million note offering and includes the effect of a Evercore projected equity offering in 2013, an equity offering which may or may not happen. 2) If Crystal indeed commands higher than normal investment yields, that may lend some support the "maximum maybe" theory of the earlier paragraph, which does not include an equity offering in 2013.

We should also remember that not only does this acquisition provide a significant, immediate thrust to the growth of SLRC, but the pre-acquisition growth strategies of SLRC are still in place, and are now enhanced by a meaningful new, continuing (and hopefully growing) income stream from Crystal.

All of this good stuff may take a quarter or two since there may be some onetime costs associated with the acquisition. We will know more as more details of the terms are available. But if the above valuations are near correct, we as investors have been handed a nice year end gift. And because details are lacking, and the market place cannot yet grasp the full impact of this buyout, the stock price may not yet reflect what is occurring. Therefore, it is a gift that may keep on giving well into the future. In the meantime, we will continue to collect a handsome dividend while the rest of the world gradually comprehends the value of this acquisition.

Just one opinion, as always.

Jan and The Shadow.
Never forget, "The Shadow Knows".

Jan: I don't disagree with anything you have said. I'm just curious as to what we paid the "extra" $20m for, based on how little we know. Presumably, we also acquired assets in addition to the $400m portfolio (which I understand is presumably generating income). Those assets could be anything. Based on hope alone, I'm hoping it isn't $20m of blue sky.

It will be interesting to see how they account for the non-recourse liability, but if I recall the PR correctly, SLRC intends to keep Crystal as a separate entity and simply pass earnings through to SLRC.

It just occurred to me that possibly (which means nothing more than a guess on my part) the portfolio is larger than $400m, but repricing M2M reduced the book value of the portfolio to $400m and SLRC presumably believes that the written down assets (nonperforming loans?) are worth more than the written down value.

mthiker2004,

Correct me if I am wrong, but the $145 million debt absorption by SLRC is a liability addition to the balance sheet and is a productive liability because it is that debt that helped fund the loans issued by Crystal which in turn produce the NII and subsequently the dividends. The actual cash outlay by SLRC for this acquisition is $275 million and they have plenty of dry powder to pay that $275. Now, in the accounting world there may be an adjustment to the income statement to get that liability on the SLRC balance sheet, but given the growth to SLRC this acquisition will provide, we shouldn't be too bothered.

I have been doing a few numbers with what little information we have, and this looks like a sweet deal to me.

Jan

From the PR:

Solar Capital expects to invest approximately $275 million to effect the acquisition ...

Crystal Financial’s credit facility is expected to have approximately $145 million of borrowings outstanding at closing and is non-recourse to Solar Capital.

End quote.

$275 plus $145 is about $420. Of course, this is based on the very limited information that is currently public. Alternatively, we could reduce the Crystal (known) assets ($400m) by the CF, for estimated net worth of $255m, for which SLRC is paying $275. Because I live in a world of "hope," I'm hoping that there are more assets that we do not yet know about.

mthiker2004,
How did you come up with the cost of the Crystal aquisition of $420 million?
Jan

Since my post below, I went back and reviewed the most recent 2-3 10Qs to see if SLRC was still drawing down the CF the day before the quarter's end. In the 10Qs that I reviewed, I saw no evidence of this practice, so I do feel better on that issue. Whether it was a practice before or not, is perhaps irrelevant if they no longer do it. (I recall at the time I was in discussions with analysts who had some interesting opinions about the subject, and who shared with me the substance of their discussions with management on the issue. Frankly, I was never satisfied with mgmt's response.)

