Q3 2024 Capital Southwest Corp Earnings Call

[music].

Yeah.

Thank you for joining today's capital southwest third quarter fiscal year, 'twenty 'twenty four earnings call.

Also bidding on the call today are Bowen Diehl CEO.

Michael Jordan CFO.

And Chris Rehberger VP finance.

I'll now turn the call over to Chris Rehberger.

Chris Rehberger: Thank you I'd like to remind everyone that during the course of this call we will be making certain forward looking statements.

These statements are based on current conditions currently available information and management's expectations assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks uncertainties and assumptions that could cause actual results to differ materially from such statements for information concerning these risks and uncertainties.

B capital Southwest's publicly available filings with the SEC.

The company does not undertake any obligation to update or revise any forward looking statements.

Chris Rehberger: As a result, 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.

Thank you to everyone for joining us for our third quarter fiscal year 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 can.

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 72 per share, which represented 20% growth.

Over the <unk> 60 per share generated a year ago in the December quarter.

72 cents per share more than covered both our regular dividend up 57 per share and our supplemental dividend of six cents per share paid during the quarter.

Portfolio earnings continues to be strong.

At the end of the quarter is at the end of quarter, we estimate that our undistributed taxable income was 52 per share.

Additionally, net asset value per share increased one 9% for the quarter was $16 77 per share from the $16 46 per share it at the end of the prior quarter.

This increase represented the fourth consecutive quarterly <unk> per share increase for capital southwest.

We're also pleased to announce today that our board of directors has declared a regular dividend of 57 cents per share for the March 24 quarter.

This represents seven 5% growth over the 53 per share paid a year ago in the March quarter.

In addition, due to the excess earnings being generated by our floating debt.

That's what portfolio in this high interest rate environment.

Our board has again declared a supplemental dividend of six cents per share for the March 'twenty four quarter.

Bringing total dividends declared for the March 'twenty for quarter 263 per share.

Which in total represents 9% growth over total dividends paid out in the year ago quarter.

While future dividend declarations are at the discretion of our board of directors. It is our intent and expectation that capital southwest will continue to distribute.

Quarterly supplemental dividend for the foreseeable future while base rates are above historical averages and we have meaningful UTI, which was generated by earnings in excess of our dividends and realized gains from our equity co 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 source attractive investment opportunities.

Private equity firms and business owners continue to transact, while non bank lenders like capital southwest.

Continued to provide more certainty to clothing than traditional bank financing structures.

That said competition from other nonbank lenders for quality lower middle market opportunities.

Has largely returned to more normal levels seen 12 months to 18 months ago.

Resulting in tighter pricing spreads as well as slightly higher leverage and loan to value in the closing capital structures.

In the larger end of the lower middle market, which is typically where we exited our investments M&A.

M&A activity picked up during the quarter as well, resulting in increased prepayments across our portfolio.

Portfolio growth during the quarter was driven by a $116 $3 million in new commitments.

<unk> a $77 million.

And that led us to four new portfolio companies and $45 6 million in commitments to 12 existing portfolio companies.

This was offset by $79 million in proceeds from five debt prepayments and one equity exit during the quarter generating a weighted average IRR of 12, 2%.

On the capitalization front, we are pleased to announce that during the quarter, we successfully upsized, our corporate revolving credit facility to $460 million.

$435 million with the addition of one new lender to the bank syndicate.

We also raised $66 5 million in gross equity proceeds during the quarter.

Through our equity ATM program at a weighted average price of $21 92 per share or 133% of the prevailing NAV per share.

In addition, subsequent to quarter end the I 45 credit facility was repaid in full and we are currently in the process of winding down the I 45 senior loan fund.

As most of you know I 45 was initially created to invest in small pieces of a large syndicated loans.

There are 45 has been a success through the years the market for syndicated loans has evolved and we no longer view this market as a favorable place to generate attractive risk adjusted returns for our shareholders.

Chris Rehberger: Michael will discuss the timing and mechanics of the dissolution of <unk> 45 in further detail in a moment.

We have remained diligent in ensuring we have strong balance sheet liquidity, while also funding a meaningful portion of our investment activity with accretive equity issuances.

We continue to maintain a conservative mindset to both balance sheet liquidity and BDC leverage.

Managing the company with a full economic cycle mentality.

While this starts with our underwriting of new investment opportunities.

It also applies to how we manage the bdc's capitalization and liquidity.

Managing leverage to the lower end of our target range.

Ensuring strong balance sheet liquidity affords us the.

The ability to invest in new platform companies EBIT in periods of volatile capital markets.

When risk adjusted returns can be particularly attractive.

Additionally, it allows us to support our portfolio companies, while also opportunistically repurchasing our stock if it were to trade meaningfully below NAV.

On slide seven and eight we illustrate our continued track record of producing strong dividend growth.

<unk> dividend coverage and solid value creation since the launch of our credit strategy back in January 2015.

Since that time, we have increased our quarterly regular dividend 28 times and have never cut the regular dividend.

All while maintaining strong coverage of our regular dividend with pre tax net investment income.

Additionally over the same period, we have paid or declared 23 special our supplemental dividends totaling $3 89 per share.

Including the <unk> <unk> per share and the board has declared for the March 24 quarter.

All generated from excess earnings unrealized gains from our investment portfolio.

We believe our track record of softwood growing our dividend.

Our consistently solid performance of our portfolio as well as our company's sustained access to multiple capital sources has demonstrated the strength of our investment and capitalization management strategies.

