Q1 2022 Capital Southwest Corp Earnings Call
Southwest first quarter fiscal year 'twenty 'twenty 2 earnings call participating on the call today are Bowen Diehl, CEO, Michael <unk>, CFO and Christian you break of the VP of finance I would now.
The call over to Christopher your Burger.
Thank you I would like to remind everyone that in the course of this call we will be making certain forward looking statements. These statements are based on current conditions currently available information and management's expectations assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks uncertainties and assumptions that could cause <unk>.
Actual results to differ materially from such statements for information concerning these risks and uncertainties see capital southwest publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward looking statements whether as a result of new information future events changing circumstances.
Or any other reason after the date of this press release, except as required by law I will now hand, the call off to our President and Chief Executive Officer Bowen Diehl.
Thanks, Chris and thank you everyone for joining us for our earnings call for the first for the quarter ended June 32021, which is the first quarter of our 2022 fiscal year.
We are pleased to be with you. This morning, and look forward to giving you an update on the performance of our company our portfolio and our progress on executing our investment strategy as stewards of your capital throughout our prepared remarks, we will refer to various slides in the earnings presentation, which can be found on our website at www dot.
Capital Southwest Dot com.
We will begin on slide 6 of the earnings presentation, where we have summarized some of the key performance highlights for the quarter.
During the quarter, we generated pretax net investment income of 45 cents per share, which more than earned our regular dividend paid for the quarter of <unk> 43 per share.
Total dividends for the quarter were 53 per share, which included a 10 cent per share of supplemental dividend.
Total dividends paid during the quarter represented an annualized dividend yield on our stock price as of the last day of the quarter of.
Of 9.1% and an annualized yield on net asset value per share of 12, 8%.
I am pleased to announce that our board of directors has increased our total dividends per share to 54 cents for the coming quarter ending September 32021.
Consisting of a regular dividend increase from 43 cents per share to <unk> 44 per share and of quarterly supplemental dividend of <unk> 10 per share.
Our decision to increase the dividend emanates from our continued confidence in the current earnings power of our portfolio as a result of portfolio growth.
Continued reductions in our cost of capital and our ability to improve our operating leverage efficiency by actively manage operating costs, while growing the asset base.
During the quarter, we grew our investment portfolio on a net basis by 16% to $799 million.
Portfolio of growth during the quarter was driven primarily by a total of $138.9 million in new commitments to 8 new portfolio companies.
Of which $102.6 million was funded at close.
Offset by $1.6 million in proceeds from exit of 1 equity co investment.
The portfolio generated net realized and unrealized gains of $6.1 million during the quarter.
Driven primarily by unrealized appreciation in our equity co investment portfolio.
On the capitalization front, we successfully raised $28.1 million of equity through our ATM program at an average price of $26.10 per share.
Representing an average of 163% of the prevailing net asset value per share.
In addition, during the quarter, our Spic's fund received its initial leverage commitment from the SBA in the amount of $40 million.
Turning to slide 7 and 8 we illustrate our continued track record of producing steady dividend growth consistent dividend coverage and value creation since the launch of our credit strategy.
We believe the solid performance of our portfolio in our company's sustained access to the capital markets as demonstrated the strength of our investment and capitalization management strategies.
Maintenance and growth of both NAV per share and shareholder dividends remain as core tenants of our long term investment objectives.
Of creating long term value for our shareholders.
Turning to slide 9 as a refresher our.
Our investment strategy has remained consistent since its launch in January of 2015.
We continue to focus on our core lower middle market lending strategy, while also maintaining the ability to opportunistically invest in the upper middle market when attractive risk adjusted returns exist.
And the lower Mark in the lower middle market, we directly originate and lead opportunities consisting primarily of first lien senior secured loans.
With smaller equity co investments made alongside of our loans.
We believe that this combination is powerful for our BDC as it provides strong security for the vast majority of our invested capital.
While also providing NAV upside from equity investments in many of these growing businesses.
Building out a well performing and granular portfolio of equity co investments is important to driving growth in NAV per share while aiding in the mitigation of any credit losses over time.
