Q2 2024 Capital Southwest Corp Earnings Call
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Thank you for joining today's capital southwest second quarter fiscal year 2024 earnings call participating on today's call are Bowen Diehl, CEO, Michael <unk>, CFO and Chris Rehberger.
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.
These statements are based on current conditions currently available information and management's expectations assumptions.
They are not guarantees of 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 restaurants.
The capital Southwest's publicly available filings with yet.
These days.
The company does not undertake any obligation to update or revise any forward looking statements.
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 to our President and Chief Executive Officer.
Thanks, Chris.
And thank you everyone for joining us for our second quarter of fiscal 2024 earnings call.
We're 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 in the Investor Relations section of our website at Www Dot capital southwest Dot com.
You will also find our quarterly earnings press release issued last evening on our website.
We'll 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 67 cents per share, which represented 24% growth over 54 per share generated a year ago in the September quarter.
With 57 cents per share more than covered both our regular dividend and our supplemental dividend paid during the quarter.
56 <unk>.
<unk> per share respectively.
Well, probably our earnings continued to be strong and as of the end of the quarter. We estimate that our undistributed taxable income was 42 cents per share.
We're also pleased to announce today that our board of directors has declared a one cent per share increase in our regular dividend to <unk> 57 per share for the quarter ending December 31 2023.
This represents an increase of one 8% compared to the 56 cents per share regular dividend paid during the September quarter, and nine 6% over a 52% per share paid a year ago in the December quarter.
These increases in our regular dividends are a result of the increased fundamental earnings power of our portfolio given its growth and performance as well as further improvements in our operating leverage.
In addition, due to the <unk>.
Excess earnings being generated by our floating rate debt investment portfolio and its high interest rate environment.
Our board has again declared a supplemental dividend of <unk> <unk> per share from December 23 quarter, bringing.
Bringing total dividends declared for the December 'twenty three quarter.
263 per share.
Which in total represent 11% growth over total dividends paid out a year ago quarter.
While future dividend declarations are at the discretion of our board of directors. It is our intent and expectation with capital southwest will continue to distribute quarterly supplemental dividends for the foreseeable future.
While base rates are above historical averages.
And we have a meaningful UTI, which was generated by earnings in excess of our dividends and realized gains from our equity investment portfolio.
During the quarter deal quality and activity in the lower middle market continued at a healthy pace and we continue to be able to find attractive investment opportunities.
Deal flow continues to be weighted more towards acquisitions, rather than refinancing it.
The environment continues to be a favorable one for non bank first lien lenders like capital southwest.
Private equity firms and business owners continue to transact, while non bank lenders continue to provide more certainty to clothing and traditional bank financing structures.
Loan pricing spreads remain attractive, but moderated somewhat we're attracting 25 to 50 basis points versus the versus the most recent couple of quarters as competition in the lower middle market among non bank lenders migrated slightly towards more normal levels.
That said, we're still seeing very attractive loan pricing spreads on new portfolio of loans that are 25 to 50 basis points higher than 12 months to 18 months ago.
Leverage levels on the new portfolio a couple of loans remained generally lower by half to a full turn of EBITDA.
We also continue to see loan to value levels on new loans calculated of our first lien loan divided by the enterprise <unk> paid for an acquisition.
Down meaningfully from 12 to 18 months ago as private equity firms remain willing to pay relatively full multiples for quality companies.
Portfolio growth during the quarter was driven by $110 million of new commitments, consisting of $81 7 billion in commitments to five new portfolio companies.
At $28 3 million in commitments to six existing portfolio companies.
On the capitalization front, we are pleased to announce that during the quarter, we successfully amended extended and upsized, our corporate revolving credit facility, while also raising $22 8 million in gross equity proceeds.
At a weighted average price of $20 77 per share.
Our 127% of the prevailing NAV per share.
We have remained diligent she had shifted sharing we have strong balance sheet liquidity.
While also funding a meaningful portion of our investment activity with accretive equity issuances.
As we believe it is important to maintain a conservative mindset to both balance sheet liquidity and BDC leverage.
We continue to manage our BDC with a full economic cycle mentality.
This starts with our underwriting of new opportunities, but it also applies to how we make the bdc's capitalization.
Managing leverage to the lower end of our target range positions us to invest throughout a potential recession when.
When risk adjusted returns can be particularly attractive.
It also allows us to support our portfolio companies, while also opportunistically repurchasing our stock in order to trade meaningfully below NAV.
Finally, subsequent to quarter end, we received shareholder approval to increase authorized shares of our common stock for 75 million shares upfront 40 million shares.
These new shares will allow us to continue our track record of growing our asset base, while maintaining a conservative balance sheet leverage are raising accretive equity primarily through our ATM program.
On slide seven and eight we illustrate our continued track record of producing strong dividend growth.
Just a dividend coverage and solid value creation central launch of our credit strategy back in January of 2015.
Since that time, we have increased our regular dividend paid to shareholders 28 times.
I've never cut the regular dividend.
All while maintaining strong coverage of our regular dividend with pre tax NII.
Additionally over the same time period, we have paid or declared 22 special our supplemental dividends.
Totally $3 83 per share <unk>.
Including a <unk> <unk> per share the board has declared for the December 2023 quarter.
All generated for excess earnings and realized gains from our investment portfolio.
We believe our track record of thoughtfully growing our dividend.
Solid performance of our portfolio as.
As well as our company's sustained access to multiple capital sources.
As demonstrated the strength of our investment in capitalization management strategy.
As well as the absolute alignment of all our decisions with the interest of our shareholders.
Turning to slide nine we lay out the core tenets of our investment strategy.
Our core strategy of lending and investing in the lower middle market. The vast majority of which is in first lien senior secured loans to companies backed by private equity firms.
In fact, approximately 91% of our credit portfolio is backed by private equity firms.
Which provide important guidance and leadership to the portfolio companies.
As well as the potential for new junior capital support if needed.
We have been pleased with the leadership and support that our private equity fund partners have provided our portfolio companies.
Both in the U S is where capital has been required to maintain the operating and growth strategies of the portfolio companies and realizing operational efficiencies and an environment where business input costs have been rising.
In the lower middle market. We also have the opportunity to invest on a minority basis and the equity pay associated with the private equity firm when.
When we believe the equity basis is compelling.
As of the end of the quarter, our equity co investment portfolio consists of 59 investments with a total fair value of $121 1 million.
Which was marked at 147% of cost.
Representing $38 9 million embedded unrealized appreciation or <unk> 97 per share.
Our equity portfolio, which represented approximately 9% of our total portfolio at fair value as of the end of the quarter.
<unk> to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses.
Which will come in the form of NAV per share growth and supplemental dividends overtime.
Our lower middle market strategy is complemented by club participations in first lien loans to larger companies led by Likeminded lenders with whom we have relationships and have gained confidence in their post closing loan management from working together across multiple deals.
Virtually all of these club deals are first lien senior secured and backed by private equity firms.
As illustrated on slide 10.
Our on balance sheet credit portfolio as of the end of the quarter grew 6% quarter over quarter to $1 2 billion.
Compared to $1 1 billion as of the end of the prior quarter.
Year over year, the portfolio has grown 31% from $903 million as of the September 22 quarter ends.
For the current quarter, 100% of our new portfolio company debt originations were first lien senior secured.
And as of the end of the quarter, 97% of the credit portfolio was first lien senior secured.
The weighted average credit exposure per company and our portfolio was one 1%.
We believe our portfolio granularity speaks to our continued investment discipline.
