SLR Investment Corp.
Q4 2014 Earnings Call Transcript

Published: 26 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Solar Capital Ltd. Earnings Conference Call for the Quarter and Year Ended 31st of December 2014. My name is Karen, I will be your event operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Michael Gross, Chairman and Chief Executive Officer. Please go ahead, sir.

[Michael S. Gross:]

Thank you very much, and good morning. Welcome to Solar Capital Ltd.'s Earnings Call for the Quarter and Year Ended December 31, 2014. I'm joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka, our Chief Financial Officer. Before we begin, Rich, please start off by covering the webcast and forward-looking statements.

[Richard L. Peteka:]

Certainly. 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 broadcasts, in any form, are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replays 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 our future 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 [phone]. 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. This month marked our fifth anniversary as a public company. Since our team made its first investment, we have consistently operated in adherence to the core tenets of our management philosophy. We invest for the long-term perspective, we pursue long-term initiatives, we act as partners to our clients in order to maintain their trust and deepen our long-term relationships with them and we are aligned with our fellow shareholders through our long-term ownership of Solar shares. With that in mind, I'd like to take a few minutes to highlight how our long-term perspective has benefited Solar Capital since we went public. At the time of our IPO in February 2010, our pro forma net asset value per share at December 31, 2009, was $21.50 compared to our current NAV per share of $22.05 on December 31, 2014. Over the course of the past 5 years, we've paid out a total of $10.54 per share in dividends. And based on last night's closing stock price, which represents an 11% discount to current net asset value, shareholders who've held our stock since the IPO, have realized a total return of 63% and an IRR annualized of 13%. Since our IPO, we've maintained a conservative approach to growth. On a cost basis, our investment portfolio is only up marginally from its size at the time of our IPO debut. Based solely on investment conditions, we have adjusted leverage and the size of our portfolio. We have not grown our asset base with the aim of increasing the fee stream to the manager. In fact, our fees in 2014 were lower than any other year in our history as a public company. As credit market conditions have changed over the course of this cycle, we have shifted our portfolio to a far greater concentration in senior secured assets. At the time of our IPO in February 2010, our portfolio was only 20% in senior secured loans compared to approximately 90% at December 31, 2014, when including Crystal Financial's full portfolio. At the IPO, 30% of our income-producing portfolio was floating rates compared to over 88% at December 31, 2014. Over 20% of our interest income in the first quarter of 2010 came from all PIC investments. Based on our portfolio at the end of this year, PIC income today accounts for less than 0.5% of our total investment income. At December 31, less than 1% of the fair value of our portfolio was nonperforming, and we feel very good about the financial performance of our portfolio companies. We have no direct exposure to the oil and gas industry. In addition to maintaining a conservative investment approach, over the course of our history as a public company, as large shareholders ourselves, we have very carefully managed our equity base. In 5 years, we have only completed 1 underwritten follow-on offering, which was priced at a premium to book value. The proceeds capitalized our strategic investment in Crystal Financial. We completed 2 additional smaller direct offerings, both at or above book value. Net of the $57 million of shares we purchased in our share repurchase program, we've increased our equity base to only approximately $200 million over 5 years, an average of just $40 million a year or approximately 4% [ph] of our current net asset value. On the subject of stock repurchase programs, our previous repurchases demonstrate our willingness to buy back shares at a discount when we believe it provides a more attractive return on capital than funding new investments. We will employ this strategy again when the situation merits. At the present time, we believe there are more accretive use for our available capital such as our senior secured unitranche loan program with PIMCO, our new life sciences venture lending initiative and funding further growth at Crystal Financial. Additionally, we believe having capital at a time others are capital constrained creates a significant competitive advantage. The average leverage for our BDC peer group currently stands at around 0.7x, where our 12/31 net leverage was just 0.9x. In fact, we currently have over $600 million of available capital on our balance sheet and an additional anticipated $1.2 billion of capacity through our unitranche partnership with PIMCO. As a reminder, we have committed $300 million of equity to our senior secured unitranche loan program or SSLP, our joint venture with PIMCO. Together with PIMCO's $300 million equity commitment and the anticipated credit facility that we have lined up, the program will have approximately $1.5 billion of investable capital. The JV has been evaluating a number of unitranche investments and seeks to fund its initial investment in the second quarter of this year. Our origination team has found that our ability to provide unitranche solutions has increased our relevance with sponsors, resulting in an increase in Solar Capital's traditional investment opportunities as well. In addition, we plan to increase our allocation to the life science venture lending space, which means -- which we entered during 2014. After exploring various ways to gain exposure to this attractive asset class, we hired a financial services veteran with over 25 years of experience and a stellar track record. Prior to joining us, he ran the life science venture lending business at GE Capital for over 13 years after launching it in 2001. During 2014, we funded $57 million into 6 companies with an average issuer exposure of $9.6 million and an all-in yield of approximately 10.7%. These loans are senior secured loans with very modest debt-to-equity ratios and significant enterprise value protection. Frequently, warrants or success fees are provided to us as part of the financing, which can often enhance the total returns over time. We are extremely pleased with the results we're initiating in this business and we anticipate increased exposure to this asset class. Our investment in Crystal Financial continues to meet our expectations. During 2014, Crystal paid us $30.8 million in dividends, which equates to an 11.2% cash-on-cash yield. Crystal had a strong year for originations and the credit quality of the portfolio remains high. Yesterday, our Board of Directors declared a quarterly distribution of $0.40 per share, which we would pay on April 2, 2015, to shareholders of record as of March 19, 2015. Since we reset our dividend 6 quarters ago, on a cumulative basis, our net investment income has more than covered distributions. As a result of our low leverage, available capital and strategic initiatives, we are positioned well for growth. And so we have the luxury of thinking about our dividend in terms of a future increase, not a reduction. At this time, I'll turn the call over to our Chief Financial Officer, Rich Peteka, to take you through the financial highlights.