As of the end of the quarter, our equity co investment portfolio consisted of 31 equity investments totaling $66.1 million.
Representing 8% of our portfolio of fair value.
Within our lower middle market portfolio as of the end of the quarter, we held equity ownership in approximately 57% of our portfolio of companies.
Though the equity portfolio has performed extremely well with $14.3 million in cumulative embedded net unrealized depreciation.
Some lingering effects of the pandemic aftermath still do persist.
Moving out very excited about the potential upside of this equity portfolio of moving forward.
As illustrated on slide 10, our on balance sheet credit portfolio as of the end of the quarter, excluding our I 45 senior loan fund.
Grew 17% of $600.671 million as compared to $573 million as of the end of the prior quarter.
Our credit portfolio is currently weighted 87% to lower middle market loans consistent with prior quarters.
For the quarter 7 out of the 8 new debt originations were first lien senior secured.
And as of the quarter end 90 per cent of the credit portfolio was first lien senior secured.
On slide 11.
We lay out the $138.9 million of capital investing in and committed to portfolio of companies during the quarter.
This included $119.4 million in first lien senior secured debt committed the 7 new portfolio companies.
$15.8 million in split lien senior secured debt in 1 new portfolio company.
Along with $3.8 million invested in equity co investments alongside 3 of the new portfolio of loans.
A brief description of the split lien structure as explained in the footnote to the table.
Turning to slide 12, we continued our track record of successful exits with 1 this quarter we.
We exited our equity investment in tax advisors group generating a realized gain of $1.1 million and.
And an IRR of 34%.
To date, we have generated a cumulative weighted average IRR of 15, 2% on 39 portfolio exits representing approximately $385.1 million in proceeds.
From a macro perspective, the market for acquisition and refinancing capital was robust this quarter and has continued its momentum into the September quarter.
Our investment pipeline as we have mentioned on previous calls has also been robust and continues to be in both volume and quality of deals.
The deal team continues to do an excellent job broadening the top end of our deal funnel, which maximizes the number of deals in the market for which we had the opportunity to review and consider.
And we've always said this is of critical component of building and maintaining a quality investment portfolio in a competitive market.
This activity has presented capital southwest with what we believe to be some very interesting investment opportunities.
Based on dialogue with our portfolio of companies. We also believe that the active market will will result in elevated prepayments for capital southwest over the remainder of this year.
On slide 13, we break out our on balance sheet portfolio as of the end of the quarter between the lower middle market and the upper middle market.
Again, excluding our I 45 senior loan fund.
As of the end of the quarter, the total portfolio, including equity co investments was weighted approximately 87% of the lower middle market and 13% of the upper middle market on a fair value basis.
Our portfolio of 49 of lower middle market companies had a weighted average EBITDA of $10.6 million and a weighted average leverage ratio measured as debt to EBITDA through our security of 4.2 times.
Our average hold size in our lower middle market portfolio was approximately $13 million.
Our on balance sheet upper middle market portfolio, Excluding I 45, senior loan fund consisted of 12 companies with a weighted average EBITDA of $61.8 million at an average leverage ratio through our security of 4 times.
Our average hold size in our on balance sheet upper middle market portfolio was approximately $8 million.
Turning to slide 14, we have laid out the rating migration within our portfolio.
During the quarter, we had 3 loans upgraded from a 2.2 of 1 and 1 loan upgraded from a 3.2 of too.
As a reminder, all loans upon origination are initially assigned an investment rating of 2 on a 4 point scale.
With 1 being the highest rating and 4 being the lowest rating.
As of the end of the quarter, we had 64 loans, representing 92, 2% of our investment portfolio at fair value range in 1 of the top 2 categories of 1 or 2.
We had 6 loans, representing 7.8% of the portfolio at fair value rated a 3.
And no loans rated a 4.
During the quarter, we placed 2 first lien senior secured loans on non accrual with a cumulative fair value of $14.5 million or 1.8% of the total investment portfolio.
Both businesses remain rating of 3 with 1 loans being in the upper middle market and 1 loan being in the lower middle market.
With respect to the upper middle market loan the.
