Q2 2022 Capital Southwest Corp Earnings Call

Yeah.

Please standby your conference call for.

Begin momentarily once again, ladies and gentlemen, thank you for your patience and please standby your conference call will begin momentarily.

[music].

Thank you for joining today's capital southwest second quarter fiscal year 2022 earnings call.

Participating on the call today are born deal C E O Microphonic, CFO and Chris Rehberger, VP Finance I will now turn the call over to Chris Rehberger, you may begin.

Thank you I'd 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 actual.

To differ materially from such statements for information concerning these risks and uncertainties see capital Southwest's 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'll 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 quarter ended September 32021, which is the second quarter of our 2022 fiscal year, which ends March 31 2022.

We're pleased to be with you. This morning, and look forward to giving you an update on the performance of our company our portfolio our progress on executing our investment strategy as stewards of your capital throughout our prepared remarks, we will refer to various slides in our earnings presentation.

It can be found on our website at www Dot capital southwest Dot com.

We'll begin on slide six of the earnings presentation, where we have summarized some of the key performance highlights for the quarter during.

During the quarter, we generated pre tax net investment income of 45 per share, which more than earned our regular dividend for the quarter of <unk> 44 per share.

Total dividends for the quarter were 54 cents per share, which included a 10 cent per share supplemental dividend.

Total dividends paid during the quarter, representing an annualized dividend yield on our stock price on the last trading day of the quarter of eight 6%.

On an annualized yield on net asset value per share of 13, 2%.

As a reminder, we previously announced that our board declared an increase in our regular dividend per share to <unk> 47 per share for the quarter ended December 2021 from the <unk> 44 per share paid in the September quarter.

This increase in our regular recurring dividend.

It reflects the increased earnings power of our portfolio, resulting from portfolio growth continued reductions in our cost of capital and continued improvements in operating leverage achieved through our internally managed structure.

Our board also declared a supplemental dividend of <unk> 50 per share to be paid out in the December quarter.

The supplemental dividend represents an accelerated pay out of our prior supplemental supplemental dividend program.

Which had been paying out <unk> 10 per share per quarter over the past several years.

We believe that this accelerated distribution of UTI maximizes value for our shareholders today, while also maintaining.

An adequate UTI balance into the future.

Going forward, we expect that shareholders will continue to participate in the successful exits of our investment portfolio through special distributions as we monetize the unrealized appreciation in our portfolio over time.

During the quarter, we grew our investment portfolio on a net basis by two 4% to $818 million.

Portfolio growth during the quarter was driven primarily by a total of $112 9 million in commitments to six new portfolio companies and four existing portfolio companies of which $77 2 million was funded at close.

This was offset by $69 million in proceeds from six debt prepayments in two equity exits during the quarter.

The portfolio generated net realized and unrealized gains of $2 $8 million during the quarter, driven primarily by unrealized depreciation in our equity co investment portfolio.

On the capitalization front, we completed an amendment to our credit facility extending the maturity to August 2026, and decreasing the interest rate to LIBOR, plus 215 basis points down from LIBOR, plus 250 basis points.

Additionally, we issued $100 million in aggregate principal of three and three eights notes due October 2026, and repaid in full our five and three 8% notes due October 2024.

Furthermore, in lockstep with our strong deal pipeline, we raised $30 3 million of equity through our ATM program at an aggregate average price of $26 59 per share representing representing an average of 160% of the prevailing net asset value per share.

On slide seven and eight 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 and our company's sustained access to the capital markets has 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 objective of creating long term value for our shareholders.

Turning to slide nine as a refresher our investment strategy has remained consistent since its launch in January 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.

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 our loans.

We believe that this combination is powerful for our BDC.

Is it provide strong security for the vast majority of our invested capital.

I'll 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.

Aiding in the mitigation of any credit losses over time.

As at the end of the quarter, our equity co investment portfolio consisted of 31 investments across approximately half of our portfolio companies.

The equity portfolio had a fair value of $69 2 million, which included $17 7 million in embedded unrealized depreciation or approximately <unk> 76 per share.

Our equity portfolio, which represented 8% of our portfolio at fair value as of the end of the quarter continues to provide our shareholders attractive upside from the growing lower middle market businesses.

As illustrated on slide 10.

How about on balance sheet credit portfolio as of the end of the quarter, excluding our I 45, senior loan fund grew 3% to $689 million as compared to $671 million as of the end of the prior quarter for.

For the quarter all six of the new portfolio company that originations were first lien senior senior secured and as of quarter end, 91% of the credit portfolio was first lien senior secured.

On slide 11, we lay out the $112 9 million of capital invested in and committed to portfolio companies during the quarter.

Capital committed this quarter included $107 8 million in first lien senior secured debt committed to six new portfolio companies, one of which we also invested $1 million in equity equity alongside our debt.

$3 $8 million in first lien senior secured debt committed to one existing portfolio company and 400000 in sub debt and equity follow on investments in three existing companies.

Turning to slide 12, we continued our track record of successful exits with six exits during the quarter.

These assets generated $69 million in total proceeds.

Realized gains of $3 $3 million and a weighted average IRR of 17, 5%.

To date, we have generated a cumulative weighted average IRR of 15, 2% and 45 portfolio exits representing approximately $462 million in proceeds.

From a macro perspective, the market for acquisition and refinancing capital was robust this quarter and has continued its strong momentum into the December quarter, resulting in heavy volume in both origination and refinancing activity.

Our investment pipeline as we have mentioned on previous earnings calls has been robust 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 have the opportunity to review and consider.

As we have always contended this is a critical component of building and maintaining a quality investment portfolio in a competitive market.

Finally, we believe that the returns returns realized on exits over the past several years has proven out the investment acumen of our investment team and the merits of our investment strategy and generating strong risk adjusted returns over the long term.

On slide 13, we illustrate some key stats for our on balance sheet portfolio.

As of the end of the quarter.

When excluding our I 45 senior loan fund.

Beginning this quarter, we have decided to consolidate reporting on our on balance sheet upper middle market and lower middle market loans in order to give shareholders a more concise view of our portfolio makeup in total.

As at the end of the quarter. The total on balance sheet portfolio at fair value was weighted 82, 4% to first lien investments six 8% the second lien investments, one 6% subordinated debt investments and nine 1% and equity co investments.

Turning to slide 14, we've laid out the rating migration within our portfolio <unk>.

During the quarter, we had two loans upgraded from a two to one.

One loan downgraded from a two to a three and one loan downgraded from three to four.

As a reminder, all loans upon origination are initially assigned an investment rating of two on a four point scale with one being the highest rating and four being the lowest rating.

As of the end of the quarter, we had 61 loans, representing approximately 90% of our investment portfolio at fair value rated and one of the top two categories of one or two.

We had six loans, representing nine 7% of the portfolio at fair value rated a three.

And one loan representing less than 1% of the portfolio rated a four.

During the quarter, we placed one first lien senior secured loan on non accrual with a fair value of $10 4 million or one 3% of the total investment portfolio.

This company is currently working through a restructuring of its balance sheet. So we have decided to place the loan on non accrual pending more clarity on the post restructure loan terms.

Based on conversations with the company to date, we expect a portion of this loan to come off non accrual in the near term once the restructuring is finalized which which should be completed in the coming weeks.

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.

Portfolio remains heavily weighted towards first lien senior secured debt with only 6% of the portfolio in second lien senior secured debt and only 2% of the portfolio and subordinated debt.

Turning to slide 16, the I 45 senior loan fund continues its solid performance as of the end of the quarter, 95% of the I 45 portfolio was invested in first lien senior secured debt.

Weighted average EBITDA and leverage across the companies and the I 45 portfolio was $75 million of four seven times, respectively down slightly from last quarter.

Portfolio continues to have diversity among industries and an average hold size of two 6% of the portfolio.

Leverage at the I 45 fund level is currently one three times debt to equity.

I will now hand, the call over to Michael to reviews more specifics of our financial performance for the quarter.

Thanks, Bowen specific to our performance for the September quarter as summarized on Slide 17, we earned pretax net investment income of $10 million were <unk> 45 per share.

Made up 44 per share in regular dividends for the quarter, an increase from the 43 regular dividend per share paid out in the June quarter.

As mentioned earlier, our board has again this quarter increase the regular dividend declaring a quarterly dividend of <unk> 47 per share for the December quarter.

Additionally, our board previously declared a final supplemental dividend of <unk> 50 per share, which will also be paid out during the December quarter.

Our investment portfolio continues to perform very well generating $2 8 million and net net realized and unrealized gains this quarter, bringing the net realized and unrealized gains over the past four quarters to $18 $7 million.

So we are accelerating the current supplemental dividend program as of December 31, 2021 going forward, we will continue to distribute special dividends as we monetize the unrealized appreciation in the portfolio as of September 32021, our estimated UTI UTI balance was <unk> 69 per share.

Maintaining a consistent track record of meaningfully covering our regular dividend with pre tax net investment income is important to our investment strategy.

We continued to maintain our strong track record of regular dividend coverage with 109% for the last 12 months ended September 32021, and 107% cumulative since the launch of our credit strategy in January of 2015.

Our investment portfolio produced $23 million of investment income this quarter with a weighted average yield on all investments of nine 6%.

Investment income was $1 7 million higher this quarter due primarily to an increase in average credit investments outstanding and prepayment fees.

There were three loans on nonaccrual with an aggregate fair value of $24 $2 million were 3% of the investment portfolio as at the end of the quarter, our weighted average yield on our credit portfolio was nine 7% for the quarter.