[Richard L. Peteka:]

Thank you, Michael. Solar Capital Ltd.'s net asset value at December 31, 2014, was $936.6 million or $22.05 per share compared to $948.7 million or $22.34 per share at September 30. At December 31, our investment portfolio had a fair market value of $1.02 billion in 43 portfolio companies in 23 industries compared to a fair market value of $1.13 billion in 47 portfolio companies in 31 industries at September 30, 2014. For the 3 months ended December 31, gross investment income totaled $32.9 million versus $28.4 million for the 3 months ended September. Expenses totaled $16.2 million for the 3 months compared to $12 million for the 3 months ended September 30. Accordingly, the company's net investment income for the 3 months ended December 31, 2014, totaled $16.8 million or $0.40 per average share versus $16.4 million or $0.39 per average share for the 3 months ended September 30. Net realized and unrealized losses for the fourth quarter 2014 totaled approximately $11.9 million versus the net realized and unrealized loss of $3.6 million for the third quarter 2014. Ultimately, the company had a net increase in net assets resulting from operations of $4.9 million or $0.11 per average share for the 3 months ended December 31. This compares to $12.8 million or $0.30 per average share for the 3 months ended September 30, 2014. At this time, I'd like to turn the call over to our Chief Operating Officer, Bruce Spohler.

[Bruce J. Spohler:]