The company has experienced softness in their post Covid performance and is currently engaged in active restructuring conversations.
We have decided to place this loan on non accrual pending more clarity on the loan terms and company performance post restructuring.
The lower middle market loans placed on non accrual this quarter as a company, which has previously experienced operational challenges, resulting in poor performance.
Recently, the company's senior management team has made significant operational and personnel changes to upgrade the organization.
While we believe the company's outlook is improving illustrated by a significant growth in the company's project pipeline.
We have decided to put this loan on non accrual as we monitor their ability to convert this growing pipeline into revenue.
Capital Southwest has representation on the company's board of directors.
And as the attending monthly operating meetings with the company's management team, giving us enhanced access to real time company performance dynamics.
Yes.
As illustrated on Slide 15, our total investment portfolio continues to be well diversified across industries.
With an asset mix, which provide strong security for our shareholders' capital.
The portfolio remains heavily weighted towards first lien senior secured debt.
With only 7% of the portfolio in second lien senior secured debt.
The only 1% of the portfolio in 1 subordinated debt investment.
Turning to slide 16.
The I 45 senior loan fund showed solid performance for the quarter with asset growth and unrealized appreciation.
Leverage at the I 45 fund level is now 1.4 times debt to equity.
As of the end of the quarter, 96% of the I 45 portfolio was invested in the first lien senior secured debt.
Weighted average EBITDA and leverage across the companies in the I 45 portfolio was $77.9 million and $4.8 times respectively.
The portfolio continues to have diversity among industries and an average hold size of 2.6% of the portfolio.
I will now hand, the call over to Michael to review more specifics of our financial performance for the quarter.
Thanks Bowen.
Specific to our performance for the June quarter as summarized on Slide 17, we earned pretax net investment income of $9.4 million.
Or <unk> 45 per share.
We paid out <unk> 43 per share in regular dividends for the quarter, an increase from the 40 <unk> regular dividend per share paid out in the March quarter.
As mentioned earlier, our board has again this quarter increased the regular dividend declaring a quarterly dividend of <unk> 44 per share to be paid out during the September quarter up from 43 per share paid out in the June quarter.
Maintaining a consistent track record of meaningfully covering our regular dividend with pre tax NII is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with the 110% for the last 12 months ended June 32021, and 107% cumulative.
Since the launch of our credit strategy in January 2015.
During the quarter, we maintained our supplemental dividend at <unk> 10 per share and again, our board has declared a further 10 per share supplemental dividend to be paid out during the September quarter.
As a reminder, the supplemental dividend program allows our shareholders to meaningfully participate in the successful exits of our investment portfolio through distributions from our UTI balance as of June 32021, our estimated UTI balance was 83 per share.
Our investment portfolio produced $18.6 million of investment income this quarter with the weighted average yield on all investments of 10, 1%.
Investment income was $1.4 million higher this quarter due primarily to an increase in average credit investments outstanding as well as an increase in cash dividends paid from our equity portfolio.
There were 2.
There were 2 non accruals with an aggregate fair value of $14.5 million or 1.8% of the investment portfolio as of the end of the quarter, our weighted average yield on our credit portfolio was 10, 7% for the quarter.
The C on slide 18, our LTM operating leverage continued to improve decreasing to 2.3% as of the end of the quarter for fiscal year 2022, we expect operating leverage to be between 2% and 2.2%.
Turning to slide 19, the company's NAV per share as of June 32021 was $16.58.
As compared to $16 <unk> at March 31, 2021, representing a quarter over quarter increase of 3.6%.
The main drivers of the NAV per share increase or $6.1 million of net appreciation in the investment portfolio and the accretion generated by the issuance of equity at a premium to NAV per share during the quarter.
On slide 20, we lay out our multiple pockets of capital as we have mentioned on prior calls a strategic priority for our company is to continually evaluate approaches to derisk, our liability structure, while ensuring that we have adequate investable capital throughout the economic cycle.
Our debt capitalization today includes a $340 million on balance sheet revolving line of credit with the 11 syndicate banks maturing in December 2023, a.
A $125 million institutional bond with 25 institutional investors maturing in 2024.