As seen on slide 18, we maintained LTM operating leverage at two 3% as at the end of the quarter, we are targeting operating leverage to approach, 2% or better in the coming quarters.

Turning to slide 19, the company's NAV per share as of September 32021 was $16 36.

As compared to $16 58 at June 32021, representing a quarter over quarter decrease of one 3%.

The main driver of the NAV per share decrease was $17 $1 million in realized losses on the extinguishment of debt on the full prepayment of our five and three eights notes due October 2024.

The realized loss consists of a make whole premium payment of $15 $2 million as well as the write off of related unamortized debt issuance costs of $1 9 million.

The refinancing of these notes with a new five year, three and three eights issuance significantly reduces our cost of capital and increases our annual net investment income run rate by approximately <unk> <unk> per share on a risk free basis. This.

This was the primary catalyst for our decision to increase the regular dividend by <unk> <unk>. This quarter from <unk> 44 per share to <unk> 47 per share.

We believe this considerable increase in earnings power enhances our market capitalization on a dividend yield basis and allows us to pass the cost of capital savings directly to our shareholders in the form of increased dividends. This transaction also.

Pushes out our nearest debt maturity to 2026, providing significant balance sheet flexibility going forward.

On slide 20, we lay out our multiple pockets of capital as we have mentioned on our 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 $335 million on balance sheet revolving line of credit with 10 Syndicate banks maturing in August 2026.

$140 million institutional bond maturing in January 2026, the newly issued $100 million institutional bond maturing in October 2026.

$150 million revolving line of credit at I 45 maturing in March 2026, and an initial $40 million leverage commitment from the SBA, which is $22 5 million left to be drawn upon.

Although the majority of our outstanding debt is currently due in 2026, we will look to opportunities opportunistically amend and extend our credit facilities well before maturity consistent with past practice.

Finally, as we've discussed on prior calls we have now begun operations within our Spic's subsidiary, which you will see going forward to noted Spic's one as a reminder, our initial equity commitment to the fund is $40 million and we have received an additional commitment from the SBA.

$440 million of fund leverage which is also referred to as one tier of leverage.

We expect to fully invest this initial 80 million of capital over the next six months at which point, we will apply for a second tier of leverage.

Over the life of the fund we plan to drive the full $175 million in FDIC debentures, alongside $87 5 million in capital from capital southwest.

We're excited to be part of this program and believe it is a natural fit with our investment strategy.

Overall, we are pleased to report that our balance sheet liquidity continues to be strong with approximately $166 million in cash and undrawn leverage commitments as of the end of the quarter.

As of September 32021, approximately 50% of our capital structure liabilities were unsecured and our earliest debt maturity is in January 2026, our regulatory leverage as seen on slide 21 ended the quarter at a debt to equity ratio of one 108 to one 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 our original vision and strategy, we communicated to our shareholders. When we began this journey.

Our team has done an excellent job building, a robust asset base deal origination capability as well as a flexible capital structure that 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 strong performance and creating long term sustainable value for all our stakeholders.

This concludes our prepared remarks, operator, we are ready to open the lines for Q&A.

Thank you.

If you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

And our first question comes from the line of Devin Ryan with JMP Securities. Your line is open. Please go ahead.

Hi, Good morning, this is Kevin on for Devin.

First question just looking at non accruals can you provide the name of the new company that was added to non accrual and then separately can you share any developments in the two existing non accrual investments.

Yes, so I'd, rather not say the name of our non accrual on a public call like this because it will end up in a transcript, but there'll be it'll be in the Q, which will be <unk>.

Alex later Tonight.

But it's a company that's been affected by the supply chain that we've all heard about out in the market and which certainly we all hope is temporary but real.

The Companys sales cycle as a result of that.

In its market has extended so restructuring.

This quarter, we think about a third of it or so will come back on accrual.

And we will own equity in the business going forward as it recovers.

What are you going to do that.

He became a premier.

Yes.

One of them is.

Cindy large syndicated deal. It's currently still working on its restructuring.

And so really no no update on that instead.

And then and then the other one continues to actually improve.

Within the pharmaceutical services space.

Same kind of same reported last quarter pipeline continues to build starting to convert the increased pipeline.

Actually pretty encouragingly.

And so we.

We think that one is going to be going to end up being fine. So we've accrued a bit there was a bit of pick accrued on that company. So as the recovery curves.

The enterprise value.

The debt value that will come back on accrual as well.

Okay. Thank you.

Information that's helpful. And then just touching on quarter to date investment activity can you give us a sense how originations are tracking so far and then also repayment activity as well.

Yes, so I mean originations this quarter are strong there'll be strong through the end of the quarter prepayments as you can imagine with all the market activity. That's out there prepayments are going to be heavy this quarter. Two we do believe we'll have net portfolio growth for the quarter.

So it's a fair amount of churn, which you would expect with a strong portfolio like ours that we're going to get refinanced out of a number of deals, but our guys. Our deal team has done a fantastic job like as I said in my remarks.

Expanding the top end of the funnel so we've been.

Very active in the market.

And again at the end of the day, we believe we will have net portfolio growth this quarter.

Great. Thank you for taking my questions and congratulations on the quarter.

Thank you.

Thank you and our next question comes from the line of Mickey Schlein with Ladenburg. Your line is open. Please go ahead.

Good morning, Paul.

And Michael.

As we all know there is this tremendous search for yield and that's attracting more and more capital to private debt, which which seems to be increasing payment risk prepayment risk across the sector. Obviously those can generate near term fees, which is great. But can you maybe talk a little bit more about what youre doing in Europe.

The organization today.

Defend your market share as we look forward.

Yes, I mean defending your market share really as a function of covering the market.

Being good partners with your deal sources sponsors mainly.

And really the track record you develop over a lot of years.

And we have every market across the country covered with a primary secondary.

Coverage person.

And it's it's.

It's pretty interesting to me anyway, that's been doing this in this business for a long time.

The number of sponsors that we've been doing business with or we have deals from that candidly that I had yet heard of and usually that's.

Junior partners at P funds spinoff into their LNP funds start their own funds and that type of thing and kind of.

And being able to really broaden the number of deal sources that we get that we get deals from and we've really seen that which has been which has been super encouraging.

And then when you go through the pandemic things like a pandemic and you have stressed in the portfolio and you sit across the table is a first lien lender, which by the way. It gives you the freedom to make good business decisions that balance your shareholders capital interest with the interest of that company and that sponsor to make reasonable fair decisions on how you deal with stress.

We had stress in the portfolio during the pandemic Fortunately everything recovered nicely and we along the way we extracted extra extra economics here and there where it was fair.

And the sponsor support of the company worst companies where necessary.

So going through something like that really.

Gives us street credibility that we might not investor had three years ago. So that's a big deal and then we're also seeing more and more sponsors that are new to us ask us for references of other sponsors that we've been doing business with and actually calling those sponsors and so.

How you Act, how you make decisions and how you operate in the market is becoming increasingly important amongst the sponsors.

Although the deal sources and so for me that's hugely encouraging so that's because that's what you want that you want to get where you want to get a benefit from the way you Act in the way you operate in the market and so those are always you defend your market share at the end of the day and the other thing Mickey is over the last few years, we've reduced our cost of capital.

We're five 5% now we're down closer to three 5% operating leverage came down from 5% down to two 3%. So this allows us to be more competitive it doesn't mean, we're chasing deals.

Offering less yield for riskier businesses, but we are able to look at look at deals at L plus six or $6 50, whereas those are deals we wouldn't have considered two three years ago.

And it also help us when we're looking at when you say defend there are certain deals that get refinanced.

Historically it was an 850 deal.

It came down to <unk> dollars 50, we didnt bother staying in the deal just on yield alone and today, we have the ability to look at the credit, especially credits, where we know well and stay in the deal based on our net interest margin and of course. The reason that happens is most people on the call know is that these companies grow leverage comes down.

Clearly spreads bread or their cost of capital is going to come down. So the question really is how long can we stay in that credit from a net interest margin perspective, and so Michael is right as we drop our cost of capital and increase our operating leverage.

Then it allows us to extend the tail on growing businesses, and then on new businesses being able to lend to companies at lower loan to value tighter spreads that kind of thing.

Also also the ATM issuance. So we're doing at one six or one seven times Thats, obviously, a lot less dilutive than raising equity at 101 point to where we would have done so in the two years ago.

I agree and thanks for that born and Michael but when you mentioned just now sitting across the table zoom meetings are great but in the end.

The end of the day.

I agree with you sitting at a table.

Gauging a new relationship is important are you doing more of that now or is travel is still an issue for the origination team.

Well, we have the industry has definitely become functional over zoom.

But the answer is yes, we're traveling again and management meetings in person are certainly superior to zoom calls can.

Candidly from a deal professional perspective, but also as a dynamic to your job. That's interesting right you get to travel to get to see manufacturing plants operations.

That type of thing it just adds a dynamic too.

To your the cadence of your work, which which I believe is a former as the deal professional myself, that's a really important thing.

And so we've seen that so thankfully, yes, we're traveling again.

And very happy to be doing that.

Thank you for that one other high level question Bohn, so apart from repayments this year, which is a trend across the sector.

Bdcs have certainly had a lot of wind at their back in terms of very strong economic growth and a very low default environment, but what I'm trying to think next year will be more challenging.

Potential fed tightening.

Probably lower economic growth.

And volatility around the election.