Maintaining a conservative posture overall risk management as we grow our balance sheet.
On slide 11, we detail the $110 million of capital invested and committed to portfolio of companies during the quarter cash.
Capital committed this quarter included $79 $7 million in first lien senior secured debt committed to five new portfolio companies.
Including two in which we also invested eight.
A total of $2 million of equity.
We also committed a total of $27 8 million in first lien senior secured debt and 550000 and equity 86 existing portfolio companies.
We are pleased with our strong market position that our team has established in the lower middle market is a premier debt and equity capital provider.
As evidenced by the broad array of relationships across the country from which our team of sourcing quality opportunities.
Deal activity over the past quarter continued at a healthy pace and we continue to expect solid net portfolio growth in the coming quarters.
Slide 12, we detail key steps for our on balance sheet.
Balance sheet portfolio as of the end of the quarter, excluding our I 45 joint venture.
As of the end of the quarter. The total portfolio at fair value was weighted 80 to 87, 8% of first lien senior secured debt.
Two 8% to second lien senior secured debt.
1% or sub debt.
And nine 3% to equity co investments.
The credit portfolio had a weighted average yield of 13, 5% and a weighted average leverage through our security of three six times EBITDA.
As seen on slide 13, our total investment portfolio, including our I 45 JV.
<unk> continues to be well diversified across industries.
With an asset mix, which provide strong security for our shareholders' capital.
The portfolio remains predominantly weighted towards first lien senior secured debt with less than 3% of the total portfolio in second lien senior secured debt.
Turning to slide 14, we have laid out the rating migration within our portfolio during the quarter.
As a reminder, all loans upon origination are initially assigned an investment rating of two.
On a four point scale with 1% being the highest rating.
And 4% being the lowest rate.
We feel very good about the performance of our portfolio was 96, 9% of the portfolio at fair value rated and one of the top two categories of one or two.
I will now hand, the call over to Michael to reduce more specifics of our financial performance for the quarter.
Thanks Bowen.
Specific to our performance for the quarter as summarized on slide 16, we increased pretax net investment income by 6% quarter over quarter to $26 4 million or.
Or <unk> 67 per share.
Compared to $25 million or <unk> 67 per share in the prior quarter.
During the quarter, we paid out 56 cents per share regular dividend and a <unk> <unk> per share.
Implemented dividend as mentioned earlier, our board has approved a <unk> per share increase to the regular dividend to <unk> 57 per share and maintained a <unk> <unk> per share supplemental dividend for the December quarter.
Maintaining a consistent track record of meaningfully covering our dividend with pre tax net investment income is important to our investment strategy.
We continue our strong track record of regular dividend coverage with 120% coverage for the last 12 months ended September 32023, and 109% cumulative coverage since the launch of our credit strategy in January of 2015.
Given the floating nature of our credit portfolio elevated interest rates continued to be a tailwind to our net investment income.
The quarter over quarter increase in the base rate index used to calculate interest on a majority of our loans moderated from the pace of increase we've seen in the past several quarters have been reset in early October to approximately $5 three 9%.
This represented an increase of 15 basis points from its early July base rate reset of approximately $5 two 4%.
As a reminder, our intent is to continue to share a portion of the excess of our quarterly pre tax NII over our regular dividend with our shareholders in our quarterly supplemental dividend we.
We are confident in our ability to continue to distribute quarterly supplemental dividends for the foreseeable future based upon our current UTI balance of 42 per share our ability to grow UTI each quarter organically by over earning our total dividend.
Operator: Thank you for joining today's Capital Southwest 2nd quarter fiscal year 2024 earnings call, participating on today's call are Bowen Diehl, CEO, Michael Sarner, CFO, and Chris Rehberger VP Finance.
And the expectation that we will harvest gains over time from our existing <unk> 97 per share and unrealized depreciation on the equity portfolio.
Chris Rehberger: I will now turn the call over to Chris Rehberger. Thank you.
Chris Rehberger: 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. [inaudible] make sure that you have the potential to make sure that you have the potential to make sure that you have the potential to make sure that you have the potential to make sure that you have[inaudible] the potential to make sure that you have the potential to make sure that you have[inaudible] Well, future dividend decorations are at the discretion of our board of directors.
For the quarter, we increased total investment income to $42 $8 million.
Representing 6% growth quarter over quarter, and 60% growth from a year ago.
Weighted average yield in the portfolio on all investments was 13%.
Total investment income was $2 4 million higher this quarter due to growth in our credit portfolio as well as an increase in our weighted average yield on investments as of the end of the quarter. We had four portfolio companies with loans on nonaccrual, representing 2% of our investment portfolio at fair value.
On slide 17, we further improved.
<unk> operating leverage to one 8% for the current quarter, achieving 2% or better operating leverage was one of our initial long term goals. When we relaunched cfw's, there's a middle market lender back in 2015.
To put this metric and perspective or one 8% operating leverage as second best in the entire BDC industry.
We believe this metric speaks to the benefits of an internally managed model and our absolute alignment with shareholders.
Internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to invest in people and infrastructure to continue to build a best in class BDC as.
As we look toward we expect further improvements in operating leverage as we continue to grow the balance sheet over time.
Turning to slide 18, the company's NAV per share at the end of the quarter increased by <unk> <unk> per share to $16 46.
Primary drivers of the NAV per share increase for the quarter were earnings in excess of our dividends for the quarter and accretion from the issuance of common stock at a premium to NAV per share partially offset by net depreciation on our investment portfolio.
Turning to slide 19, we are pleased to report that our balance sheet liquidity remained strong with approximately $207 million in cash and undrawn leverage commitments on our revolving credit facility as of the end of the quarter.
We recently completed an amendment upsized an extension on our revolving credit facility as our bank Syndicate continues to support our growth in fact eight of our existing lenders in the facility upsize their commitments, which we believe demonstrates their confidence in our stewardship, especially in the current capital markets environment.
The amendment increased total revolving facility commitments from 400 million to $435 million and extended the maturity of the facility from August 2026 to August 2028 base.
Based on our current borrowing base, we have full access to the incremental revolver capacity.
The facility also has an accordion feature allowing for the further increase of total commitments up to an aggregate $750 million.
Now for us to continue to grow our overall capacity in lock step with the growth of our overall balance sheet.
In addition, we have a $45 million in uncommitted SBA debentures capacity to draw from in the future.
As at the end of the September quarter, 49% of our capital structure liabilities, where an unsecured covenant free bonds and our earliest debt maturity is in January 2026.
Chris Rehberger: It is our intent and expectation that Capital Southwest will continue to distribute quarterly supplemental dividends for the foreseeable future, while baserates are above historical averages, and we have a meaningful GTI, which is generated by earnings and excess of our dividends and realized gains from our equity investment portfolio. During the quarter, deal quality and activity in the lower-middle market continued at a healthy pace, and we continue to be able to find attracted investment opportunities.
As Bowen mentioned earlier subsequent to quarter end, we have received shareholder approval to increase the number of authorized shares from $40 million to 75 million.
These incremental shares provide capital southwest with the flexibility to continue our track record of raising accretive equity to maintain conservative balance sheet leverage as we continue to grow our asset base.
Chris Rehberger: The deal flow continued to be weighted more towards acquisitions rather than refinancing, and the environment continued to be a favorable one for non-bank personally in lenders like Capital Southwest. Private equity firms and business owners continued to turn back while non-bank lenders continued to provide more certainty to closing than traditional bank financing structures. Loan pricing spreads were made attractive, but moderated somewhat. Retracting 25 to 50 basis points versus the most recent couple of quarters, as competition in the lower-middle market among non-bank lenders migrated slightly towards more normal levels.