Thank you, Rich. During the fourth quarter of 2014, the high yield and liquid leverage loan markets experienced fund outflows, which resulted in spread widening. Our middle-market business benefited from the weakness in the liquid markets, predominantly in the form of better covenants on new issues. The degradation of secondary trading levels, driven in large part by the decline in oil prices, is not reflective of the financial condition of our portfolio companies. Overall, our issuers are experiencing stable to modest EBITDA growth. Furthermore, we have no direct exposure to the oil and gas sector. At December 31, the weighted average yield on our income-producing investment portfolio, when measured at fair value was 9.9%. The weighted average investment risk, weighting of our total portfolio remained at approximately 2, measured at fair market value, based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. Our 2 investments on nonaccrual account for less than 1% of the portfolio at fair value, with the other 99-plus percent of our portfolio performing at or above our expectations. At the end of the fourth quarter, our portfolio consisted of 43 companies operating across 28 industries. When measured at fair value, our portfolio was comprised of roughly 59% senior secured loans, 29% Crystal Financial, 7% subordinated debt, 2% preferred equity and 2.5% in other common equity and warrants. When including Crystal Financial's full portfolio, which consists entirely of senior secured loans, approximately 90% of our portfolio is in senior secured investments. At December 31, approximately 88% of our income-producing portfolio was floating rate, including Crystal's full portfolio. Now let me give you a quick update on Crystal. Crystal, which provides asset-based and other secured financing solutions to midmarket companies, had a very strong quarter. At December 31, Crystal had approximately $478 million of funded senior secured loans across 27 issuers with an average exposure of $17.7 million per issuer. During the quarter, Crystal funded new loans totaling approximately $104 million and experienced repayments totaling approximately $36 million. All of Crystal Financials investments are floating rate senior secured loans. At the end of Q4, Crystal had a net debt to invested equity ratio of 0.85x. For the quarter, our investment in Crystal paid Solar Capital a cash dividend of $7.9 million, which is the equivalent of an 11.5% annualized cash on cash yield. For the full year, Crystal paid Solar close to $31 million, equating to an 11.2% cash-on-cash yield. Now let me discuss our portfolio originations. During Q4, Solar originated approximately $115 million of investments across 8 portfolio companies. All of the loans that we originated were senior secured and carried a floating interest rate. Investments pre-paid or sold during the quarter totaled approximately $224 million. As a reminder, on our Q3 earnings call, we indicated that our portfolio growth for the second half of last year would be essentially flat as a result of expected legacy investment repayments in Q4. Not only were we pleased to be repaid on those investments, but our origination efforts exceeded our projection for the quarter, resulting in approximately $42 million of portfolio growth for the second half of 2014. For the full year, our originations, including Crystal Financial, totaled approximately $820 million and our repayment in sales totaled approximately $858 million. Now I'll highlight some of our Q4 investments. We originated a $51.5 million second lien term loan in DISA Global Solutions to support the acquisition of the company by Court Square Partners. DISA provides drug and alcohol testing, as well as background checks, occupational medical services and transportation services. We underwrote the entire second lien tranche, which enabled us to achieve more attractive credit and economic terms. The all-in yield on this investment is approximately 10%. Additionally, we funded a $25 million second lien term loan to TierPoint, provider of IT infrastructure solutions. The company had recently acquired Xand Corporation, in which Solar had previously invested. Our experience with that credit facilitated our due diligence process for this investment. Not only is the 9% yield on this new investment higher than our original investment in Xand, but our leverage ratios through which we invested are lower, and the company is larger and more diversified from a cash flow perspective. During the quarter, we also funded $10 million of an incremental second lien term loan to support core wireless groups, acquisition of Rayco [ph] wireless. Our investment, which now totals $55.5 million, yields just under 10%. In Q4, we also originated $25 million of senior secured loans to 4 distinct companies in the life sciences sector, bringing our total funded loans to $57 million in the life sciences sector. As Michael highlighted, we are pleased with the initial results of this strategy and are optimistic regarding our ability to continue to grow this leg of our origination platform in 2015. I'll now highlight a few of our Q4 repayments. Approximately $105 million of the $224 million of repayments realized during the quarter were from sub-debt or equity investments across 4 companies. Upon the sale of Grakon to Industrial Growth Partners, we received just over $25 million in proceeds for our subordinated debt and equity investments. As a reminder, we had placed Grakon on nonaccrual back in the third quarter of 2010, at which time we fair valued our debt investment at $0.25 on the dollar and our equity investment at 0. We helped with the restructuring of the company, which was completed during Q1 of 2011. From our initial investment to our final exit, we realized an IRR on the debt investment of 13.2% and a multiple on invested equity of 1.4x. This is a great state case study on why the average recovery value for middle market loans is higher than that of large liquid loans. We were able to work directly with the company and sponsor to control our destiny, rather than trying to corral a large group of lenders with varied agendas. Additionally, we benefited from our ability to exercise patience as the company's performance rebounded, thanks to our permanent capital base and long-term perspective. In addition, in Q4, we repaid on our $42.5 million investment in Adams Outdoor Advertising, which resulted in IRR since funding of over 20%. Furthermore, in conjunction with Ontario Teachers' acquisition of Nuveen, we received approximately $23 million of consideration in Q4. We also redeemed on our $23 million mezzanine investment in Richelieu Foods at a premium to par. Our IRR since inception was in excess of 16%. In the aggregate, the exits of these portfolio of companies reduced our exposure to unsecured investments from 20% at September 30 to just over 12% at December 31. Also during the fourth quarter, we repaid on our $61 million second lien term loan to Tecomet at a premium to par, which resulted in IRR in excess of 17%. We are pleased with the reduction in our exposure to subordinated debt that resulted from these Q4 repayments. However, we anticipate that our NII will be lower in Q1 as we work to reinvest these proceeds. As a reminder, in the mid-market lending business, Q1 can be a seasonally lower quarter for originations. In the current market environment, we anticipate a lighter volume of repayments in 2015 than we have experienced in 2014 and '13. To be specific, thus far in Q1, 2 months through, we received repayments of under $5 million and currently are not aware of any significant repayments expected in 2015. Now I'd like to turn the call back over to Michael.