How are you thinking about those risks in terms of.

New originations that you are seeing.

And your own balance sheet leverage.

Yes, so well first of all new deals were kind of doing like we've always done which is saying okay. What could go wrong in the system. If you will part of that the recession part of that is pandemic black Swan events.

As of the type things, we stress testing models before we do do deals upfront so hopefully.

We certainly we certainly believe that that's the best we can do in setting the asset base up to be able to weather different things, obviously as interest rates increase we have the vast majority of our capital is in floating rate loans. We obviously are very attuned to fixing the rate on the liability.

<unk> sighed, hence.

To issue our most recent three and three eighths bond issue on an unsecured basis.

And so I think those are the things that we do as we look forward really too we've always you've been hearing US say this from the very beginning we're always paranoid about a recession in the next year or two.

I feel like that's what our shareholders pay us.

To do it.

And then to protect the execution for that if we don't have a recession fantastic that's upside, but we always have to be thinking about that mentally.

As far as the election year that can be there can be volatility around that clearly, but at the end of the day. It's at the end of the day its economic volatility.

And so hopefully the all the things, we do and we're underwriting and thinking about atmospherically in the system things that can go wrong.

The collection could be catalyst to that but it could be other things the catalyst of that too but at the end of the day.

It's the same answer which is what's the economy going to do.

And obviously thats by pushing out our maturities as far as we did I mean, that's essentially taking a lot of that risk off the table, allowing us to draw additional debt off the SBA, which youll have some interest rate.

Volatility, but not nearly what you would expect in the broader market.

Got you.

Just one small housekeeping question for Michael did you reverse any previous income accruals for the new NPL.

No we didn't accrue anything this quarter for that asset and you didn't reverse anything for previous accruals.

No no.

We just reversed out whenever it was reserved for this quarter.

Okay terrific. That's it for me I appreciate your time thank you.

Thanks Mickey.

Thank you and our next question comes from the line of Bryce Rowe with Walter Your line is open. Please go ahead.

Thanks.

Good morning wanted to.

I wanted to ask kind of about the the level of commitments here over the last couple of quarters relative to to funded debt investments.

<unk> seen it seemed kind of an uptick in.

Unfunded so to speak.

Within the new investment.

Within the new investment activity, So Bowen and Michael maybe you could speak to.

Whether you expect that that structure.

And then any any any feel for kind of the pace of those unfunded commitments, maybe converting to some level of funding here.

In the near future.

Yes, sure. Thanks Bryce.

Clearly managing unfunded commitments as a first lien lender clearly revolvers are oftentimes, you're providing revolvers as well as the term loan.

Revolvers that are used a whole lot.

Are that interesting to banks and so we can we can offer the revolver get ticking fees the rate on the revolver is the same as the rate on the term loan which is higher than a bank would charge, but so it's ends up being a nice security for us but.

We have to manage our balance sheet liquidity.

Such that in the pandemic for example, I think we had 35% of our revolver capital drawn which is lower than that maybe we would've thought it would've been but.

But we have to have the liquidity on our balance sheet to fund that.

And obviously those the revolver, obviously not obvious those revolver fundings are a function of the company's being within covenant covenant compliance.

That's the revolvers on the on the delayed draw term loan so our.

Our unfunded commitments this quarter about half revolver about half delayed draw term loans delayed draw term loans or different those are usually.

A function of specific acquisition strategy.

Based on buying similar businesses, maybe it's <unk>.

Funding and partly funding an earn out on a on a purchase in other words the earn out means that they hit a higher EBITDA number a higher earnings number and so then by definition the earn outs paying out when the companies are doing well.

And so.

That's not really that those unfunded commitments are different I mean, it's not like all of a sudden the world starts to fall apart pandemic or otherwise and they just all of a sudden draw the delayed draw term loan that's not how those work.

But what those are and those are our future originations. So those are companies that again, if the hit there. If there is if a company grows hits a higher EBITDA target, we're going to be funding a new origination. That's good that's quality that we'd like to do that.

Or if there is an add on acquisition, which obviously further diversifies that business allows the business to realize synergies on the acquisition. So those are also originations that we'd like to do and it also sets us up in the facility to already have a pre bank financing for that acquisition.

I believe it decreases the odds significantly that that company goes out on the outside and refinances us out.

With another deal on the on the acquisition. So it just kind of puts you in the pole position to fund into a very attractive situations. So delayed draw term loans, our future originations, we would affect Canada.

We would expect to fund most of that.

If not all of the delayed draw some of the delayed draws are you.

12 months, maybe 18 months an extension so when you get closer to the 12 months and Youre not going to funded or the earn out period passes and they havent earned the earn out and that then that would tend to fade, but most of the most of the delayed draw term loan.

We have in our financials, we would intend to.

We would expect to fund it.

We've seen.

On a normal quarterly basis, we see about maybe 10% of the revolvers get drawn but we also see 10% of them be repaid so on a quarterly basis and this is most all quarters you have a net funding of zero on the revolvers.

Boeing's point during Covid, the 35% that was funded that was funded really soon after the Covid hit and then those were all repaid as well and then on the from a planning perspective. The <unk> those were all scheduled out they have dates in which there those earnings can be met so we're closely monitoring that and that will.

Packed how much equity we raised on an ATM.

Obviously, our planning purposes for raising additional debt.

Okay. That's helpful.

And so kind of along those same lines in terms of kind of pace of investment activity.

Yes.

When we when we think about it sounds like this current quarter.

To see good activity good activity, both on the origination and on the on the repayment side of things.

How do you all when you when.

When you look at the income statement.

Obviously, you have some some prepayment activity that came into the income statement here in the September quarter does it does that does that deal kind of outsize relative to the amount of repayment activity that you had or would we expect at least another quarter.

Of that level.

Here here in the December quarter.

Yes, So I think September I think the originations and repayments are both above what we would have anticipated, but the net growth was.

Modest, but that's fine I think this coming quarter I think Bowen said earlier, we expect to see net portfolio growth, but it's going to be on significant repayments as well as significant originations.

But what we're seeing I think in Beaumont can speak to it as fast as Theres a lot of deals that are just being pulled forward into the 12 31 quarter.

So.

The I think the question Mark we have is going to see how much deals in the 331 quarter, we will be left to have or how much was pulled forward and therefore it can be until 630, when you see sort of the.

And increase come back again, but I mean thats more of a theory I mean, I think a lot of people in the market have that theory.

With taxes, Jim changes in that type of thing that if you were.

The founder of a business and you were looking to.

No.

Monetize a portion of your earnings are private equity transaction is attractive because you can rollover a heavy amount stay involved with the company, but you can also monetize some of your lifelong work.

And if you were thinking about doing that sometime in the next.

A couple of years or a year or whatever.

This would be a pretty good year to do it you just lived through the pandemic.

Learn life is not forever and things can happen and youre not getting any younger and oh by the way tax regimes are changing so theres a lot of things that would drive a founder owned business to CK CK.

Seek a sale if a sale was already on the docket.

In their mind and Thats also sponsors selling too so.

So we'll see but.

Theoretically.

Believe that a lot of the market activity as some of the dynamics at least in the lower middle market. Some of the dynamics I just described.

We'll see.

The P&L to your question.

We would expect to see inflated prepayment penalties in the 12 31 quarter.

Exit to sort of spread across I mean, we've already had significant amount of exits have already occurred.

And we are anticipating more in November and December so.

You'll get some level of interest off of those assets, but youre also going to see those prepayment penalties.

Got it Okay, and then maybe one last one for me.

You've got your liability structure quote unquote cleaned up in terms of extending.

Do you all.

Do you expect the same pace of ATM activity to continue or is that is that really more a function of.

Net originations.

Where the stock is trading relative to NAV.

So it's a lot of variables.

Certainly one of them.

The metrics, we look at and manage to as leverage right. So we've talked about kind of target leverage range, but that's a function of.

Originations so function of prepayments at the end of the day net portfolio growth.

And then against the backdrop of where the stock price trades too, but I mean, it's mainly.

Yes.

Net portfolio growth and portfolio BDC leverage.

Less a function of the actual stock price.

It's more of a.

I mean, our business model is an organic growth story with respect to just drove eloping an excellent track record.

Keeping our head down and just executing what our guys know how to do and then have access to the equity market to grow slowly grow the equity as the permanent capital base in lockstep with the net portfolio of growth and so at the end of the day again, it's it's your BDC leverage is what you are looking at but you are raising.

Equity in lockstep with with portfolio growth.

No.

Michael Yeah, I agree I mean, it's very variable I mean this quarter.

Before.

At this point right now we know Theres a lot of repayments were expecting a lot of originations and so if we think that some of the originations don't occur then we will pull back on ATM usage. We certainly are cognizant of the dilution that the ATM brings to following quarter. So we're not going to raise equity for equity stake.

Yes.

Being prudent one.

Actually I'll just take the opportunity to also mentioned is that we put in our shelf registration.

Last week, we refreshed it.

Well, our ATM equity distribution agreement.

And that's the whole point of that was not to raise equity in a secondary offering but to have a shelf available to raise capital over the next three years.

Debt and ATM equity.

I know.

Some level of confusion in the market on that but we are still resolved to raise ATM equity as our primary source, if not only source of equity going forward.

The other thing we look at the size portfolio leverage as I mentioned earlier.

<unk> balance sheet liquidity availability on the credit facility. That's also another important.

Important.

Metric that we watch and manage to.

