SLR Investment: Fight Inflation With This 8.5% Yielder

Summary

SLR Investment maintains a safe portfolio of primarily first-lien secured loans, and has a strong track record of shareholder returns.

It’s seeing a favorable deal environment, and its pending merger with SLR Senior Investment should drive scale and efficiencies.

SLRC’s high dividend yield could help investors stay ahead of inflation in this low interest rate environment.

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Jira Pliankharom/iStock via Getty Images Many BDCs continue to be reasonably valued despite the broad rally in the stock market this year. This is helpful, especially in the low interest rate environment that we find ourselves in. As seen below, recent macroeconomic factors have pushed the 10-year Treasury rate down to just 1.35%, and the 3-year rate is under 1%. (Source: FRED)

At such low rates in an inflationary environment, savers and treasury bond investors are sacrificing real returns for the promise of getting their principal back at maturity.

While I’m by no means discounting the safety that treasury bonds can provide, I also find it prudent to have a diversified portfolio of income-generating assets to offset the loss in purchasing power. This brings me to the following BDC, which appears to be a good income generator at the current price, so let’s get started. Fight Inflation With This 8.5% Yielder

SLR Investment ( SLRC ) is a BDC that invests in U.S. middle market companies, and is externally-managed by Solar Capital. It’s also a sister company to SLR Senior Investment Corp ( SUNS ), which is advised by the same manager.

SLRC is one of the older and more established BDCs in the space, as it’s been publicly traded since 2010. At present, it has a sizeable investment portfolio of $2.01 billion that’s spread across more than 600 portfolio companies and 75 industries.

SLRC maintains a rather conservative investment structure compared to other BDCs, with 99.4% senior secured loans (95.6% first lien, 2.3% second lien), and with the remaining 0.6% related to equity investments.

Having such low exposure to equity gives SLRC less potential for NAV/share upside compared to some of its peers, but it helps to provide for steady returns. SLRC has paid an uninterrupted dividend since 2013, and as seen below, has provided its investors with a 100% total return over the past decade. (Source: Seeking Alpha)

Meanwhile, SLRC is producing encouraging results, with NII/share growing by 5.9% YoY to $0.36 per share in the third quarter. Net asset value per share has also slightly increased by $0.04 since the start of the year, to $20.20, but still has some ground to make up to get to the $21.44 from the end of 2019 (pre-pandemic). I’m encouraged, however, by the strong portfolio health. As seen below, 96.6% of SLRC carry an internal investment rating of 2 or higher, with no investments sitting in the lowest tier. (Source: SLRC Earnings Release )

Looking forward, I see plenty of headroom for SLRC to deploy capital and boost its bottom line. This is supported by the low debt-to-equity ratio of 83.6% , sitting well below the 200% regulatory limit. Plus, SLRC is currently operating in a favorable deal environment, in which there are favorable uses for capital, as noted by management during the recent conference call : During the third quarter, a compelling opportunity set of cash flow investments across health care, software, and financial services, drove over $120 million of portfolio growth. Additionally, origination volume in the fourth quarter should contribute to further growth before year-end. In the third quarter, we made $185 million of new cash flow commitments and funded $140 million. Additionally, the Life Science Finance team currently has a robust pipeline of new opportunities. The weighted average yield on this portfolio was 9.6%, which excludes success fees and warrants. We are seeing robust origination activity, which would translate into continued portfolio growth in the coming quarters. We believe we are still in the early innings with substantial runway as financial sponsors deploy record amounts of dry powder and more of the larger businesses we prefer to lend to choose direct financings over syndicated debt markets. Plus, I see the recently announced merger between SLRC and SUNS, with SLRC being the surviving entity, as being a positive for both companies. This is considering the fact that the vast majority of SLRC’s loans are already first lien senior secured (similar to SUNS).

This transaction is expected to greatly improve SLRC’s income diversification, scale, and operating leverage, as reflected […]

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