Q4 2022 Capital Southwest Corp Earnings Call
Ladies and gentlemen, please stand by your conference call will begin momentarily once again, ladies and gentlemen, please stay on the line.
Okay.
[music].
Thank you for joining today's capital southwest fourth quarter and fiscal year 2022 earnings call participating on the call today are Bowen Diehl, CEO , Michael <unk>, CFO and Chris re Berger VP finance.
I will now turn the call over to Chris Rehberger.
Thank you I would like to remind everyone that in the course of this call we will be making certain forward looking statements. These statements are based on current conditions currently available information and management's expectations assumptions and beliefs.
Not guarantee that future results 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, Thanks, Chris and thank you.
Everyone for joining us for our fourth quarter and fiscal year 2022 earnings call.
We are pleased to be with you. This morning, and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute 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.
I'll start by saying that during multiple times like we have seen recently in the public markets. It's comforting to have a portfolio heavily weighted to first lien senior secured debt built with full cycle underwriting mentality that we have deployed over the past seven years since the launch of our credit strategy.
It is also a company that 89% of our credit book is in sponsor backed companies, which provides these companies with potential capital and operating support if needed.
On the capitalization, Brian we have been diligent about maintaining over half of our liabilities and unsecured debt, while consistently raising equity through our cost efficient equity ATM program.
Finally, we are well positioned for rising interest rate environment with 98% of our debt assets and floating rate securities and only 38% of our liabilities and floating rate securities.
Now turning to slide six of the earnings presentation, we will begin with a summary of the key performance highlights for the fiscal year.
Total return to shareholders for the fiscal year was 18%.
Which consisted of share price appreciation of 7% and total dividends paid during the year of $2 52.
Our NAV per share grew 5% to $16 86.
From $16 one in the prior year.
Driven primarily by over $17 million and net realized and unrealized gains on the portfolio.
During the fiscal year, we grew our total portfolio at fair value by 36% year over year to $937 million from 688 million in the prior year.
While increasing our pre tax net investment income by 6% to $1 90 per share from $1 79 per share in the prior year.
Furthermore, we strengthened our balance sheet capitalization during the year through.
Through the opportunistic issuance of $150 million of three and three eights unsecured notes.
Approximately $100 million in equity proceeds raised through our equity ATM program and.
$80 million in SBA debentures on which we are currently drawing.
Moreover, in May we received $45 million in additional commitments on our I N G led revolving credit facility.
This now brings to the credit facility commitment to $380 million.
Michael will provide further detail on this later in our prepared remarks.
On slide seven of the earnings presentation, we have summarized some of the key performance highlights for the fourth quarter of our fiscal year.
During the quarter, we generated pre tax net investment income of <unk> 50 per share, which more than covered our regular dividend paid during the quarter of 48 cents per share.
As previously announced our board has declared a special dividend of <unk> 15 per share for the June quarter.
Which will be in addition to the 48 cents per share regular dividend and also declared for the June quarter.
The special dividend of <unk> 15 per share as a result of another successful equity exits and.
It demonstrates our continued track record of distributing realized gains to our shareholders through a special dividend.
During the quarter acquisition and financing activity in our lower middle market continues to be strong, albeit slightly below the record activity. We saw in the December 2021 quarter.
On a net basis, we were able to grow our investment portfolio by approximately $60 million or six 8% to.
$937 million.
Portfolio growth during the quarter was driven by $103 million in new commitments consisting of investments in three new portfolio companies totaling $50 million.
Two refinancing transactions totaling $41 million and add on commitments and eight existing portfolio companies totaling 12 million.
This was offset by $49 million in proceeds from for debt prepayments during the quarter.
On the capitalization front, we raised $25 2 million of equity through our ATM program at an average price of $24 27 per share representing an average of 150%.
Of the prevailing net asset value per share.
Additionally, we received approval for an additional $40 million of leverage from the SBA, increasing our total leverage commitment from the SBA to $80 million.
As a reminder, the total leverage expected from our current <unk> license is $175 million.
On slide eight and nine we illustrate our continued track record of producing steady steady dividend growth.