[Michael S. Gross:]

Thank you, Bruce. Now that we've covered our recent quarter and our path, I'd like to wrap up by discussing our future. We believe that our philosophy of managing the business for the long-term perspective has positioned us well for a successful 2015 and beyond. We believe our current portfolio is the highest quality it's been. Its predominantly senior secured floating rate construction should provide protection if the economic environment declines and/or interest rates rise. With only 2 troubled assets that have a de minimis fair market value and no direct exposure to the oil and gas industry, we are confident in our ability to preserve our book value. With the addition of the ability to provide unitranche loans through our SSLP, our core underwriting business is primed for another strong year of originations. We anticipate the additional cylinder of origination engine, Crystal Financial, and our life science venture lending business to continue to increase their contribution to our earnings. We have ample dry powder, without raising additional equity to fuel our originations business and strategic initiatives as well as to take advantage of any market dislocations that may occur. At year end, we had $145 million in cash and $490 million available on our credit facility subject to borrowing limitations. In conclusion, while our Q1 net investment income will reflect a lower portfolio balance as we reinvest the fourth quarter's heavy repayments, we are excited about our current opportunity set. Our conservative long-term oriented philosophy has positioned us to be on the offensive at the time when others may have to take a defensive approach. We are confident in our ability to cover our dividend and are optimistic about our prospects for increasing it in the future as we use our multi-cylinder [ph] sourcing engine to grow net investment income with a current substantial available capital. At 11

[Operator:]

[Operator Instructions] Your first question comes from the line of Greg Mason of KBW.

[Greg M. Mason:]

The biggest issue over the last 18 months has been the significant repayments versus the new originations. You just painted, I think, a pretty favorable outlook for 2015. As we think about that $600 plus million of available capital, how much of that are you guys hoping or anticipating to be able to put to work on a net basis in 2015?

[Bruce J. Spohler:]

Yes, I think you're correct. The first part of that equation, Greg, is obviously the repayment activity. And I think in both '13 and '14, we saw an excess of $600 million per year come back. As I mentioned, this quarter, we have less than $5 million of repayments and no visibility on any meaningful repayments for the rest of the year. It doesn't mean we won't see one later in the year, but nothing we see sitting here today. So I think that's a significant part, obviously, of the math. Our origination path, as you know, historically, has been in the $100 million to $150 million a quarter. On average, it's been north of $500 million a year. Q1 can be a light quarter, as we touched on, for this year and I think in prior years as well. But I think we feel extremely well positioned because unlike the prior years, we have multiple growth engines, not only our core sponsor business but, as Michael mentioned, the PIMCO joint venture, Crystal, which obviously joined our platform at the end of 2012, and now life science venture lending platform that we're ramping up. So we feel extremely well positioned. As you know, we find the right opportunities as we did in Q3 of last year, where we had elevated origination level. We'd be happy to deploy all of this capital this year, but we're going to be prudent in doing so.

[Greg M. Mason:]

Great. And then on the joint venture with PIMCO, you said you expect your first investment to be in the second quarter. How do you view kind of the timing of that versus your -- when you originally did the deal? Is this taking longer than expected or in line with expectations? And just kind of the view of once you get that close kind of the ramp-up phase after that first deal is done?

[Bruce J. Spohler:]

Yes, I think that, to be honest with you, it's consistent with what we had anticipated. We opened the doors on this at the beginning of Q4, as you know. And the team has been out there getting the word out that we have this product in our arsenal. We touched on before, the strategic benefit of the product is significant. And what I mean by that is, when sponsors are evaluating how to best finance a potential platform investment for themselves, they evaluate multiple financing structures, first lien, second lien, bank debt, mezzanine and unitranche. And so having that product offering gets us invited to more opportunities and gives us more looks, widening out our origination funnel. But at the end of the day, we can't direct which capital structure they decide to go with. And so what I would say is that we've seen more things. [Audio Gap] Second lien investments, we saw in Q4, were directly the result of having had a unitranche, where a sponsor originally considered that as a financing structure. So, so long as it is accretive... [Audio Gap] It's obviously extremely beneficial regardless of which asset gets funded. Having said that, we are actively out there offering the unitranche product on multiple situations and are optimistic that we'll begin to ramp that this year.

[Greg M. Mason:]

Okay, great. And then one final question, DirectBuy, the new nonaccrual. You've got a 53% of par on nonaccrual status. One of your peers has the exact same loan, I believe at 76% at par and still on accrual status. So could you just maybe give us a little commentary on DirectBuy and what at least appears to us to be -- at least a relatively conservative view towards that investment?