A $140 million institutional bond maturing in 2026 of $150 million revolving line of credit at I 45 also maturing in 2026, and the initial $40 million leverage commitment from the SBA, which is yet to be drawn upon.
With regard to our revolving line of credit. We are currently indicate in discussions with our bank syndicate on an amendment and extension while.
While we do not have anything formal to announce today. We can say that we are very pleased with the terms of the amendment and the tremendous support we continue to receive from our bank syndicate. The closing of the amendment is imminent and we plan to announce the details in the coming days.
Finally, as we've discussed on prior calls we have now begun operations with our Spic's subsidiary, which will see going forward do you noted CSW C. Spic's 1 as a reminder, our initial equity commitment to the fund is $40 million and we have received an initial commitment from the SBA from $40 million of fund <unk>.
Average, which is also referred to as 1 tier of leverage we would expect to invest this initial $80 million of capital over the next 6 to 9 months at which point, we will apply for a second tier of leverage over the life of the fund we plan to draw the full $175 million in FDIC debentures alongside 87.5.
And capital from capital Southwest, we're excited to be part of this program and believe it will be a natural fit with our investment strategy.
Overall, we are pleased to report that our liquidity continues to be strong with approximately $203 million in cash and undrawn leverage commitments as of the end of the quarter.
As of June 32021, approximately 58% of our capital structure liabilities were unsecured our earliest debt maturity is in December 2023, which we would expect to extend upon the closing of the credit facility Amendment are.
Our regulatory leverage as seen on slide 21 ended the quarter and of debt to equity ratio of 123 to 1.
Finally, our board of announced a further share repurchase program authorizing the company to repurchase up to $20 million of stock below in a day.
As you recall, we maxed out of our prior $10 million program during the extreme market volatility seen in 2020, while we don't wish for future Black Swan events, we do endeavor to manage our balance sheet in a manner to provide our shareholders. The benefit of repurchasing shares if such extreme volatility as experienced in the future I will now hand the call back.
To Bowen for some final comments.
Thanks, Michael and thank you everyone for joining us today.
Capital Southwest continues to perform well and consistent with the vision and strategy, we communicated to our shareholders 6 and a half years ago.
Our team has done an outstanding job building, a robust asset base deal origination capability as well as a flexible capital structure the prepares us for all environments throughout the economic cycle.
We believe that our performance continues to demonstrate the investment acumen of our team at capital southwest and the merits of our first lien senior secured debt strategy.
We feel very good about the health of our company and portfolio and we are excited to continue to execute our investment strategy going forward.
Everyone here at capital Southwest is totally dedicated to being good stewards of our shareholders' capital by continuing to deliver performance and creating long term sustainable value for all our stakeholders.
This concludes our prepared remarks, operator, we are ready to open the lines up for Q&A.
Thank you to ask a question you will need the press star 1 on your telephone to withdraw.
Your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Devin Ryan with JMP Securities. Your line is open.
Hi, Good morning, this is Kevin Fulton for Devon.
First question dividend income was elevated in the quarter due to the dividends received from portfolio of companies of roughly $1.1 million can you provide some color on the source of that dividend and then also confirm whether that should be considered recurring or nonrecurring.
Yes, so a portion of that is recurring we received from our shareholders from our portfolio of companies held in our blocker.
On and on a quarterly basis, I think the levels around call. It 3 to 350 thousands of what we're receiving and then some of those tend to be onetime in nature from dividend income coming from portfolio companies of distributions.
Okay. That's helpful. And then looking at the expense side G&A talked about higher this quarter than last quarter.
Net interest driven by 1 time expenses or is that reflective of higher G&A due to increased scale of the business.
Sure. So some of it is related just to the seasonality of this is our annual meeting is in July. So we incur some audit costs and 10-K. So thats 200, that's about 200000 and Youll see that every year in the 600 quarter. We also noted we had a $100000 onetime costs for a headhunter.
For our new principal that we hired which obviously is onetime in nature and then we did increase we added 1 new board member and that's increased professional expenses by 100000, so that will be recurring going forward.
Okay got it that makes sense and thanks for taking my questions.