As well as the absolute alignment of all our decisions with the interests of our shareholders.

Turning to slide nine we lay out the core tenets of our investment strategy.

Our core strategy of lending or 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 92% 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.

In the lower middle market. We also have the opportunity to invest on a minority basis and the equity carry pursue with a private equity firm when we believe the equity thesis is compelling.

As of the end of the quarter, our equity co investment portfolio consisted of 62 investments with a total fair value of $129 1 million.

Which was marked at 143% of cost.

Representing $38 $5 million and embedded unrealized depreciation or <unk> 90 per share.

Our equity portfolio, which represented approximately 9% of our total portfolio at fair value as of the end of the 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 per share growth in supplemental dividends over time.

As illustrated on slide 10, our on balance sheet credit portfolio ended the quarter at $1 2 billion representing year over year growth of 19% from $990 million as of December 2022 quarter.

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 our credit portfolio was first lien senior secured.

The weighted average credit exposure per company remains granular at one 2%.

We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture overall risk management as we grow our balance sheet.

We fully expect that this metric will continue to improve as our asset base grows.

On slide 11, we.

We detail the $116 3 million of capital invested in and committed to portfolio of companies during the quarter.

Capital committed this quarter included $66 $7 million in first lien senior secured debt committed to four new portfolio companies and which we also invested a total of $4 million in equity.

We also committed a total of $43 $5 million in first lien senior secured debt and $2 1 million in equity to <unk> existing portfolio of companies.

We are pleased with the 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 is sourcing quality opportunities.

As well as consistency of our origination activity.

In fact deal activity post quarter end has continued at a healthy pace and we expect solid net portfolio growth in the coming quarter.

Turning to slide 12, as I mentioned earlier increased M&A and refinancing activity during the quarter resulted in greater than average prepayment activity.

We continued our track record of strong returns on our exits.

With five debt prepayments and one equity exit during the quarter.

In total these efforts generated approximately $79 million in total proceeds generating a weighted average IRR of 12, 2%.

Since the launch of our credit strategy nine years ago, we have realized 73 portfolio company exits representing $885 million in proceeds.

Has generated cumulative weighted average IRR of 13, 9%.

On slide 13, we detailed some 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 at fair value was weighted 87, 5% to first lien senior secured debt to.

Two 6% of second lien senior secured debt.

1% to subordinated debt and nine 8% to equity co investments.

Our credit portfolio had a weighted average yield of 13, 5% and weighted average leverage through our security of three six times.

Cash flow coverage of debt obligations across our portfolio continued to be strong despite the high base rate environment.

With weighted average interest coverage of three times and weighted average fixed charge coverage of two five times.

As seen on slide 14, our total investment portfolio continues to be well diversified across industry with an asset mix, which provide strong security for our shareholders' capital.

Turning to slide 15, we have laid out a 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 one being the highest rating and four being the lowest rating.

We feel very good about the performance of our portfolio at 95% of the portfolio at fair value rent. It is one of the top two categories of one or two.

In fact, the portfolio generated weighted average revenue growth of 3% and weighted average EBITDA growth of 7% during the quarter.

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

Thanks, Bowen specific to our performance for the quarter are summarized on slide 17, we increased pretax net investment income by 13% quarter over quarter to $29 8 million or <unk> 72 per share compared to $26 4 million or.

Or <unk> 67 per share in the prior quarter.

During the quarter, we paid out 57 per share regular dividend and a <unk> <unk> per share supplemental dividend.

As mentioned earlier, our board has declared a regular dividend of <unk> 57 per share and declared a <unk> <unk> per share supplemental dividend for the March 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 123% coverage for the last 12 months ended December 31, 2023, and 110% cumulative coverage since the launch of our credit strategy in January 2015.

As a reminder, our intent is to continue to distribute the portion of the excess of our quarterly pre tax NII over our regular dividend to our shareholders in our quarterly supplemental dividend.

We are confident in our ability to continue to distribute quarterly supplemental dividend for the foreseeable future based upon our current HCI balance of 52 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 90.

<unk> per share and unrealized depreciation on the equity portfolio.

For the quarter, we increased total investment income of $48 6 million.

Representing 14% growth quarter over quarter, and 48% growth from a year ago.

Weighted average yields in the portfolio on all investments was 13, 7%.

Total investment income was $5 $8 million higher this quarter, primarily driven by an increase in the weighted average cost basis of our debt investments as well as an increase in dividend and fee income.

As at the end of the quarter, we had three portfolio companies with loans on nonaccrual, representing two 2% of our investment portfolio at fair value.

As seen on slide 18, we maintained LTM operating leverage at one 8% for the current quarter.

To put this metric in perspective, our one 8% operating leverage as the second best in the entire BDC industry.

We believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The.

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 BDC.

As we look forward, we expect further improvements in operating leverage as we continue to grow the balance sheet over time.

Turning to slide 19, the company's NAV per share at the end of the quarter increased by 31 per share to $16 77.

Representing an increase of one 9% compared to the prior quarter.

Turning to slide 20.

To report that we have significant balance sheet liquidity with approximately $333 million in cash and undrawn leverage commitments on both our revolving credit facility and SBA debentures as of the end of the quarter.

We recently completed an increase to our revolving credit facility, adding one new lender and bringing total revolver credit facility commitments to $460 million from $435 million in the prior quarter.

