425: Silver Spike Investment Corp. Discusses Fiscal Year 2023 Results and Proposed Loan Portfolio Acquisition

Silver Spike Investment Corp. held a conference call on March 28, 2024, to discuss its fiscal year 2023 financial results and the proposed acquisition of a loan portfolio from Chicago Atlantic Loan Portfolio, LLC.

Summary

• Silver Spike Investment Corp. (SSIC) reported its fiscal year 2023 financial results during a conference call on March 28, 2024.
• The company's gross investment income for the quarter ended December 31, 2023, was $3.6 million, compared to $2.9 million in the previous quarter.
• Expenses for the quarter were approximately $1.2 million, excluding $0.7 million in expenses related to the proposed loan portfolio acquisition from Chicago Atlantic Loan Portfolio, LLC (CALP).
• Net investment income for the quarter was $1.7 million, or $0.28 per share.
• Net assets at the end of the period were $85.6 million, with a net asset value per share of $13.77.
• For the full year 2023, SSIC reported gross investment income of $11.9 million and total expenses of $5.3 million, including the loan portfolio acquisition expenses.
• Net investment income for the year was $6.6 million, or $1.07 per share, and the company paid a total dividend of $1.33 per share.
• SSIC's deal pipeline remains strong, with an active pipeline of over $420 million.
• As of December 31, the total investment value was a little over $54 million, with an average yield to maturity across the loans of 18%.
• The company announced a definitive agreement on February 20th to purchase a loan portfolio from CALP in exchange for newly issued shares of SSIC's common stock, expected to close in mid-2024.
• Pro forma net assets following the acquisition are estimated at approximately $213 million, including approximately $187 million of portfolio investments and $25 million of cash.
• The pro forma combined gross weighted yield to maturity of the loan portfolio is approximately 19.1%.
• SSIC's investment strategy is expected to expand on or about April 22 to permit investments in companies outside of the cannabis and health and wellness sectors.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive due to the company's growth in investment income, strong deal pipeline, and the potential benefits of the proposed acquisition. However, there are also risks and uncertainties associated with the acquisition and the evolving cannabis industry.

Positives

• Gross investment income increased from $2.9 million to $3.6 million quarter over quarter.
• The company's deal pipeline remains strong at over $420 million.
• All positions are first lien loans or secured bonds, and none are in non-accrual status.
• Over 90% of the portfolio is in floating rate notes.
• The gross portfolio yield of 18% compares favorably to the broader listed BDC universe.
• The proposed acquisition from Chicago Atlantic Loan Portfolio is expected to increase scale and liquidity, enhance portfolio diversification, improve access to capital markets, and accrete to net investment income.
• The investment strategy is expanding to include companies outside of the cannabis and health and wellness sectors.

Negatives

• Net assets decreased slightly from the previous quarter due to the payment of a dividend.
• The last quarter of 2023 was a slow period for loan transactions in the cannabis sector.
• Expenses of $0.7 million were incurred related to the loan portfolio acquisition, impacting net investment income.

Risks

• The loan portfolio acquisition is subject to SEC review and customary closing conditions, with potential risks related to timing, approvals, and realization of anticipated benefits.
• There are uncertainties associated with the percentage of stockholders voting in favor of the proposals.
• Competing offers or acquisition proposals could be made.
• The company faces risks related to diverting management's attention from ongoing business operations.
• Stockholder litigation in connection with the loan portfolio acquisition may result in significant costs.
• Changes in the economy, financial markets, and political environment, including inflation and rising interest rates, could impact the company.
• Future changes in laws or regulations could affect the company.
• The company's ability to locate suitable investments and monitor its investments is a risk.
• The ability of CALP to obtain the necessary consents for, or otherwise identify and obtain additional loans for including in the CALP Loan Portfolio is a risk.
• The performance of the loans included in the CALP Loan Portfolio, and the possibility of defects or deficiencies in such loans notwithstanding the diligence performed by the Company and its advisors is a risk.

Future Outlook

The company expects activity to pick up in the cannabis sector and anticipates closing the loan portfolio acquisition in mid-2024. The investment strategy is expanding to include companies outside of the cannabis and health and wellness sectors.

Management Comments

• 'At this point, many of those potential borrowers have figured it may be best to not necessarily wait for an update on the rescheduling front and have begun to reengage with lenders like us.'
• 'We expect activity to pick up, in fact the discussions have already picked up.'
• 'This acquisition is expected to provide various benefits to SSIC and its stockholders, including increased scale and liquidity, enhanced portfolio diversification, improved access to debt and equity capital markets and accretion to net investment income.'

Industry Context

The cannabis industry is poised for growth, with inflation concerns abating and consumer sentiment improving. Several states have launched recreational use, with varying degrees of success. Key markets like California and Michigan have seen price stabilization. The company is positioning itself to support the growth plans and capital needs of operators in the industry.

Comparison to Industry Standards

• The document states that SSIC's gross portfolio yield of 18% compares quite favorably to the broader listed BDC universe.
• The document highlights that all of SSIC's positions are first lien loans or secured bonds, and none are in non-accrual status, which is a positive differentiator compared to some other BDCs.
• The document mentions that over 90% of SSIC's portfolio is in floating rate notes, which can be advantageous in a rising interest rate environment compared to BDCs with a higher proportion of fixed-rate loans.

Stakeholder Impact

• Shareholders will benefit from increased scale and liquidity, enhanced portfolio diversification, improved access to capital markets, and accretion to net investment income following the loan portfolio acquisition.
• Portfolio companies will benefit from the company's continued support of their growth plans and capital needs.
• The expansion of the investment strategy may provide opportunities for investments in companies outside of the cannabis and health and wellness sectors.

Next Steps

• File an N-14 with the SEC for review of the loan portfolio acquisition.
• Obtain stockholder approval for the proposed acquisition.
• Close the loan portfolio acquisition, anticipated in mid-2024.
• Implement the expanded investment strategy, effective on or about April 22.

Key Dates