Okay. Thanks.
Thank you. Our next question comes from Kyle Joseph with Jefferies. Your line is open.
Hey, good morning, guys. Thanks, a lot for taking my questions.
<unk>.
In terms of other income it was it was late in the quarter I would get that has to do with the the lower prepayment activity in the quarter, So and I think from your comments. It sounds like you expect prepayment activity to pick up as the year goes on and therefore should we expect to pick up in other income.
So I mean, we're looking probably at maybe somewhere in the $30 million to $60 million in potential prepayments between now and the end of the year now some of those have may calls. So the newer companies that maybe have been with us of a year or 2 they'll have either 2 or 1 of 1 but theres others that potentially come back and don't have a make whole so.
Im not sure that it can be elevated beyond.
Somewhere in the 500000 range.
Yes, Okay got it.
And then I just wanted to get your high level thoughts on credit obviously, you know the ratings of our positive there was some unrealized depreciation but we did see 2 investments go on non accrual just broadly talk about that whether it's revenue or EBITDA growth trends youre seeing across your portfolio.
Yes, I'd say across the portfolio EBITDA is from the LTM perspective is growing slightly.
As we move forward you know each quarter, we are progressively further across the calendar. So we start losing some of those COVID-19 months of last year. So yes.
Yes, I think generally EBITDA is kind of flat to slightly slightly up across the portfolio.
Okay got it and then last 1 from me I would say of good quarter on the origination side can you give a sense of that the cadence of originations throughout the quarter and 1 of the Atlas currently that are back weighted.
Help us figure out of it.
The modeling yield going forward.
You know of quality its in the middle of I think we had some very early and then.
Probably like 40% very early in the 60% very late so.
Like it's fairly evenly weighted.
That's right.
Okay, great well, thanks, so much of answering my questions. Thank.
Thank you.
Thank you. Our next question comes from Brian <unk> with the Hog The group your line is open.
Thank you good morning, Bowen and.
Michael.
Wanted to ask you make note of I guess, the additional employees their capital southwest and maybe you could speak to the principle that was that was hired.
And how that might impact kind of deal flow going forward in the in the <unk>.
The investment funnel.
Yeah, No we're very excited about it youll see her.
I think last year on our on our website.
Very excited of where she joined US from Alliance Bernstein, obviously, another competing credit shop down in Austin.
We're very excited for the addition, and she comes with very.
Very robust underwriting track record and she gives us more horsepower to originate deals so to put out in the market. So pretty excited about her joining.
Great Okay.
And then.
Bowen you make you guys made mention of the.
The impact of the <unk>.
Appreciate the within the equity portfolio on NAV for the quarter.
Can you speak to kind of how broad based that was the was it.
Again, driven across multiple investments or.
Really just concentrated in a couple.
No it's sort of it.
Pretty I mean, I'd say I'd say, if you looked at the list of investments. It's probably you know almost maybe 40% of them had appreciation and.
Just thinking of the lift and 1 of the list in front of me, probably 20% of them had some kind of depreciation with the appreciation being higher than that small the 20% of the companies that were the depreciated and a bunch of them that were basically flat so I would say.
Slightly less than half of the companies had had appreciation.
And then what do you have the.
On the on the equity side, we had 4 companies sort of a project.
Cereal to add material appreciation just.
Performing tremendously and then the debt side, you know like the half a million of appreciation of its small it was very granular and it's these are some of them on the debt side on the debt side of it to some degree of just like the companies that were struggling during COVID-19 are starting to come out from that and you're starting to see some granular appreciation.
On those assets as they re appreciate.
Okay. Okay, and then maybe following up on Karl's question, there around yields and pricing of looked it looked like spreads it's kind of.
<unk> been relatively stable quarter to quarter.
Are you seeing that within the pipeline.
You described as robust.
And just trying to get a feel for how you how you think about portfolio yield as we as we move forward here.
Yes, I mean, the portfolio pipe or the deal pipeline has been strong we're pleased by that.
The the yields I mean, clearly they've they have retraced the COVID-19 move in the market is obviously very competitive.