Our regulatory regulatory leverage as seen on slide 20 ended the quarter at a debt to equity ratio of <unk> 92 to one down meaningfully from $1. One one to one as of the year ago September quarter. We.
We will continue to methodically and Opportunistically raised both secured and unsecured debt capital as well as equity capital through both our ATM program and secretary offerings to ensure we continue to maintain significant liquidity conservative leverage and adequate covenant cushions throughout all economic cycles, I will now hand, Nick.
Call back to Bowen for some final comments.
Thanks, Michael and again, thank you everyone for joining us today, we appreciate the opportunity to provide you an update on our business our portfolio on the market environment.
Chris Rehberger: That said, we are still seeing very attractive loan pricing spreads on new portfolio loans, that are 25 to 50 basis points higher than 12 to 18 months ago. Leverage levels on the new portfolio couple loans remain generally lower by a half to a full-turn of EBITDA. We also continue to see loan-to-value levels on new loans, calculated as our personally loan divided by the enterprise value of the paid per-and-acquisition. Down meaningfully, from 12 to 18 months ago, as private equity firms remain willing to pay relatively full multiples for quality companies, portfolio growth during the quarter was driven by a hundred and ten million in new commitments, consisting of 81.7 million in commitments to five new portfolio companies, and 28.3 million in commitments to six existing portfolio companies.
Our company and portfolio continued to demonstrate strong performance and we continue to be impressed by the job. Our team has done in building a robust asset base dealer.
Deal origination and portfolio management capability as well as a flexible capital structure.
As to the uncertainty in the economy, we have been underwriting new deals and managing the overall BDC with a full economic cycle mentality since day, one which.
Which we believe has positioned us well for the potential economic volatility in the coming months and years.
In summary, we have a credit portfolio heavily weighted to first lien senior secured debt.
Allocated across a broad array of companies and industries.
Over 90% of which is backed by private equity firms.
Chris Rehberger: On the capitalization front, we are pleased to announce that during the quarter, we successfully amended, extended and upsized our corporate revolving crisis silly, while also raising 22.8 million gross equity proceeds at a way average price of $20.77 per share, or 127% of the prevailing NAV per share. We have remained diligent to ensuring we have strong balance of liquidity, while also funding a meaningful portion of our investment activity with a creative equity issue with us.
We have a well capitalized balance sheet with multiple capital sources strong liquidity and a flexible capital structure.
Much of which is fixed rate and covenant light.
We believe our first lien senior secured investment focus and our capitalization strategy provide us complete confidence in the health and positioning of our company and our portfolio as we look ahead.
This concludes our prepared remarks, operator, we are ready to open the lines for Q&A.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our first question.
Chris Rehberger: As we believe it is important to maintain a conservative mindset to both balance sheep liquidity and BDC leverage. We continue to manage our BDC with a full economic cycle mentality. This starts with our underwriting of new opportunities, but it also applies to how we manage the BDC's capitalization. Managing leverage to the lower end of our target range, position just to invest throughout a potential recession, when risk-adjusted returns can be particularly attractive.
Our first question comes from Mickey <unk> with Ladenburg. Your line is open.
Yes, good morning, everyone, Poland one of your larger investments this quarter was in <unk>.
Chris Rehberger: It also allows us to support our portfolio companies, while also opportunistically we are purchasing our stock in order to trade meaning to the Finally, some switch quarters we received shareholder approval to increase authorized shares of our common stock to 75 million shares up from 40 million shares. These new shares will allow us to continue our track record of growing our asset base while maintaining conservative balance sheet leverage by raising a creative equity primarily through our ATM program.
<unk> restaurants.
And obviously that can be a difficult sector to invest in and eating out is one of those things that people cut back on during a recession, which may be coming.
I do see that its menu seems to be focused on value.
Which is appealing but is there anything else in that deal in particular that attracted you to this investment.
Yes, it's an interesting question because we don't do a lot of restaurant deals obviously.
That was kind of unique you referenced the value menu, but it's also it's bounded.
Chris Rehberger: On slide 7 and 8, we illustrate our continued track record of producing strong dividend growth, consistent dividend coverage, and solid value creation since the launch of our credit strategy back in January of 2015. Since that time, we have increased our regular dividend pay to shareholders 28 times and have never cut the regular dividends. All while maintaining strong coverage of our regular dividend with pre-tax NII. Additionally, over the same time period, we have paid or declared 22 special or something old dividend, totally $3.83 per share, including the six cents per share the board has declared for the December 2023 quarter.
Founded back in $19 34.
And it's in it's in a certain couple of markets that it's been there for a long time and it kind of <unk> drive in.
Literally the waiters and waitresses job to your car and back in.
<unk> has been it's kind of a.
Yeah.
Very very loved by the community, let's put it that way.
So a lot of people go there because they want their or their parents and grandparents went there that type of thing. So that's very that's why include the award in the <unk> in the press release, that's literally what it is.
And then obviously the leverage profitability and all those other things are very attractive to us.
Chris Rehberger: All generated from excess earnings and realized gains for our investment portfolio. We believe our track record of thoughtfully growing our dividend, the solid performance of our portfolio, as well as our company's sustained access to multiple capital sources, is demonstrated the strength of our investment and capitalization management strategies, as well as the absolute alignment of all our decisions with the interest of our shareholders.
But but yes.
Yes.
These are the reasons that it's different than your typical restaurant deal.
I appreciate that.
I wanted to ask you also a couple of questions about the operating.
Our leverage ratio can you give us a sense of the number of portfolio companies. You are now managing per investment professional and do you see that how do you see that ratio trending.
Chris Rehberger: On slide 9, we lay out the core tenets of our investment strategy, our core strategy is lending and investing in the lower middle market, the vast majority of which is in virtually senior secured loans to companies backed by private equity firms. In fact, approximately 91% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies, as well as the potential for new junior capital support, if needed.
So we've got 94 portfolio companies and we have the team <unk> team of investment professionals.
So that's the average of a six three for investment professionals.
Yes.
Plus we've got a bunch of employees that have been here for a while too so underwrote those employees of those portfolio companies. So we feel pretty good about that.
Coverage ratio that Youre, asking about and certainly we watch obviously and as we grow.
Chris Rehberger: We have been pleased with the leadership and support that our private equity firm partners have provided our portfolio companies. Both in the few instances where capital has been required to maintain the operating and gross strategies of the portfolio company, and in realizing operational efficiencies in an environment where business input costs have been rated. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity period pursued with the private equity firm when we believe the equity basis is compelling.
Certainly be increasing people as well as internal promoting people and hiring more junior people underneath them to leverage their time and you might want to just touch about the scale we've added.
Significant employees in middle Middle levels.
Employees from within where probably a deep today than we've ever been in.
A lot of these people are seasoned professionals that can handle necessarily can handle 660, all that time, yes, we're certainly very biased towards internal professional development.
Chris Rehberger: As in the end of the quarter, our equity co-investment portfolio consists of 59 investment, with a total fair value of 121.1 million, which was marked at 147% of cost, representing 38.9 million in embedded unrealization. Our equity portfolio, which represented approximately 9% of our total portfolio of fair values of the new quarter, continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, which will come in the form of NAV for share growth and supplemental dividends over time.
Then letting people grow and learn how we do things.
How the business model was actually worked through with worked quite well over the last eight years.
Yes, I agree.