Now, SLRC has bought $400m loans for $420m. Of course, until we get more facts, we really don't know what was purchased, or the exact price. I will re-iterate that thus far I have been impressed with management's consistently conservative approach in not merely investing our money for the sake of growing the portfolio, so I'm hoping this acquisition is consistent with that conservatism. It will be very interesting to see the actual details so we can see if this is more akin to ARCCs acquisition of Allied Capital, or something substantially less rewarding.

mthiker2004,
I also recall the discussion, several quarters ago, concerning the practice you refer to. However I have not heard anything or read anything suggesting this borrow/payback strategy is being done on a continual basis. I would think this is the kind of thing the professional analysts would jump all over if it was being done at the expense of the stockholders. Additionally, such a practice may not be totally transparent to us, but would certainly be visible to the accountants. I would like to think that fiduciary responsibility alone, of management to its' stockholders would preclude any excesses in this type of activity. But I really don't know.
Thanks for your comments.
Jan

Jan: I've always appreciated your well-reasoned thoughts on the various BDCs and their performance. I don't disagree with anything you have said as it pertains to SLRC and its future prospects. On the one hand, I've been impressed with management's discipline to not simply grow the portfolio for the sake of growth, especially over the most recent 2 years. However, I am concerned about mgmt's apparent practice of borrowing the full amount of the credit line on the day before quarter end, and repaying it the following day (discussed, sort of, several quarters ago in the CC). The only purpose I can see in this action is to increase the assets at quarter end, and thus increase the management fee "earned" based on gross assets at quarter end. Absent evidence that there is a benefit to the shareholders for this gimmickry (for lack of a better word), it would appear that mgmt's interests are not as aligned with the shareholders as I would like. Although such conflicts of interest are inherent in externally managed BDCs, the magnitude in this instance, troubles me (notwithstanding the significant percentage of insider ownership). I still hold SLRC, but monitor it carefully.

Since we are approaching the SLRC x-dividend date I thought it might be time for a follow-up to my Oct. 18th post. At that time I suggested SLRC might be one of the most attractive BDC's for the months ahead. In my judgment, that continues to be the case.
In the recent Q3, SLRC reported NOI of $.60 per share which was the best since Q1 of 2010 when they had 32.5 million F/D shares outstanding versus 37 million at end of the latest quarter. That $.60 NOI covered the Q3 dividend and the Company said the Q4 NOI will also cover the Q4 dividend. The street NOI consensus quarterly estimates for the next five quarters are all at $.60 or higher.

NAV advanced over both the previous quarter and the year ago quarter. Realized Gains and Unrealized Gains were both positive. Despite record portfolio growth in Q2 ($186 million net growth), Q3 saw negative portfolio growth as prepayments and exits exceeded originations as loan markets tightened. There is nothing too disturbing here as we know the origination of new loans can be lumpy and the schedule of loan closures can be difficult to predict. Also, tightening markets require more discipline when evaluating new loans. The portfolio credit quality remains strong. Over 98% of income producing assets are performing, and the two remaining loans on non-accrual status are expected to come off of non-accrual in this current quarter. The pipeline is healthy and SLRC has plenty of dry powder to fund whatever opportunities that pipeline presents.

Here are a few SLRC numbers with comparisons to the BDC peer group. Using a recent close of $22.87 per share, the current dividend yield is 10.5% versus the BDC peer group median of 9.4%. The price to NAV is 101% versus the peer group median of 107%. The potential total return (dividend yield plus capital gain to the analysts' consensus target price) is 20.78%.

In my last post I talked about the catalyst to drive the SLRC price higher in time. On this post, I will re-visit that concept but with a slightly different approach. At the end of Q3, SLRC had some $322 million available for new investment against a portfolio value of $1171 million. So there is lots of portfolio growth coming which will eventually result in earnings/dividend increases. Their debt was running at a low .28 of equity versus an industry average of .55 debt to equity. One of the industry analysts calculated the quarterly earnings potential if SLRC ran its' portfolio at a .65x debt to equity ratio, which is the SLRC stated target. That earnings potential calculated out to upwards of $.70 per share, per quarter. That is a nice advance from the current quarterly NOI.

It is sometimes helpful to get from the analyst community a valuation of SLRC management. The analyst community I refer to are the major brokerage firms and not the letter writers or the amateur analysts who populate the internet. Since the last SLRC earnings release I have seen reports or excerpts from four analysts. Their general comments below may give us some reassurance that as investors, we have a competent partner in SLRC management.
a) "SLRC is managed by a quality team"
b) "We continue to like SLRC and view management team as strong"
c) " We expect that as the company adds additional leverage SLRC should be able to expand its NII and grow the dividend"
d) "Solar Continues to Shine: We continue to view SLRC as one of the most appealing mezzanine strategies in the BDC space given our outlook for opportunistic portfolio growth over time, along with book value upside."

