Good day, ladies and gentlemen and welcome to the Solar Senior Capital Ltd. Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Michael Gross, Chairman and Chief Executive Officer. You may begin.

Thank you very much and good morning. Welcome to Solar Senior Capital Limited’s earnings call for the fiscal year ended December 31, 2016. I am joined here by Bruce Spohler, our Chief Operating Officer and Richard Peteka, our Chief Financial Officer. Rich, would you please start off by covering the webcast and forward-looking statements?

Sure. Thanks, Michael. I would like to remind everyone that today’s call and webcast are being recorded. Please note that they are the property of Solar Senior Capital Ltd. and that any unauthorized broadcast, in any form, are strictly prohibited. This conference call is being webcast on our website at www.solarseniorcap.com. Audio replays of this call will be made available later today as disclosed in our press release. I would 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. Additionally, past performance is not indicative of future results. Actual results may differ materially as a result of the number of factors, including those described from time-to-time in our filings with the SEC. Solar Senior Capital Limited 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 212-993-1670. At this time, I would like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. We are pleased with our performance in the fourth quarter, which capped off a strong 2016, during which we grew our comprehensive investment portfolio by 25%, increased our net asset value by 3%, fully covered our distributions with GAAP and net investment income and increased our capital base. Equally important, we believe that our portfolio of senior secured floating rate loans provides us with a solid foundation for significantly growing investment income in 2017 through further investment in our existing strategic initiatives, as well as two new platform strategic developments which I am pleased to now discuss. First, as you may have seen from our press release yesterday morning, we have entered into a new life science lending joint venture with our sister company, Solar Capital, affiliated to the joint venture between Solar Capital Partners and PIMCO and Deerfield Management. Solar Life Science loan program is expected to invest the majority of its assets in first lien loans to publicly traded companies in the life science industry and will be incremental to our existing life science loan strategy. Aside from the larger enterprise value of the target companies, the business model will be consistent with the loans currently originated by Solar Capital Partners’ life science teams. To-date, our team has achieved a weighted average internal rate of return on all exit investments for the solar platform of 18.6%. We are pleased to be partnering with Deerfield Management, a top tier private investment firm with over $8 billion in assets under management. The firm specializes in healthcare investing from seed stage to mature companies across all segments of healthcare and has a tremendous track record. Solar has committed $75 million to the $350 million equity committed to the JV. With anticipated leverage of up to 1:1 debt to…

Thank you, Michael. Solar Senior Capital Limited’s net asset value at December 31, 2016 was $269.1 million, or $16.80 per share. This compares to a net asset value of $268.9 million, or $16.78 per share at September 30. SUNS’ investment portfolio at December 31, 2016 had a fair market value of $365.5 million in 51 portfolio companies operating in 22 industries compared to a fair market value of $327.9 million in 49 portfolio companies operating in 22 industries at September 30. At December 31, the weighted average yield on our income producing portfolio was 7.8% measured at fair value. During the fourth quarter, we have placed one asset on non-accrual, which accounted for approximately 1.8% of the cost of our portfolio. Subsequent to year end, the company completed its restructuring and we removed the assets from non-accrual. At December 31, net leverage increased to 0.32 times from a modest 0.14 times at September 30, which reflected the net leverage post the company’s follow-on equity offering in September. I would like to note that we will continue to target leverage at 0.8 times as we deploy our available capital. From a P&L perspective, gross investment income for the three months ended December 31, 2016 totaled $7.2 million on a larger average portfolio versus $7.0 million for the three months ended September 30. Net expenses for the three months ended December 31 were $1.5 million compared to $2.5 million for the three months ended September 30 as we waived the majority of the management fees and all of the performance-based incentive fees totaling $870,000 for Q4. For the full year 2016, we waived approximately $2 million of management and performance-based incentive fees. Accordingly, net investment income for the quarter ended December 31, 2016 was $5.6 million or $0.35 per average share compared…