[Bruce J. Spohler:]

Yes, I think you sum it up correctly. It is a conservative perspective. As you know, this is -- all investments are meaningful to us. But this is in the context of our $1 billion portfolio, somewhat de minimis at just over $8 million at face value. Fair value, obviously is closer to $4 million. I will say that we have a smaller position so we are not on the board the way some of our peers are, and they may, hopefully, have better information. We love their mark to be closer to realizable value, but we are reflecting conservatism.

[Operator:]

Your next question comes from the line of Rick Shane of JPMorgan.

[Richard B. Shane:]

We've seen an interesting dislocation in the market in terms of the BDCs were having reduced access to capital. You guys are well positioned. You're not the only one who's well positioned, but you are well positioned in terms of liquidity versus a number of your peers. Are you seeing this start to impact the competitive landscape in any way? Are you seeing the opportunity to drive better deal terms as some of your peers are more cautious with their capital?

[Bruce J. Spohler:]

I think everybody that we respect in the sector is prudent about their capital management, so that they can continue to be in business. What we are seeing is people more willing to share on assets, which does broaden our funnel, obviously, as we are a likely partner in many of these opportunities. So I think from that perspective, we're back to a couple of years ago, to some extent, where people are more willing to club things up

[Michael S. Gross:]

And I think from a pricing structure, I think things have stabilized.

[Operator:]

The next question comes from the line of Chris York of JMP Securities.

[Christopher York:]

Just a follow-up on the DirectBuy question. When did you guys recognize that as a nonaccrual?

[Michael S. Gross:]

In Q4.

[Christopher York:]

Yes, which month?

[Michael S. Gross:]

It took effect -- it went retroactive the entire quarter.

[Richard L. Peteka:]

Right, there was no income.

[Michael S. Gross:]

There's no income at all from it for the quarter.

[Operator:]

Your next question comes from the line of Doug Mewhirter of SunTrust.

[Douglas Mewhirter:]

A couple of quick questions. First, with the disruption in the liquid markets, have you considered any opportunities to find some mispriced, or pieces of mispriced liquid loans to put some capital to work? I know that's not really your core thing, but sometimes things can get blown out of wack and there might be some opportunities on the trading desk, so to speak?

[Michael S. Gross:]

I think a couple of comments to that. One is on -- it doesn't really follow our philosophy of directly underwriting loans. Those would be more of a kind of a trading opportunity, if you will. And to be frank, given where we are on our invested capital, the only beneficiary of a trade of like that is also the asset manager because we're in the catch-up phase of our earnings. And so that's just not something we would do. Also, the liquid market continues to have highly compromise structures and complete lack of covenants.

[Bruce J. Spohler:]

One thing I would add, what we have seen is in some of our club year transaction, in fact, the earlier question of one of your peers, people are more willing to maybe allow us to buy a little bit more of an existing position trading amongst club members as they're trying to allocate their capital. So we've seen a little bit of that around the edges.

[Douglas Mewhirter:]

Okay, very helpful. Second question, pretty quick question. Your life sciences venture lending, is the average turn -- term of the loan shorter or longer, or about the same as your core business?

[Bruce J. Spohler:]

The stated maturity of the loans typically is around 5 years. But they do, unlike our traditional loans, have amortization after a year or 2 period. And so on average, I would say, you probably get back to the same sort of 3-year average life. You just get there differently.

[Douglas Mewhirter:]

Okay. Yes, because I heard that there's a little bit more churn in that market, given that the VC funding is so dynamic. My last question, about Crystal, you had it since, again, the end of -- for, I guess, a couple of years now. And it's kind of growing in fits and starts, but you seem to be a little bit more confident in its outlook to grow for the whole year even though quarterly fluctuations can be wide. Is there something changed in their business where you're feeling a little more confident now? The language -- because your language seemed to have shifted versus what -- the way you've talked about that business, say, last year.

[Bruce J. Spohler:]

Yes, I would say Crystal's business thrives particularly in periods of greater volatility because what they predominantly offer is certainty of funding amongst other things. And I think that what we saw in Q4 was fewer repayments and portfolio churns. You may recall, 2013, 80%-plus of their portfolio turned. So you're correct, it is a high-velocity portfolio. But the churns slows down in periods of volatility and the origination effort is that much more effective. And so I think it really goes to, as you've seen, the portfolio has grown to just under $500 million. I think if we collectively underwrite additional volatility this year, you'll see growth. If not, you'll see churn. But as you know, their economic model is such that they generate significant fee income as a result of the churn. So we're happy either way, but I think it really goes to one's underlying assumption of volatility.