Dividend coverage and value creation since the launch of our credit strategy.
We believe the solid performance of our portfolio in our company's sustained access to the capital markets. We demonstrated the strength of our investment and capitalization management strategy.
Maintenance and growth of both NAV per share and shareholder dividends will remain a core tenants of our long term investment objective of creating long term value for our shareholders.
Turning to slide 10, as a refresher our investment strategy has remained consistent since its launch in January of 2015.
We continue to focus on our core lower middle market lending strategy, while also maintaining the ability to opportunistically invest in the upper middle market when attractive risk adjusted returns are good.
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 many of our loans.
Is that even in a quarter our equity co investment portfolio consisted of 41 investments with a fair value of $85 2 million, which included $25 1 million and embedded unrealized depreciation were approximately $1 <unk> per share.
Our equity portfolio, which represents approximately 9% of our total portfolio at fair values at the end of quarter continues to provide our shareholders attractive upside from growing lower middle market businesses.
As illustrated on slide 11, our on balance sheet credit portfolios at the end of the quarter, Excluding I 45 senior loan fund.
Grew 7% to $794 million as compared to $745 million at the end of the prior quarter.
For the quarter, 100% of the new portfolio originations were first lien senior secured debt.
Finally as of quarter end, 93% of the credit portfolio with first lien senior secured.
On slide 12, we lay out the $103 million of capital invested in and committed to portfolio of companies during the quarter.
Capital committed this quarter included 49 billion in first lien senior secured debt committed to three new portfolio companies, including one in which we also invested $1 million in equity.
Finally during the quarter, we also committed $51 million in first lien senior secured debt to nine existing portfolio companies.
Turning to slide 13, we continued our track record of successful exits with four debt investments prepayments.
Two of these loan prepayments were refinancings related to acquisitions in which capital southwest was able to participate.
<unk> and the new credit facility.
In total the debt exits generated over $49 million in total proceeds.
<unk> realized gains of $512000 and generating a weighted average IRR of 12, 9%.
Since the launch of our credit strategy over seven years ago, we have generated a cumulative weighted average IRR of 14, 4% on 60 portfolio exits.
Presenting approximately $695 million in proceeds.
As previously mentioned the market for acquisition and refinancing capital continues to be strong.
Our investment pipeline as we have mentioned on previous calls.
<unk> robust throughout fiscal year 2022 on both volume and quality of deals and that trend has continued into the June quarter.
Given the current activity we are seeing in the market. We expect the June quarter to again be a strong quarter for originations.
We are pleased with our strong market position and our team is established in the lower middle market is a premier debt and equity capital partner.
On slide 14, we illustrate some key stats for our on balance sheet portfolio is at the end of the quarter again, excluding our I 45 senior loan fund.
As of the end of the quarter. The total portfolio at fair value was weighted 84, 2% first lien investments.
6% of second lien and 0.1% subordinated debt.
And 99, 7% to equity co investments.
Turning to slide 15, we.
We have laid out the rating migration within our portfolio.
During the quarter, we had no loans upgraded and one small loan position downgrade from a two to three.
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 rate.
As of the end of the quarter, we had 71 loans, representing 95, 3% of our investment portfolio at fair value rated one of the top two categories of one or two.
We had six loans, representing four 6% 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 had no new loans placed on non accrual.
As illustrated on Slide 16, our total investment portfolio continues to be well diversified across industries.
With an asset mix, which provide strong security for our shareholders' capital.
The portfolio remains heavily weighted towards first lien senior secured debt with only 6% of the total portfolio in second lien senior secured debt and only 1% exposure to subordinated debt.
Turning to slide 17, our I 45, senior loan fund continued to generate solid performance.
As of the end of the quarter, 97% of output.
45 portfolio is invested in first lien senior secured debt.
Weighted average EBITDA and leverage across the pool of the companies and the I 45 portfolio was $72 million and four two times respectively.
The material decrease in leverage this quarter.
Due to these was due to the exclusion of a loan position in one portfolio company that had negligible fair value and EBITDA.