Based on our current borrowing base, we have access to the full $460 million revolver capacity.

The facility 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 and lock step with the growth of our overall balance sheet.

In addition, during the quarter, we received an additional leverage commitment and the amount of $45 million from the SBA from which we can draw upon in the future.

As of the end of the December quarter, 53% of our capital structure liabilities, where an unsecured covenant free bonds with our earliest debt maturity in January 2026.

Finally, as Bowen mentioned earlier subsequent to quarter end. The I 45 credit facility was repaid in full at the option of the joint venture partners.

We are currently in the process of winding down the I 45 fund by allocating the residual assets in the fund to the joint.

<unk> partners.

Assets from the funds will be allocated from the financing subsidiary to the balance sheet of each joint venture partner consistent with their invested capital.

The impact to capital southwest will be a small increase in assets slightly higher leverage due to the paydown of the I 45 credit facility and a modest increase in earnings as we eliminated frictional cost related to the <unk>.

Our regulatory leverage as seen on slide 21 ended the quarter at a debt to equity ratio of <unk> 77 to one now.

Meaningfully from <unk> 91 to one as of a year ago December quarter.

We opportunistically brought leverage slightly below our target range as of the end of the December quarter in part to accommodate the I 45 credit facility pay off and I 45 fund wind down.

We will continue to methodically and opportunistically raise secured and unsecured debt capital as well as equity capital through our ATM program.

To ensure we continue to maintain significant liquidity conservative leverage and adequate covenant cushions throughout all economic cycles, and 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 on the market environment.

Our company and portfolio continue to demonstrate strong performance and will 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.

We believe we have prepared our company well for future growth and performance and we feel very good about how our shareholders' capital is positioned in the market.

In summary, we have a credit portfolio predominantly made up of first lien senior secured debt.

Allocated across a broad array of companies and industries.

Over 90% of which is backed by private equity firms.

Also enjoying participation in the equity upside of many of these growing lower middle market businesses.

Further.

We are a well capitalized balance sheet with multiple capital sources.

Very strong liquidity and a flexible capital structure.

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

Thank you.

Ladies and gentlemen to ask a question. Please press star one on your telephone and then wait to hear your name announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Yes.

Our first question comes from the line of Mckesson, Li with Ladenburg Thalmann. Your line is open.

Yes, good morning, everyone.

Boeing there was this theory that M&A volumes really wouldn't pick up until there was certainty that the fed would cut rates.

I'm in the camp that we.

We don't know when.

We still don't know what their target and obviously rates have not come down yet. So so from your perspective whats driving this increase which you mentioned has has spilled over into the first quarter.

Yes, it's interesting I mean, if you look at our projects with three of them were sales and two of them are refinancings.

On the sales.

Private equity backed firms.

There is a strategic interest in the assets.

I think they were all strategic sales looking at them.

So they were just it was just.

Currently it's private equity firms trying to trying to prep gains and companies that are performing so.

And there is a strategic interest in the assets.

And so.

I don't know I read the same press clippings you do those trends are probably.

True as you laid out, but it's a little random.

Our portfolio just had.

A number of sales in it.

I attribute part of that to a general increase in M&A activity that we've seen out there we also see.

Our deal flow as well being being really strong.

So we've also seen the top half of our portfolio the loan grade ones. These companies, we have a significant number of companies that have deleveraged.

Underneath two times, even to the extent that are half turn to a turn and a half and so those guys will find potentially a lower yielding option.

Maybe they were when we originated yes, that's more of a company performance aspect that's true for sure, but the M&A activity just looking at these names I mean, there just has been interest in those assets.

Private equity firms, obviously, you don't get paid until they sell and monetize your.

Pedro Kerry so.

We shipped a bit.

Understand that's helpful.

I noticed there were a couple of two there were two credit downgrades during the quarter can you describe.

General trends in credit quality in the portfolio and in particular, what these to worry about.

Yes.

Step back and look at trends in our portfolio. If you look at revenue and EBITDA growth you look at the number of upgrades versus downgrades.

I would say credit performance of our portfolio as a whole is excellent.

<unk> phase one was the <unk>.

Already.

Non accrual <unk>.

We basically had a term loan b and downgraded we download granted terminal.

And the other one was a company that's that's.

You know kind of bumping along and we decided to go ahead and downgrade. It so it's a new downgrade not an existing.

But again, if you look at.

60, something million of upgrades and downgrades.

Downgrades.

It's a general trend perspective, it looks okay.

Fair enough and my last question more housekeeping.

Can you help me understand.

The net realized loss because on page 12 of the Investor presentation. There is a realized gain but there is a much more meaningful net realized loss on the income statement can you just.

Reconcile that yes.

Operator: Thank you. Thank you for joining today's Capital Southwest 3rd Quarter Fiscal Year 2024 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP of Finance. I will now turn the call over to Chris Rehberger.

One of our portfolio companies had a restructuring of which a portion of their debt was converted to equity.

Mechanics.

Youll see that show up as a realized loss for the quarter and you'll see when the 10-Q comes out you'll see a full reconciliation.

Quarter of kind of what happened to each of the companies and that was one of our non accruals it's been non accrual.

We voiced on our prior earnings call that we expected to have that restructuring calendar year.

Chris Rehberger: Thank you. I'd like to remind everyone that during the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information, and management's expectations, assumptions, and beliefs. They are not guaranteed future results and are subject to numerous risks, uncertainties, and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and their progeny, see Capital Southwest's publicly available files with the address. The company does not undertake any obligation to update or revise any forward-looking statement.