Underneath them, so the staffing ratio it looks pretty good right now.
So so my last question sort of a segue from that Youre operating leverage ratio is now very close to the Peter you mentioned in your prepared remarks, and they've obviously been around a long time and there are quite a bit larger than you. So do you see more upside in this ratio or.
Is this about as good as it is it can get.
Chris Rehberger: Our lower middle market strategy is complemented by club participations and firstly loans to larger companies led by like-minded lenders with whom we have relationships and have gained confidence in their post-closing loan management for working together across multiple deals. Virtually all of these club deals are personally in senior secures and backed by private equity firms As illustrated on 510, our on-bound sheet credit portfolio is at the end of the quarter for 6% quarter of a quarter to 1.2 billion compared to 1.1 billion is at the end of the prior quarter.
Yes, that'd be great.
They may improve a little bit but.
I mean, obviously, we need to have the best professionals in the industry. So we have to compensate them accordingly and so.
So theres only.
Asset management business or something like that.
The operating leverage will grow.
Yes, I'd, probably improve a little bit, but it's not going to drop by half, Okay, alright, right net run rate.
It's about one 7% and we probably see over the next I would actually say for the next six to 12 months, we see us dropping.
One seven on an LTM and probably down to one 6% a little bit of improvement.
Chris Rehberger: Year over year the portfolio has grown 31% from 903 million as of the September 22 quarter of it. For the current quarter, 100% of our new portfolio company debt originations were firstly in senior secured and as of the end of the quarter, 97% of the credit portfolio was firstly in senior secured. The way the average credit exposure per company in our portfolio was 1.1%. We believe our portfolio of granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management if we grow our balance sheet.
Sure sure Okay, yes.
Right. Okay I appreciate it those are my questions. This morning. Thank you.
Thanks Nicky.
One moment for our next question.
Our next question comes from <unk> Abraham with UBS. Your line is open.
Hi, everybody. Thanks for the question you mentioned on the last call.
There was some potential M&A percolating and potentially 35% to $75 million in prepaid through the end of the year can you just talk a little bit about what transpired over the quarter that may have delayed that.
Chris Rehberger: On 511, we detailed the 110 million of capital invested in and committed to portfolio of companies during the quarter. Capital committed to score included 79.7 million in firstly in senior secured debt committed to 5 new portfolio companies, including 2, which we also invested a total of 2 million equity. We also committed a total of 27.8 million in firstly in senior secured debt and 550,000 in equity to 6 existing portfolio companies. We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital provider as evidence by the broad array of relationships across the country from which our team is sourcing quality opportunity. The activity over the past quarter continued at a healthy pace and we continue to expect solid net portfolio growth in the coming quarters.
Broader public market volatility.
Socratic dynamics.
That may have changed things.
Yes, no I think.
I wouldn't say that I am thinking of the processes were referring to I wouldn't say they were significantly delay they do other sale processes.
Take a while.
Obviously, the financing market is choppy here than it was 12 to 18 months ago, so raising financing.
I'd say, probably a larger or more of a hand, holding type exercise, where a private equity firm that it might have been.
Afternoon.
So maybe things take a little bit longer but.
And two of them actually one of them is going through an HSR process that was not identified before the need for it so that actually pushed out eight to 10 weeks.
To close.
The other one that we were probably alluding to is actually not happening I think they are probably more likely to do a dividend recap.
Chris Rehberger: On 12, we detailed key steps for our on balance sheet portfolio as of the end of the quarter, excluding our I-45 joint venture. As of the end of the quarter, the total portfolio of fair value was weighted 87.8% to firstly in senior secured debt, 2.8% to secondly in senior secured debt, 0.1% to sub-debt, and 9.3% to equity go investments. The credit portfolio was added weighted average yield of 13.5% and weighted average leverage through our security of 3.6 times revenue.
Stay in the deal.
So those are the two largest deals.
Okay.
That's helpful and then.
Yes, just as you think about.
Just line of sight into prepaid over the next couple of quarters, and and just balancing that with with managing leverage.
Just any thoughts there.
I'm going to look forward.
Yes, so I think.
I'm talking about really leverage and we obviously ended the quarter at <unk> 92.
And we want to know we just received approval to increase our share base.
Chris Rehberger: If you see on slide 13, our total investment portfolio, including our I-45JV, continues to be well diversified across industries, with an asset niche which provides strong security for shareholders, capital. The portfolio remains predominantly weighted towards firstly in senior secured debt with less than 3% of the total portfolio in secondly in senior secured debt.
For the shelf from $40 to 75 million. So we had essentially.
Partial quarter of a run rate.
At ATM raises I'd, probably tell you in this fourth quarter will be more than the 22 million network was right in this quarter.
Okay.
Yes.
Okay.
Okay. So actually in prepayments I think we have around maybe $25 million to $30 million.
Chris Rehberger: Turning to slide 14, we have laid out the rating migration within our portfolio during the quarter. As a reminder, all loans upon origination are initially assigned to the investment rating of 2, on a 4 point scale with 1% being the highest rate, and 4% being the lowest rate. We feel very good about the performance of our portfolio with 96.9% of the portfolio fair value rated in one of the top two categories of one or two.
And prepayments that were expecting that those could also slip past the end of the year. So you will see that if we do plan to bring leverage down this quarter, probably closer to <unk>.
25 to nine range.
Our expectation with or without that exit.
Okay.
That's all helpful. I'll hop back in the queue. Thank you.
Thank you.
One moment for our next question.
Michael Sarner: I will now hand the call over to Michael to review more specifics about financial performance for the quarter. Thanks, Bowen. Specific to our performance for the quarter, as summarized on slide 16, we increased pre-tax net investment income by 6% quarter over quarter to 26.4 million dollars or 67 cents per share compared to 25 million dollars or 67 cents per share in the prior quarter. During the quarter, we paid out a 56 cents per share regular dividend, when a 6 cent per share supplemental dividend.
Our next question comes from Bryce Rowe with B Riley Your line is open.
Thanks, Good morning.
Maybe wanted to touch on that last point, Michael Michael It sounds like the.
Shareholder vote to increase the authorized shares is really the reason for.
Maybe less usage on the ATM this past quarter.
That is correct yes.
Okay. That's helpful.
Michael Sarner: As mentioned earlier, our board has approved a 1 cent per share increased to the regular dividend to 57 cents per share and maintaining 6 cents per share supplemental dividend for the December quarter. Maintaining a consistent track record of meaningfully covering our dividend with pre-tax net investment income is important to our investment strategy. We continue our strong track record of regular dividend coverage with 120 per cent coverage for the last 12 months and in September 30, 2023 and 109 per cent cumulative coverage since the launch of our credit strategy in January 2015.
And then.
Maybe I wanted to hit on I 45 leverage within that.
<unk>.
Within that JV kind of continues to go down in terms of that debt outstanding on that particular facility.
What's the outlook there do you expect to continue.
To see debt outstanding within that were for that facility going down or kind of steady state from this point forward.
Yes, I mean over time, we've seen less attractive opportunities in that market and I think mainstreet debt capital southwest ultimately if thats the case.
No we havent originated in quite some time, but we have seen significant amounts of capital coming back, which we've utilized to pay down debt facility. We would tell you probably over the next.
Michael Sarner: Given the floating nature of our credit portfolio, elevated interest rates continue to be a tailwind toward net investment income. The quarter over quarter increase in the base rate index used to calculate interest on a majority of our loans moderated from the pace of increase we have seen in the past several quarters, having reset in early October to approximately 5.39%. This represents an increase of 15 basis points from its early July base rate reset of approximately 5.24%.