Is that for each of the December and March quarters excluded this portfolio company pro forma leverage across the I 45 portfolio would have been four three times and four two times in each of the December and March quarters, respectively.
The portfolio continues to add diversity among industry and an average hold size of two 4% of the portfolio.
Leverage at the I 45 fund level is currently 159 times debt to equity.
I will now hand, the call over to Michael to review more specifics of our financial performance for the quarter.
Thanks, Tony.
Vic to our performance for the March quarter as summarized on Slide 18, we earned pretax net investment income of $12 million or <unk> 50 per share we paid out <unk> 48 per share in regular dividends for the quarter, an increase from the 47 cents per share paid out in regular dividends and the December quarter as mentioned earlier.
Our board has declared a special dividend of <unk> 15 per share for the June quarter.
Maintaining the regular dividend for the June quarter at 48 per share.
Maintaining a consistent track record of meaningfully covering our dividend with pretax net investment income is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with 105% for the last 12 months ended March 31, 2022, and 107% cumulative.
Since the launch of our credit strategy in January of 2015.
Our investment portfolio continues to perform well generating $7 $7 million and net realized and unrealized gains this quarter, bringing the net realized and unrealized gains on the investment portfolio over the past four quarters to $17 3 million.
Someone mentioned going forward, we intend to periodically distribute special dividends to our shareholders as we monetize the unrealized depreciation in the portfolio.
As of March 31, 2022, our estimated UGI balance was 47 per share.
Our investment portfolio produced $21 million of investment income this quarter with a weighted average yield on all investments of 9%.
Total investment income was $1 3 million lower this quarter due primarily to a decrease in one time fees paid on debt repayments in the December quarter there.
There continue to be three loans on non accrual with an aggregate fair value of $14 million or one 5% of the investment portfolio as of the end of the quarter.
We did not place any new loans on non accrual during the quarter the weighted average yield on our credit portfolio with nine 3% for the quarter.
As seen on slide 19, we further improved LTM operating leverage to two 2% as at the end of the quarter, we are targeting operating leverage to approach, 2% or better in the coming quarters.
Turning to slide 20, the company's NAV per share as of March 31, 2022 increased four 1% for the quarter to $16 86 per share compared to $16 19 per share as at the end of the December quarter.
The driver of the NAV per share increase was due to the strong performance of the investment portfolio, coupled with the accretion from our equity ATM program.
Turning to slide 21, we are pleased to report that our balance sheet liquidity continues to be strong, but approximately $178 million in cash and undrawn leverage commitments as at the end of the quarter as Bowen mentioned earlier in early May we received broad support from our lender group, which increased commitments on our IMG led senior secured credit.
Silly by $45 million, bringing total commitments to $380 million.
Bank Syndicate continues to support our growth and we are pleased with the flexibility the increased revolving credit facility provides to our capital structure.
In addition, we continued to draw debentures, and our Spic's subsidiary as we originate SBA IC eligible asset.
End of the quarter, we had drawn $40 million in debentures with an average capital cost of two 6%.
Our current commitment from the SBA is $80 million, which we fully expect will increase over time to the maximum under our license of the $175 million as we continue our participation in the FDIC program.
As of March 31, 2020 to approximately 54% of our capital structure liabilities were unsecured and our earliest debt maturity is in January of 2026, our regulatory leverage as seen on slide 22 ended the quarter at a debt to equity ratio of 116 to one.
Turning to slide 26, our balance sheet is well positioned to benefit from rising interest rates short term interest rates have increased significantly with LIBOR, increasing from 21 basis points at the end of December to 96 basis points at the end of March and as of yesterday LIBOR is approximately 150 basis points.
The weighted average floor on our investments is approximately 1% with the short term rates exceeding the floor on our investments. This will have a positive impact on net investment income based on quarter end rates, we estimate at 50 basis points and 150 basis point increase in reference rates would result in an annual incremental earnings of approximately.
10.
<unk> 33 per share.
I will now hand, the call back to Bowen for some final comments.
Thanks, Michael and thank you everyone for joining us today.
Capital Southwest continues to perform well and consistent with the original vision and strategy, we communicated to our shareholders. When we began this journey.
