SLR Investment - Q3 2023

Transcript

Operator (participant)

Good day, everyone, and welcome to the Q3 2023 SLR Investment Corporation Earnings Conference. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question by pressing star one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Please note, this call may be recorded. I'll be standing by if you should need any assistance. It is my pleasure to turn the conference over to Chairman and Co-CEO, Michael Gross.

Michael Gross (Chairman, President & Co-CEO)

Thank you very much, and good morning. Welcome to SLR Investment Corp's earnings call for the Q3, ended September 30, 2023. I'm joined today by Bruce Spohler, our Co-Chief Executive Officer, and our Chief Financial Officer, Shiraz Kajee. Shiraz, before we begin, would you please start by covering the webcast and forward-looking statements?

Shiraz Kajee (CFO, Treasurer & Secretary)

Thank you, Michael. Good morning, everyone. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of SLR Investment Corp., and that any unauthorized broadcast in any form is strictly prohibited. Conference call is also being webcast from the events calendar in the investor section on our website at www.slrinvestmentcorp.com. Audio replays of this call will be made available later today as disclosed in our November seventh earnings press release. I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections. These statements are not guarantees of our future performance or financial results and involve a number of risks and uncertainties. Past performance is not indicative of future results.

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. We do not undertake 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 would like to turn the call back over to our Chairman and Co-CEO, Michael Gross.

Michael Gross (Chairman, President & Co-CEO)

Thank you, Shiraz. We are pleased to report that for the Q3 of 2023, SLRC generated net investment income of $0.43 per share, representing a 16% increase year-over-year, which once again exceeded our distributions for the quarter. The increase in our NII per share over the past year has been driven by portfolio growth and increases in reference rates, which have flowed through to our floating rate portfolio. At September 30th, our net asset value per share was $18.06, up from $17.98 per share at June 30th, reflecting stable credit performance and the over-earning of our distribution. Before digging into our Q3 performance, I'd like to touch on the overall investment climate.

We're living in a period of heightened mid-market volatility resulting from geopolitical tensions and the economic uncertainties, with sadly, no near-term end in sight. Inflationary pressures from elevated energy, labor, and capital costs are proving to be persistent, and interest rates are expected to stay higher for longer. Growth may slow as a result, but the U.S. economy has remained remarkably resilient despite these multiple shocks. The performance of our portfolio companies has equally remained resilient. In sponsor finance, our portfolio companies largely continue to exhibit both revenue and EBITDA growth. While the rapid increase in rates impacted valuations and diminished M&A volume this year, there are attractive opportunities to finance quality borrowers who have resilient cash flows or stable assets supporting borrowing base. SLR has been an important provider of capital to the private equity community as some private credit managers grapple with hold limitations.

Importantly, M&A volume has begun to pick up and is expected to continue expanding next year, given substantial PE dry powder and projected stable interest rates. Given uncertainties associated with the economy and geopolitical events, we believe that maintaining a defensive approach via asset selections be critical to maintain our long-term strong performance. Across our platform, we are seeing some of the most attractive investment opportunities in years, and we believe the private credit asset class remains highly attractive, both on an absolute and relative return basis. The current market environment creates opportunities for firms like SLR, who have deep experience and expertise in investing throughout market cycles. SLR will be opportunistic in leveraging its diversified platform across sponsor and specialty finance investment strategies to generate attractive returns while protecting our capital.

The overall health of our portfolio remains solid, with a non-accrual rate based on cost at just 0.7% and 0.3% at fair value at quarter end. The weighted average interest coverage on our sponsor finance loans is just under 2x. We believe these healthy metrics are the result of our focus in sponsor finance on recession-resilient industries, high recurring free cash flow, such as healthcare and business services. As a reminder, our specialty finance businesses enable us to be highly selective in our sponsor finance strategy. At quarter end, approximately 98% of our portfolio was comprised of first-lien senior secured loans. Our long-term investment in first-lien loans has resulted in a portfolio we believe is better equipped to withstand continued inflationary pressures and high interest rates than portfolios with second lien and unitranche loans.