One to two quarters, we will look to continue to pay down that facility.
And with the notion that Theres always we've talked to the market in times of that consolidation being a possibility.
That is something that in order to do so we'd probably be delevering ahead of time so.
Bye Bye Delevering, obviously give us a little bit of flexibility what we wanted to do.
Michael Sarner: As a reminder, our intent is to continue to share a portion of the excess of our quarterly pre-tax NII over our regular dividend with our shareholders in a quarterly supplemental dividend. We are confident in our ability to continue to distribute quarterly supplemental dividends for the foreseeable future based upon our current UTI balance of 42 cents per share. Our ability to grow UTI each quarter organically by over earning our total dividend and the expectation that we will harvest gains over time from our existing 97 cents per share in unrealized appreciation on the equity portfolio.
Okay. That's helpful.
And maybe one follow up just on expenses compensation Michael.
Michael do you expect kind of an uptick here in the fourth quarter in that comp line as maybe you get some catch up bonus accruals.
Yes for sure I think so what you saw during the 930 quarter was.
Tell you, though the run rate of SG&A was.
Probably about $200000 high actually based on the fact that we had a special meeting.
But the cash comp was right on in terms of a run rate. So we would expect.
Michael Sarner: For the quarter, we increased total investment income to 42.8 million dollars representing 6% growth quarter over quarter and 60% growth from a year ago. Weighted average yield in the portfolio on all investments was 13%. Total investment income was 2.4 million higher this quarter due to growth in our credit portfolio as well as an increase in our weighted average yield on investments. As at the end of the quarter, we have four portfolio companies with phones on non-a-cruel representing 2% of our investment portfolio at fair value.
Potentially.
Thank you.
I would almost say $1 million to $2 million in addition to that correct.
<unk> cash costs and the following.
Good deal I appreciate the comments thanks.
Thanks, Bob.
One moment our next question.
Our next question comes from Erik Zwick with half the group your line is open.
Thank you and good morning, everyone. I wanted to first just start thinking about the outlook for the weighted average yield in the portfolio and kind of what that implies for interest income just curious as to how much of the.
Michael Sarner: As shown slide 17, we further improved LPM operating leverage to 1.8% for the current quarter. Achieving 2% or better operating leverage was one of our initial long-term goals when we relaunched CFWC as a middle-market lender back in two dozen, and Death Team. To put this metric in perspective, our 1.8% operating leverage is second best in the entire VDC industry. We believe this metric speaks to the benefits of an internally managed model and our absolute alignment with shareholders.
So we're continuing to kind of move higher in <unk> looks like it may have stabilized here for a little bit and if we assume the fed doesn't move tomorrow and we're kind of in this current environment now is there still a little bit more of the.
930 quarter increase in Cobra to trickle through the portfolio or is most of that been realized at this point.
Yes, Theres, probably another I think 15 basis points based on the most recent reset in October for the coming quarter.
Okay, great. Thank you and then I know you addressed prepayment fees, a little bit already but just looking at that prepayment fees and other income line.
Michael Sarner: The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to invest in people and infrastructure to continue to build a best-in-class VDC. As we look forward, we expect further improvements in operating leverage as we continue to grow the balance sheet over time. Turning the slide 18, the company's NAV per share at the end of the quarter increased by 8 cents per share to $16.46.
Down a little bit in the 930 quarter, just curious what percentage of that line item is driven by prepayment fees versus other than just curious about kind of that the outlook going forward from your perspective.
Yes, so the prepayments were about 330000, which were considered one time.
Top of that there's another 400000 and that's really the base.
Michael Sarner: The primary drivers of the NAV per share increase for the quarter or earnings in excess of our dividends for the quarter and accretion from the issuance of common stock at a premium to NAV per share. It's partially offset by net depreciation on our investment portfolio. Turning the slide 19, we're pleased to report that our balance sheet liquidity remains strong, but approximately 207 million in cash and under on leverage commitments on our revolving credit facility as at the end of the quarter.
Thats, a really admin admin fees and management fees that we receive on a recurring basis from a portfolio company.
Going forward you should expect that that 400 has grown at about 25000, a quarter based on origination historically.
And then prepayment fees and amendment fees, that's obviously a lot harder to judge we would tell you that we saw amendment fees later piece sort of peak two quarters ago, and so it's come down precipitously over the last two so.
Michael Sarner: We recently completed an amendment upsides an extension on our revolving credit facility as our bank certificate continues to support our growth. In fact, eight of our existing lenders in the facility upsides their commitments, which we believe demonstrates their confidence in our stewardship, especially in the current capital markets environment. The amendment increased total revolving facility commitments from 400 million to 435 million and extended the maturity of the facility from August 2026 to August 2028.
Looking at the 12 31 quarter right now theres not a whole lot of activity that way. So I wouldn't expect a significant amount there.
That's helpful. Thank you and last one just looking at.
Slide 14 in the three credits that were downgraded in the quarter I'm wondering if you could add a little color there in terms of the industries that those companies operate.
Maybe what developments in the quarter led to their to the downgrades.
Yes.
Our three companies downgraded in three companies upgraded on the downgrades.
Michael Sarner: Based on our current borrowing base, we have full access to the incremental revolver capacity. The facility also has an accordion feature allowing for the further increase of total commitments up to an aggregate of $750 million, allowing us to continue to grow our revolver capacity in lockstep with the growth of our overall balance sheet. In addition, we have a 45 million uncommitted SBA debentures capacity to draw from in the future. As at the end of the September quarter, 49% of our capital structural liabilities were in unsecured covenant free bonds, and our earliest debt maturity is in January, 2026.
Any of the Socratic to those certain companies one services utilities and <unk>.
Education management and that the industry has moved to that one big pharma services and the farmer farmers kind of delaying some of their budgeting.
And so that kind of affected that business.
Socratic around some industrial industrial type things, but around that particular company, so nothing really economics per se.
It was encouraging this quarter, we had three upgrades.
The two companies that were upgraded to two were formerly three.
And so the credit risk improve meaningfully in both those cases so.
Michael Sarner: As Bowen mentioned earlier, subsequent to quarter end, we have received shareholder approval to increase the number of authorized shares from 40 million to 75 million. These incremental shares provide capital southwest with the flexibility to continue our track record of raising a creative equity to maintain conservative balance sheet leverage as we continue to grow our asset base. Our regulatory leverage that's seen on slide 20 ended to quarter at a debt-to-equity ratio of .92 to 1, down meaningfully from 1.11 to 1 as of the year of host September quarter.
So we're seeing things migrate up.
From a struggling to performing is obviously encouraging.
Thank you for the color there and yes nice to see that the overall total rating went up even with the downgrades as you've noted some upgrades as well.
Excellent that's all for me today. Thank you.
Thank you.
One moment for our next question.
Our next question comes from Sean Paul Adams with Raymond James Your line is open.
Michael Sarner: We will continue to methodically and opportunistically raise both secured and unsecured debt capital as well as equity capital through both our ATM program and secondary offerings to ensure we continue to maintain significant liquidity, conservative leverage, and adequate covenant pushes throughout all economics.
Hey, guys. Good morning, just a few questions have you guys seen any change in the <unk>.
Types of businesses that are coming to market now versus three to six months ago, whether it be industry sectors or credit quality.
Sales: Sales.