So what we have in SLRC is an experienced management team committed to investing in recession resilient, stable companies that can generate cash flow and reduce leverage throughout an economic cycle. We also have a Company generating an exceptional current dividend yield, selling at a price to book well below its' peers **, and positioned to deliver a high total return when coupling the dividend yield to the potential stock price movement. But most importantly, SLRC, with its' large amount of available investment capital and low leverage profile, is poised to ramp up the quarterly NOI and dividend amount thus giving us some forward looking comfort. This forward visibility coupled with the historical stable performance, makes SLRC an attractive BDC. It's the kind of stuff we look for as investors.

** Peer group consists of those BDC's with a market capitalization of $500 million or more.

Note 1 : For those of you who may wish to capture the coming $.60 dividend, the x-date is 12-18-12 which is just around the corner. An investor must buy/own the stock prior to that date. Buying the stock on 12-18-12 will not get that dividend on those new shares.

Note 2 : Should SLRC, in time, pay a $.70 quarterly dividend, the dividend yield based on the current price and a $.70 dividend run rate would be 12.36% and there currently is just one other BDC (a small BDC well out of the peer group) that returns that level of dividend yield.

Note 3 : If the SLRC stock price advanced to match its' current 10.5% dividend yield while paying $.70 quarterly, the stock price would go to $26.67 per share which is 16.6% higher than the current price. That may be why two analysts have the SLRC target price at $27 per share and a third analyst has a target of $26.50. The report I saw from one of those analysts has NOI quarterly estimates as follows: 2012 Q4 $.60; 2013 $.60, $.62, $.62, $.64; and 2014 $.65, $.66, $.68, $.71.

Note 4 : We haven't talked about institutional ownership of BDC stocks but I am aware of one firm that does track this metric and SLRC ranks 6th highest of 33 BDC's monitored for institutional ownership.

Note 5 : All of this is just my opinion but I do get the help from "The Shadow" and he knows everything.

"Who knows what evil lurks in the hearts of men? The Shadow knows!"

Good Hunting to you all and happy holidays.

Jan

jackmaster20,
After reading your last couple of posts I concluded you put a lot of thought into your work and that is a good thing. But we have some differing opinions. For example, DS Waters is not on "non-accrual" status and the preferred stock position and its' PIK income (resulting from the re-structure), is not particularly troubling because the previous DSW notes were also PIK. So the current PIK income status of the DSW position has little to do with SLRC's ability to pay its' current $.60 dividend. It has always paid its' dividend from taxable income (no return of capital) and expects to continue to do so regardless of the old PIK income or the new PIK income from DSW. SLRC is not paying a "Phantom Dividend". Yes we would prefer NON-PIK to PIK income, but we have what we have. Current indications are that DSW is performing in line with current expectations and is increasing revenues. We may have to wait longer for payment of the PIK funds, but we could have even a bigger payday if SLRC monetizes that loan in the near future as they suggested they might do when conditions permit.

Also, and as you point out, Granite and Direct Buy are on non-accrual. But they both should be back to accrual status this quarter. But to assume these two will go on PIK status after the re-structure is tough to justify. Neither was on PIK to start with. SLRC has not suggested they are going on PIK and none of the analyst comments I've heard or seen have hinted at PIK status for these two investments. In fact, SLRC has said that Granite Global will pay interest in Q4 as it comes off of non-accrual which tells us it is not headed for PIK status.

In any event, thanks for your work. It has inspired additional activity on this board. I continue to have a very good feeling about SLRC and I will convey that sentiment by updating my October post.

Just one opinion.
Jan

I can understand the concern about the future of SLRC portfolio company DS Waters. AINV got into difficulty when one of its very large holdings, Innkeepers USA Trust, went on non-accrual, and subsequently entered Chapter 11 bankruptcy in July of 2010. InnKeepers exited bankruptcy 15 months later. I am not sure AINV has fully recovered from that mistake. But there is little evidence, at this point, that DSW is an "InnKeepers".