Additionally, with 72% of our comprehensive investment portfolio invested in specialty financed assets, which are borrowing bases and full covenant structures supporting our investments, we are defensively positioned. Our differentiated investment approach of coupling cash flow loans with specialty asset-based loans provides us with enhanced portfolio diversification and additional downside protection in periods of tightening economic conditions. Importantly, our broad set of origination capabilities allows us greater flexibility in allocating capital to our various private credit investment strategies to the best risk-reward opportunities across economic cycles. Firms with significant available capital, such as the SLR platform, are able to fill the void left as regional banks retreat and the syndicated loan market grapples with structural challenges from the end investor base.

Borrowers value our speed and certainty of execution, and our flexibility and ability to invest $150 million-$200 million in a given upper middle market financing, which gives us greater pricing power and influence over terms. With $13 billion of total investable capital across the platform, inclusive of anticipated leverage, SLR has the scale to provide full financing solutions, which benefits SLRC through co-investment. As SLR has increased its capital base, we've continued to invest in the firm's infrastructure and origination capabilities. Recent hires in the Q3 include investment professionals, a strategic operating partner focused on growth initiatives, a chief business development officer, and a former BDC equity, equity research analyst.

We believe these human capital investments significantly enhance our strategic focus of being a right-sized and differentiated private credit manager with a scale to access a deep and broad opportunity set to generate alpha through security selection, rather than producing index-like returns of a cash flow loan-only approach. Additionally, our specialty finance businesses are benefiting from the regional banking turmoil as borrowers seek alternative financing to replace their existing credit lines from banks who retreated from the market. Our in-place teams of approximately 200 professionals across SLR, include our specialty finance affiliates owned by SLRC, provides us local market knowledge and relationships that lead to competitive sourcing and information advantages. Importantly, we have ample dry powder to capitalize on this favorable investment environment.

of September 30, including available credit facility capacity at the SSLP and our specialty finance portfolio companies, SLRC had over $600 million of available capital to take advantage of the current attractive investment environment. I'll now turn the call back over to Shiraz, our CFO, to take you through the Q3 financial highlights.

Shiraz Kajee (CFO, Treasurer & Secretary)

Thank you, Mike. SLR's SLR Investment Corp.'s net asset value at September 30, 2023, was $985 million, or $18.06 per share, compared to $981 million, or $17.98 per share at June 30, 2023. At quarter end, SLRC's on-balance sheet investment portfolio had a fair market value of approximately $2.2 billion in 154 portfolio companies across 43 industries, compared to a fair market value of $2.2 billion in 156 portfolio companies across 45 industries at June 30. September 30, the company had approximately $1.2 billion of debt outstanding, with leverage of 1.21 times net debt to equity.

This point-in-time level of leverage doesn't fully reflect planned loan asset contributions from our balance sheet to the SSLP as we continue to ramp that vehicle. September 30, the SSLP portfolio consisted of $134 million of senior secured floating rate loans. To complete the SSLP ramp, we expect our leverage ratio to once again be in the middle of our target leverage range of 0.9-1.25x. SLRC's funding profile is in a strong position to weather a rising rate environment. Our existing $470 million of senior unsecured fixed rate notes have a weighted average annual interest rate of 3.8%, and we do not have a maturity until the end of 2024.

Moving to the P&L, for the three quarters ended September thirtieth, gross, gross investment income totaled $59.6 million, versus $56.3 million for the three months ended June thirtieth. Net expenses totaled $36.3 million for the three months ended September thirtieth. This compares to $33.7 million the prior quarter. As a reminder, at the time of the merger of SLR Senior Investment Corp., or SUNS, into the company last year, the investment advisor agreed to waive incentive fees resulting from income earned due to the accretion of purchase discount allocated to investments acquired as part of the merger. During Q3, the company waived approximately $175,000 of merger-related incentive fees, which now totals approximately $2 million in cumulative waivers by the manager related to the merger.

Accordingly, the company's net investment income for the three months ended September 30 totaled $23.4 million, or $0.43 per average share, compared to $22.7 million, or $0.42 per average share, for the three months ended June 30. Over the line, the company had net realized and unrealized gains for the Q3, totaling $3.6 million, versus a net realized and unrealized loss of $3.7 million for the Q2 of 2023. As a result, the company had a net increase in net assets resulting from operations of $26.9 million for the three months ended September 30, 2023, compared to a net increase of $19 million for the three months ended June 30, 2023.