We have been underwriting with a full economic cycle mentality since day one.
Which we believe has prepared us well for any environment presented to us in the coming months and years.
I continue to be impressed by the job our team has done in building a robust asset base.
Deal origination capability as well as a flexible capital structure.
We believe that our performance continues to demonstrate the investment acumen of our team our capital southwest and the merits of our first lien senior secured debt strategy.
We feel very good about the health and positioning 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.
Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone.
Question has been answered or you wish to move yourself from the queue. Please press the pound key.
First question comes from Mickey <unk> with Ladenburg.
Yes, good morning born.
We're experiencing macro headwinds that we haven't seen for a long time, and obviously you have a lot of experience in the credit markets. So I'd like to ask you, where you think you will see defaults and non accruals head over the next couple of years.
Okay.
Yes, it's hard to predict Mickey we have we have been doing this for a while.
Honestly when we took over the BDC seven years ago, we were apparently about a recession and we've underwritten to the great recession for seven years now.
And so we've kind of always.
Expected or had to plan for.
Increased defaults.
And our portfolio and so you know we.
We've underwritten debt portfolio that will perform well and a great recession type economic environment. So while it's hard to it while it's hard to.
The actual numbers.
You know, we look at our underwriting deal by deal.
And.
Our portfolio performed very well in that kind of a full cycle.
We underwrite to 30% to 50% LTV on a typical deal.
And 89% of our portfolio of sponsors.
Sponsor backed deals.
And as we all know sponsored easier it's pretty flush with liquidity. So you know when I think about.
Portfolio, that's going to generate a dividend for the shareholders, which includes US you know feel.
Feel pretty good.
That.
So thanks for that bone.
Not a specific answer your question on a prediction, but but again.
You know kind of worried about recessions or making sure we had a portfolio that would withstand the recession since the beginning.
I understand.
The dividend side, you know the other way that we planned for this is obviously to maintain that dip.
Dividend coverage, that's conservative as we've done I think.
Keep noting each period that were 107% dividend coverage since.
This and 105 I believe in the last year. So I think it'll be important for us to continue to lead.
But you know enough cushion as we move through this.
And see how severe recession could be.
To make certain that our dividend is conservative.
Respective of what the environment might look like.
I understand Michael I appreciate that thank you.
When we look at the forward LIBOR and so for curves that are obviously very steep and that implies a nominal rates on that.
The debt investments you've made could go up fairly sharply over the next year or so so how do you see that trend affecting your borrowers in terms of their appetite for capital and their ability to service their existing debt.
Yes so.
Good question. So we look at that at least every quarter.
It does.
Start with the underwriting leverage that youre, putting on companies in the <unk>.
Leverage seems to be appropriate for the potential volatility of those particular industries.
So it starts with that but we look at our portfolio and our.
Our weighted average fixed charge coverage across the book as well a little over three times.
So EBITDA, Nevada.
Earnings provided for fixed charged a little over three times.
And you kind of sensitize. It if you were to increase.
So for LIBOR by 200 basis points from where it is today.
That three times would go to about a little over two four times.
And if you would increase that by 300 basis points that coverage would be about two two times.
That.
Those numbers are pretty solid so.
That gives me confidence that that.
A pretty substantial increase in interest rates you still got two two times coverage of your fixed charges across your portfolio.
That's interesting born that's obviously, assuming everything else remains equal right.
That's right I mean, obviously, you're you know if the economy starts to slow down youre going to youre going to have increased.
<unk> covenant defaults to a first lien lender doesn't necessarily mean, it's a disaster. It means that we charged additional economics on those loans fees and other fees or otherwise.
But certainly in a slowing economy, starting to have a little bit more noise in the portfolio for sure.
Of course, Boeing when we think about those rising interest rates.
That could provide a big tailwind to you and to other bdcs.
Since most portfolios are floating rates.
How much of that increase.
Increase in short term rates do you think the lenders will keep versus perhaps passing some of that through to the borrowers that spread compression to help support them.
Yes, that's a good question I mean I've been doing this for a while and I would tell you when rates start to increase.