I have not tried to quantify the affect on SLRC's NAV or earnings should DS Waters get into serious trouble because I don't think DSW is in any real trouble. Yes, DSW had to refinance the maturing debt, and because they gave up a lot to get the new package, things were obviously not as smooth as one would hope for. But the refinancing is done and DSW is moving forward. DSW is a big Company. It has been around a long time and appears to have stable and improving operations, and it has a strengthened management team. One could take the worst case (total loss) and get a rough estimate of the affect on SLRC NAV by taking the current fair value of the DSW investment and dividing that number by the SLRC shares outstanding. Earnings would be a bit more difficult because we have to consider both the forward losses to NII (PIK is an income statement item even if not yet collected) and the realized capital loss. But, in my judgment, DSW is a survivor and SLRC will monetize that investment sooner than later, and on favorable terms. So even though vigilance is appropriate, to speculate on DSW's demise at this point, may not be very realistic or productive.

Also consider this. SLRC is expected to deliver one of its best quarters (in Q2) from a portfolio growth standpoint. Not only should this performance subsequently result in increased earnings, but it will also reduce the concentration risk of the DS Waters holding in the portfolio.

To editorialize a bit, I think too many folks are too concerned about the risk involved with investing in BDC stocks. During the 2008 market collapse, BDC's were under price pressure as were most other companies. But not one BDC filed for or went into any bankruptcy chapter. Yes, there were take over mergers (ARCC bought ALD; PSEC took out Patriot Capital), and there were restructures (GNV to SAR and HCD to non-BDC HCF), and four withdrew from BDC status (KED, TTO, UTK, and MACC). All BDC's survived either in a different format or as part of another company. None caused a total loss to their investors as did so many other non-BDC companies.

So from a safety standpoint, what have BDC's got going for them?

1) BDC portfolio companies often have two sets of management teams. One is the management team that runs the portfolio company and the second is the BDC managers themselves or the sponsor managers for sponsored loans. That is a lot of brain power.
2) leverage is limited by regulation. A high debt structure can become a difficult burden. The BDC's debt to equity restrictions do not permit the BDC's to accumulate excessive debt.
3) Because of the high dividend payments, BDC's tend to recover from down periods faster than most. And the high fixed income provided by the right BDC's, makes it much easier to ride through economic and stock market downturns.
4) Yes, BDC's invest in younger companies and younger, smaller companies are often considered more risky companies. But not only do these portfolio companies have advisory help (see item 1 above), but the BDC's themselves have numerous companies in their portfolios representing a variety of industries. SLRC has 34 of them. And these portfolio companies sell a huge variety of products to countless customers. So no one product failure or even a particular industry slowdown, will be that troublesome for a BDC. If one believes in diversification, BDC's are your game.

Like any other industry, you must pick the right BDC. There are 37 of them out there and many are not worthy investment candidates. There are those which are very small and go nowhere. Some have had erratic operations with many dividend cuts. Others fail to demonstrate an ability to grow or grow at a very slow pace. Some pay no dividend at all which tend to defy the BDC model.

On the other hand, there are many fine BDC's out there. For example, PNNT is solid and steady and has never cut the dividend. ARCC may have the best management team in the BDC industry. At present my two favorites for near term appreciation are (a) SLRC because of its' high dividend yield and because its' current quarter is off to a great start and (b), MCC because of the recent strong increase in the quarterly dividend and because management has effectively said that Q2 will show increased earnings and an even bigger dividend.

One way to make money with BDC's is to find a new, young, well managed BDC and invest in it as the Company puts its new IPO funds to work thus setting the stage for increasing earnings and increasing dividends. Note that a new/young BDC does not necessarily mean a new/young company. Many firms convert from a different structure to the BDC structure and bring with them existing portfolios and lots of experience. One such entity is TCPC (IPO on April 4th). It is about to issue its first quarterly report, and has already declared its first quarterly dividend of $.34. The prospectus is available on the SEC web page. The quiet period is about to end so we should see a lot of comments from the various analysts. There were ten brokerage firms in the underwriting/selling group. We will learn much more about TCPC in the coming week.