Got it.

And Michael the Qs coming out Tonight.

Yes, okay.

Those are all my questions I appreciate your time as always thank you.

Thank you.

Thank you.

Please standby.

Question.

Yeah.

Yeah.

Our next question comes from the line of Robert Dodd with Raymond James Your line is open.

Chris Rehberger: Whether those are the result of new information, future events, changing circumstances, or any other reason after the date of this press release, the press is required by law. I will now again call the President and Chief Executive Officer, Bowen Diehl. Thanks, Chris.

You must be on mute Robert yes.

Chris Rehberger: Right.

Yes, I was on mute, yes, that's my back.

Yes.

The leverage you said youre below the bottom end of your target range, obviously some of Thats planning.

And thank you to everyone for joining us for our third quarter fiscal year 2024 RA 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 in the investor relations section of our website at www.capitalsouthwest.com.

85.

Could you give us any color do you still feel more comfortable at the bottom or below the bottom of the target range for leverage or can you give us an update on where you.

Thank you <unk>.

<unk> may be doing better than you thought your credit quality.

And very well so I mean can you give us some thoughts on where you see that in the medium term.

Conceptually driving five adjusted.

You will also find our quarterly earnings press release issued last evening on our website. We'll begin on slide 6 of the earnings presentation, where we have summarized some of the key performance highlights for the quarter. During the quarter, we generated pre-tax near-investment income of $0.72 per share, which represented 20% growth over the $0.60 per share generated a year ago in the December quarter. The $0.72 per share more than covered both our regular dividend of $0.57 per share and our supplemental dividend of $0.06 per share paid during the quarter. Our earnings continue to be strong as of the end of the quarter. As of the end of the quarter, we estimate that our undistributable taxable income was $0.52 per share.

Sure of course, so yes, I 45 would suggest that I think we were more at eight three times I think for a go forward basis or we can give you the range of $8 95.

Centrally where we'd like to stay in.

At the moment I think you said.

Kind of clear skies ahead at the moment portfolios performing well.

You can see us tick up closer to the higher end in the next several quarters.

Right.

Obviously, if you look at our earnings release.

Sure.

One of the more productive.

Companies in the BDC space, we're able to produce 72 cents.

707 leverage so we don't really need to press the gas pedal.

You'd probably see us somewhere in the middle of that range.

Additionally, the net asset value per share increased 1.9% for the quarter. The $16.77 per share from the $16.46 per share is of the end of the prior quarter. This increase represented the fourth consecutive quarterly NAD per share increase for Capital Supply. We are also pleased to announce today that our Board of Directors has declared a regular dividend of $0.57 per share for the March 24 quarter. This represents 7.5% growth over the $0.53 per share paid a year ago in the March 24 quarter. In addition, due to the excess earnings being generated by our floating debt investment portfolio in this high interest rate environment, our board has again declared a supplemental dividend of 6 cents per share for the March 24 quarter, bringing total dividends declared for the March 24 quarter to $0.63 per share, which represents 9% growth over total dividends paid out in the year-a

Got it got it. Thank you and then on I 45 milligram.

It's got $27 million I think in unrealized depreciation and it currently when it's when the assets are on boarded and theyre going to be on boarded at the existing cost and value based inside the unrealized depreciation allstate or is any of that going to be crystallized during the onboarding process.

So a portion of the assets that are being assigned to each of our balance sheets will come over at cost and fair value.

The amount of losses or gains that have been incurred.

Portfolio companies have already exited that'll just get reclassified from.

Unrealized equity to retained earnings.

Got it thanks, and then sorry go.

Got it.

No go ahead I apologize.

Last one kind of housekeeping on the dividend income, which was quite a lot of it looks like that was maybe at $2 million.

Nonrecurring.

While future dividend declarations are at the discretion of our Board of Directors, it is our intent and expectation that Capital Southwest will continue to distribute Quarterly Supplemental Dividends for the Foreseeable Future while base rates are above historical averages and we have meaningful UTIs generated by earnings in excess of our dividends and realized gains from our equity co-investment portfolio. During the quarter, deal quality and activity in the lower middle market continued at a healthy pace.

Maybe to do with one of the.

The portfolio company sales and has it been a recap on anything but can you give us any color I mean was it a one time kind of $2 million or.

Has something changed in one of the performance.

Performing portfolio companies, where it's going to stop paying a consistent dividend or was that one off.

So yes. So this quarter, we had one portfolio company.

Probably one of our most successful portfolio of companies.

That had essentially less than one time had a dividend recap.

And we continue to be able to support, source, attract, and invest in opportunities. Private equity firms and business owners continue to transact while non-bank lenders like Capital Southwest continue to provide more scrutiny to closings than traditional bank financing structures. That said, competition from other non-bank lenders for quality low or middle market opportunities has largely returned to the more normal level seen 12 to 18 months ago, resulting in tighter pricing spreads as well as slightly higher leverage and loan to value in the closing capital structure in the larger end of the lower middle market, which is typically where we exit our investment. MA activity picked up during the quarter as well, resulting in increased prepayments across our portfolio. Portfolio growth during the quarter was driven by $116.3 million in new commitments, consisting of $70.7 million in commitments to four new portfolio companies and $45.6 million in commitments to 12 existing portfolio companies. This was offset by $79 million in proceeds from five debt prepayments and one equity exit during the quarter. Generating a weighted average IRR of 12.2%.