As we mentioned on the previous call, the company has returned to making quarterly rather than monthly distributions, and on November 7, the board of SLRC declared a quarterly distribution of $0.41 per share, payable on December 28, 2023, to holders of record as of December 14, 2023. We estimate this change will slightly reduce our annual operating expenses and is one change that is consistent with our objective to find solutions to maximize shareholder value. With that, I'll turn the call over to our Co-CEO, Bruce Spohler.

Bruce Spohler (Co-CEO & COO)

Thank you, Shiraz. Before I provide an overview of our portfolio, I'd like to discuss our approach to portfolio construction.

Over 17 years of expanding our lending strategies as a diversified commercial finance company has provided us with a financing platform well-suited for the current volatile market environment. We are seeing a dispersion in the opportunity set across segments of the private debt markets. As a result, we believe that asset selection will be critical to achieving strong performance during this vintage. Business model provides us with the flexibility and capabilities to capitalize on the most attractive lending opportunities in today's market. Take a fundamental bottom-up approach to our portfolio construction, based upon the relative attractiveness and risk-adjusted returns across our investment verticals. Today, we are more active in sponsor finance. However, we expect to see increased opportunities in both ABL and life science lending as we get into next year. At that point, we will readjust our deployment accordingly.

We believe having the flexibility to play offense and defense at the right moments across cycles is key to long-term, consistent investment performance. Now let me discuss the portfolio. At quarter end, the comprehensive portfolio consisted of approximately $3.1 billion of senior secured loans to approximately 790 borrowers. It was across 110 industries with $4 million or 0.1% average position exposure. Measured at fair value, 99.2% of our portfolio consisted of senior secured loans, with approximately 98% invested in first lien loans, including investments through our SSLP attributable to the company. Only 0.2% was invested in second lien cash flow loans, with the remaining 1.2% invested in second lien asset-based loans.

Our specialty finance investments account for approximately 73% of the comprehensive portfolio, with the remaining 26.5% in senior secured cash flow loans to upper mid-market, sponsor-owned companies. We believe that this defensive approach to portfolio construction positions us well for potential economic weight, weakness, and provides a differentiated risk-return profile for our shareholders. At quarter end, our weighted average asset level yield was 12.3%, up from 12.1% last quarter. Our portfolio credit quality remains strong. At quarter end, the weighted average investment risk rating was just under 2, based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. 99.3% of the portfolio on a cost basis was performing. Now, let me touch on each of our 4 investment verticals. I'll start with our sponsor finance cash flow business.

Here, we re-originate first lien senior secured loans to upper mid-market companies in non-cyclical industries such as healthcare providers and diversified financials, which help to mitigate the impact on our portfolio from cyclical economic factors. At quarter end, our cash flow portfolio was approximately $824 million, including loans in our SSLP attributable to the company. It's invested across 51 borrowers. With approximately 99% of the cash flow portfolio invested in first lien loans, we believe that this portfolio is well positioned to withstand liquidity pressures that individual borrowers may face. Additionally, we believe we have a defensively positioned portfolio. Our borrowers have a weighted average EBITDA of over $130 million. We have low LTVs of approximately 41% and interest coverage ratios of just under 2x.

Our portfolio is comprised of businesses that perform essential services with either recurring or reoccurring revenues, and they have low capital intensity, which results in high free cash flow. Overall, our portfolio has exhibited solid credit metrics that have remained relatively steady throughout this year. During the Q3, we originated $115 million and experienced repayments of $34 million. Our Q3 investments have an average yield to expected maturity of 12.9%, leverage of approximately 5x through our investment, and interest coverage of just under 2x. Importantly, these investments carry less leverage than the historical average for new cash flow issuance. As Michael mentioned, our sponsor finance deal flow continues to be lower overall as valuation expectations result in higher base rates, but we have found pockets of opportunities to make loans at very attractive risk-adjusted yields.