Got it okay. Thanks, guys I appreciate it.

Thank you and our next question comes from the line of Robert Dodd with Raymond James Your line is open. Please go ahead.

Hi, guys and congratulations on the quarter just a couple of kind of market question more than anything else I missed your very high level of activity in this quarter.

The liquidity of the put it 112 million give or take but only about 1% of that just over 1% equity co invests.

I don't want to.

<unk> eight.

A quarter into a trend, but is there anything to read in.

The market is great right now for equity valuations within your equity portfolio, but is that making it less appealing.

Co invest right now with elevated valuations or are they all told them harder to get right now and any color. You can you can give us on that one.

Just the quarter, but.

That's just the environment.

Cunard.

Yes, that's a good question I'm trying to think about I would say first of all I would definitely wouldn't read too much into the percentage of equity co investments this quarter or past quarters.

I'd Love to tell you how we're.

Sure, so precise and everybody's way overpaying and we're just not choosing to participate I mean that would be.

Exaggeration, I mean, I think it's a little bit.

Just the kinds of deals.

It can be it can be I mean, there are times, where the.

The sponsor's got excess liquidity they want to over <unk>. The balance sheet, there may be a situation, where they probably should but the check is still small.

Our equity co investment might be so small it's not worse.

The exercise of putting it on our books and valuing it I mean, there's a number of theres a number of things that do come to play over time.

But.

Most of the time, if we have the vast majority of Titan we have the relationship with the sponsor and we like the equity story, we have we will have an opportunity.

To invest in the equity of some amount so.

Yes, I would.

Read too much into this quarter in particular.

Fair enough this one.

Latest follow up.

Since the credit strategies.

On on.

Capital is about 15%.

My math says about 60% of that is coupon roughly the other 40% is.

Fees and.

Equity gains et cetera, do you think going forward is the market can reduce its too.

Maintaining that kind of total.

Going forward I mean.

Two points are coming down a little bit because public because your cost of debt has come down or other moving parts. I mean do you think that so are we.

Noble.

Target might not be development.

The right word for it but is that 15% kind of sustainable.

That just beneficial did that benefit from a couple of <unk>.

Big wins, while you have a smaller business it may be that number comes down going forward.

I think that that comes down a little bit based on the fact that our yields have come down.

When we started this business again, we were looking at deals that are probably little more weighty.

<unk> in the 8%.

<unk> seen our yield has come down where we're looking at deals that are now $6 50 to eight and so the likelihood is that the IRR might come down a few basis points perhaps.

Relative to where we were before I don't think from a.

Overall.

Yield.

I am that will come down but on the individual deals themselves you'd say, maybe that 15 ends up being 13 of half of 2014.

Yes, you made a comment that the.

Yes exit as being lumpy I mean, if you look at the list of exits I mean.

It's not.

That track record that we referenced the 45 assets or whatever it is over $460 million of proceeds thats pretty pretty evenly distributed over time and over companies in.

I mean, it's.

Our Guy I didn't give the guys credit that's pretty outstanding track record and I do think as a first lien lender remember.

Lago don't understand I mean, when a company breaches covenants as a first lien lender you have all kinds of options and things and extract a little bit of economics here and there in its market to do so so its not like youre breaking relationship glass to extract economics win when small companies bump in the night.

So it is it is an element of a first lien lower middle market strategy that film is doing this for 20 years. That's that's the way that works in one of the reasons that you want to be a first lien lender amount of sub debt lender is to be able to have some of that flexibility and so.

Yes, I do think that maybe it comes down a little bit but.

We think we think the business model is pretty pretty attractive in.

In the long term.

We will also we have Robert we also have the $18 million in unrealized depreciation in the portfolio and we probably would have.

There is somewhat of a glide path for us exiting some of those deals over the next 24 months. So there is some of those have sizeable gains in as well.

Understood Yes.

Appreciate the Lumpiness was not.

Because you obviously you did have.

A particularly big with us.

Going back.

But you have got a track record.

I've done this month.

On more than those those handful so I appreciate that.

It's a completely fair question I think that IRR on that lumpy gain that you referred to like something like 12%. So it actually brought the 15% down on.

On an average basis, if you are talking about IRR.

But that's the Lumpiness.

No.

And asset performance is a fair question that that people should ask it's just pretty broad.

And that's true for Titan liner and MRI Baltimore within the portfolio for years and years, so the IRS in the teens right.

Got it thank you.

Thank you and our next question comes from the line of Sarkis <unk> with Steve Riley Securities. Your line is open. Please go ahead.

Hey, good morning, and congrats on the quarter just wanted to touch off very quickly on kind of the cost of capital relative to the interest rate environment. It looks like you have some nice tailwind here to compete in the current backdrop given your lower cost of debt I was wondering if you can maybe give an update on pricing or spreads real time, just kind of considering.

Any potential interest rate regime shifts or kind of ideologies you guys are carrying going forward.

If you look on the asset side of the liability side.

Well.

From an asset and liability perspective.

The totality of things.

Yes.

You can speak to the asset side and I can go through yes.

Spreads in the market I mean, essentially you asked I mean, clearly there is competition in the market.

Any kind of Covid premiums long gone.

But generally speaking I wouldn't say that.

The universe of deals that we're working on and chasing the spreads have come down.

<unk>.

Terribly in the last quarter I mean, I think it's been relatively flat I think I think our our situation is really mainly it is being able to compete.

In deals that just priced tighter.

And so you need to get your cost of capital down because at the end of the day you live on net interest margin.

And that's been the main thing.

Markets definitely competitive so don't want a leading by wrong in that respect.

There are also I mean, Linda.

Blenders, we'll see what happens throughout the end of the year, but lenders borrowers are pretty full right now right I mean, they've got a lot of deals going on so when someone shows up December 1st and say I've got to get a deal done by the end of the year.

That incremental lender in the market might not be quite as aggressive on pricing that deal I mean, thats, a little bit more just supply demand theory, but thats.

Interesting to see what happens so.

But thats the asset side I think it's and then it's mainly account cost capital story I believe so yes, so I mean on the right side, obviously with the.

Amended and extended our credit facility with IMG tell $2 15, and so that's going to be locked in for a number of years, we think that's pretty competitive for small and mid cap EDC.

We did look down the road and opportunistic did that bond deal at three and three eights for the very reason, we do believe it's not a it's not an if it's a when you see the rates start coming back up then so blocking that it was the prudent thing to do and then on the SBA side.

They pool.

Debentures twice a year in between those poolings that cost of capital is about 1% and in between there right now so over the next six months, we're going to be drawing we would anticipate drawing around $60 million off of the SBA at 1% and that gets pulled into maybe it would be one 5% maybe.

Being a little higher than that but that's kind of when we alluded to earlier our all in cost of capital is really trending down towards the three to three 5% and youll start seeing that as the SBA is fully ramped.

<unk>.

12 to 24 months.

Yeah.

Yes, understood and I guess, if we got to think about things here in the near term, obviously, a lot of liquidity everyone's flushed with it but I suppose if you look at the next six nine and 12 months, if theres any dislocations gear.

Given your.

Liability side of the equation is pretty attractive do you think there will be an opportunity to kind of.

Take advantage of that NIM potentially expanding a little bit.

Well potentially because by.

We manage our assets in kind of a what if world right what happens if there's a dislocation in the market what happens what if what if what if rate and so obviously locking in and extending out our maturities on our liability side and then maintaining adequate.

Liquidity.

Flushing liquidity on our balance sheet.

Then if there are dislocations the only variable that moves in your world as your asset yields expand and so if we have the liquidity to invest in a dislocation like that and that's exactly what would happen. Your net interest margin would expand and so we feel like we've kind of set the business up to weather storms on the downside and potentially take advantage of things on.

The upside from an asset yield perspective, and I think also.

On the right side I think.

We would look opportunistically to raise potentially additional debt.

On that three and three eighths issuance.

As we see the volume there I mean, certainly that's at those rates.

It's opportunistic and it would be it would expand and I am.

Immediately.

Yes sounds good one more for me if you can maybe describe some key factors on some of the deal quality Youre seeing real time and I just wanted to understand maybe covenants are getting looser out there.

And this is impacting the way you're underwriting if so.

Yes, no I would say in the lower just macro comment in the lower middle market.

At least our deals.

When I would imagine other lower middle market lenders will be the same way here, but I don't think.

Covenants are really not.

Yes, the things you have to watch for covenants getting looser.

Obvious, but the definition of EBITDA and add backs and adjustments.

Those are things that we watch very carefully.

We just really haven't seen a lot of that.

Sedative market.

Smart sponsors that are well well financed with multiple lender relationships clearly and that ones that prove to support companies when they bump in the night.

Better financing terms I mean, they just do.

Is there a better financing terms.

Situations, where the EBITDA more earnings margin EBITDA margin is higher and loan to value on the loan is lower you get better terms, which switch the risk of those loans is lower and you should have better terms, but generally speaking loan for loan.

Haven't seen a bunch of.

Our lower middle market, and that's very different than the syndicated market. We just haven't seen a lot of deterioration on kind of covenant cushions in and that kind of thing I mean, the looser covenant cushions are the safer deals.

But just.

<unk> broad.

Covenant deterioration in our market, we really haven't seen that.

Great. Thank you that's all for me.

Thank you. This concludes our question and answer session and I would like to turn the conference back over to Bowen Diehl for any further remarks.

