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