At quarter end, the weighted average yield on this cash flow portfolio was 11.8%. Now let me turn to the ABL segment. Historically, this segment has performed well during periods of market volatility, when borrowers that are asset rich but have cash flow pressures seek to raise capital backed by their liquid assets. The opportunity set has increased for ABL as borrowers seek working capital financing against the backdrop of increased bank regulation, the fallout from the regional banking crisis, and tightening credit in the ABL segment. Given these, the economic headwinds, we are very conservative in our approach to underwriting. The increase in deal volume, however, is enabling us to remain active while being extremely selective. At quarter end, Senior Secured ABL portfolio totaled $976 million, representing 31% of the comprehensive portfolio, and it was invested across 159 borrowers.

The weighted average asset level yield of this portfolio was 15.3%, up from 14.6% in the Q2. The average LTV was approximately 60%. For the Q3, we had $85 million of new investments and repayments of roughly the same, $87 million. Now let me turn to equipment finance. At quarter end, this portfolio totaled $955 million and was highly diversified across 550 borrowers. The credit profile continues to be strong. Our weighted average asset level yield was 9.6% on the equipment portfolio. During the Q3, we originated $122 million of new investments and had repayments of $144 million. Our investment pipeline and equipment finance has increased significantly this quarter.

We have expanded our vendor financing business for non-OEM distributors and finding attractive risk-adjusted return profiles. We expect to provide portfolio and income growth for this segment in 2024. Now, let me finally turn to life sciences. Ripple effect of the Silicon Valley Bank failure has had a profound impact on the life science sector. With a decline in investment valuations evidenced by public market caps, borrowers are seeking to extend the cash runway via debt financings without corresponding equity cushions provided by incremental equity investment. This dynamic has resulted from borrowers' reluctance to issue equity at today's lower valuations. As a result, our team is seeing signs of distress in the earlier, riskier stage of the life science issuance market, which is where we don't play.

We are pleased to report that our $325 million portfolio remains fundamentally strong. Over 95% of the portfolio is invested in loans to borrowers that have over 12 months of cash runway. Additionally, all of our portfolio companies have revenues with at least one product in the commercialization stage, which significantly de-risks our investment. As a result, none of our life science loans are on a watch list or have migrated lower in our risk rating system during 2023. Life science loans represent just over 10% of the portfolio and contributed just over 20% of our gross investment income in the Q3. During the quarter, the team committed $39 million to new investments and funded $25 million of those commitments. In addition, we had repayments of $42 million.

We have just under $110 million of unfunded commitments, which may be accessed by borrowers based on reaching milestones such as FDA approval, revenue levels, or liquidity milestones. At quarter end, the weighted average yield on this portfolio was 13%. This excludes any success fees and warrants, which takes our yield higher. While we expect valuations in the life science market to take another quarter or two to stabilize before we see equity issuance pick up, we do continue to see several new issue opportunities that we find extremely attractive. Given SLRC's ability to allocate capital to the best reward, risk-reward segments, we have the luxury of being highly selective in our capital deployment in the life science sector, while still generating positive originations for the company overall.

As the life science market continues to stabilize, we expect the opportunity set to increase, hopefully with less competition from lenders who were risk on during this current wild, volatile environment. Now I'll turn the call back to Michael.

Michael Gross (Chairman, President & Co-CEO)

Thank you, Bruce. SLRC's portfolio reflects stable fundamentals and benefits from the flexibility to allocate capital to investments across our lending verticals that we believe offer the most attractive risk-adjusted returns for our shareholders. We have available capital and an opportunity for continued earnings growth in Q4 and in 2024. While the direction of its rates remain volatile, it is important to remember that specialty finance spreads and returns are not as volatile as cash flow sponsor finance investments across cycles. Importantly, we would not expect yield contraction for specialty finance assets to the same extent as sponsor finance when markets return to a more normal state. Looking forward, we expect broad origination opportunities to be driven by a combination of increased M&A activity, loan maturities, and regulatory/credit contraction forces impacting regional banks to the benefit of middle-market lenders such as SLRC.

In addition, as the regional bank dislocation continues to unfold, we are seeing increased opportunities to expand our specialty finance capabilities through tuck-in acquisitions for our existing commercial finance portfolio companies to add or acquire portfolio teams, partner or to acquire portfolios of specialty finance assets. SLRC's broad foundation of diversified commercial finance businesses have the resources and experience to acquire portfolios and service loans on an opportunistic, opportunistic basis. We continue to believe that a diversified portfolio approach across sponsor and commercial finance assets is the most effective strategy to generate income and manage risk across economic cycles. In closing, our investment advisors' alignment of interest with company shareholders continues to be the one of our guiding principles. The SLR team owns over 8% of company stock.