Thank you everybody and thanks for joining us and thanks for all the questions, we like answering the questions and for the shareholders that are not answering asking the questions I get to hear more about our business and so thanks for that and I look forward to giving everyone. Further updates as we go forward.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Okay.

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Thank you for joining today's capital southwest second quarter fiscal year 2022 earnings call.

On the call today are born deal CEO, Michael Pharmacy F O and Chris Rehberger, VP Finance I would.

Now I'll turn the call over to Chris Rehberger, you may begin.

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.

No guarantees of future results and are subject to numerous risks uncertainties and assumptions that could cause actual results to differ materially from such statements for information concerning these risks and uncertainties see capital Southwest's 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.

Chris and thank you everyone for joining us for our earnings call for the quarter ended September 32021, which is the second quarter of our 2022 fiscal year, which ends March 31 2022.

We're pleased to be with you. This morning, and look forward to giving you an update on the performance of our company our portfolio our progress on executing our investment strategy as stewards of your capital throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www Dot capital.

Southwest Dot com.

We will begin on slide six of the earnings presentation, where we have summarized some of the key performance highlights for the quarter.

During the quarter, we generated pre tax net investment income of 45 cents per share, which more than earned our regular dividend for the quarter of <unk> 44 per share.

Dividends for the quarter were 54 cents per share, which included a 10 cent per share supplemental dividend.

Total dividends paid during the quarter, representing an annualized dividend yield on our stock price on the last trading day of the quarter of eight 6% and an annualized yield on net asset value per share of 13, 2%.

As a reminder, we previously announced that our board declared an increase in our regular dividend per share to <unk> 47 per share for the quarter ended December 2021 from the <unk> 44 per share paid in the September quarter.

This increase in our regular recurring dividend.

Reflects the increased earnings power of our portfolio, resulting from portfolio growth continued reductions in our cost of capital and continued improvements in operating leverage achieved through our internally managed structure.

Our board also declared a supplemental dividend of <unk> 50 per share to be paid out in the December quarter.

The supplemental dividend represents an accelerated pay out of our prior supplemental supplemental dividend program.

Which had been paying out <unk> 10 per share per quarter over the past several years.

We believe that this accelerated distribution of UTI maximizes value for our shareholders today, while also maintaining an adequate UTI balance into the future.

Going forward, we expect that shareholders will continue to participate in the successful exits of our investment portfolio through special distributions as we monetize the unrealized appreciation in our portfolio over time.

During the quarter, we grew our investment portfolio on a net basis by two 4% to $818 million.

Portfolio growth during the quarter was driven primarily by a total of $112 9 million in commitments to six new portfolio companies and four existing portfolio companies of which $77 2 million was funded at close.

This was offset by $69 million in proceeds from six debt prepayments in two equity exits during the quarter.

The portfolio generated net realized and unrealized gains of $2 $8 million during the quarter, driven primarily by unrealized depreciation in our equity co investment portfolio.

On the capitalization front, we completed an amendment to our credit facility extending the maturity to August 2026, and decreasing the interest rate to LIBOR, plus 215 basis points down from LIBOR, plus 250 basis points.

Additionally, we issued $100 million in aggregate principal of three and three eights notes due October 2026, and repaid in full our five and three 8% notes due October 2024.

Furthermore, in lockstep with our strong deal pipeline, we raised $30 3 million of equity through our ATM program at an aggregate average price of $26 59 per share representing representing an average of 160% of the prevailing net asset value per share.

On slide seven and eight 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 and our company's sustained access to the capital markets has demonstrated the strength of our investments in capitalization management strategies.

Maintenance and growth in both <unk> NAV per share and shareholder dividends remain as core tenants of our long term investment objective of creating long term value for our shareholders.

Turning to slide nine as a refresher our investment strategy has remained consistent since its launch in January 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.

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 our loans.

We believe that this combination is powerful for our BDC.

Is it provide strong security for the vast majority of our invested capital.

We're 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.

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 investments across approximately half of our portfolio companies.

The equity portfolio had a fair value of $69 2 million, which included $17 7 million in embedded unrealized appreciation or approximately <unk> 76 per share.

Our equity portfolio, which represented 8% of our portfolio at fair value as of the end of the quarter continues to provide our shareholders attractive upside from growing lower middle market businesses.

As illustrated on slide 10.

How about on balance sheet credit portfolio as of the end of the quarter, excluding our I 45, senior loan fund grew 3% to $689 million as compared to $671 million as of the end of the prior quarter for.

For the quarter all six of the new portfolio company that originations were first lien senior secured senior secured and as of quarter end, 91% of the credit portfolio was first lien senior secured.

On slide 11, we lay out the $112 9 million of capital invested in and committed to portfolio companies during the quarter.

Capital committed this quarter included $107 8 million in first lien senior secured debt committed to six new portfolio companies, one of which we also invested $1 million in equity core equity alongside our debt.

$3 8 million in first lien senior secured debt committed to one existing portfolio company and 400000 in sub debt and equity follow on investments in three existing companies.

Turning to slide 12, we continued our track record of successful exits with six exits during the quarter.

These assets generated $69 million in total proceeds.

Realized gains of $3 $3 million and a weighted average IRR of 17, 5%.

To date, we have generated a cumulative weighted average IRR of 15, 2% and 45 portfolio exits representing approximately $462 million in proceeds.

From a macro perspective, the market for acquisition and refinancing capital was robust this quarter and has continued its strong momentum into the December quarter, resulting in heavy volume in both origination and refinancing activity.

Our investment pipeline as we have mentioned on previous earnings calls has been robust 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 have the opportunity to review and consider.

As we have always contended this is a critical component of building and maintaining a quality investment portfolio in a competitive market.

Finally, we believe that the returns returns realize on exits over the past several years has proven out the investment acumen of our investment team and the merits of our investment strategy and generating strong risk adjusted returns over the long term.

On slide 13, we illustrate some key stats for our on balance sheet portfolio as of the end.

As of the end of the quarter again, excluding I 45 senior loan fund <unk>.

Beginning this quarter, we have decided to consolidate reporting on our on balance sheet upper middle market and lower middle market loans in order to give shareholders a more concise view of our portfolio makeup in total.

As at the end of the quarter. The total on balance sheet portfolio at fair value was weighted 82, 4% to first lien investments six 8% of second lien investments, one 6% of subordinated debt investments and nine 1% and equity co investments.

Turning to slide 14, we have laid out the rating migration within our portfolio.

During the quarter, we had two loans upgraded from a two to one.

One loan downgraded from a two to a three and one loan downgraded from three to four.

As a reminder, all loans upon origination are initially assigned an investment rating of two on a four point scale.

With one being the highest rating and four being the lowest rating.

As at the end of the quarter, we had 61 loans, representing approximately 90% of our investment portfolio at fair value rated and one of the top two categories of one or two.

We had six loans, representing nine 7% of the portfolio at fair value rated a three.

And one loan representing less than 1% of the portfolio.

<unk> four <unk>.

During the quarter, we placed one first lien senior secured loan on non accrual with a fair value of $10 4 million or one 3% of the total investment portfolio.

This company is currently working through a restructuring of its balance sheet. So we have decided to place the loan on non accrual pending more clarity on the post restructure loan terms.

Based on conversations with the company to date, we expect a portion of this loan to come off non accrual in the near term once the restructuring is finalized which which should be completed in the coming weeks.

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.

Folio remains heavily weighted towards first lien senior secured debt with only 6% of the portfolio in second lien senior secured debt and only 2% of the portfolio and subordinated debt.

Turning to slide 16, the I 45 senior loan fund continued solid performance as of the end of the quarter, 95% of the I 45 portfolio was invested in first lien senior secured debt.

Weighted average EBITDA and leverage across the companies and the I 45 portfolio was $75 million of four seven times, respectively down slightly from last quarter.

Portfolio continues to have diversity among industries and an average hold size of two 6% of the portfolio.

Leverage at the I 45 fund level is currently one three times debt to equity.

I will now hand, the call over to Michael to reviews more specifics of our financial performance for the quarter.

Thanks Bowen.

Specific to our performance for the September quarter as summarized on Slide 17, we earned pretax net investment income of $10 million were <unk> 45 per share.

We paid a <unk> 44 per share in regular dividends for the quarter, an increase from the 43 regular dividend per share paid out in the June quarter.

As mentioned earlier, our board has again this quarter increase the regular dividend declaring a quarterly dividend of <unk> 47 per share for the December quarter.

Additionally, our board previously declared a final supplemental dividend of <unk> 50 per share, which will also be paid out during the December quarter.

Our investment portfolio continues to perform very well generating $2 8 million and net net realized and unrealized gains this quarter, bringing the net realized and unrealized gains over the past four quarters to $18 $7 million.

So we are accelerating the current supplemental dividend program as of December 31, 2021 going forward, we will continue to distribute special dividends as we monetize the unrealized appreciation in the portfolio as of September 32021, our estimated UTI UTI balance was <unk> 69 per share.

Maintaining a consistent track record of meaningfully covering our regular dividend with pre tax net investment income is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with 109% for the last 12 months ended September 32021, and 107% cumulative since the.

The launch of our credit strategy in January of 2015.

Our investment portfolio produced $23 million of investment income this quarter with a weighted average yield on all investments of nine 6%.

<unk> income was $1 7 million higher this quarter due primarily to an increase in average credit investments outstanding and prepayment fees.

There were three loans on non accrual with an aggregate fair value of $24 $2 million or 3% of the investment portfolio as at the end of the quarter, our weighted average yield on our credit portfolio was nine 7% for the quarter.