We just have people out in the market, where whiting widening the top end of our deal funnel. So we can have a greater percentage of the deals that we're looking at of the market. We think that's pretty critical to maintaining our track record.
But you know I think over time, you know yields.
Our average yield of our portfolio, maybe comes down a bit, but not not not a ton but a bit.
Yields right now in the market seem to be as you noted seem to be pretty stable from what they've been in the last quarter or so.
Yes, so obviously this quarter it dropped.
Due to our non accruals, but we also saw probably like 20 basis points of reduction there is true.
Lower lower yielding assets, we think thats part of going to come back up.
In the coming quarters and then.
On the hotel side I think we think that the 2 credits that are on non accrual of a very high likelihood.
Of coming back on accrual and those are higher yielding assets that would bring the yield back up yes, we have a pretty long dialogue back and forth about.
1 of the questions last quarter about the kind of my analogy of the deep into the pool of shallow end of the pool. So.
As we've gotten our cost of capital down and we've increased our operating efficiency, meaning that our assets are growing faster than our operating costs are growing.
Cost of doing business as is dropping from that perspective, obviously offset by non accruals and I'd love to tell you all of that this is the non zero defect business of as much as I want it to be if not.
But as we as our cost of delivering the investment strategy to the shareholders comes down we can compete.
And a safer and of the lower middle market the tends to price at slightly lower spreads and whereas like 3 years ago 2 years ago.
Really those are deals that we really couldnt compete for.
We could but we just our net interest margin wasn't wasn't attractive and so now you'll see deals that <unk>.
<unk> 650, LIBOR 625.
Those are our net interest margin on those deals are as we've gotten as our business has evolved.
It's very attractive and so we can compete for those deals and so.
Some of the rating some of the yield migration is not necessarily the same deal that was higher yield 2 years ago, It's a different.
Safety lower Ltvs.
Type deal flow, so and so youll see that and we've talked about the after the last couple of quarters being of dynamic in our business.
That gives a very attractive piece of our story going moving forward.
Bowen makes a good point because on the net interest margin perspective, so yields may come down maybe from the $10.7 down to 10 a quarter.
Over the next 6 months to 12 months, but our SG&A, our operating leverage is going to go to 2% and probably hold around 2%.
You didn't ask the question, but we did we are in the process of amending our credit facility, which we think is going to have.
The significant reduction in cost as well.
Couple of that with us starting to draw we've already drawn $7.5 million on our S. B IC and that should be up to $25 million by the end of the quarter. So as those get drawn so.
Borrowing at sub 3%.
And of their SG&A of 2% I think you'll see an expansion of our NII.
Even with the reduction in the yield.
Great that's good detail and really nice to see the the dividend increase and you all continuing to execute.
I appreciate it thanks, Brian I appreciate it.
Thank you. Our next question comes from the stock is sure Betsy <unk> with B Riley Securities. Your line is open.
Hey, good morning, and thank you for taking my question here.
I just wanted to see if I can get some more color on the pipeline share of quarter to date as well as the activity that youre seeing and then just if you can kind of pair that up with your expectation for <unk> for the the.
The repayments to come in as the the.
The balance of the year progresses.
Yes.
If I look at our pipeline right now and I when I add up the deals that are either we've either closed quarter to date or are signed up and working through diligence.
It's $60 million to $70 million in that range, and so 6 new new companies and so the quarters of far from over so.
Candidly, we probably expect additional deals to close before September 30, but that gives you an idea. So you know 138 million in the quarter is obviously the heavy quarter.
Not sure of that replicates in the next quarter or 2.
But the of originations are the continues to be the very strong and then if we think about repayments.
Looking down our portfolio names and the dialogue, we're having with the companies.
Add up kind of of the names.
The capital that we would put a put a pin on saying, okay. That's something that very likely we're prepay before the end of the calendar year and that number is about $50 million and from a timing perspective, we control that obviously less.
But.
Generally speaking.
Wouldn't surprise me, if thats pretty evenly distributed between the next 2 quarters September December so.
If youre modeling you might say $50 million of 25 million of quarter.
And prepayments.