Bowen Diehl: I will now hand the call back to Bowen for some final comments. Thanks, Michael. And again, thank you everyone for joining us today. We appreciate the opportunity to provide you an update on our business, our portfolio and the market environment. Our company in portfolio continues to demonstrate strong performance and we continue to be impressed by the job our team has done in building a robust asset base, deal origination and portfolio management capability, as well as a flexible capital structure.
Essentially the question.
<unk>.
Not really on the type companies and the credit quality anytime you have an environment where.
No.
Yields are and the healthy loan value multiples are about the same in leverage levels down for your loan to value on new loans. It has come down it's been down.
Over the last three or four for three quarters anyway.
Bowen Diehl: As to the uncertainty in economy, we have been underwriting New Deal and managing the overall BEC with a full economic cycle mentality since day one, which we believe has positioned us well for the potential economic volatility in the coming months and years. In summary, we have a credit portfolio heavily weighted the first lean senior shared debt allocated across a broad array of companies and industries, over 90% of which is backed by credit equity firms.
That's obviously a good thing for a first lien lender.
And so I would say quality of deals.
As had been strong.
Slightly changed this quarter as I referenced in our remarks.
Bowen Diehl: We have a well capitalized balance sheet with multiple capital sources, strong liquidity and a flexible capital structure, much of which is fixed rate and covenant light. We believe our first lean senior shared investment focus and our capitalization strategy provide us complete confidence in the health and position of our company and our portfolio as we look ahead.
The competitive landscape in all of our markets.
<unk> increased a bit but still not back to normal levels I would say, but it's definitely.
Like I said in the remarks slightly slightly moved towards more normal levels.
But loan to value is still very attractive.
Yields are still.
Obviously very strong for folks like us.
The flow of deal flow has been attractive and we will start boats in earlier, but.
Our loan to value, probably a year ago before it was 40% over the last two three quarters. It was really in the 25% to 30% now it's ticked up between maybe 30 30 to 40.
Operator: This concludes our prepared remarks.
Operator: Operator, we are ready to open the lines for Q&A. Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question.
So still it's still attractive, but low thirty's certainly in this last 12 to 18 months has definitely been.
Strong in terms of.
Tighter LTV.
Thank you I appreciate the color and my last question was last quarter you briefly touched on the two non accruals in the portfolio I think bring it to a total of three.
As well as your expectations for a restructuring event for for both by the year end has there been any update on those plans and was there any surprises on the non accrual performance for the quarter.
Michelean: Our first question comes from Michelean with Latinburg. Your line is open. Yes, good morning, everyone. Bowen, one of your larger investments this quarter was in Swenson's restaurants. And obviously that can be a difficult sector to invest in. And eating out is one of those things that people cut back on during a recession, which may be coming. I do see that its menu seems to be focused on value, which is appealing. But is there anything else in that deal in particular that attracted you to this investment?
Quarter.
No.
Restructuring I think one of them will happen before the other one.
The company that we move to.
Four.
It will be restructured probably mix.
Couple of weeks.
Absolutely.
Improved slightly since the end of the quarter, but but it'll be restructured.
The one that's little bit.
Unclear as far as the timing of another one.
Michelean: Yeah, it's interesting. It's interesting question. We don't do a lot of restaurant deals, obviously. That one's kind of unique. You referenced the value menu, but it's also, you know, it was founded back in 1934. And it's in a certain couple of markets that has been there for a long time. And it's kind of nostalgic drive in. We're literally the waiters and waitresses, you know, jog to your car and back. And it's very nostalgic.
Hey, guys.
<unk> sponsor the quantum of dollars coming in et cetera, So I'm thinking about that specific to that company.
But one of them will be done in the next couple of weeks and the other ones.
Six weeks away.
Let me also say one of the other portfolio companies.
Michelean: And it's been, it's kind of a very, very loved by the community. It's been that way. And so a lot of people go there because they went there right there were, you know, the parents and grandparents went there, that type of thing. So it's very, that's why I included the word nostalgic and the press release. That's literally what it is. And then obviously the leverage probability and all those other things were very attractive to us.
Greater downgrade, but it's performing.
Pretty pretty well over the last three quarters <unk> been conservative maintained it on nonaccrual, but.
A high chance that one of those actually is removed.
Upgraded to <unk>.
Thank you I appreciate the insight Thats all from me.
One moment our next question.
Our next question comes from Carlos Abraham with UBS. Your line is open.
Bowen Diehl: But, but, you know, those are the reasons that it's different than your typical restaurant. Radio. Appreciate that.
Michelean: I wanted to ask you also a couple questions about the operating leverage ratio. Can you give us a sense of the number of portfolio companies you're now managing per investment professional? And do you see that?
Wireless Abraham with UBS. Please make sure your line is on mute.
Sorry about that I was on mute.
The UTI is up to 42 cents per share. This quarter can you just discuss that trend and whether there is a range that you'd like to be on an ongoing basis with that.
Bowen Diehl: How do you see that ratio trending? So we've got 94 portfolio companies and we have 15, 15 investment professionals. So that's the average of 6.3 per investment professional. I mean, it's, you know, plus we've got a bunch of employees that have been here for a while too. So I'm going to underrate those employees, those portfolio companies. So we feel pretty good about the coverage ratio that you're asking about. And certainly we watch, obviously, and as we grow, you know, we'll certainly be increasing people as well as internally promoting people and hiring more junior people underneath at the leverage our time.
Absolutely. So I think you noted we had a 42.
At the end of the quarter, if you look at where our run rate NII as which is around $6 67, a good run rate.
I think a question earlier in terms of the increased by 15 basis points will drive that higher over the next few quarters assuming rates continue.
To be maintained in this range, we would expect to share half of this.
Under distributed income so grow our UTI bucket by five a quarter. So if you look ahead, it's another 20.
We're targeting probably having a minimum of 60 or more.
Bowen Diehl: And you might want to just touch about the scale. We've added, you know, skipping employees in middle, middle levels. We've promoted employees from within. We're probably a deep today and we've ever been and it's going to have a lot of these people are seasoned professionals that can handle, certainly can handle six fields at a time. Yeah, we're certainly very biased towards internal professional development. And then, you know, let people grow and learn how to how we we do things, you know, how we how the business model is actually works, which worked quite well the last eight years. Yeah, you agree, aren't people underneath them. So the staffing ratio looks pretty good right now.
And is.
Going forward and we think that that that type of level will help support the <unk> supplemental dividend that we're paying today as a minimum.
These facilities and to grow it but it certainly allows us to maintain that success and long term into the future.
Okay.
Okay.
That's very helpful and maybe if I could sneak just one more in here.
Can you give some color on how your portfolio companies are thinking about 2020 for budgeting in terms of EBITDA expectations is it preparing for the worst and hoping for the best kind of situation or is there a more sanguine way to characterize it.
Michelean: So, so my last question sort of the segue from that you're operating leverage ratio is now very close to the peer you mentioned in your prepared remarks. And they've obviously been around a long time and they're quite a bit larger than you.
They're thinking about things when you're looking at thank you.
Yes, so just to be clear I mean with 91% of them.
Bowen Diehl: So, do you see more upside in this ratio or is this about as good as it can as it can get? Yeah, I think they may improve a little bit, but I mean it's, you know, we don't, I mean, obviously we need to have the best professionals in the industry, so we have to compensate them accordingly. And so, you know, there's only, you know, that's a management business or something like that, you know, the operating leverage will grow.
Being.
Portfolio, our private equity firm back Theyre going through the budgeting process right now so I don't have any specific.
Views of the actual budgets in front of us our internal necessarily yet.
But that said I mean these these p/e firms have been working.