As seen on slide 18, we maintained LTM operating leverage at two 3% as at the end of the quarter, we are targeting operating leverage to approach, 2% or better in the coming quarters.

Turning to slide 19, the company's NAV per share as of September 32021 was $16 36, as compared to $16 58 at June 32021, representing a quarter over quarter decrease of one 3% the.

The main driver of the NAV per share decrease was $17 $1 million in realized losses on the extinguishment of debt on the full prepayment of our five and three eights notes due October 2020 for the.

The realized loss consists of a make whole premium payment of $15 2 million as well as the write off of related unamortized debt issuance costs of $1 9 million.

The refinancing of these notes with a new five year, three and three eights issuance significantly reduces our cost of capital and increases our annual net investment income run rate by approximately <unk> 10 per share on a risk free basis.

This was the primary catalyst for our decision to increase the regular dividend by <unk>.

This quarter from 44 per share to <unk> 47 per share.

We believe this considerable increase in earnings power enhances our market capitalization on a dividend yield basis and allows us to pass the cost of capital savings directly to our shareholders in the form of increased dividends. This transaction also pushes out our nearest debt maturity to 2026, providing significant balance.

Sheet flexibility going forward.

On slide 20, we lay out our multiple pockets of capital as we have mentioned on our 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 $335 million on balance sheet revolving line of credit with 10 Syndicate banks maturing in August 2026.

$140 million institutional bond maturing in January 2026, the newly issued 100 million institutional bond maturing in October 2026.

A $150 million revolving line of credit at I 45 maturing in March 2026, and an initial $40 million leverage commitment from the SBA, which is $22 5 million left to be drawn upon.

Though the majority of our outstanding debt is currently due in 2026, we will look to opportunity opportunistically amend and extend our credit facilities well before maturity consistent with past practice.

Finally, as we've discussed on prior calls we have now begun operations within our Spic's subsidiary, which you will see going forward to noted Spic's one as a reminder, our initial equity commitment to the fund is $40 million and we have received an additional commitment from the SBA.

$440 million of bond leverage, which is also referred to as one tier of leverage we would expect to fully invest this initial 80 million of capital over the next six months at which point, we will apply for a second tier of leverage over the life of the fund we plan to drive the full $175 million in FDIC debentures alongside <unk>.

$87 5 million in capital from capital Southwest where.

We're excited to be part of this program and believe it is a natural fit with our investment strategy.

Overall, we are pleased to report that our balance sheet liquidity continues to be strong with approximately $166 million in cash and undrawn leverage commitments as of the end of the quarter as of September 32021, approximately 50% of our capital structure liabilities were unsecured and our earliest debt maturity is in January 2026.

Our regulatory leverage as seen on slide 21 ended the quarter at a debt to equity ratio of one 108 to one 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 our original vision and strategy, we communicated to our <unk>.

Our orders when we began this journey.

Our team has done an excellent job building, a robust asset base deal origination capability as well as a flexible capital structure that 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 strong performance and creating long term sustainable value for all our stakeholders.

This concludes our prepared remarks, operator, we are ready to open the lines for Q&A.

Okay.

Thank you.

If you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

And our first question comes from the line of Devin Ryan with JMP Securities. Your line is open. Please go ahead.

Hi, Good morning, this is Kevin on for Devin.

First question just looking at non accruals can you provide the name of the new company that was added to non accrual and then separately can you share any developments in the two existing non accrual investments.

Yes, so I'd, rather not say the name of our non accrual on a public call like this because it all up in the transcript, but there'll be it'll be in the Q, which will be <unk>.

Alex later Tonight.

But it's a company that's been affected by the supply chain that we've all heard about out in the market and which certainly we all hope is temporary but real.

The Companys sales cycle as a result of that.

And its market has extended so restructuring.

Restructuring in this quarter, we think about a third of it or so will come back on accrual.

And we will own equity in the business going forward as it recovers.

Yes.

We became a premier.

Yes, one of them.

One of them is.

Cindy large syndicated deal. It's currently still working on its restructuring.

And so really no no update for that settlement.

And then and then the other one continues to actually improve.

Once in the pharmaceutical services space.

Same kind of same reported last quarter pipeline continues to build starting to convert that the increased pipeline.

Actually pretty encouragingly.

And so we.

We think that one is going to be going to end up being five so yes, we have accrued.

A bit of PEC accrued on that company, so as the recovery curves.

The enterprise value exceeds the debt value that will come back on accrual as well.

Okay. Thank you Bob.

Information that's helpful. And then just touching on quarter to date investment activity can you give us a sense how originations are tracking so far and then also repayment activity as well.

Yes, so I mean originations this quarter are strong there'll be strong through the end of the quarter prepayments as you can imagine with all the market activity. That's out there prepayments are going to be heavy this quarter. Two we do believe we'll have net portfolio growth for the quarter.

So if the churn, which you would expect with a strong portfolio like ours that we're going to get refinanced out of a number of deals, but our guys. Our deal team has done a fantastic job as I said in my remarks.

Expanding the top end of the funnel so we've been.

Very active in the market.

And again at the end of the day, we believe we will have net portfolio growth this quarter.

Great. Thank you for taking my questions and congratulations on the quarter.

Thank you.

Thank you and our next question comes from the line of Mickey Schlein with Ladenburg. Your line is open. Please go ahead.

Good morning, Paul.

And Michael.

As we all know there is this tremendous search for yield and that's attracting more and more capital to private debt, which which seems to be increasing payment risk prepayment risk across the sector. Obviously those can generate near term fees, which is great. But can you maybe talk a little bit more about what youre doing in Europe.

The organization to help defend your market share as we look forward.

Yes, I mean defending your market share really as a function of covering the market.

Being good partners with your deal sources sponsors mainly.

And really the track record you develop over a lot of years.

And we have every market across the country covered with a primary secondary.

Coverage person.

And it's it's.

It's pretty interesting to me anyway, that's been doing this in this business for a long time.

The number of sponsors that we've been doing business with or we have deals from that candidly that I had yet heard of unusually that's.

Junior partners at P funds spinoff into their LNP funds start their own funds and that type of thing and kind of.

And being able to really broaden the number of deal sources that we get that we get deals from and we've really seen that which has been which has been super encouraging.

And then when you go through the pandemic things like a pandemic and you have stress in the portfolio and you sit across the table is a first lien lender, which by the way. It gives you the freedom to make good business decisions that balance your shareholders capital interest with the interest of that company and that sponsor to make reasonable fair decisions on how you deal with stress.

We have stress in the portfolio during the pandemic, Fortunately everything recovered nicely and along the way we extracted extra extra economics here and there where it was fair.

And the sponsor support of the company worst companies, where necessary and so going through something like that really.

Gives us street credibility that we might not have necessarily had three years ago. So that's a big deal and then we're also seeing more and more sponsors that are new to us ask us for references of other sponsors that we've been doing business with and actually calling those sponsors and so.

How you Act, how you make decisions and how you operate in the market is becoming increasingly important amongst the sponsors.

I'd rather deal sources and so for me that's hugely encouraging so thats because thats. What you want that you want to get where you want to get a benefit from the way you Act in the way you operate in the market and so those are always you defend your market share at the end of the debt and the other thing Mickey is over the last few years, we've reduced our cost of capital.

There are five 5% now we're down closer to three 5% operating leverage came down from 5% down to two 3%. So this allows us to be more competitive it doesn't mean, we're chasing deals.

Offering less yield for riskier businesses, but we are able to look at look at deals at L. Plus six or 650, whereas those are deals we wouldn't have considered two or three years ago.

And it also help us when we're looking at when you say defend there are certain deals that get refinanced.

That historically, if it was an 850 deal.

It came down to <unk> dollars 50, we didnt bother staying in the deal just on you have alone and today, we have the ability to look at the credit, especially credits, where we know well and stay in the deal based on our net interest margin and of course. The reason that happens is most people on the call know is that these companies grow leverage comes down.

Clearly spreads Brad or their cost of capital is going to come down. So the question really is and how long can we stay in that credit from a net interest margin perspective, and so micro bright as we drop our cost of capital and increase our operating leverage.

Then it allows us to extend the tail on growing businesses, and then our new businesses being able to lend accompany that lower loan to value tighter spreads that kind of thing.

Also also the ATM issuance. So we're doing at one six or one seven times Thats, obviously, a lot less dilutive than raising equity at 101 point to where we would have done so in the two years ago.

I agree and thanks for that Paul.

And Michael but when you mentioned just now sitting across the table zoom meetings are great, but in the end in the end of the day.

I agree with you sitting at a table.

Gauging a new relationship is important are you doing more of that now or is travel is still an issue for the origination team.

Well, we have the industry has definitely become functional over zoom.

But the answer is yes, we're traveling again and management meetings in person are certainly superior to zoom calls.

Candidly from a deal professional perspective, but also as a dynamic to your job. That's interesting right you get to travel to get to see manufacturing plans operations.

That type of thing it just adds a dynamic too.

To your the cadence of your work, which was I believe the former as the deal professional myself, that's a really important thing.

And so we've seen that so thankfully, yes, we're traveling again.

Very happy to be doing that thank.

Thank you for that one other high level question Bohn, so apart from repayments this year, which is a trend across the sector.

Bdcs have certainly had a lot of wind at their back in terms of very strong economic growth and a very low default environment, but what I'm trying to think next year will be more challenging with potential fed tightening.

Probably lower economic growth and volatility around the election.