Understood. Thanks for that and I think another 1 is a little bit more I suppose of of hypothetical question, but just wanted to kind of understand you know with with your.
Cost of debt capital and just kind of the overall cost of doing business coming down for for you.
If there is let's say of change in interest rates. It seems like maybe the first 125 basis points might be a little bit of the NII headwind I guess, how do we think about that is there a way to kind of parse through that in the event that happens or do you think.
You are kind of insulated from from any of the the potential changes that may come about there.
Yeah, I mean, I think the way we think about it is we've looked into hedging, but it's that's a really difficult concept because you're spending a lot of dollars to predict the timing for when how quickly youre going to that first 100 basis points is going to go up. So we didn't think that that's really an option for us.
So quite frankly the way we're looking at it is with our originations in our cost of debt and cost of.
Operating leverage coming down.
If if and when the rates start rising for the first 75 basis points Youll see our growth.
On the NII slow, but Youll line.
Essentially once you get past that 75% youre going to see an acceleration. So you won't see reduction in NII of dividend you will see slower growth and then an acceleration once it's done obviously.
On that I mean, the cost of debt with the FDIC.
Just to be clear on.
I think you guys probably have other bdcs you look at cost of debt right now on the pooled debt is 2% from really about 165, but on the debt that you draw before pooling and pooling happens twice a year. The actual cost is about 60 basis points. So just giving you a sense as rates go up and I think that gets off.
<unk> bye.
Extremely cheap capital that we're going to be drawing from so that's why we feel pretty confident we'll continue to grow the dividend while interest rates rise.
Yes, you also have to keep in mind that the interest analysis on that last slide of the static analysis. So it seems like nothing else happens like new portfolio originations portfolio of growth in that kind of thing so the 120.
The.
The slide illustrates a headwind, but it's not a it's not a it's not a 1 to 1 of its not 1 to 1 map as we as we continue to evolve and grow the portfolio. So.
Yeah, no understood. The dynamic just wanted to get a sense for the the changing dynamics, there and obviously, you'll you'll be originating and you'd probably get some repayments and what have you back but I just wanted to get a sense for the.
The the NII and dividend and how insulated the business. That's all very helpful comments. Thank you guys.
Great. Thanks, good questions.
Thank you. Our next question comes from Matt Tjaden with Raymond James Your line is open.
Hey, all good morning, and I. Appreciate you taking my questions first 1 from me following up on the equity book can you give us a sense of how much of the appreciation was a function of improved performance or kind of expanded market multiples and if it was some combination of the 2 kind of what proportion was which.
The vast majority of it is I'm just looking down the names of the vast majority of it is our company performance.
I mean pretty robust performance.
Got it.
And that's the.
I guess as a follow up of apologies if I missed this with the receipt of the first that's the IC license can you remind us whether or not you have a target leverage range, both in an economic sense and on the regulatory level.
Yes, we've had said this before where are the economic leverage is going to be somewhere in the 1.2 to 1.3 range and our regulatory leverage will be around between <unk> 9 and 1.1.
We actually think that with the pace of originations and the draws at the FERC, we should be near 1 times in the next 6 months.
Got it that's helpful last 1 from me on Pik income so it looks like over the last 4 quarters pick income both nominally and as a percentage of total investment income has fallen pretty materially.
Any color you can give on how much of that is purposeful is that a kind of a concentrated effort to steer away from Pik income is that just how the docks are being being signed any of any high level color there.
Well I would tell you, it's actually kind of concentrated the.
The company 1 of the lower Middle market company, we put on non accrual it had essentially converted from cash to pick.
And then we obviously inevitably put into non accrual this quarter.
So there was sort of a write up of pick for that company over the last 2 quarters and then it was.
Reserved against this quarter. So therefore, it what youre seeing now is actually the normal run rate of Pik income.
Got it that's it from me I appreciate the time.
Thank you. Thank you.
Yes.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to the Bowen Diehl for closing remarks.
Great. Thanks, operator, and thanks, everybody for joining today, we appreciate your time and we certainly love talking about our business from giving you the giving you all updates on the business. So I appreciate it and have a great week and look forward to talking to the next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Yes.