Lenders do have a tendency to.
You are the market generally has a tendency to give some of the increase in the index back in spread.
I do know the vast vast majority of the increase in index will be kept by the lenders, but you know there's.
Our job is to make sure we minimize how much we get back.
But that is a dynamic that does happen.
If you think about our capital structure, we've got over 50% of our liabilities into fixed rate.
Notes and so and you know within our assets were all floating rates. So we're pretty levered to the upside on interest rates.
Good luck at the margin you're right I mean, that's.
That's something that the lending industry does to an extent.
The index goes up again, a little bit of a spread back.
At the end of the day, where net interest margin, we eat net interest margin at the end of the day so yes.
We have to minimize the amount of that dynamic, but it does it has in past cycles.
It's been that way at the margin.
Yeah I agree with that my my last question sort of housekeeping maybe for Michael could you just give us what the main drivers were of the realized and unrealized gains this quarter.
Yes six.
$6 3 million of depreciation was related to the equity portfolio.
And I think we had I want to say at least three portfolio companies on the equity side that our loan grade ones.
That had sizable increases.
Across the board it really there I would say that was up as well I think about one 4 million I believe for the quarter.
Which was fairly granular I mean, I think from them.
Even in kind of a macro perspective our companies.
So revenue growth.
We saw EBITDA growth as well despite.
Labor and transportation costs.
So overall and we saw EBITDA margins, probably come down slightly but overall the portfolio performed individually quite strong when it one of the things Mickey I thought it was encouraging this quarter was across our equity portfolio the equity co investment portfolio.
<unk> multiples were down slightly.
But our portfolio appreciated and so that was a really fundamental performance across that equity book as opposed to just market multiples expanding so.
And that was.
It's a healthy group of companies.
Yeah. That's helpful. I. Appreciate your time. This morning, Thank you for taking my questions.
Thanks Nicky.
Our next question comes from Kevin <unk> with JMP.
James J P M Securities.
Hi, Good morning, and thank you for taking my question.
I'd like to start with a question on leverage.
As far as leverage was 116 times at quarter end can you just remind us what your target leverage range is and then also could you talk about if your target leverage range has shifted at all recently given the current market backdrop.
Sure. So what we've said in the past is our economic leverage target is one two to one four and our regulatory would be between 1.0 and 1.2.
So we're obviously in the middle of those ranges.
But we are mindful of what's going on.
The economic environment and from that perspective.
The notion is that we would like to be in the middle to low end of those.
Those ranges.
Entering into what are the possible recessionary period so.
How do we do that we'd be the likelihood.
To use the ATM fully as we've done before.
We don't want to be behind the curve and forced to raise equity to bring leverage back down.
You can kind of imagine that we're probably more conservative on that front and tried to stay.
Around one point to 1.5 months, which you did two five and probably one one to 1.15 on them.
Inventory.
Okay that makes sense, Michael and then just in regards to portfolio positioning just curious if there are any pockets or industries that you find particularly attractive in the current environment.
Well certainly I mean.
Pardon me everybody certainly beat this drum for years on the whole recession full cycle underwriting.
Mentality, we use but if you kind of look at some of the deals we've done in the last quarter, you'll see American nuts as a food deal you see American thrift store, which the thrift retailer.
<unk>.
<unk> of supply chain parts, little screws, and bolts and things and manufacturing plant so supply chain things that they have to manage its complex.
Air conditioning specialists, which is a which.
Which as Eric HVAC service company the people that come by your House and service your AC.
So those are all kind of.
Non him very low cyclicality of any cyclicality associated with those industries and so.
That's kind of how we're thinking about the world I mean, we like industries that are.
Stable high cash flow margin.
Aren't you know, particularly discretionary type purchases.
And the ones that shouldnt be as affected by the economy.
Timing kind of affects everything to some extent, but but.
<unk> less much less cyclical or even countercyclical, you'll see a national credit care for example, certainly in counter cyclical.
Type industry.
So as you look at our deals you'll see that theme. So that I think that's how I'd answer that question.