Of an equity position with significant appreciation on the company.

And so we participated in that dividend to the tune of $2 $3 million. So one time.

Correct.

Got it thank you.

Thank you please standby for our next question.

Our next question comes from the line of Kyle Joseph with Jefferies. Your line is open.

Hey, good morning, guys. Thanks for taking my questions.

Most have been answered, but just I know that she's going out, but just do you mind running through any inflows or outflows to non accrual I know you mentioned there was a restructuring there.

On a fair value basis, I think it ticked up 20 basis points or whatever but just help us out in terms of the inflows and outflows.

Yes, so for the non accruals, we had one portfolio company.

That came off and I think we noted earlier the portfolio company that was restructured that had a realized loss that portion came off and then we had.

The term loan a.

Another portfolio company, where the <unk>.

He is already on non accrual at the Cowen mentioned it earlier it went on non accrual. So I think it was $15 million at a cost basis coming off and $12 million coming on.

On the capitalization front, we are pleased to announce that during the quarter, we successfully upsized our corporate revolving credit facility to $460 million from $435 million with the addition of one new lender to the bank syndicate. We also raised $56.5 million in gross equity proceeds during the quarter through our Equity ATM program at a weighted average price of $21.92 per share, or 133% of the prevailing NAD per share. In addition, the I-45 credit facility was repaid in full, and we are currently in the process of winding down the I-45 senior run fund. As most of you know, I-45 was initially created to invest in small pieces of a large syndicated line. The I-45 has been a success through the years. However, the market for syndicated loans has evolved, and we no longer view this market as a favorable price to generate attractive risk-adjusted returns for our shareholders. Michael will discuss the timing and mechanics of the dissolution of I-45 in further detail in a moment.

So a slight reduction on the cost basis, and then to fair value.

Was slightly higher.

Got it and then.

As youre thinking about the dividend going forward obviously.

Forward curve is adjusted pretty dramatically since the last time, we spoke but.

I know you guys are.

Has strong coverage, especially over the run rate dividend, but how youre thinking about the dividend from here.

So obviously, we bifurcate it between the regular dividend and the supplemental dividend so on a regular dividend.

We had 72 cents this quarter, which we would tell you that run rate.

Absent that dividend.

Cash given it was really like 69, so it compare that 69%.

57, we pay so it's still significant coverage there.

You noted, we're still kind of in a wait and see approach to see what the fed does see the pace of rate reductions.

We feel comfortable that when the rates come down to a neutral.

A neutral spot in the next 18 to 24 months, we would expect that our NII.

We have remained diligent in ensuring we have strong balance sheet liquidity while also funding a meaningful portion of our investment activity with accretive equity issuance. We continue to maintain a conservative mindset to both balance sheet liquidity and BDC leverage. Managing the company with a poor economic cycle mentality.

In the low 60, so theres still plenty of room for growth on the regular dividend and having said that we will wait.

To just see how things play out on the supplemental dividend.

We continue to think UTI by over earning our dividend.

We have 90.

While this starts with our underwriting of new investment opportunities, it also applies to how we manage the BDC's capitalization and liquidity. Managing leverage for the lower end of our target range, while ensuring strong downstream liquidity, affords us the ability to invest in new platform companies, even in periods of volatile capital markets, when risk-adjusted returns can be particularly attractive. Additionally, it allows us to support our portfolio companies while also opportunistically repurchasing our stock if it were to trade meaningfully below NAE. On slides 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 quarterly regular dividend 28 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividends with pre-tax net investment increases. Additionally, over the same period, we have paid or declared 23 special or supplemental dividends, totaling $3.89 per share, including the six cents per share of the board at the clinic on the March 24th quarter.

Depreciation on the balance sheet that we would hope to exit a portion either.

Or beyond and so that coupled with a 52 cents of UTI. We have currently we feel very comfortable.

This program will continue into the future.

Today that may vacillate.

Up or down, but we feel comfortable that that program going forward.

Got it helpful. And then last one for me you talked about credit we talked about there.

But just in terms of.

Classify with revenue or EBITDA growth.

Any sort of changes.

I spoke.

Yes, I mean as I know.

In our remarks.

The portfolio, we had revenue growth quarter over quarter a 3%.

EBITDA growth quarter over quarter up 7% so portfolios.

Feel pretty good about some of the portfolio.

General performance for sure.

Got it thats it from me thanks for answering my questions.

Thank you.

Please standby for our next question.

Our next question comes from the line of Bryce Rowe with B Riley Your line is open.

All generated from XRF earnings and real-life gains from our investment portfolio. We believe our track record of thoughtfully growing our division... A consistently solid performance in our portfolio, as well as our company's maintaining access to multiple capital sources, has demonstrated the strength of our investment and capitalization management strategy, as well as the absolute alignment of all our decisions with the interests of our shareholders. Turning to slide 9, we lay out the core tenets of our investment strategy. Our core strategy is lending and investing in the rural middle market, the vast majority of which is in first-lien senior secured loans to companies backed by private equity firms. In fact, approximately 92% of our credit portfolio is backed by private leavers, which provide important guidance and leadership to the Portfolio Council, as well as the potential for new junior capital support needs. In the lower middle market, we also have the opportunity to invest on a minority basis in the equity trade procedure with a private equity firm when we believe the equity thesis is compelling.

Thanks, Ken good morning.