Thank you, Rich. Let me begin by providing a portfolio update. At year end, the credit fundamentals and financial performance of our portfolio companies remained solid, reflecting our disciplined underwriting, seniority in the capital structure and focus on downside protection. At the end of Q4, the weighted average EBITDA of our first lien investments in SUNS portfolio, including our ownership of FLLP, was $75 million. Additionally, on a fair value weighted average basis, leverage to our investment was 3.9 times and our interest coverage was just under 3 times. Related 12-month revenue for our portfolio of companies grew approximately 7.5% and EBITDA has been stable on a fair value basis. At year end, SUNS’ approximately $430 million comprehensive portfolio included loans held in FLLP and had loans to 57 issuers across 25 different industries, with an average investment of $7.5 million or 1.8% of the portfolio. Virtually 100% of the comprehensive portfolio is invested in senior secured loans, including our investment in Gemino whose portfolio consists entirely of senior secured loans. Including our equity investment in Gemino, over 97% of our income-producing portfolio is floating rate. At year end, the weighted average yield on this portfolio was 7.8%. Our internal risk assessments remained at approximately 2, measured at fair market value and based on our 1 to 4 risk rating scale with 1 representing the least amount of risk. We continue to have no direct exposure to the oil and gas or commodity sectors. As Rich mentioned, during the fourth quarter, we placed one loan on non-accrual, which comprised 1.8% of our portfolio cost and 90 basis points of our portfolio’s fair value. In January, the company completed a consensual lender-led restructuring at a value modestly above our year end mark. As a result of the restructuring, the loan is…

Thank you, Bruce. In the fourth quarter, Solar delivered another quarter of solid results. With a comprehensive investment portfolio that’s almost 100% senior secured and 97.2% floating rate, coupled with multiple strategic initiatives offering low to high teens return on equity profiles, we believe we are well-positioned for continued strong performance. In what are currently continued challenging credit market conditions, we feel confident that through our proprietary sourcing channels, we can continue to expand our comprehensive portfolio of floating rate senior secured loans. We are excited about the new Solar Life Science program joint venture’s potential to further boost our investment income, as well as the incremental investment opportunities we expect to arise from our advisor’s joint venture with PIMCO. We are confident that once we fully invest our available capital, our portfolio will generate quarterly net investment income that continues to exceed our current distributions. At last night’s close, SUNS trades at an 8.1% yield, which represents a significant discount to the 4.7% implied yield of S&P LSTA Leveraged Loan 100 Index and the 6% yield of a representative sample of 14 closed end loan funds. Given the credit quality of our diversified portfolio, our disciplined investment philosophy and relatively low fee structure, as well as the investor-friendly actions management has taken such as the fee waivers, we believe SUNS deserves a premium valuation. As the second largest shareholder, we, the management team, are closely aligned with our fellow shareholders. We believe our ongoing efforts to responsibly steward our shareholders’ capital will result both in NAV preservation and significant investment income growth. Thank you very much for your time this morning. We look forward to speaking to you next quarter. Operator, would you please open the line for questions?

Thank you. [Operator Instructions] And our first question comes from Robert Schweich of RMB Capital. Your line is now open.

Thank you. At what point will rising interest rates related to Fed actions benefit the company?

Yes. We do have some disclosure in our 10-Q. Right now, we are looking pretty good. We do have that floating rate portfolio with LIBOR – one month LIBOR moving up above 50 basis points and the 3-month over 1% now. On the 3-month side, we are above our floors. And so we should just see a net benefit given our floating rate assets exceeding our debt and that will ramp over time.

Do you expect a benefit in 2017 of any meaningful significance?

If rates were to increase, we would, but we don’t know obviously what the best plan is for timing.

Thank you.

Thank you.

Thank you. [Operator Instructions] And our next question comes from Allison Taylor Rudary from Oppenheimer. Your line is now open.

Hey, good morning everyone.

Good morning.

I know you guys covered a lot of the life science JV details in the prior call for the Solar vehicle, but I still think it’s worth asking, if you guys could go into some of the reasons why you think that this particular area of investing is beneficial, why it has an opportunity and maybe a little bit about what some of the dynamics are in that lending environment that help you believe that you can kind of get to that mid-to-high teens ROE in this new vehicle for investors and the SUNS’ vehicle specifically?

