425: Silver Spike Investment Corp. Discusses Q1 2024 Results and Proposed Chicago Atlantic Loan Portfolio Acquisition

Silver Spike Investment Corp. held a conference call on May 10, 2024, to discuss its Q1 2024 financial results and the proposed acquisition of a loan portfolio from Chicago Atlantic Loan Portfolio, LLC.

Summary

• Silver Spike Investment Corp. (SSIC) held a conference call on May 10, 2024, to discuss its Q1 2024 financial results and the proposed acquisition of a loan portfolio from Chicago Atlantic Loan Portfolio, LLC (CALP).
• The company announced a definitive agreement on February 20, 2024, to purchase a loan portfolio from CALP in exchange for newly issued shares of SSIC's common stock.
• The company filed a registration statement on Form N-14 with the SEC on April 15, 2024, in connection with the loan portfolio acquisition.
• SSIC anticipates the transaction to close in mid-2024.
• For Q1 2024, gross investment income was $2.8 million, compared to $2.5 million in Q1 last year.
• Excluding transaction expenses, investment income was $2.0 million, compared to $1.4 million last year.
• Transaction-related expenses were $2.1 million in the quarter.
• Net investment income was negative $0.1 million.
• Net assets were $84.5 million, down from last year due to dividend payments and transaction expenses.
• Investment income, excluding transaction expenses, was $0.33 per share, compared to $0.22 per share last year.
• Net investment income was negative $0.01 per share.
• Net asset value as of March 31, 2024, was $13.60.
• The board declared a regular quarterly cash dividend of $0.25 per share, payable on June 28 to stockholders of record on June 20.
• The deal pipeline remains strong with an active pipeline of over $425 million.
• The company has over $54 million invested, with an average yield to maturity of about 18%.
• All positions are first lien loans or secured bonds, and none are in non-accrual status.
• Over 90% of the invested portfolio is in floating rate loans.
• The company views the DEA's apparent approval of the HHS's recommendation to reschedule cannabis as positive, but the process timeline is uncertain and could take several years.
• The company does not expect the rescheduling to significantly change the capital constraints in the cannabis industry.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. The company is showing growth in investment income and has a promising acquisition in progress. However, transaction expenses are impacting net income, and there are uncertainties surrounding cannabis rescheduling.

Positives

• Gross investment income increased to $2.8 million in Q1 2024 from $2.5 million in Q1 2023.
• Investment income, excluding transaction expenses, increased to $2.0 million from $1.4 million year-over-year.
• The company has a strong deal pipeline of over $425 million.
• The portfolio has a high average yield to maturity of approximately 18%.
• The DEA's apparent approval of rescheduling cannabis is viewed as a positive development for portfolio companies' cash flows.

Negatives

• Net investment income was negative $0.1 million due to transaction-related expenses of $2.1 million.
• Net assets decreased to $84.5 million due to dividend payments and transaction expenses.
• Net investment income per share was negative $0.01.

Risks

• The timing and likelihood of the Loan Portfolio Acquisition closing are uncertain.
• The ability to realize the anticipated benefits of the Loan Portfolio Acquisition is not guaranteed.
• The process timeline for rescheduling cannabis is uncertain and could take several years.
• The company faces risks associated with changes in the economy, financial markets, and political environment.
• Elevated levels of inflation could impact the company and its portfolio companies.

Future Outlook

The company anticipates closing the loan portfolio acquisition in mid-2024 and expects the rescheduling of cannabis to positively impact the cash flows of its portfolio companies, though it does not foresee significant changes in the competitive dynamics of the lending industry in the near term.

Management Comments

• Scott Gordon stated that the DEA's apparent approval of rescheduling cannabis is a positive step, but the devil remains in the detail around timing and implementation.
• Scott Gordon believes that the current dynamic of capital constraints in the industry will be largely unchanged despite rescheduling.
• Umesh Mahajan stated that the N-14 statement was submitted to the SEC for review on April 15th and expects the process to take another month or two.
• Umesh Mahajan believes that the competitive dynamics for the lending industry will not change significantly in the near term due to the rescheduling of cannabis.

Industry Context

The announcement comes amid broader discussions about cannabis rescheduling and its potential impact on the industry. While rescheduling is generally viewed as positive, the company believes that the fundamental challenges of federal illegality and industry complexity will continue to constrain capital availability. Competitors in the cannabis lending space include other BDCs and private credit funds focused on the sector.

Comparison to Industry Standards

• The company's gross portfolio yield of 18% compares favorably to the broader listed BDC universe.
• Other BDCs in the cannabis lending space, such as AFC Gamma and Innovative Industrial Properties, have different investment strategies and risk profiles, making direct comparisons challenging.
• The impact of potential cannabis rescheduling on borrowing costs and capital availability is a key factor being monitored across the industry.

Stakeholder Impact

• Shareholders will be impacted by the potential dilution from the issuance of new shares for the loan portfolio acquisition.
• Portfolio companies may benefit from improved cash flows if cannabis is rescheduled.
• Employees may be affected by changes resulting from the acquisition.

Next Steps

• The company expects to receive comments from the SEC on the N-14 registration statement.
• The company will hold a shareholder vote on the proposed loan portfolio acquisition.
• The company anticipates closing the loan portfolio acquisition in mid-2024.
• The company will continue to monitor developments related to cannabis rescheduling and its potential impact on the industry.

Key Dates