I 45 SLF LLC: IQ 2021 Update

We’ve written once before about this joint venture, which invests in large cap borrower syndicated loans, between Main Street Capital (MAIN) and Capital Southwest (CSWC). That was back in the beginning of the pandemic as the nature of the investments, the leverage being used and lower LIBOR were all conspiring to drive down I-45’s value. This caused the two BDC partners to ante up additional capital. At its worst – in the IQ 2021 – the discount applied was (42%).

Since then the situation has greatly improved. Some of the extra capital advanced has been returned; troubled credits have improved in value and the discount on the JV – whose total cost is now $91mn – has been reduced to (21%). This is what CSWC’s management said about the status of the JV on May 26, 2021:

 “The I-45 portfolio also continued to show improvement during the quarter as our investment in the I-45 joint venture appreciated by $1.5 million. Leverage at the I-45 fund level is now 1.27 debt-to-equity at fair value. The increase in leverage at I-45 was mainly driven by an equity distribution to the JV partners during the quarter, which represented most of the capital contributed to the JV during the hike of the COVID-related market disruptions. … As of the end of the quarter, 95% of the I-45 portfolio is invested in first lien senior secured debt with diversity among industries and an average hold size of 2.8% of the portfolioIn March 2021, we amended our I-45 credit facility, lowering our cost of capital to LIBOR plus 215 basis points and extending the maturity of the facility to 2026“.

We are retaining the CCR 4 rating on the company, the above notwithstanding, as we still expect a material realized loss will be recognized when I-45 is ultimately wound up. Last time round we projected that hypothetical loss – still years away – could amount to ($15mn-$20mn). We stand by that estimate, but at the moment the unrealized loss is ($19.4mn), 4/5ths of which will inure to CSWC.

We have the JV on our Trending list because we expect a material – albeit not very large – value increase in the IIQ 2021. That’s because large cap borrower loans are in great demand – the JV has 36 companies in its portfolio – and their value has probably increased since March 31, 2021. Overall, though, this is not an investment that causes us much concern under existing market conditions.