Bruce Spohler (Co-CEO & COO)

Including a significant percentage of their annual incentive compensation invested in the stock. Team's investment alongside fellow SLRC shareholders demonstrates our confidence in the company's diverse portfolio, stable funding, and favorable position. We thank you very much for your time today, and we'll now open up the line for questions.

Operator (participant)

At this time, if you'd like to ask a question, please press star one now on your telephone keypad. To withdraw yourself from the queue, you may press star two. Once again, to ask a question, that is star one on your telephone keypad. We'll take our question. First question from Eric Zwick of Hovde Group. Your line is open.

Erik Zwick (Director, Equity Research)

Thanks. Good morning, everyone. I wanted to start, maybe if you could just provide a little bit of color into the type of investments or the characteristics of those that you are selecting to put into the SSLP at this point.

Bruce Spohler (Co-CEO & COO)

Sure. Just to refresh for a minute, Eric, you may recall, we merged SLR and SLR Senior, which closed in April of 2022. SLR Senior had a portfolio of lower-yielding cash flow backed sponsor loans, in addition to some ABL assets. The strategy for the SSLP was to migrate the SLR Senior lower-yielding cash flow assets into the SSLP. That's primarily what's been moving in there. There's been one or two assets where we've originated direct cash flow loans into the SSLP, but it's been predominantly migrating the SUNS portfolio down there.

Erik Zwick (Director, Equity Research)

Thank you. That's helpful. Then just curious a little bit on your commentary for the life sciences kind of segment. You mentioned that in some of the areas where you don't lend, they're starting to see a little bit of pressure. Curious if you'd just add a little bit of maybe detail into, you know, what issues are arising there, and in your confidence that, you know, those would not spread to kind of the areas of the life science that you do lend to in those companies.

Bruce Spohler (Co-CEO & COO)

Sure. I think just, you know, from 30,000 feet, the life science segment is dictated in large part by capital raising as they continue to fund the development of drugs and devices through the FDA approval process, where we are starting to see some stress is in the early stages. Because valuations have come off on the equity side, we're finding that issuers and borrowers are waiting as long as possible in the hopes that that equity value will recover, to fund that continued cash burn needed to move through the FDA approval process. We have always been late stage. As you may recall, our business, our team in life sciences has been doing this for over 25 years. They've never had a default or a loss throughout their career, knock on wood.

We are focused on late stage, and the best evidence for that is that the burn is lower and we have revenues. As I mentioned, 100% of our companies have revenues in one product at a minimum across their portfolio of products that may be moving through the FDA. What that means is that there is value there. You can put a multiple on those revenues. They're moving towards cash flow breakeven, and so the ability to raise capital still exists on the equity side. They are waiting in the hopes that they can raise it at a more attractive valuation, but they have been able to tap the equity markets, both private and public.

That's why, as I mentioned, we have over 95% of the portfolio has cash runway over a year to fund that continued burn as they move towards cash flow breakeven. So that's what's been insulating our companies, from the earlier stage companies that are, you know, struggling to raise capital to fund moving through clinical trials to phase three and commercialization with the FDA.

Erik Zwick (Director, Equity Research)

That's great detail. Thank you, and last one for me, and I'll step aside. If you could just kind of refresh me on your current interest rate sensitivity, as, as well as maybe your expectation if, if rates are going to stay here longer, or if we might see some changes in the near term.

Bruce Spohler (Co-CEO & COO)

I don't think we have a unique crystal ball on that. Our focus is really on for our borrowers and across our portfolios, making sure that we have the liquidity as well as the free cash flow to cover interest rates today. We are stressing them to be 50-100 basis points higher when we look at our stress tests across the individual portfolio companies. And that's where we're very comfortable. I don't think anyone is underwriting an increase much above that.

Erik Zwick (Director, Equity Research)

I realize the second part of that question was more speculative, but just curious. I appreciate your thoughts today. Thank you.

Bruce Spohler (Co-CEO & COO)

Thank you.

Operator (participant)

We'll take our next question from Sean-Paul Adams of Raymond James.