Well, I have gone on long enough. Good hunting to all. And, as usual, all of the above is just one opinion.

Jan

The recent quarterly SLRC news release made for good reading and the CC made for good listening. Any concerns about the SLRC portfolio being in any trouble were, in my judgment, greatly diminished. The Q1 numbers, especially the realized and unrealized gains, which are good indications of a portfolio's condition, were just outstanding. And the discussion on the CC of both DS Waters and Direct Buy (Direct Buy being the only non-performer in the SLRC portfolio) were comforting. The credit quality of the overall portfolio remains high. Direct Buy is valued at $4.4 Million in a $1.008 Billion dollar portfolio which is why SLRC can say that over 99.5% of the portfolio is performing. Direct Buy is in restructuring and even though SLRC says they do not expect to recover par value, they do expect see Direct Buy at values above the current mark.

Turning to DS Waters. DSW is now coming off the recapitalization and is also integrating the coffee business acquisition. Since the last update from SLRC, DWS is continuing to outperform its budget, and customer growth in Q1 was the best DWS has seen in nearly ten years. The market is currently valuing the DWS loans at approximate par value. SLRC says it expects DWS to take the next couple of quarters to integrate the coffee business acquisition after which SLRC will begin to investigate the monetization options for the DWS investment. With SLRC now in control of the DS Waters board, the timing and terms of any monetization will be under the control of SLRC management.

In Q1, SLRC reported NOI of $21.1 million or $.58 per share, realized gains of $9.2 million or $.25 per share, and unrealized gains of $15.9 million or $.43 per share. It was the first time ever at SLRC that all three of those categories were in positive territory for any quarter, which speaks well not only for the current shape of the SLRC portfolio, but also gives us hope for even better portfolio marks as the U.S. economy continues to improve.

SLRC believes the realizable value of its portfolio is currently north of $24.50 per share. And that value should improve as we go forward.

Redemptions and sales did exceed new investments in Q1. All prepayments in Q1 were at or above par and all were above the prior quarters mark. The equity sales ($29 million worth) were not only profitable, but the realized funds which were non-yielding investments, can now be put to work as yielding investments. Management said it has to date, not received notice of any redemptions for Q2. With the pipeline strengthening in the last half of Q1 and to date in Q2, and the increased originations so far in Q2, SLRC is already positioned for an excess of 10% net portfolio growth in Q2 (all of which should enhance Q2 earnings).

Since the CC, several analysts have commented on the SLRC Q1 performance. Here is a summary of the five I could find.

Ladenburg Thalmann reiterated their "Buy" rating with a target price of $23.50.

Evercore Partners said the investing outlook is bright at SLRC. They say a strong outlook on investments, NAV growth, and a stable dividend make SLRC attractive. They reiterate their "Overweight" rating.

Deutsche Bank expects portfolio growth to drive earnings growth highlighting the approximate $376 in unused borrowing capacity. They reiterate their "Buy" rating and increase the target price to a hefty $27 per share. (They are not alone with that target price. See below).

The folks at Stifel Nicolaus had a lot of complimentary things to say about SLRC but stayed with their "Hold" rating. Their single concern dealt with DS Waters. Stifel said that even though SLRC gave an improving report on the DSW business, they (Stifel) would like to see continual improvement as the restructuring takes hold. Stifel also said Q1 portfolio growth was below expectations, but added Q2 could see the largest portfolio growth in SLRC's history. Stifel commented on the $375 million available for future investments; increased the 2012 and 2013 earnings estimates; said the credit quality remains solid; suggested SLRC's investment grade rating from both S&P and Fitch was a powerful driver for the recent repricing of the Wells credit facility and will also help SLRP drive the Citi pricing down; said if SLRC lever's its balance sheet to its target level of 0.65x it will provide a meaningful boost to earnings and added that SLRC is managed by a quality team.