[Operator:]

Your next question comes from the line of Andrew Kerai of The BDC Income Fund.

[Andrew Kerai:]

I was just wondering maybe if you could give a little bit more color, I guess, on the -- what you're seeing out there in the market in terms of -- so obviously, as you had alluded to, right? Most of the BDC universe is at target leverage given that the majority of the universe is trading below NAV. Growth is likely to slow. I mean have you seen that impacting either the rate, the leverage attachment point or both on your new deals? It just seems like sort of you're gearing up for, as you put it, kind of offense in growth mode. Just wondering if you're seeing any change in dynamic from a pricing and underwriting standpoint?

[Bruce J. Spohler:]

Yes, in Q4, we clearly did. You need volume in order to see these impacts. And we did see good volume in Q4 of activity, both at Solar and Solar Senior. And so you saw pricing, I would say, widen out on average, maybe 50 basis points. And more importantly, from where we sit, we saw leverage ratios come in a little bit and structures get a little bit more attractive from our perspective. It's a little bit early to say whether that continued because this has been a slow start to the year, as you often see in the deal business, given the elevated activity in Q4 as people try to drive closings. So we're cautiously optimistic, but I think to Michael's commentary, we're not just relying on the core sponsor business to drive that growth for us. We've created less correlated growth engines in the form of Crystal, which is not dependent on or susceptible to what's going on with the liquid credit markets to the same extent as well as our life science business, which is also a bit of a niche business. And so we tried to diversify our origination efforts, but I think broadly speaking, we do think we're well positioned. We just can't control the level of M&A activity out there.

[Andrew Kerai:]

Sure. No, that certainly makes a lot of sense. And then how should we -- just given that you're ramping up, right, to JV with PIMCO, which tends to be sort of a mid-teens type of target IRR for you guys. How should we think about the portfolio yield as we move along in 2015 here?

[Michael S. Gross:]

Well, as you saw in Q4, the new originations [ph] were about 9.9? And we think about our growth, I'm glad you brought this up. The JV is low to mid-double digits; life science, is 11-ish percent on an unlevered basis; Crystal, [indiscernible] 11-plus percent returns. So I think we would expect the overall yields and return to go up as those strategies grow.

[Andrew Kerai:]

Sure. No, I think that makes sense. And then -- and I think the last question that I had was just on the origination side. So certainly appreciate the color on the repayments coming in. I mean, it seems like from your commentary that I'm not sure if I was reading this correctly, but it seemed like maybe origination levels would be modestly higher compared to 2014? Or is it just that the origination levels themselves on a gross basis might be relatively constant, it's just that the driver of the net portfolio growth is coming from the payout? Just any color on your outlook for gross originations.

[Michael S. Gross:]

I think, as you know, we never had been in the habit of projecting originations. So we kind of point to history. So last year, we did about $550 million of originations, $50 million of that was in the life science business. None of it was in the SSLP. So I think we view it, the PIMCO program, as totally incremental and we expect the growth in life science to be more than $50 million this year. So assuming we're in a kind of similar environment to last year, our originations should exceed last year.

[Bruce J. Spohler:]

And the net portfolio growth will be significantly benefited, we believe, today by significant reduction of repayments.

[Operator:]

Your next question comes from the line of Casey Alexander of Gilford Securities.

[Casey J. Alexander:]

You reported for the quarter $11.9 million of realized and unrealized loss. How much was realized versus unrealized?

[Richard L. Peteka:]

About 6.7%. That's broken out in our income statement, but it's about 6.7%, on the realized side.

[Casey J. Alexander:]

Yes, it's okay. I'm sorry I missed it. Secondly, you report 88% senior secured. Can you break that into first and second lien?

[Bruce J. Spohler:]

What I would say is that when you look through with Crystal's portfolio on a consolidated basis, close to 2/3 of the portfolio is first lien.

[Casey J. Alexander:]

Okay, that's very helpful. And lastly, while you don't have much of any exposure to oil and gas now, that doesn't mean that there might not be opportunities in the future. Have you seen anybody coming to you with recap ideas or things that might carry a good rate with good covenants, and potentially, good equity kickers to it?

[Bruce J. Spohler:]

What I would say is we're not taking credit for being smarter than others by not having energy exposure. We've never had any energy exposure in our portfolios because we don't have a team dedicated to the sector, and don't feel that we have the expertise as a lender to focus on the sectors. And that continues to be the case and it's something that we evaluate constantly as to whether we should be adding that expertise. But I think until we feel that we have sector expertise, which obviously recent volatility has proven out is important, if not essential, I think we're going to stay on the sidelines.