How are you thinking about those risks in terms of.

New originations that you were seeking and your own balance sheet leverage.

Yes, so well first of all new deals were kind of doing like we've always done which is saying okay. What could go wrong in the system. If you will part of that the recession part of that is pandemic black Swan events. Those are the type things we stress testing models before we do do deals upfront so hopefully.

We certainly we certainly believe that that's the best we can do in setting the asset base up to be able to weather different things, obviously as interest rates increase we have the vast majority of our capital is in floating rate loans.

We obviously are very attuned to fixing the rate on the liability side.

Being able to issue our most recent three and three eighths bond issue on an unsecured basis.

And so I think those are the things that we do as we look forward really too we've always you've been hearing US say this from the very beginning we're always paranoid about a recession in the next year or two.

I feel like that's what our shareholders pay us to.

To do and then to protect the execution for that and if we don't have a recession fantastic that's upside, but we always have to be thinking about that mentally.

As far as the election here that can be there can be volatility around that clearly, but at the end of the day. It's at the end of the day its economic volatility.

So hopefully.

All the things, we do and we're underwriting and thinking about atmospherically in the system things that can go wrong.

The collection could be catalyst to that but it could be other things the catalyst for that too but at the end of the day it.

It's the same answer which is what's the economy going to do.

And obviously by pushing out our maturities as far as we did I mean, that's essentially taking a lot of that risk off the table, allowing us to draw additional debt off the SBA, which will have some interest rate.

Volatility, but not nearly what you would expect in <unk>.

Router market.

Got you just one small housekeeping question for Michael did you reverse any previous income accruals for the new NPL.

No we didn't accrue anything this quarter for that asset and you didn't reverse anything for previous accruals.

No no we just reversed out whenever it was reserved for this quarter.

Terrific. That's it for me I appreciate your time thank you.

Thanks Mickey.

Thank you and our next question comes from the line of Bryce Rowe with multi your line is open. Please go ahead.

Thanks, Good morning wanted to.

Wanted to ask kind of about the the level of commitments here over the last couple of quarters relative to to funded debt investments you've seen it seemed kind of an uptick in.

Unfunded so to speak within the new investment.

Within the new investment activity, So Bowen and Michael maybe you could speak to whether you expect that debt structure.

Continue and then any any any feel for kind of the pace of those unfunded commitments, maybe converting to some level of funding here.

In the near future.

Yes, sure. Thanks Bryce.

Clearly managing unfunded commitments as a first lien lender clearly revolvers are oftentimes, you're providing revolvers as well as the term loan.

Revolvers that are used a whole lot.

Are that interesting to banks and so we can we can offer the revolver give ticking fees the rate on the revolver is the same as the rate on the term loan which is higher than our banquet charge for <unk> ends up being a nice security for us, but we have to manage our balance sheet liquidity.

Such that in the pandemic for example, I think we have 35% of our revolver capital drawn which is lower than that maybe we would've thought it would've been but.

But we have to have the liquidity on our balance sheet to fund that.

And obviously those the revolver, obviously not obvious those revolver fundings are a function of the companies being within covenant Covenant compliance.

That's the revolvers on the on the delayed draw term loan so.

Our unfunded commitments this quarter about half revolver about half delayed draw term loans delayed draw term loans or different those are usually.

A function of specific acquisition strategy.

Based on buying similar businesses, maybe it's <unk>.

Funding and partly funding an earn out on a on a purchase in other words the earn out means that they get a higher EBITDA number a higher earnings number and so then by definition the earn outs paying out when the companies are doing well.

And so.

That's not really that those unfunded commitments are different I mean, it's not like all of a sudden the world starts to fall apart pandemic or otherwise and they just all of a sudden draw the delayed draw term loan that's not how those work.

But what those are as those of our future originations. So those are companies that.

Again, if the hit there if there is if a company grows hits a higher EBITDA target, we're going to be funding a new origination. That's good that's quality that we'd like to do that.

Or if there is an add on acquisition, which obviously further diversifies that business allows the business to realize synergies on the acquisition. So those are also originations that we'd like to do and it also sets us up in the facility to already have a pre bank financing for that acquisition.

I believe it decreases the odds significantly that that company goes out on the outside and refinances us out.

With another deal on the on the acquisition. So it just kind of puts you in the pole position to fund into a very attractive situations. So delayed draw term loans, our future originations we would affect.

We would expect to fund most of that.

If not all of the delayed draw some of the delayed draws are usually 12 months, maybe 18 months an extension. So when you get closer to the 12 months and youre not going to funded or the earn out period passes and they havent earned the earn out and then.

And that would tend to fade, but most of the most of the delayed draw term loan.

That we have in our financials, we would intend to.

We would expect to fund it.

We've seen.

On a normal quarterly basis, we see about maybe 10% of the revolvers get drawn but we also see 10% of them be repaid so on a quarterly basis and this is most all quarters you have a net funding of zero on the revolvers.

Billings point during Covid, the 35% that was funded that was funded really soon after the Covid hit and then those were all repaid as well and then on the from a planning perspective. The <unk> those were all scheduled out they have dates in which there those earnings can be met so we're closely monitoring that and that will.

Packed how much equity we raised on an ATM.

Obviously, our planning purposes.

Raising additional debt.

Okay.

And so kind of along those same lines in terms of kind of pace of investment activity.

Yes.

When we think about it sounds like this current quarter.

Continue to see good.

Good activity good activity both on the origination.

On the on the repayment side of things.

How do you all.

You look at the income statement.

Obviously, you have some some prepayment activity that came into the income statement here in the September quarter does it does that does that deal kind of outsized relative to the amount of repayment activity that you had or would we expect at least another quarter.

That level.

Here here in the December quarter.

Yes, So I think September I think the originations and repayments are both above what we would have anticipated, but the net growth was modest but that's fine I think this coming quarter.

I think Boeing said earlier, we expect to see net portfolio growth, but it's going to be on significant repayments as well as significant originations.

So.

But what we're seeing I think in Beaumont can speak to it as fast as Theres a lot of deals that are just being pulled forward into the 12 31 quarter.

And so.

I think the question Mark we have is going to see how much deals in the 331 quarter, we will be left to have or how much was pulled forward and therefore it can be until 630, when you see sort of the.

The increase come back again.

I mean thats more of a theory I mean, I think a lot of people in the market have that theory.

With taxes, Jim changes in that type of thing that if you were.

<unk> business and you were looking to.

Monetize a portion of your earnings are private equity transaction is attractive because you can rollover.

The amount to stay involved with the company, but you can also monetize some of your lifelong work and if you were thinking about doing that sometime in the next.

A couple of years or a year or whatever.

This would be a pretty good year to do it you just lived through the pandemic.

You learn that life is not forever and things can happen and youre not getting any younger and oh by the way tax regimes are changing so theres a lot of things that would drive a founder owned business to CK.

Teekay sale, if a sale was already on the docket.

In their mind and Thats also sponsors selling too so.

So we'll see but.

Theoretically.

I believe that a lot of the market activity is is some of the dynamics.

Just in the lower middle market some of the dynamics I just described.

And on the <unk>.

P&L to your question.

We would expect to see inflated prepayment penalties in the 12 31 quarter.

The exits are sort of spread across I mean, we've already had significant amount of exits have already occurred.

And we are anticipating more in November and December so.

You'll get some level of interest off of those assets, but youre also going to see those prepayment penalties.

Got it Okay, and then maybe one last one for me.

You've got your liability structure.

Cleaned up in terms of extending.

Do you all.

Do you expect the same pace of ATM activity to continue or is that is that really more a function of.

Net originations.

Where the stock is trading relative to NAV.

So it's a lot of variables.

Certainly one of the.

The metrics, we look at and manage to as leverage right. So we've talked about kind of target leverage range, but that's a function of <unk>.

Originations so function of prepayments at the end of the day net portfolio growth.

And then against the backdrop of where the stock price trades too, but I mean, it's mainly.

Yes.

Net portfolio growth and portfolio BDC leverage.

It's less a function of the actual stock price.

More of a.

I mean, our business model is an organic growth story with respect to just drove eloping an excellent track record.

Keeping our head down and just executing what our guys know how to do and then have access to the equity market to grow slowly grow the equity as the permanent capital base in lockstep with the net portfolio of growth and so at the end of the day again.

Your BDC leverage is what you are looking at but you are raising equity in lockstep with with portfolio growth.

So the primary there's not I would add Michael Yeah, I agree I mean, it's very variable I mean this quarter.

Before.

At this point right now we know Theres a lot of repayments were expecting a lot of originations and so if we think that if some of the originations don't occur then we will pull back on ATM usage. We certainly are cognizant of the dilution that the ATM brings to following quarter. So we're not going to raise equity for equity stake.

Yes.

Being prudent one thing actually I'll just take the opportunity to also mentioned is that we put in our shelf registration.

Last week, we refreshed it.

Well.

Equity distribution agreement.

The whole point of that was not to raise equity in a secondary offering but to have a shelf available to raise capital over the next three years.

That an ATM equity.

I know that.

Some level of confusion in the market on that but we are still resolved.

As ATM equity as our primary source, if not only source of equity going forward I'd.

I would say Brian the other thing we look at the size portfolio leverage as I mentioned earlier.

<unk> balance sheet liquidity availability on the credit facility that is also another important.

Important.

Metric that we watch and manage to.

Got it okay. Thanks, guys I appreciate it.