RBC Capital says the SLRC outlook remains positive and the Company is poised for growth. RBC raised its earnings estimates to $2.38 for 2012 and $2.53 for 2013. The RBC rating is "Outperform" and the target price is $27. On the subject of DS Waters, RBC said that despite recent investor focus on the SLRC's DS Waters position as a result of an S&P ratings release, "we do not anticipate any meaningful negative impact". RBC went on to say that they continue to view SLRC as one of the most appealing plays in the BDC space given the outlook for healthy origination activity ahead.

None of us know where SLRC will take us from here. But we have to like the results of this last quarter, especially from a Company which is already delivering such an attractive dividend. It is what makes BDC investing so much fun.

As always, all of the above is just one opinion.

Jan

thewisejman,
Thanks for trying to post the write up on Yahoo. Sometimes they will take the content and sometimes they won't. I guess we are dealing with a Yahoo computer program because there never is an explanation.

jdb_1234,
You are welcome. Here is one more indication that the DS Waters operations may be in pretty good shape. Kelso, considered putting DSW up for sale in October of 2010. This was prior to DSW's last four acquisitions so DSW should be performing with higher operating numbers now than back then. Nevertheless, here is what Businessweek had to say about the possible sale:

DS Waters Reportedly Up For Sale
Oct 29 10
DS Waters of America Inc. will be divested in an auction expected to fetch up to $700 million, people close to the situation said. The people stated that a private equity company is most likely to acquire DS Waters. They added that the auction was still in its initial stages and the company may not be sold if the offers are too low. Buyout groups may be interested in the company, as it has steady sales and regular cash flow, the people said.

I'll try to answer your specific questions. It is tough to try to guess what kind of capital gains may be realized from the preferred equity as we don't know all the terms associated with the preferred. We think we know they are five year issues with a 15% rate, with no conversion features. So their value may be governed by interest rates coupled with the fortunes of DS Waters. So even though the capital gains on the preferred may be limited, the 15% coupon makes for a great return. And yes, PIK income is reported quarterly on the income statement even though it is not received quarterly but instead added to the principal amount. And PIK income is included when satisfying the annual distribution requirements of a RIC (Regulated Investment Company). That is why we don't want to see too much PIK income coming from the portfolio companies. But keep in mind that the restructuring did not add any new PIK income to the SLRC income flow since both the old notes and the new preferred both were PIK income loans and in the same amounts.

We should get an update on the DSW situation when SLRC reports Q1 on May 1st which is just eleven trading days from now. There should be no material fallout from this refinancing. I say that because in a recent update to a SLRC N-2 filing SLRC said:

"Recent Portfolio Developments
Subsequent to December 31, 2011, DSW Group, Inc., our largest investment, announced it is seeking to refinance its capital structure. Until the terms of the recapitalization have been finalized, we cannot fully assess the impact on our portfolio; however, at this time, we do not believe the impact will be material.

I agree with both of you that the current SLRC stock price is at an unusually attractive level. Relative to book value, SLRC hasn't been this low for six months and that was back when the Dow was more than 2200 points lower. As of yesterday's close the SLRC dividend was yielding 11.72%; was selling at just .93 times its' $22.02 book value; and had a potential total return of 34.86%.

st3ve27,
Thanks for your kind words. I'll try to put some words together on MCC in the next few days.

Jan

S&P did revise the "outlook" (not the rating) for SLRC to "negative" because of the restructuring of DS Waters. That restructuring is not a new development. Stifel Nicolaus addressed the DS Waters issue in a February 17th report saying the restructuring certainly heightens portfolio credit quality risk at SLRC, but Stifel also reminded us that the annual EBITDA at DS Waters covers the payments due on the debt and preferred equity. That means that if things don't get materially worse at DSW, this loan will continue to perform as expected.

S&P did not change its' credit rating on SLRC. It affirmed the current rating.