[Operator:]

Your next question comes from the line on Jon Bock of Wells Securities.

[Jonathan Gerald Bock:]

Michael and Bruce, regarding the JV, can you give us a sense of the limiting factors of the speed at which it can be deployed? So if we look at the credit facility or what's in place, are there governors to the pace of growth depending on what you want to do? We understand that it's, particularly for you guys, going to be a target-rich environment. And I'm just wondering how you can maybe expound upon maybe some of the limitations that might govern the speed at which you deploy, what is a very attractive asset?

[Michael S. Gross:]

There are no structural limitations at all. Frankly, just finding good solid investments that meet our risk-reward that we're able to win.

[Jonathan Gerald Bock:]

Okay. So then moving on from that, when you offer your unitranche product offering, can you give us a sense of the fee structures -- or excuse me, the upfront fees that are charged as part of that product offering? Would you expect to generate a certain amount of upfront fee income off of that vehicle?

[Michael S. Gross:]

As you know, our policy is that we amortize any upfront fees over the life of the loan. So you won't see an upfront benefit from that. And it's no different than existing loan. We get 1 point, 1.5 points, maybe 2 points if we're lucky. 2 points and that would be amortized over 5 or 6 years. So you're not going to see a huge ramp-up in NII because of a paid origination increasing.

[Bruce J. Spohler:]

I would just add that the limiting factor is not competing with other unitranche. Generally speaking, there's an ability to club together as we're seeing larger and larger unitranche. What we don't control, however, as I mentioned before, is whether the sponsor elects unitranche versus a first lien, second lien. And unitranche, as you know, has only been around the last couple of years. Not every sponsor likes it depending on the stage of development for their underlying portfolio of companies. So I would actually say that is the biggest determinant. We just can't control whether they're going to select the unitranche versus some other form of capital structure. But as it relates to the credit facility, we have one available, it just hasn't been economically prudent to close it and pay those fees until we start funding into the joint venture.

[Jonathan Gerald Bock:]

Got it. And then one last question, and I apologize if it's been asked in one iteration or another previously. When we look at second lien exposure, I understand that you outline credits that are senior secured, but we and the market, understands that there may, in fact, be a difference between what is a first lien secured loan and what is a second lien secured loan, of which you do have a healthy amount of second lien exposure. I don't want to necessarily want to opine good or bad. I just want to understand that at a point when people automatically associate second lien with risk, heightened risk at that, given where we were in the credit cycle, how do you answer whether or not now is a time to be exposed to such an asset class like second lien debt? Because I know a lot of us would be interested in the answer.

[Bruce J. Spohler:]

Sure. Great question. I think if you look at our portfolio on a consolidated basis, whether it's Crystal Capital, which is all first lien assets, whether it's -- how we're going to look to grow out the unitranche, which as you know is dollar one risk first lien as well; life sciences, which is first lien. On a consolidated basis at 12/31, as I mentioned earlier, in excess of 60% of the portfolio is first lien. So then when you get to our second lien exposure, as you know, we don't believe all assets -- or all second lien assets are created equally. And what I mean by that is the predominance of our second lien investments are directly originated underwritten transactions, where we control -- are either the only 1 or 1 of 2 lenders, and we have full covenant packages. There have been a small asset or 2 in the books, where we participated in a secondary transaction -- I'm sorry, or a liquid transaction because it's a business that we've underwritten in the past, such as Asurion or such as TierPoint. But those are small positions. Again, there are things that we've been underwriting for a number of years. The predominance of our second lien investments are directly originated and have full covenants. And we think those are, therefore, higher quality. And I would add, you look at our most significant repayment in Q4 was a business called Tecomet, which was a second lien investment, which totally appreciate from your vantage point, you wouldn't really know the underlying fundamentals. Well, we made that investment in Q4 of 2013, got repaid within 12 months and realized an IRR in excess of 17%. Why? We believe because it was a directly originated second lien transaction.

[Operator:]

Your next question comes from Mickey Schleien of Ladenburg.

[Mickey M. Schleien:]

I realize we're running out of time because of the other call. But just quickly then, spreads look like they were pretty attractive in the fourth quarter. We certainly see that in the SUNS results, but they've tightened dramatically this quarter, so far. So I'd like to get your sense of how you feel about the market today?