Okay. Thanks, Brian that's helpful. And then just one more follow up on Mickey's question.
You had some pretty nice unrealized gains on equity and debt investments in the quarter.
Kind of the opposite of what we saw in the public markets and other BDC portfolios in the March quarter, just curious just in the equity portfolio.
The unrealized gain primarily in a handful of equity securities or was that kind of broad across the portfolio.
Yes, so I would say there is certainly a handful and a half of companies that we're shining stars for sure.
But we saw pretty broad performance across the portfolio.
But certainly here like a handful and a half of shining stars.
So I think that's okay.
Typically what happens in the equity portfolio.
I got a pretty encouraged by the fact again that if you looked across our portfolio you had market multiples come down.
Market multiples come down as we all know we saw that in the public markets.
The equity portfolio EBITDA grew and kind of increase in depreciation overall.
Okay I appreciate the color there and I'll leave it there congratulations on a nice quarter.
Thank you.
Our next question comes from Kyle Joseph with Jefferies.
Hey, good morning, guys.
For taking my questions most have been answered.
But.
We talked about kind of the rising rate environment impact on demand for middle market credit can you go to the kind of the other side of the spectrum and talk about how you see rising rates impacting competition in the over overall supply of credit to the middle market.
That's a good question.
You know the supply as far as our competitors in capital.
You know availability of capital I would say.
Expected changing all that much I mean, there's if the market's competitive now.
Was competitive yesterday and will continue to be.
Be competitive.
And so you know and I think again, the private equity community.
Pretty flush with liquidity.
I think people are all talking about recession, and so I'd say that the sensitivity around recessions.
Certainly heightened we've had that sensitivity for a while but that's but that's the market certainly sensitive to that so I think that could.
As the lender community is thinking more about recessions and trying to quote underwrite to recession.
That does typically and it should.
Increase the conservatism across the industry.
But I think the quality of the quantum of capital out there I don't see it changing but I do see the mentality of the lender community and sponsor community as well.
Becoming more recession sensitive as they are thinking about investing capital.
I guess also from a competitor's perspective, it's going to depend on their overall health of their portfolio and the leverage they have going into what could be a cycle, whether theyre going to be able to be aggressive.
<unk> unique opportunities, which is what you tend to see in a down market.
Got it very helpful. Thanks for answering my questions.
Yeah.
Our next question comes from Bryce Rowe with hobby.
Yeah.
Thanks, Good morning.
Wanted to maybe start on your commentary around the pipeline it feels like you've got another another healthy quarter coming up here.
For the June quarter over two thirds of the way through.
Maybe maybe you could speak to what Youre seeing kind of from a from a terms or pricing perspective with.
Some of the shifting market dynamics that we've seen here over the last few months.
Yes pricing in terms I would say really from everything is down from a volume perspective from the December quarter of last year, because it was a feverish pace of them.
The June quarter is similar to the March quarter, and as far as general activity.
And so as far as pricing and terms.
It's been kind of the same.
It Hasnt really been.
As a general statement it hasn't been that much different between the quarters.
There's differences between deals into everything feels specific but I think generally speaking, it's not we haven't seen it.
Material change.
And pricing in terms I mean, we have in the lower middle market, we have strong covenants first lien.
Low lower LTV.
Cash flow businesses, and so that's kind of the same.
In the June quarter, it was in the March quarter.
That's helpful Bowen.
And yet you've obviously had some some amount of monetization.
Exits are you are you still seeing some opportunity for for that here.
Or do you expect.
Expect that activity to slow down here.
Yeah.
Well I mean it was.
Again, following kind of followed the market activity. So you know the market activity in the December quarter was actually really high prepayments were high.
Kind of into this year, you know they've kind of it kind of a little bit of a <unk>.
Steady hum.
You know I mean, I'm not going to be.
Comment on.
I mean, I think tank.
Only slow down, but what I would say just looking down.
Next six to 12 months some of the loan grade ones.
<unk> extremely well.
Those are always possibilities for repayments, our exits and we.
I think if you've looked at our history since 2016, we've had a large exit.
We haven't provided supplemental dividend or special dividend and every year since and so.