Maybe maybe Don wanted to start on some of the exit activity.

<unk> got I guess, a couple of equity investment stubs.

That remain after.

After after those exits.

What's the plan there is the plan to to stay stay in those equity investments or is that are those are those potential exit opportunities here over the near term.

Yeah. Thanks for the question.

General matter, obviously, there are companies with vast majority of them are owned by private equity firms.

So they obviously sell the company then we don't have an equity for equity stubs are ones that we have.

Been refinanced out of.

And so it's pretty much the rule that we will arrive we will ride the liquidity curve. If you will with the private equity firm so yes.

Private equity firms as we all know don't really get paid their carry until the exit and so they're looking to maximize value and then looking to exit when it's prudent to exit and we kind of ride that trained.

As of the end of the quarter, our equity-to-investment portfolio consisted of 62 investments with a total fair value of $129.1 million, which was marked at 143% of cost. This represents $38.5 million in indebted unrealized appreciation or $0.90 per share. Our equity portfolio, which represented approximately 9% of our total portfolio at our fair value at the end of the 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. As illustrated on slide 10, our undoubted chief credit portfolio ended the quarter at $1.2 billion, representing year-over-year growth of 19% from $990 million as of the December 2022 quarter. For the current quarter, 100% of our new portfolio company debt origination was secured by personal and senior security. And as of the end of the quarter, 97% of our credit portfolio was first-wing senior security. The way the average credit exposure per company remains granular at 1.2%.

So long winded answer to yes, I mean, those are equity stubs are a potential future exits.

And usually at the company has been refinanced its probably growing and doing really well.

And so just because it's market X today, I would say private equity firm owning it for another year or two.

Mobley as the exits.

B Lowe and expertise.

Likely to be higher than <unk>.

But we ride that curve override that trained with the private equity firm exit when they exit.

Got it okay. That's helpful.

And then maybe a couple more for me in terms of the <unk>.

Assets that come on your balance sheet from I 45, obviously have a different profile than what you might like to put in your portfolio today.

Yes.

Look for an opportunity to exit those to create some liquidity or will you in fact ride those out as well.

Well I would say.

There are over 45, but there are still assets that generate returns in.

Sure.

It won't change.

Certainly there are bigger companies for the most part syndicated credits for the most part.

We don't need the liquidity, but on the other hand, yes, we would look we will look for opportunities to exit those names.

We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our foundation. We fully expect that this metric will continue to improve as our asset base grows, on Slide 11. We detail the $116.3 million of capital invested in, and committed to, portfolio companies through the Quirk. Capital committed this quarter included $66.7 million in first-wing senior security debt committed to four new portfolio companies, in which we also invested a total of $4 million in equity.

At attractive values.

Over time, those names will get refinanced out of course, as those companies grow and sell but.

Okay and.

And the spread to LIBOR on these assets is six 5%, which is maybe slightly lower end of our yield.

But it's certainly on the fairway.

Okay.

Okay. That's helpful.

And maybe one more for you Michael you kind of laid out the potential I guess regulatory debt to equity range.

With the with the I 45 assets coming on balance sheet.

We also committed a total of $43.5 million in personal and senior secured debt and $2.1 million in equity to 12 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 evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities, as well as the consistency of our origination activities. In fact, deal activity post-quarter end has continued at a healthy pace, and we expect solid net portfolio growth in the coming quarter. Starting with slide 12, as I mentioned earlier, increased M&A and refinancing activity during the quarter resulted in greater than average prepayment activity. We continue our effort for a strong return on our equity, with five debt prepayments and one equity exit during the quarter. In total, these efforts generated approximately $79 million in total proceeds, generating a weighted average return of 12.2%.

Can you can you kind of give us a feel for what the economic.

Our leverage range might look at and I'm kind of thinking about.

The ability to now draw of $45 million more.

VA debentures and kind of how that works into the to the equation.

Yes, I mean kind of what I said earlier and I would say its not I don't think I have anything to add to it is that it will probably be in the mid <unk>.

We will finish up with this.

<unk> $45 million on the SBA probably buy.

To summer.

And so I think our leverage economic leverage will be around one times with that.

The regulatory something eight five range that makes sense.

It will vacillate look theres opportunities to raise capital at premium to book today and.

So you'd be at certain points of time delever a bit when the opportunities are there and then pull back the range at other times.

I'll, just say that one of them.

Does that mean.

Since we launched our credit strategy nine years ago, we have realized 73 corporate company hectares, representing 885 million in proceeds. It has generated a cumulative rated Average IRR of 13.9%. On slide 13, we detail some key facts for our unbalanced sheet portfolio as of the end of the quarter, excluding our I-45 joint venture. And so at the end of the quarter, the total portfolio fair value was rated 87.5% to first wing senior secured debt. 2.6% to secondly in senior year debt.

A lot of liquidity on the balance sheet. So the ability to fund into the Spi subsidiary borrowing that leverage commitments.

That's hard to do so.

One other point it probably makes us with longer term is like we have an eye to the future. We're looking at our 2000.

Sure.

Patients are split maturities, that's obviously two years away, but we're starting that planning today. So.

Our collateral that comes back from I 45 comes on balance sheet.

So we're going to look for opportunities to increase our secured financing.

So to give us.

If and when we want to pay down those bonds, we don't like whats going on in the capital markets in terms of unsecured market you can always funded.