Sure. I think it’s important to step back and understand, Allison, as I know you do that our team in the life science area has been doing this for over 15 years. And while they were previously employed in General Electric, there was no differentiation in their strategy between public and private companies, because they didn’t have the non-qualified constraint that we as a BDC have. So, this is where they have been operating the majority of their career until they got to Solar 3 years ago. So, the opportunity set is such that we felt that by creating this joint venture, we would have a vehicle where the team could now invest in these companies. And sometimes it’s the same company, it goes from private to public and now you can refinance your own loan whereas historically, they had to let those opportunities go to competitors that outside of the BDC sector, because obviously, all BDCs have this non-qualified constraint for public companies above the $250 million market cap. So, it allows them to mine the universe that they have historically been operating in, as well as the universe of private companies that migrate into the public sector. So, it’s more of the same for our team. I think it’s important to note that as it relates to Solar Senior, where you know we are focused on dollar one first lien risk assets across our platform, whether it’s cash flow lending, Gemino or life sciences, we see these as the least risky part of late-stage venture lending and so therefore Solar Senior appropriate from a risk perspective. As it relates to returns, the team, since they have been on our platform, has generated realized returns of 18.6%, when you factor in success fees, exit fees and warrants. We don’t believe that the yields will approach that for this asset class on an un-levered basis. But when you put modest amount of leverage, call it up to 1:1, you can take the low-teens asset level returns to the high-teens ROE. And so that’s how we look at it mathematically.

Great. That’s really helpful. Thank you for that color. And I guess my next question will be, when we look at the M&A environment right now currently and we see that kind of going forward, it does really appear that activity or at least announced activity in the larger markets seems to have fallen off a bit. And there is a lot of uncertainty around the environment. Is the tax environment – whether or not interest will be deductible, whether or not we’ll have a border adjustment tax and I kind of – maybe it would be helpful a little bit if you guys discuss both what the kind of horizon looks like both in terms of your pipeline and how you see your – the company managers that you work with in investing kind of viewing the next 12 to 18 months as they think about how to position their own capital structures going forward?

Sure. I think we are blessed at Solar Senior by having these diverse asset classes within mid-market lending that are not that correlated with each other, be it Gemino which is more of a relationship local bank healthcare lender on an asset-based underwriting perspective, the life science joint venture that we are now going to be ramping with Deerfield and then our direct cash flow lending. So, I think the M&A environment most directly affects our direct cash flow lending business at Solar Senior. And again, we are blessed by having diverse engines, not just relying on these sponsor community for deal flow. But I think as you know Michael and I having done this for many, many years know that the M&A cycle is just that and it moves quarter-to-quarter and year-to-year. We have seen more activity in the first quarter. But just reflecting on last year, we had over 200 deals in the fourth quarter alone, many of which we passed on, but there is activity. We just weren’t comfortable with some of the risk adjusted returns that were being offered. So, the activity is there and what’s most important is that there is a tremendous amount of pent-up un-invested private equity, as well as existing levered businesses and their portfolio companies that need to be refinanced as we move forward. So from our perspective, it’s a matter of when, not if. This capital we have deployed and our capital will be needed to leverage the equity. But I think that it’s fair to say that many people in the private equity community are waiting for a little more clarity from the new administration in terms of tax policy. I heard the new Treasury Secretary talk about a summer timeframe. And I think obviously the specifics are very important, but equally important is getting some clarity on what the specifics will be, so that people can make decisions. But I think that’s this year, hopefully, sooner rather than later event. So to your point, as we look out over 12 to 24 months, there will be activity. We can’t pinpoint it quarter-to-quarter from an M&A perspective, but we continue to see the sponsor community doing a lot of add-on acquisitions and that’s where we are spending a lot of our capital. We find that’s a great risk adjusted way to stay with the existing portfolio companies, put more capital to them on a diversified basis, while they are growing and expanding their business, which generally de-risks our investment. So the activity is there, but I think any real acceleration maybe held off until people have a little more clarity on some of the administration’s new policies.

That’s great color and that’s it for me. Thanks very much for taking my questions.

Thank you.

Thank you. [Operator Instructions] And our next question comes from Jonathan Bock of Wells Fargo Securities. Your line is now open.