We all hear about all the business entered costs going up across the whole economy.
Bowen Diehl: You know, it's probably improved a little bit, but you know, it's not going to drop by half. Well, okay, right now run rate on is about 1.7%. And we probably see over the next, I've actually taken the next six to 12 months, we see us dropping, you know, should that 1.7 on an LTM and probably down to 1.6%. Yeah, so a little bit of improvement. Yeah, for sure. Okay, yeah, that sounds right.
The other has been going up is there interest burden.
And so they've been working very diligently on streamlining every everywhere all levels of the cost structure to counterbalance that.
And so.
One would think inflation should start moderating next year.
Really position themselves well on automating works automating digitizing, where you can digitize.
Michelean: Okay, I appreciate it. Those are my questions this morning. Thank you. Thanks, thank you.
And that type of thing so.
Operator: One moment for our next question.
They've gotten a companies.
Very efficient in my view.
And so I would expect.
Vylas Abraham: Our next question comes from Vylas Abraham with EBS. Your line is open. Hi, everybody. Thanks for the question. You mentioned on the last call that there was some potential M&A percolating and potentially 35 to 75 million in prepay through the end of the year. Can you just talk a little bit about what transpired over the quarter that it may have delayed that, you know, the broader public market volatility or idiosyncratic dynamics that may have changed things.
Alright that was the budgets will be as a general matter I mean, the portfolio companies now are growing on an EBITDA level is kind of low single digits year over year high.
High single digits on a revenue basis year over year.
And so they're kind of kind of plugging along so it'll be interesting to see what the budgets look like for 'twenty, four but we haven't seen it yet.
End of October and are working through right. Now my guess is we will see them see the budget by.
By the next time, we talk to our shareholders that will be early.
February I guess.
January so we will have better knowledge of that so I would say ask that question again next quarter, and we'll have a better better view out of really actually seeing the budgets.
Vylas Abraham: Yeah, no, I mean, I think I would say that I'm thinking of the processes we're referring to. I would say they were significantly delayed. They do a lot of your sale processes, you know, kind of take a while. Obviously, the financing market is chopper than it was 12, 18 months ago. So, you know, raising financing is a, you know, I'd say probably a larger, a more of a hand holding type exercise or a private equipment firm than it might have been two year and a half ago.
Okay, Great I appreciate it.
And one thing I just want to step back on is on the <unk>. The other part of our UTI balance on top of just the undistributed earnings realized gains that we'll harvest in the future. So when I noted the 60 thats, probably a minimum number because we do anticipate being able to harvest gains in 2024.
Vylas Abraham: So, maybe things take a little bit longer, but in two of them, actually one of them going through an HSR process that was not identified before the need for it. So, that actually puts that out 8 to 10 weeks, so expected to close. The other one that we were probably alluding to is actually not happening. I think they're probably more likely to do a dividend recap and stay in the deal. So, those are the two largest deals.
Got it thanks.
Thank you that concludes the question and answer session. At this time I would like to turn it back to Bowen Diehl for closing remarks.
Great. Thank you operator, and thanks, everyone for joining us as always we enjoy giving updates on the company and things are going well and we appreciate all you all support we will talk to you next quarter.
Bowen Diehl: Okay. That's helpful. And then, yeah, just to think about, you know, just line of sight into prepays over the next couple of quarters and just balancing that with, you know, with managing leverage, just to even just any thoughts there on the look forward. Yeah. So, I think, you know, we're talking about really leverage. And we obviously ended the quarter of 0.92. And we want to know we just received approval, you know, to increase our share base for the shelf from 40 to 75 million.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
[music].
Okay.
[music].
Okay.
Bowen Diehl: So, we had essentially, you know, had a partial quarter of a run rate at ATM raises. We'd probably tell you in this quarter will be more than the 22 million that was right in this quarter. Okay. So, actually, in the prepayments side, I think we have around maybe 25 to $30 million in prepayments that we're expecting, but those could also slip, you know, past the end of the year. So, we'll see that. If we do plan to bring leverage down this quarter, probably closer to, you know, the point eight, five to point nine range. That's our expectations, which without that exit. Okay.
[music].
Vylas Abraham: That's helpful.
Vylas Abraham: I'll hop back in the queue. Thank you.
Operator: One moment for our next question.
Okay.
[music].
<unk>.
Yes.
[music].
Yeah.
No.
Bryce ROE: Our next question comes from Bryce Roe with B. Riley. Your line is open. Thanks. Good morning.
Bryce ROE: Maybe wanted to touch on that last point, Michael, Michael and Bob, and it sounds like the shareholder vote to increase the authorized shares was really the reason for, you know, maybe less usage on the ATM this past quarter. Absolutely. Yeah. Okay. That's helpful.
Bowen Diehl: And then, you know, maybe wanted to hit on I 45 leverage within that within that JV kind of continues to go down in terms of, you know, debt, debt outstanding on that particular facility. What's the outlook there? Do you expect to continue to, you know, to see, you know, debt outstanding within that or for that facility going down or kind of steady state from this point forward? Yeah, I mean, over time we've seen less attract opportunities in that market and I think mainstream capital Southwest, ultimately is that's the case.
Bowen Diehl: So we haven't originated in quite some time, but we have seen significant amounts of capital coming back, which we've utilized to pay down that facility. We would tell you probably over the next one to two quarters, we will look to continue to pay down that facility and with the notion that there's always talk to the market in times about consolidation being a possibility. That is something that in order to do so, we probably be delivering ahead of time. So by delivering that, I'll obviously give us a little bit of flexibility what we want to do. Okay, that's helpful.
Michael Sarner: And then maybe one follow-up just on expensive compensation. Michael, do you expect kind of an uptick here in the fourth quarter in that comp line as maybe you get some catch-up bonus accruals? Yeah, for sure. I think so. What you saw during the 930 quarter was, I tell you though, the run rate of SGNA was probably about $200,000 high actually based on the fact that we have a special meeting, but the cash comp was right on in terms of our run rate.
Bryce ROE: So we would expect potentially, you know, I would almost say 1 to 2 million in addition to the current quarters cash comp in the following work. Good deal. I appreciate the comments. Thanks.
Operator: Next one.
Ericsson: One moment for our next question.
Ericsson: Our next question comes from Ericsson. Quiz Thank you.
Ericsson: Good morning, everyone. I wanted to first just start thinking about the outlook for, you know, the weighted average yield in the portfolio and kind of what that implies for interest income. Just crazy for how much of the, you know, so far continue to kind of move higher in 3Q, click it may have stabilized here for a little bit if we assume, you know, the Fed doesn't move tomorrow and we're kind of in this current environment now.
Ericsson: There's still a little bit more of the 930 quarter increase in October to trickle through the portfolio as most of that didn't realize at this point. Yeah, there's probably another, I think, 15 basis points based on most recent reset in October for the coming quarter. Okay. Great. Thank you.
Michael Sarner: And then I know you addressed, you know, prepayment fees a little bit already, but just looking at that prepayment fees and another income line, you know, down a little bit in the 930 quarter, just curious, you know, what percentage of that one at a misdriven private prepayment fees versus other and just curious about kind of that, the outlook going forward from your perspective. Yeah. So the prepayments were about 330,000, which were we've considered one time.