0.1% to subordinated debt and 9.8% to equity co-investment. The credit portfolio had a weighted average yield of 13.5% and weighted average leverage through our security of 3.6 times. Task force coverage of debt obligations across our portfolio continues to be strong despite the high base rate environment, with weighted average interest coverage of 3 times and weighted average fixed charge coverage of 2.5 times.

Facility. So the I 45 consolidations gives us additional collateral to work with us to really continue to diversify our capital sources got it. Okay. I. Appreciate you guys taking the time.

Thanks, Brian.

Please standby for row next question.

Our next question comes from the line of Erik Zwick with hub Group. Your line is open.

As seen on slide 14, our total investment portfolio continues to be well-diversified across industries with an asset mix that provides strong security for our shareholders' capital. On page 515, 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 2 on a 4 point scale, with 1 being the highest rating and 4 being the lowest rating.

Good morning, I may have missed this.

Earlier comments, but just in terms of the winding down of I 45 did you provide a timeframe whether it'd be done at the end of this current quarter or will it take a little bit longer may have I'm not sure if I caught that earlier.

Yes.

Our expectation is that would be done at the end of the quarter, but having said that with some of these credits.

When we duty, we essentially do the allocation and we put in for assignment.

The agents work faster than others, and so to the extent that we are not able to get every asset assigned.

We feel very good about the performance of our portfolio, with 95% of the portfolio fair value graded in one of the top two categories of one or two. In fact, the portfolio generated weighted average revenue growth of 3% and weighted average EBITDA growth of 7% during the quarter. I will now hand the call over to Michael to review more specifics of our financial performance for the quarter. Thanks, Bowen.

It could live on a very small basis for another quarter, but we are working in earnest at the moment just trying to get that all accomplished.

That's helpful. Thanks.

And then I just noticed that the pik income increased occupancy above a $4 million or so in the quarter higher run rate than we've seen recently is there something I'm wondering if you could just talk about kind of what drove that higher and if it was anything kind of one time or should we expect something along that run rate going forward.

Specific to our performance for the quarter, as summarized on slide 17, we increased pre-tax net investment income by 13% quarter over quarter to $29.8 million or $0.72 per share compared to $26.4 million or $0.67 per share in the prior quarter. During the quarter, we paid out a $0.57 per share regular dividend and a $0.06 per share supplemental. As mentioned earlier, our board has declared a regular dividend of $0.57 per share and declared a $0.06 per share supplemental dividend for the March quarter. Maintaining a consistent track record of meaningfully covering our dividends with pre-tax net investment income is important to our investment strategy. We continue our strong track record of regular dividend coverage with 123% coverage for the last 12 months ended December 31st, 2023 and 110% cumulative coverage since the launch of our credit strategy in January 2012.

Yes, so I mean, it's a little bit higher this quarter, but just to put it in perspective, I mean, two of the companies in the portfolio.

Optioned up to pick their pik toggles, we don't have a lot of Pik toggles a portfolio, but we've got a small handful and so a couple of impacts one of them was company affected by the writers strike. That's obviously top of mind is since other companies obviously turning around.

It was actually a one quarter on quarter the writer's strike. So it's a very healthy company.

It did pik toggle the other one is a company that's.

Very effective the next few years and so it's going to have a big you should have a very good year. This year. So they pick a quarter. So if you took those two those are those are pick income aspects, but if you want to look at it what's the trend. If you were to look at the rest of the Pik income is about 5% of our income and so the cash portion is 95.

If you look back over the last several quarters, it's kind of been 195%, 96% cash and so.

As a reminder, our intent is to continue to distribute the portion of the excess of our quarterly pre-tax NII over our regular dividends to our shareholders in a quarterly supplemental dividend. We are confident in our ability to consume each of the students' quarterly supplemental dividends for the foreseeable future based upon our current UTI balance of $0.52 per share, our ability to grow UTI each quarter organically by over-earning our total earnings, and For the quarter, we increased total investment income to $48.6 million, representing 14% growth quarter over quarter and 48% growth from a year ago. The weighted average yield in the portfolio on all investments was 13.7%.

Just help put that in perspective.

<unk> is kind of how we're how we're trending.

And also the cash dependent Arnold are generally only for a few quarters theres are not indefinite alone.

I think that those will either roll off because they have reached the end or they will be choosing a lot about cash along the way.

Okay.

Got it and then one just last one for you you seem fairly optimistic about the opportunity to make new commitments and funded new loans at least for the next quarter. So wondering if you as you look at the pipeline. If you could just provide a little commentary it already.

Commonalities in terms of kind of the industries, where you're seeing strength today or is it more broad based at this point.

It's pretty broad based question, it's pretty broad based the activity is pretty robust right now.

Total investment income was $5.8 million higher this quarter, primarily driven by an increase in the weighted average cost basis of our jet investments, as well as an increase in dividend and fee increases. As of the end of the quarter, we had three portfolio companies with loans on NICOL, representing 2.2% of our investment portfolio at Parabellum. As seen on slide 18, we maintain LTM operating leverage at 1.8% for the current quarter. To put this metric in perspective, our 1.8% operating leverage is the second best in the entire BDC industry. We believe this metric speaks to the benefits of the internally managed BEC model and our absolute alignment with shareholding.

Which is a good thing.

Asked majority as we talked about the vast majority of our business is family owned entrepreneurial businesses that are selling to private equity firms.

That are buying controlling interest in our business and heavy rollovers from the founders are situations, but it's pretty.