Looking further at the DSW restructuring, it was necessary to refinance its' maturing capital structure which matures in a few months. The SLRC PIK notes were exchanged for PIK preferred equity (same principle amount). The resulting equity will have a dividend rate consistent with the old notes. In addition, SLRC achieves voting control and board control of DSW allowing SLRC to control the forward corporate actions of DSW such as future financings and exit alternatives. All of that helps SLRC hasten the future monetization of DSW.

And not too many folks got too nervous about the DSW restructuring. After the restructuring information became available, and after the discussion of DSW on the SLRC conference call, Evercore Partners, on February 23rd, conceded that "credit quality weakened modestly" but also said they are comfortable with SLRC's ability to expand its NII going forward. Additionally, Evercore pointed out the significant borrowing capacity of SLRC ($303 million) for future investment. On February 23rd, Deutsche Bank, increased their target price of SLRC to $26.50 while also pointing out the $300 million of capital SLRC had available for investment. Also on February 23rd, Stifel said that because the DSW debt above SLRC in the capital structure is now more expensive, the SLRC investment in DSW is now a higher credit risk. But Stifel also said that SLRC is managed by a quality team and SLRC is viewed as a quality player in the BDC space.

Let's look at DSW itself. This is an aggressive Company formed in 2003. Some of its acquired brands (from acquired companies) have been serving customers for over a hundred years. It supplies a valuable product, clean water, along with coffee and tea services and water filtration systems. DSW recently (March 23rd) purchased The Standard Companies, Inc. It also bought Deep Rock Water Co. last December (a Colorado Co.); bought Mount Olympus Waters, Inc. in November of 2010 (a Utah Co.); and bought the bottled water delivery service of Echota Beverage Group, Inc., also in November of 2010, (a Tennessee Co.). DS Waters operates 28 manufacturing facilities and provides its products and services across the United States. DS Waters not only operates in most major markets in the U.S. based on population, the company also maintains a significant market share position in most of the markets in which it operates. In late 2005, when DSW was sold to investment equity fund Kelso, DSW revenue was at about $800 million, and DSW has made a lot of acquisitions since 2005. DS Waters looks like a well positioned company with a needed product. And it now has a strengthened management team. It is also somewhat ironic that S&P said that if the restructuring closes as contemplated, it will RAISE the credit rating of DS Waters.

"We are placing our 'CCC+' corporate credit rating on DS Waters on CreditWatch with positive implications."

"We intend to resolve the CreditWatch listing when DS Waters completes the proposed recapitalization transaction. At that time we expect to assign a 'B' corporate credit rating based upon terms of the currently proposed recapitalization. If the company does not complete the proposed refinancing and balance sheet recapitalization, we would withdraw the new issue-level ratings for the proposed refinancing, and reevaluate the direction of the CreditWatch listing given the substantial near-term debt maturities that would remain at DS Waters."

So does the recent price hit on SLRC (because of the time dictated recapitalization of DSW) provide a current buying opportunity for SLRC. Well, each investor will have to decide that for himself or herself. But here are a few statistics based on Friday's closing numbers. Three of the best valued BDC's right now are MCC (young and growing), PNNT (solid and stable but with slower growth), and SLRC (proven player and undervalued). The dividend yields on each BDC in the order mentioned are 10.35%, 10.90%, and 11.48%. All of these yields, especially the 11.48% of SLRC, are well above the median yield of the BDC industry which is 9.3%. The potential total gains (price gain to analysts' target price plus dividend yield) are 23.35% for MCC, 27.74% for PNNT, and 32.15% for SLRC. Regarding NAV, PNNT is selling above book with MCC and SLRC selling below book. But SLRC is selling at a greater discount to the average peer group book than are the other two. (I use two BDC peer groups based on market capitalization. One group consists of those BDC's with a market cap. of greater than $400 million and the second group of $100 million to $400 million). Remember, all of these numbers are as of Friday's closing prices, but today, the SLRC stock price is down again and thus making the metrics even more compelling.

A couple more points of interest. Even after the completion of the DWS restructuring, 99.4% of the SLRC loan portfolio is on a "performing" status. And SLRC has stated that the realizable value of its' portfolio is north of $24 per share.

As always, the above is just one opinion. Good hunting to you all.

Jan

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p

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