Sean-Paul Adams (Senior Research Associate, BDCs & Specialty Finance)

Hey, guys. Good morning. Could you just give a little bit of color about the status of the JV and the facility where the revolving period ends in June 2024?

Bruce Spohler (Co-CEO & COO)

For the SSLP? For the SSLP?

Sean-Paul Adams (Senior Research Associate, BDCs & Specialty Finance)

Yes.

Bruce Spohler (Co-CEO & COO)

The JV is in the process of ramping. We've contributed a combined $57 million of equity between the two of us, so $28.5 million each so far. And the assets, just to track that for you, it started in the fourth quarter of last year. We had about $18 million of commitments and have been moving assets steadily in each quarter. That was $46 million of commitments in Q1, 79 in Q2, and now we're up to $140 million. As we stated previously, we continue to expect to get in that $230 million-$250 million by year end, and the maximum should be about $300 million when we continue to complete the ramp in Q1.

The credit facility really just opened a year ago, so we have the ability to continue to extend that forward. The maturity is 2027, just to give you that date.

Sean-Paul Adams (Senior Research Associate, BDCs & Specialty Finance)

Perfect. Thank you for the color.

Operator (participant)

We'll take our next question from, Ryan Lynch of KBW.

Ryan Lynch (Managing Director, Equity Research)

Hey, good morning. First question I had was just on the chart that you guys have regarding the asset-based loans weighted average yield, it's like 15.3%, in the quarter. What I'm trying to reconcile is that's a very high yield on those asset-based loans, but then when I look at the underlying businesses that are holding those loans besides any sort of finance that are on your balance sheet, one being like SLR Credit Solutions, that entity only generated about a 6.9% yield to SLRC over the first nine months of 2023. Looks like it's about levered 1-to-1, you know, that entity.

I'm just trying to understand and reconcile very high underlying asset yields on those asset-based financings, but yet the overall entity of SLR Credit Solutions has a, you know, a yield of less than half of that that is generated for SLRC. Can you reconcile those two?

Bruce Spohler (Co-CEO & COO)

Yeah, without getting to the specific numbers, just thematically, Ryan, as you know, the asset-based loan category that references the 15.3% asset-level yield is a combination of Credit Solutions, to your point, as well as business credit and healthcare ABL, both of which came into SLR in connection with the merger with Suns last year. Their asset-level yields are higher than Credit Solutions, where they are focused, as you know, predominantly on receivable-backed financing and factoring of receivables across a variety of industries, including the healthcare-dedicated segment. So that's just a little color on the components. Credit Solutions does have lower asset yields in that blend to 15.3%.

We are ramping Credit Solutions and the return on equity there is burdened by obviously being underinvested, which we're in the process of rebuilding that portfolio together with the cost of the business, which is more fixed. We expect to see improved returns there as we continue to ramp that portfolio.

Ryan Lynch (Managing Director, Equity Research)

I mean, are there, because it's hard to tell, have there been underlying credit issues that have pressured the net returns off some of these entities? Because from a high level, because you're right, there's different pieces here. But from a high level, if I just look at your controlled investments, they represent about 38% of your overall portfolio that SLRC holds. When I look at the returns that they've generated for the first nine months, it's an annualized return of about 7.1%. So there's a very low return on these investments relative to the overall weighted average yield on your portfolio of 12.3%. So the underlying assets that are going into these entities, you know, seem like they're very high and very healthy.

Meanwhile, these controlled investments, the ultimate returns that they're generating for SLRC are very low. And so it'd be helpful if you could kind of piece together where, reconcile what that difference is coming from and how to improve the returns on those entities, given the asset yields in them are already really strong.

Bruce Spohler (Co-CEO & COO)

Sure. I think to your first question, Credit Solutions did have an asset impairment earlier this year, which we talked about was on our balance sheet as well, AmeriMark, which we're working through, and without spending too much time on that one, are optimistic that it's marked for recovery at both Credit Solutions and us. That's not the full story to your point and to your question. It's really about revamping that portfolio. The Credit Solutions, in particular, does have high churn. As you know, that is lending to companies that are cash flow in transition. It is not an easy portfolio to keep fully invested, although in times like this, it is a time that we expect it to continue to ramp that portfolio.

