DBRS Morningstar Confirms SLR Senior Investment Corp. at BBB, Trend Revised to Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of SLR Senior Investment Corp. (SUNS or the Company), including the Company’s Long-Term Issuer Rating of BBB. At the same time, DBRS Morningstar has revised the trend on the ratings to Stable from Negative. The Company’s Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA3, resulting in SUNS’ final ratings positioned in line with its IA.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects SUNS’ sound operating performance through the challenging environment brought about by the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar sees this performance as illustrating the benefits SUNS gains from access to the SLR Capital Partners (SLR) platform and investing expertise. Despite the challenging pandemic economic backdrop, SUNS had no portfolio investments on nonaccrual status throughout 2020. We see this as validating the Company’s underwriting and investment strategy of focusing on sponsored-backed, upper middle-market companies operating in non-cyclical industries and asset-based commercial lending. Positively, SUNS’ earnings were resilient in 2020 with the Company reporting a net increase in assets from operations (net income) of $13.9 million in 2020, despite unrealized losses due to general credit market stress in 1Q20 and elevated prepayment activity in the investment portfolio.

The ratings also consider the Company’s ample liquidity to near-term requirements as well as its appropriately managed funding profile. Balance sheet leverage is low relative to regulatory and covenant limits due to elevated prepayment activity in 2020. We do not expect leverage to remain at current levels and management expects to redeploy capital in 2021 that could potentially see leverage increase to 1.0x, which would still be below the long-term target of 1.25x to 1.5x.

The Stable trend considers our view that uncertainties related to the worst of the pandemic shock are likely now in the past, as businesses have adapted to social distancing practices and periodic restrictions on activities to address recent waves in virus cases. Rising M&A activity in the middle market underpinned by expectations for a strong economic recovery in 2021 due to government stimulus and central bank actions should produce good investment opportunities for BDCs. While we expect some deterioration in credit quality across the BDC sector, this is expected to be related to specific portfolio companies and is not expected to be broad based, especially considering SUNS’ focus on sponsor-backed companies that may invest additional capital in their portfolio companies.

RATING DRIVERS
Sound earnings performance supported by strong performance of the investment portfolio while maintaining disciplined deployment of leverage and appropriate liquidity would result in a ratings upgrade. Conversely, a sustained and meaningful deterioration in the currently ample buffer to debt facility covenants or regulatory requirements would result in a ratings downgrade. Weak performance in the investment portfolio that erodes net asset value (NAV) and dividend coverage also would result in ratings pressure.

RATING RATIONALE
SUNS has a disciplined and conservative investment strategy that combined with sound underwriting has resulted in the Company’s strong credit performance since inception, which is a key factor supporting the ratings. Indeed, despite the unprecedented disruptions to the U.S. economy from the pandemic, each of SUNS’ portfolio companies made their monthly payments throughout 2020. This resulted in SUNS having no investments on non-accrual status at any point in 2020. We view this performance as illustrating the benefits of SUNS’ defensive and diverse comprehensive investment portfolio focused on first lien senior secured, floating rate investments in both cash flow lending and asset-based lending. At December 31, 2020, SUNS’ comprehensive investment portfolio, which reflects the underlying investments in SLR Healthcare ABL (fka Gemino Healthcare) and SLR Business Credit (fka North Mill Capital), totaled approximately $461 million across more than 200 distinct borrowers across over 120 industries, of which more than 99% is first lien secured with the remainder equity in investments.

SUNS’ franchise is sound, benefiting from its relationship with SLR, including the increasing scale of the platform, as well as SLR’s well-established and seasoned management team that have invested through several business and economic cycles. In our view, this investment expertise and acumen was key to SUNS’ ability to navigate the pandemic while generating good operating performance. SCP’s national direct origination platform focuses on lending to upper middle market companies reflecting the Advisor’s view that these portfolio companies have the scale, access to capital, and better resources to navigate an economic downturn. At December 31, 2020, the Adviser had over $7.5 billion of investable capital, including leverage, across its BDCs, private credit funds and separately managed accounts, with over $3.0 billion available to make new investments.

While SUNS’ 2020 earnings were impacted by the general credit market dislocations in 1Q20 and lower net investment income due to elevated prepayment activity, SUNS has demonstrated good earnings generation ability since inception. Indeed, SUNS has been profitable every year since inception, including 2020 when the Company reported a net increase in assets from operations (net income) of $13.9 million, down from $22.9 million in 2019. Good levels of recurring investment income and solid cost control have underpinned the Company’s sound earnings generation capacity over the last several years. SUNS’ earnings generation ability is also supported by solid yields from the debt investment portfolio and consistent dividend income. While we generally consider dividend income as a potentially more volatile source of investment income for BDCs, we view SUNS’ dividend income from its controlled specialty finance companies as higher quality and more predictable.

SUNS’ disciplined use of leverage and appropriately managed funding profile continue to support the ratings. SUNS was underleveraged at year-end 2020, reflecting substantial prepayment activity across the investment portfolio. Leverage (debt-to-equity) was a very low 0.35x at December 31, 2020, well below the regulatory limit of 2.0x, and the Company’s long-term target range of 1.25x to 1.50x.

During 2020, SUNS completed its inaugural issuance of senior debt, introducing fixed rate debt and duration to the funding base. Over the medium-term, the Company intends to maintain a balanced funding profile that includes both senior debt for term and fixed costs and floating rate bank debt for flexibility to absorb periods of elevated repayment activity. Importantly, the Company has no refinancing requirements until 2023. Liquidity at year-end 2020 was ample with nearly $440 million of available liquidity, which was more than sufficient to meet unfunded commitments of $24.8 million, as well as potential new investments over the near-term. While the Company has no intention to issue dilutive new equity, SUNS has received shareholder approval each year to issue equity below net asset value, if necessary.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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