Good afternoon and thank you for taking my questions. Michael, as we look at the senior secured investment landscape today with spreads tighter etcetera, we see you growing through off balance sheet JVs, both at SLRC and herein, those have been very attractive. I am curious to your views on forward NOI growth beyond that of the dividend, because on one side, we have received the benefit of your fee waivers that have allowed NOI to stay right in line with the dividend, but it would also be hard to assume that you would give the benefit of the fee waiver to the extent that earnings surpasses the dividend as a result of, take your pick, good investment, LIBOR increasing, you name it. So, I mean, is the common point that you are going to get across now here with this waiver is the best you are going to be able to do is you get the dividend and that’s it and that could be a right answer. I am just curious, I am not sure investors know that.

I think thematically, that’s a great question, Jonathan. We should step back and look back at the genesis of the current fee waiver and that was the equity offering that we did last fall as you know, because the immediate use of proceeds is to pay down the credit facility and put some near-term pressure on NII. Until you deploy those proceeds, we at the management decided it’s appropriate to put that waiver in place while we re-ramp the portfolio and got NII back to that covering the distribution level. I think it’s important to note, as I am sure you will do, when you run the math on the new life science joint venture and SUNS’ $75 million commitment to it, it gives SUNS the ability to meaningfully exceed its current distribution.

Okay. Then the next question I would like to discuss would be just all-in spread compression as well as general risk across the investment landscape, where do you see yields kind of panning out over the next 12 months largely because to the extent that economic growth is improving, we will likely continue to see spread compression, as well as we have seen kind of leverage rates rise and the upper middle-market where you are focused here seems to be fairly competitive. And so just a long-term view on spreads as well as where we are in terms of just the current credit cycle namely because corporate credit is fairly extended now and your forward views would be very helpful? Thank you.

Yes, I am going to let Bruce hit that, but what I would like to emphasize before he does is, it’s very important to note that we have these diversified sourcing engines in place. So Gemino, which has roughly $100 million portfolio today, is not really influenced by the spread compression that you are discussing. They are still getting their very high returns and we haven’t seen any spread compression there. And ultimately, when we ramp our life science portfolio, we are going to have exposure to about 150 of loans on our balance sheet and those loans have not and will not experience spread compressions. So, a significant amount of our comprehensive portfolio is insulated from the dynamics that you are pointing out.

And I think Jonathan, as you know, first and foremost for us it begins with analysis of risk. And I think we have been incredibly disciplined when existing portfolio companies are refinancing or recapping out a dividend to the owner to re-underwrite that new risk level, that is really 99% of our work and then try to overlay that, assuming we are comfortable with the risk with what is the appropriate yield in this market environment that we can get. I would say that as you look back over the last couple of years where we have had periods of spread compression, it seems to be generally – and I will just focus on first lien mid-market loans for a moment – it seems to sort of floor out for the most part in L400, L425. And then in other times like late ‘15, early ‘16 when there was some dislocation, it would migrate out L550, L525. And we tend to sell into strength the lower yielding investments. You saw in SUNS in Q4, we had over $100 million of originations. Most of that was new deals rather than staying in existing deals and we had access of over $65 million, because we took that opportunity to both cycle out of some second liens, so we can redeploy proceeds into this JVs that we have and the flips at SUNS, but also to sell into strength as well as some of our lower yielding first lien investments that all seem to have a par bid that we had taken at issuance in ‘98 or ‘99. So if history is going to repeat itself today, we are feeling that floor again around 4, 4.25, because what happens is there are floor to spreads here, because the big buyers that step in very often are the CLO buyers and you get to a minimum spread where it just doesn’t work for their structure and they start to put a little bit of floor and discipline underneath that spread compression, but that’s how I would range it. That 4 to 4.25 on the low end and we’ve seen it migrate up to 5.25 to 5.50 as things widen out, that can change in a quarter’s time as you know, but that’s how I would range it out.

Great. Thank you.

Thanks, Jon.

Thank you. [Operator Instructions] And this does conclude our question-and-answer session. I would now like to turn the call back over to Michael Gross, Chairman and Chief Executive Officer for any further remarks.

Just thank you for all your time this morning. We look forward to talking to you when we report Q1 results in early May or anytime before that. Take care.