Thank you and our next question comes from the line of Robert Dodd with Raymond James Your line is open. Please go ahead.

Hi, guys and congratulations on the quarter just a couple of kind of market question more than anything else I missed your very high level of activity in this quarter.

The quarter, you reported 112 million give or take but only about 1% of that just over 1% was equity co invest.

I don't want to.

Reed Reed a quarter into a trend, but is there anything to read in there is it the market rate right now for equity evaluations within your equity portfolio, but is that making it less appealing for the.

Co invest right now with elevated valuations or are they co invest harder to get right now and any color. You can you can give us on that one.

Maybe not just the quarter, but.

But just the environment.

<unk>.

Yes, that's a good question I'm trying to think about I would say first of all I would definitely I wouldn't read too much into the percentage of equity co investments this quarter or past quarters.

I'd Love to tell you how we're we're so precise and everybody's way overpaying and we're just not choosing to participate I mean that would be.

Exaggeration, I mean, I think it's a little bit.

Just the kinds of deals.

It can be it can be I mean, there are times, where it.

The sponsor's got excess liquidity they want to over <unk>. The balance sheet, there may be a situation, where they probably should but the check is still small.

Our equity co investment might be so small it's not worse.

The exercise of putting it on the books and valuing it I mean, there's a number of theres a number of things that do come to play over time.

But.

Most of the time, if we have the vast majority of time, if we have the relationship with the sponsor and we like the equity story, we have we will have an opportunity.

To invest in the equity of some amount so.

Yes, I would.

Read too much into this quarter in particular.

Fair enough this one.

A follow up since.

Credit strategies.

On on.

Capital is about 15%.

My math says about 60% of that is coupon roughly the other 40% is fees and.

Equity gains et cetera, do you think going forward is the market conducive to.

Maintaining that kind of total.

I'll go and what I mean.

Two points coming down a little bit because public because your cost of debt has come down or other moving parts. I mean do you think that.

Noble.

Target might be doable.

For it but is that 15% kind of sustainable or was that just beneficial did that benefit from a couple of.

Big wins, while you have a smaller business it may be that number comes down going forward.

Yes.

I think that that comes down a little bit based on the fact that our yields have come down.

When we started this business again, we are looking at deals that are probably little more weighty.

<unk> in the 8%.

<unk> seen our yield has come down where we're looking at deals that are out $6 50 to eight and so the likelihood is that the IRR might come down a few basis points perhaps.

Relative to where we were before I don't think from a.

Overall.

Yield.

That will come down but on the individual deals themselves you'd say, maybe that 15 ends up being 13 of half of 2014.

Yes, you made a comment that the.

Yes exit as being lumpy I mean, if you look at the list of exits I mean.

It's not.

That track record that we referenced 45 exits or whatever it is over $460 million of proceeds thats pretty pretty evenly distributed over time and over companies in.

I mean, it's it's.

And our guide I didn't give you guys credit that's pretty outstanding track record and I do think as a first lien lender remember.

Lago don't understand I mean, when a company breach of covenants I mean, thats as a first lien lender you have all kinds of options and things and really extract a little bit of economics here and there in its market to do so so its not like youre breaking relationship glass to extract economics win when small companies bump in the night.

So it is it is an element of a first lien lower middle market strategy that film is doing this for 20 years.

That's the way that works in one of the reasons that you want to be a first lien lender amount of sub debt lender here as to be able to have some of that flexibility and so.

Yes, I do think that maybe it comes down a little bit but.

We think we make the business model is pretty pretty attractive in.

In the long term.

We will also we have.

Robert We also have the $18 million in unrealized depreciation in the portfolio and we probably we havent.

Somewhat of a glide path for us exiting some of those deals over the next 24 months. So there is some of those have sizeable gains in as well.

Understood Yes.

The Lumpiness was not.

Because you obviously you did have.

A particularly big win.

Going back to.

Yes, but.

You have got a track record.

Delivering non side.

More than those those handful so I appreciate it's.

It's a completely fair question I think that IRR on that lumpy gain that you referred to is like something like 12%. So it actually brought the 15% down.

On an average basis, if you are talking about IRR, yes.

But that's the Lumpiness.

No.

And asset performance is a fair question that people should ask it's just pretty broad.

Sure for Titan liner MRI, both of them more than the portfolio for years and years. So the IRS were in the teens right.

Got it thank you.

Thank you and our next question comes from the line of Sarkis <unk> with B Riley Securities. Your line is open. Please go ahead.

Hey, good morning, and congrats on the quarter just wanted to touch off very quickly on kind of the cost of capital relative to the interest rate environment looks like.

Some nice tailwind here to compete in the current backdrop given your lower cost of debt I was wondering if you can maybe give an update on pricing or spreads real time, just kind of considering any potential interest rate regime shifts or kind of ideologies you guys are carrying going forward.

On the asset side of the liability side.

Well.

From an asset and liability perspective right.

The totality of things.

Yes.

You can speak to the asset side and I can go through with average spreads in the market I mean, clearly if that's your RASM and clearly there is competition in the market.

Any kind of Covid premiums long gone.

But generally speaking I wouldn't say that.

The universe of deals that we're working on and chasing the spreads have come down.

Terribly in the last quarter I mean, I think it's been relatively flat I think I think our our situation is really mainly it is being able to compete.

In deals that just priced tighter.

And so you need to get your cost of capital down because at the end of the day you live on net interest margin.

And that's been the main thing.

Markets definitely competitive so don't want a leading by wrong in that respect.

There are also a.

Blenders, we'll see what happens throughout the end of the year, but lenders borrowers are pretty full right now right I mean, they've got a lot of deals going on so when someone shows up December 1st and say I got to get a deal done by the end of the year.

That incremental lender in the market might not be quite as aggressive on pricing that deal I mean, thats a little bit more just supply demand theory, but thats really interesting to see what happens so.

But thats the asset side I think it's and then it's mainly account cost capital story I believe so yes, so I mean on the right side, obviously with the.

<unk> amended and extended our credit facility with IMG tell $2 15, and so that's going to be locked in for a number of years, we think that's pretty competitive for small and mid cap BDC.

We did look down the road and Opportunistically did that bond deal at three and three eights for the very reason, we do believe it's not a it's not an if it's a when you see the rates start coming back up then so blocking that it was the prudent thing to do and then on the SBA side.

They pool.

Debentures twice a year in between those pooling the cost of capital is about 1% and in between there right now so over the next six months, we're going to be drawing we would anticipate drawing around $60 million off of the SBA at 1% and that gets pulled into maybe it would be one 5% maybe being a little.

Higher than that but that's kind of when we alluded to earlier, our all in cost of capital is really trending down towards the three to three 5% and youll start seeing that as the SBA is fully ramped.

Next 12 to 24 months.

Yeah.

Yes, understood and I guess, if we got to think about things here in the near term, obviously, a lot of liquidity everyone's flushed with it but I suppose if you look at the next six nine and 12 months, if theres any dislocations gear.

Given your.

Liability side of that equation is pretty attractive do you think there will be an opportunity to kind of.

Take advantage of that NIM potentially expanding a little bit.

Well potentially because I mean.

Where are we.

We manage our assets in kind of a what if world right what happens if there's a dislocation in the market what happens what if what if what if rate and so obviously locking in and extending out our maturities on our liability side and then maintaining adequate.

Liquidity are.

Flushing liquidity on our balance sheet.

Then if there are dislocations the only variable that moves in your world as your asset yields expand and so if we have the liquidity to invest in a dislocation like that and that's exactly what would happen year in net interest margin would expand and so we feel like we've kind of set the business up to weather storms on the downside and potentially take advantage of things on.

The upside from an asset yield perspective, and I think also.

On the right side I think.

We would look opportunistically to raise potentially additional debt.

On that three and three eights issuance.

As we see the volume there I mean, certainly that's at those rates.

It's opportunistic and it would be it would expand and I am.

Immediately.

Yes sounds good one more for me if you can maybe describe some key factors on some of the deal quality Youre seeing real time and I just want to understand maybe covenants are getting looser out there.

And this is impacting the way you're underwriting if so.

Yes, no I would say in the lower just macro comment in the lower middle market.

At least our deal.

What I would imagine other lower middle market lenders will be the same way here, but I don't think.

Covenants are really not.

Yes, the things you have to watch for covenants getting looser.

Obvious, but the definition of EBITDA and add backs and adjustments.

Those are things that we watch very carefully.

We just really haven't seen a lot of that.

<unk> market.

Smart sponsors that are well well financed with multiple lender relationships clearly and ones that prove to support companies when they bump in the night.

Better financing terms I mean, they just do.

Is there a better financing terms.

Situations, where the EBITDA more earnings margin EBITDA margin is higher and loan to value on the loan is lower you get better terms, which switch the risk of those loans is lower and you should have better terms, but generally speaking loan for loan.

Haven't seen a bunch of.

Our lower middle market is very different in the syndicated market. We just haven't seen a lot of deterioration on kind of covenant cushions in and that kind of thing I mean, the looser covenant cushions are the safer deals.

But just general broad.

Covenant deterioration in our market, we really haven't seen that.

Great. Thank you that's all for me.

Thank you. This concludes our question and answer session and I would like to turn the conference back over to Bowen Diehl for any further remarks.

Thank you everybody and thanks for joining us and thanks for all the questions, we like answering the questions and for the shareholders that are not answering asking the questions I get to hear more about our business and so thanks for that and I look forward to giving everyone. Further updates as we go forward.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.