[Bruce J. Spohler:]

Yes. Again, I think that, Mickey, there hasn't been a lot of activity. I think, in the liquid market as well, but clearly, you can see from secondary trading levels, to your point, spreads have tightened back. But fortunately because we're playing in the direct originated market, we're really not seeing a material shift because I think that Solar Capital, whether it's stretch first or second lien, that's not where you're seeing spreads tighten. Spreads have tightened predominantly in the first lien liquid loan market. So we haven't seen much of a trickle-down effect yet. As you know, it takes a little bit of time to create a trend in this market.

[Mickey M. Schleien:]

Right. I wanted to move on to dividend income. Crystal's dividend to Solar was more or less stable quarter-to-quarter. But overall, dividend income was up sharply from the third quarter to fourth quarter. Can you tell me what drove that?

[Richard L. Peteka:]

Yes. Mickey, I think the dividends were -- we had a little bit more maybe, but dividend income was pretty stable from Crystal.

[Mickey M. Schleien:]

Yes, I said that. I understand. But total income, total dividend income was up sharply from the third quarter to the fourth quarter. So something else paid a large dividend to Solar unless I'm doing the math wrong.

[Richard L. Peteka:]

Yes. I mean, we get some dividends from our aircraft. So it could be $1 million there. Hold on, let me take a look. Do you have any other questions like [indiscernible]

[Mickey M. Schleien:]

Yes, one is just sort of a fine-tuning question. I saw in the statement of changes in that assets that $2 million from other sources for distributions. Was that a return of capital or something else?

[Richard L. Peteka:]

It was due to some timing differences. Mickey, I'll look up the dividends and get back to you offline. I just don't have that detail with me.

[Operator:]

Your last question comes from Randy Rochman [ph] of Yes [ph].

[Unknown Analyst:]

I had 2 questions, but one's already been answered. So the remaining question is the following

[Michael S. Gross:]

Look, we always carry our values conservatively. Let's put it this way. We would never sell it for anywhere close to what we bought it for or anywhere close to where it's marked today. It's just a great recurring earnings stream for us with a phenomenal management team. And it's a business that -- it's somewhat kind of cyclical. When we do hit a rough spot in the economy, we will see a lot more portfolio growth out of these guys because their capital becomes more needed. So look, we think there's a lot of upside here. We have no intent to ever sell it, so we don't really focus kind of on what the market value is per se.

[Unknown Analyst:]

Okay. And then 1 follow-on question. If you add up the unrealized loss mark that the portfolio has incurred for the 99-point-change percent that's all performing, what do you think that aggregates?

[Michael S. Gross:]

In dollar, penny per share?

[Unknown Analyst:]

Yes, pennies per share.

[Michael S. Gross:]

Well, we were down -- our net [ph] was down what for the quarter?

[Richard L. Peteka:]

34 to 205, so 29.

[Michael S. Gross:]

So we're down...

[Richard L. Peteka:]

1%.

[Michael S. Gross:]

1%. So essentially, the vast majority of the mark changes were really technical changes, given the choppiness in the market in the fourth quarter. So you saw, not withstanding my comments on Crystal, we did move the value of Crystal down a little bit because we are -- the valuation firm focuses on more on computer [ph] trading. We think those are all kind of temporary marked to marks, given the choppiness of the market and we'll come back into NAV at some future point in time.

[Richard L. Peteka:]

And I think the only technical -- fundamental market is the DirectBuy.

[Michael S. Gross:]

That's correct.

[Richard L. Peteka:]

That's $2.5 million. The rest was all fundamental. Technical, excuse me.

[Unknown Analyst:]

I'm just trying to figure out what [indiscernible]. Your originated loan in 98, you're accreting a discount. But now it's -- you're carrying it at 96. We all know it's money good. I'm just trying to figure out what the aggregation of all those 96 to 98s are.

[Richard L. Peteka:]

Maybe on the balance sheet on the bottom in the equity section there's a net unrealized there.

[Michael S. Gross:]

We can walk you through it offline. I'm happy to do it.

[Operator:]

Thank you, ladies and gentlemen. I would now like to turn the call over to Michael Gross for the time closing remarks. Thank you.

[Michael S. Gross:]

Thank you very much. We appreciate all your time, and hopefully, we'll entertain many of you in the next 3 minutes on SUNS call, where we talk about all the positive elements we experienced in the fourth quarter.

[Operator:]

Thank you for your patience and for your participation in today's conference call. This concludes the presentation. You may now disconnect. Thank you, and have a very good day.