Looking at that list, we would think that the high likelihood that there could be an exit before the end of the year and I think that's all.
I think Thats, a fair comment I mean, if you look at those those names.
Some of those businesses that would certainly be considering a sale I mean, given the extremely extreme outperformance some of these names.
So.
No line of sight on any particular, one at the moment.
But certainly it's certainly not unreasonable to think we would see something by the end of the year.
Okay.
Maybe a couple of housekeeping questions for me.
From a young.
And access to.
Future SBA drawls.
Is that something Michael that you guys can can access here now or.
I seem to remember there being.
A review by the SBA now you said that first first year.
Yeah.
We already received that review when we got through our first half year, which was a $40 million. So we're past that so we have access right now to $80 million as of the end of this quarter. We had drawn 40, and we would tell you that.
But.
It can be seen robust this quarter in several of the deals we're looking at our FDIC eligible.
See ourselves being in the not quite at 80, but pushing it by the end of the June quarter or into July so.
So, we'll probably be back to the SBA and into summer looking for additional leverage commitment.
Okay. Okay. That's helpful and then maybe one more around <unk>.
45, it looks like that the dividend that came into the BDC from I 45 was was up.
Is this a good run rate anything kind of driving that.
Mike cause that to fall back down.
Honestly it was a strong quarter, we did see I would tell you towards the end of the quarter some exits of 945.
And then we're ramping that back up right now more late stage. So I would tell you that number comes down a bit, but it's not going to be too far off.
Okay.
Okay, great. Thank you.
Our next question comes from Robert Dodd with Raymond James.
Thanks.
Congratulations on the quarter guys if I can.
Going back to the special dividend.
Spillover is now 47 cents I mean, you've paid over the last 12 months a lot of special dividends.
Shareholders don't quite well.
Is it the intent to kind of.
But at some level of spillover here.
And basically payout overrunning, if you havent realized gain or if you continue to.
Over on the dividend.
Just a more NII basis. So if rates go up obviously that there's earnings power of that as well or is that just going to be more.
Potential.
Our plan basically pay out, earning each quarter or something like that to.
To manage this spill opened down so you don't have the excise tax. So can you give us any any thoughts on that front.
Sure sure. So honestly that is what we have been doing.
Our balance was quite high and.
Obviously, you go back to the MRI days, we've had in over a dollar in UTI they were paying.
Again excise tax.
We paid that down through the supplemental dividend program and this 15 cents was related to an exit of one of our equity portfolio companies.
<unk> produced our 15th distribution that we're paying off this brings us down to approximately 30 to 32.
On our UTI balance, which we would tell you that we think that we should be somewhere between 20 and 30.
So we are really where we want to be.
From this point going forward.
Think normal activities will maintain that balance and then as VC exits.
I think we noted we have $25 million of unrealized depreciation. So we do expect to see exits that will generate.
<unk> and that would be included in special distributions going forward, but while maintaining that 20 to 30 UTI balance.
Got it I appreciate that thank you and then one more if I can on that.
The color you gave that unit revenues and EBITDA. Both grew margins came down slightly I don't think that that's a great spuds were there any.
And because of the portfolio not necessarily specific to any areas.
Where you saw margin compression that maybe you didn't anticipate I mean, obviously labor cost raw materials, but was there any other kind of drive it.
That came out of left field so to speak.
So I mean, obviously labor inputs are up material inputs are up.
Fortunately for the vast majority of the companies you know when you have an inflationary environment inflationary environment narrative out in the public square easier to call to your customers and raise prices right.
Extensive when you do so.
It helps I think the one area that.
That you haven't mentioned.
We all know about the supply chain and just not only the cost of inputs, but the difficulty to get inputs.
And we have seen a couple of companies.
Utilize working capital.
To pre buy in bulk up there working capital base their inventories and so.
The cost of doing that is essentially a cash flow margin.
Hit rate so.
That's been something I wouldn't say, we didnt expect it I mean like it kind of makes sense right with the supply chain being what has been said.
Months.
But that is definitely a dynamic that affects companies across the economy.