Michael Sarner: On top of that, there's another 400,000 that's really the base. That's a really admin fees and management fees that we receive on a recurring basis from a portfolio company. So going forward, you should expect that 400 has grown at about 25,000 quarter based on origination historically. And then, you know, prepayment fees and amendments fees, that's obviously a lot harder to judge. We would tell you that we saw amendments fees, labor fees sort of peak two quarters ago. And so it's come down precipitously over the last two. So great. Looking at the 1231 quarter right now, there's not a whole lot of activity that way. So I wouldn't expect there. That's helpful. Thank you.
Michael Sarner: And last one, just looking at the slide 14 and the three credits that were downgraded in the quarter. I wonder if you could add a little color there in terms of the industries with those companies operating and maybe what developments in the quarter led to the to the downgrades. Yeah, finishing. So there were three companies downgraded and three companies upgraded. On the downgrades, you know, it's pretty idiosyncratic to those certain companies, one services, utilities, and vegetation management and that industries move a bit.
Michael Sarner: One's in forest services and the farmer's farm is kind of delaying some of their budgeting. And so that kind of affected that business. The other is some credit around some industrial type things that are on that particular company. So nothing really economic per se. It was encouraging this quarter of the three upgrades to the two companies that were upgraded to two were formerly three. And so the credit risk improved meaningfully about those cases.
Michael Sarner: So, you know, seeing things migrate up from struggling to performing is obviously encouraging. Yes, thank you for the color there and just nice to see that the overall total rating went up even with the downgrades as you noted some upgrades as well. So that's all for me today.
Operator: Thank you.
Sean Paul Adams: One moment for our next question.
Bowen Diehl: Our next question comes from Sean Paul Adams with Raymond James. Your line is open. Hey guys, good morning. Just a few questions. Have you guys seen any change in the types of businesses that are coming to market now versus 36 months ago, whether it be industry sectors or credit quality?
Bowen Diehl: Certainly question. I think I'm not really on the type companies. The credit quality, you know, any time you have an environment where, you know, yield and then healthy, you know, value multiples are about the same and leverage levels down for your loan to value on your new loans. It's come down. It's been down, you know, kind of in the last three or four or three quarters anyway. That's obviously a good thing for a first-ling lender.
Bowen Diehl: And so I'd say quality of deals has been strong. You know, it'll be slightly changes quarters. Our reference in our remarks with the competitive landscape in the lower loan markets increased a bit. There's still a lot back to normal level, I would say, but it's definitely like I said in the remarks, slightly moved forward from low level levels. But loan to value is still very attractive. You know, yields are still, you know, obviously very strong for folks like us.
Bowen Diehl: Do I feel like the flow of vehicles has been attractive? Yeah, I'm not sure I've gone to it earlier but, you know, our loan to value probably a year ago before it was 40 percent. So in the last two, three quarters, it was really in the 25 to 30 percent. Now it's checked up between maybe 30 to 40. So still still attractive. But, uh, they're low 30. So, yeah, certainly this last 12 to 18 months, has been strong in terms of tender LTV.
Sean Paul Adams: Thank you. I appreciate the color.
Bowen Diehl: And my last question was, last quarter, you briefly touched on the two non-accruals in the portfolio. I think bring it to a total of three, as well as your expectations for a restructuring event for both by the year end. Has there been any update on those plans and was there any surprises on the non-accrual performance for the quarter? No, I mean, I think the restructuring I think one of them will happen before the other one.
Bowen Diehl: The company that we move to for will be restructured probably next a couple of weeks actually improved slightly since the end of the quarter, but it'll be restructured. The other one, it's a little bit unclear as far as the timing and other one. It's, anyways, it's question related sponsor, the quantum dollars coming in, etc, something like that, specific to that company. But one of them will be down the next couple of weeks and the other ones for the six weeks away maybe.
Bowen Diehl: And we also say one of the other portfolio companies that wasn't upgraded down rate, but it's performing pretty well over the last three quarters. We've been conservative, it can maintain it on non-accrual, but there's a high chance that one of those actually is removed and probably upgraded to a two.
Bowen Diehl: Thank you. I appreciate the insight.
Sean Paul Adams: That's all for me.
Operator: One moment for our next question.
Vylas Abraham: Our next question comes from Byless Abraham with UBS. Your line is open. Byless Abraham with UBS, please make sure your line is unmuted. Sorry about that. I was on mute. The UTI is up to 42 cents per share quarter.
Michael Sarner: Can you just discuss that trend and whether there's a range that you'd like to be on an ongoing basis with that? Absolutely. So I think you noted we have 42 cents at the end of the quarter. If you look at where our run rate NII is, which is around, you know, 67 cents, a good run rate. I think a question earlier in terms of the increase by 15 basis points will drive that higher over the next few quarters.
Michael Sarner: We're assuming rates continue to be maintained in this range. We'd expect to share half of this under distributed income, so grow our UTI bucket by five cents a quarter. So if you look ahead, that's probably another 20 cents. We're targeting probably having a minimum of 60 cents or more. As it's going forward, and we think that that type of level will help support the six cents supplemental dividend that we're paying today as a minimum. There's always possibility to grow it. It certainly allows us to maintain that success in long term into the future. Okay.
Vylas Abraham: That's very helpful.
Bowen Diehl: Maybe if I could sneak just one more in here. Can you give some color on how your portfolio companies are thinking about 2024 budgeting in terms of EBITDA expectations? Is it preparing for the worst and hoping for the best kind of situation, or is there a more sanguine way to characterize how they're thinking about looking ahead?
Bowen Diehl: Thank you. Yeah, I mean, so just to be clear, I mean, that would 91% of them, you know, being, you know, portfolio or private equity firm back, so they're going to be the budgeting process right now. So I don't have any specific views of the actual budgets in front of us are internally necessarily yet, but that said, I mean, these, these PE firms have been working, you know, we all hear about all the business input costs going up across the whole economy.
Bowen Diehl: And, you know, they're, the other thing is going up is their interest burden. And so they've been working very diligently on streamlining everywhere, all levels with the cost structure, the count about that. And so, you know, one would think inflation should start moderating this year. I mean, the companies have really positioned themselves well on, you know, automating where it's automating digitizing where you can digitize. And that type of thing. So, you know, they've got the companies, you know, very efficient in my view.
Bowen Diehl: And so I would expect, you know, I really know what the budgets will be as a general matter. I mean, the portfolio of companies now are growing on either that level is kind of low single digits year over year and high single digits on revenue basis year over year. And so, you know, they're kind of kind of plugging along. So it'll be interesting to see what the budgets look like for 24.
Bowen Diehl: We haven't seen them yet yet. You know, obviously in the October they're working here right now. I guess as we will see them see the budgets by, you know, certainly by the next time we talk to the shareholders. So that'll be, you know, you know, we'll have better knowledge of that.
Bowen Diehl: So I would say ask that question again, that's next quarter. And we'll have a better, better view out of really actually seeing the budgets.
Vylas Abraham: Okay.
Vylas Abraham: Great. Appreciate it.
Michael Sarner: And, you know, Bill, I said one thing I just want to step back on is on the UTI, the other part of our UTI balance on top of just the under tribute or during the real life games that will harvest in the future. So when I noted the 60 cents, that's probably a minimum number because we do anticipate being able to harvest games in 2024. Got it. Thanks.
Vylas Abraham: Thank you.
Operator: That concludes the question and answer session.
Bowen Diehl: At this time, I would like to turn it back to Bowendeele for closing remarks. Great. Thank you, operator. And thanks everyone for joining us. As always, we enjoy giving updates on the company and things are going well and we appreciate all your support. We will talk to you next quarter.
Operator: Thank you for your participation in today's conference.
Operator: This does conclude the program. You may now disconnect.
Operator: Next. Thank you.