We do expect to be able to build that ROE up, in particular in Credit Solutions. Away from that, we're also exploring some opportunities to dramatically increase the portfolio at our other ABL business, which is focused more on factoring and ABL receivables. I think the short story is it's about expanding those portfolios to a larger scale.

Sean-Paul Adams (Senior Research Associate, BDCs & Specialty Finance)

I think it's notable that we discussed the fact we have $600 million of the dry powder. The vast majority of that, or substantially all of it, is within the finance companies and the SLP. So we have the opportunity as we deploy that capital, to really drive the ROE of those entities and of SLRC as a whole.

Ryan Lynch (Managing Director, Equity Research)

Okay. It sounds like it's more of a capital deployment, further leverage within the entities, it would be the biggest driver that you guys could see to drive returns there. Because the yields, it looks like the underlying yields are already pretty healthy. Is that fair?

Sean-Paul Adams (Senior Research Associate, BDCs & Specialty Finance)

We do expect yields to get better.

Ryan Lynch (Managing Director, Equity Research)

Yeah.

Sean-Paul Adams (Senior Research Associate, BDCs & Specialty Finance)

We do expect to deploy more capital.

Bruce Spohler (Co-CEO & COO)

And-

Ryan Lynch (Managing Director, Equity Research)

Okay

Bruce Spohler (Co-CEO & COO)

The backdrop of the regional banking crisis, as you know, earlier this year, that sort of froze those markets. I would have told you, though, that they are starting to reopen. A year ago, when we lost a transaction in that segment, it would be to a regional bank, and now they're just not showing up to bid for transactions. These are more working capital relationship loans, and it takes a while to launch them. The good news is they are stickier away from credit solutions, which is transactional. We think as we build that business and the backdrop of the regional banking crisis works through the system, we're already seeing increased pipeline opportunities to expand the platform.

Ryan Lynch (Managing Director, Equity Research)

Okay. That's all for me today. I appreciate the time.

Bruce Spohler (Co-CEO & COO)

Thank you.

Operator (participant)

Once again, to ask a question that is star one now on your telephone keypad. We'll move next to Casey Alexander of Compass Point.

Casey Alexander (Senior Vice President, Research Analyst)

Yeah, good morning. Just one question, and I apologize, there's a lot of calls going on at the same time, so I'm in late. If you already answered this, I appreciate it. I'm just wondering, why go back to a quarterly dividend? You went to a monthly dividend, presumably for a good reason, and I'm just curious why you're going back to a quarterly dividend pay.

Bruce Spohler (Co-CEO & COO)

A couple of reasons. One is pretty much all the BDCs are quarterly with just one or two exceptions. At the end of the day, also, it saves us money. It saves, you know, probably $0.01-$0.02 a share annually in earnings to go back to quarterly, and that, for us, was reason enough to do it.

Casey Alexander (Senior Vice President, Research Analyst)

That sounds like a good reason. Okay, thank you. That's my only question. Appreciate it.

Bruce Spohler (Co-CEO & COO)

Thanks, Casey.

Operator (participant)

Once again, that is star one to ask a question. One moment while we queue. We have a follow-up from Sean-Paul Adams of Raymond James. Your line is open.

Sean-Paul Adams (Senior Research Associate, BDCs & Specialty Finance)

Hey, guys. One quick follow-up about Bayside. A couple of the BDCs actually just put them on accrual. Is there any commentary on their status within your portfolio?

Bruce Spohler (Co-CEO & COO)

Bayside is a restructured loan from earlier this year, and it has been restructured into a combination of debt and equity. And the company itself is in a period of very positive transition with a meaningful strategic joint venture that is underway as we speak. There's a new, the old security was converted to a new debt and equity security. I can't speak to how others are treating it, but we think that the debt will accrue interest, and, you know, the company's performing better than expectations.

Sean-Paul Adams (Senior Research Associate, BDCs & Specialty Finance)

Got it. Thank you.

Bruce Spohler (Co-CEO & COO)

Thank you.

Operator (participant)

It appears that we have no further questions at this time.

Bruce Spohler (Co-CEO & COO)

Thank you, everyone. We appreciate your time. And as always, if you have any follow-up questions, please feel free to call any of us. Thank you.

Operator (participant)

This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.