I mean, we've seen we've seen utilized utilized capital to to increase their inventory.
To defend against just availability of.
Of inputs.
Has that been one of the drivers of the.
The strength of the pipeline in terms of or is that just at the margin somebody using working capital or was that pretty.
Unless it pervasive, but pretty common across the portfolio.
I mean, our pipeline is not really working capital deals obviously.
We have revolvers across the portfolio I'd say at the margin some of the revolvers, maybe drawn in part with that with those reasons.
The pipeline really is still basically.
Yeah.
Its founder owned businesses that are that are selling well.
Our diversifying their holdings as they get later later in their life right. So there are private equity transactions and interesting alternatives because it allows the founder of the rollover a portion of their proceeds into the new into the company.
Stay involved in the company, but diversify their holdings.
Yes.
Having the pandemic in the rearview mirror.
Economy being a concern.
People that might not have not quite ready to sell myself.
Maybe maybe a deal where I take a few of our chips off the table might make some sense.
And it's given private equity guys, a chance to to invest in companies and so I think that general dynamics still still is there.
It's not necessarily working capital look for looking for working capital as much as it is.
M&A kind of transactions.
Got it thank you and that makes sense I mean, you wouldn't get $12 million of add ons. This quarter last one if I can't count when underwriting and to your point you're always underwrite.
For a recession to occur are doing during the lifecycle alone.
How.
Increment, what do you think that the quality of your incremental knowledge about a ball that was given that the COVID-19 in those.
The portfolio.
Using your portfolio, obviously survive COVID-19 and manage supply chain disruptions and economic issues that do you think that.
Financial information you have about bars.
<unk> relatively recent compared to the financial crisis, which was.
Okay to go at this point.
Does that give you more confidence in.
The ability of borrowers to.
To withstand any economic hiccups over the next couple of years or do you think COVID-19, which is.
That it doesn't tell us much about.
Survivability equal.
Success doing.
Put adequate surround normal recession, if that comes to pass.
Yes, theres several parts to that answer I mean.
Covid the Covid stress created a slowdown in business and so whether the slowdown in business as a recession or COVID-19 or otherwise.
You get to see how <unk> had a lot of these companies handle or the business models handle kind of a stress in the economy co is a little different because it was a flash crash and of course, then didn't thankfully.
Getting into it.
That being.
A lasting thing from an economy perspective.
The Covid dynamics interesting when we had we have probably have.
Certainly a bunch of business models that we've.
That we've seen out there and new deal flow and to some extent in our portfolio that actually.
Peer EBITDA perspective benefited from Covid.
Meaning that there.
Their product or service was needed more.
And COVID-19 in a COVID-19 environment than before and so we are underwriting deals now we're underwriting to downside, but were also hit.
A lot about in certain businesses, we're looking at and underwriting.
Is any of the EBITDA that we're underwriting COVID-19 bump.
Kind of a lasting effect of COVID-19, so when that kind of fades.
Else equal EBITDA will come down so it's a little bit.
There are businesses out there that you know like I said EBITDA increased during COVID-19 for very specific reasons.
And then of course, there's a lot of businesses decreased substantially given COVID-19.
I would say just general just seeing the portfolio of stretch in an environment like that it is helpful and sure to some extent as you said it.
It's comforting to see.
Our borrowers that withstand it.
Pvp hang out there and the like but you know.
A lot of these companies didn't use of funds.
I think some of the patent box.
So yeah. So it was good I mean, it was good in the great recession as a long time ago.
But.
But having something more recent that stress the portfolio and portfolio performed as certainly company.
On the liquidity side, Robert we did see even though there was stimulus money out there we saw probably a third of our portfolio companies draw on our revolver and then pay it back down actually almost.
All of them paid it back down within a month or month and a half.
But you kind of get a sense of just how they operate in a recession environment environment.
Got it. Thank you. Thank you.
And I'm not showing any further questions at this time I'd like to turn the call back to Bowen for any closing remarks.
Alright, well, thanks, everybody thanks for joining us.
We appreciate your time and we look forward can you give you further updates as we go forward.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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