Pretty pretty broad yes. The other thing is the other thing is we've got a decent amount of add on what's going on in the portfolio too which is.

And then kind of a steady drumbeat over the last several quarters and should be continuing in the future I mean, just add ons or <unk>.

Probably a third.

Of our originations on kind of a regular basis and so the <unk>.

Activity this quarter since quarter end is definitely on the new platforms.

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 business card company. As we look forward, we expect further improvements in operating leverage as we continue to grow the balance sheet over time. Turning to slide 19, the company's MAD per share at the end of the quarter increased by 31 cents per share to $16.77, representing an increase of 1.9% compared to the prior.

Adults as well.

And thats been a trend we've seen that over the last probably four quarters and I think with the portfolio. The size. It is today, we would expect that to continue yes aspect of the business model I mean, these private equity firms by controlling interest in the founder a family owned business.

And the family founder Rolls over a big chunk of their equity into the business as we talked about and then one of the things that the founders and families like the ability to then have a private equity firm by three or four of their competitors.

It's one of the reasons they want to rollover keep back.

The primary drivers of the NAD for Sure increase for the quarter were earnings in excess of our total dividends paid for the quarter and accretion from the issuance of common stock at a premium to NAD for Sure, partially offset by net unrealized depreciation on our investment portfolio. Turning to slide 20, we are pleased to report that we have significant balance sheet liquidity with approximately $333 million in cash and underarm leverage commitments on both our revolving credit facility and SBA's ventures as of the end of the quarter. We recently completed an increase to our evolving credits. Adding one new lender and bringing total revolver credit facility commitments to $460 million from $435 million in the prior quarter. Based on our current borrowing base, we have access to the full $460 million.

Equity in the business because of the accretion opportunity that that entails.

So because thats generally.

The nature of our deal flow, we should expect to continue to always kind of see a meaningful amount of add ons and thats, great because the traditional credit commitment in businesses that we know.

It's not new platforms that we have to learn about this business as we see performance and so it's a very attractive portion of deal flow in general and these are generally not delayed draw term loans I E. We're doing diligence on these add ons and making a new investment decisions.

Correct, yes.

Great that makes a lot of sense. Thanks for taking my questions today.

Alright, thank you.

Thank you ladies standby for our next question.

The facility 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, during the quarter, we received an additional leverage commitment in the amount of $45 million from the FDA, which we can draw upon. As of the end of the December quarter, 53% of our capital structure liabilities were in unsecured covenant-free bonds with our earliest debt maturity in January 2020. Finally, as Bowen mentioned earlier, subsequent to quarter end, the I-45 credit facility was repaid in full at the option of the joint venture partner. We are currently in the process of winding down the I-45 fund by allocating the residual assets in the fund to the joint venture partners. Assets from the fund will be allocated from the financing subsidiary to the balance sheet of each joint venture partner consistent with their invested capital. The impact of Capitol Southwest will be a small increase on average.

Our next question comes from the line of Bemis Abraham with UBS. Your line is open.

Hey, everybody just one from me you guys mentioned in your prepared remarks competition coming back to where it was about 12 to 18 months ago can you just give a little bit more color on the nature of that competition.

How do you think that translates into a spreadsheet are over the next few quarters.

Yes.

This is definitely strengthening market its just.

Section of just overall health in the financial markets.

It is mainly from non bank lenders.

But it's kind of like I said, it's kind of back to where it was 18 months ago, which is competition, we've been dealing with for eight years. So.

It's not really necessarily new players.

And so.

So I feel pretty good about the spreads I mean kind of where they are this quarter's kind of where they will stay.

And so it's not like they're tightening to a point, where we have an earnings this year.

I wanted to express that.

Slightly higher leverage shoots the pay down of the I-45 credit and the modest increase in earnings as we eliminate personal costs related to the fund. Regulatory leverage, as seen on slide 21, and this quarter had a debt-to-equity ratio of 0.77 to 1, down meaningfully from 0.91 to 1 as of the year ago, December 4th. We opportunistically brought leverage slightly below our target range as of the end of the December quarter, in part to accommodate the I-45 credit facility payoff and I-45 fund wind-up. We will continue to methodically and opportunistically raise secured and unsecured debt, as well as equity capital through our ATM program, to ensure we continue to maintain significant liquidity, conservative leverage, and adequate covenant cushions throughout all economic conditions. I will now hand the call back to Bowen for some final thanks. Michael. And again, thank you, everyone, for joining us today.

The last several quarters I mean, the competition had been lighter than they started coming back.

I don't necessarily think it's a bad thing we've certainly based on our cost of capital at R. R.

Our institution.

We can compete fines for quality deals and so and generate nice risk adjusted returns.

But I would say spreads are kind of where we should expect them to be kind of in the next few quarters.

I actually looked at the last 12 months, we had 24 deals that closed in the spread was essentially 750 ish, but the last nine deals.

Timber had been just a little over 700 and ltvs for the whole year or the first half of the year with 25% to 30 and the overall is around 30 now. So we saw maybe the LTV is kicking up to 35% to 40%. So I was just.

I think what Boeing says correct, it's about where it usually is significantly lower for a period of time.

We appreciate the opportunity to provide you an update on our business, our portfolio, and the market environment. Our company and portfolio continue to demonstrate strong performance, and we continue to be impressed by the job our team has done in building a robust asset base, de-imagination, and corporeal management capability, as well as a flexible capital structure. We believe we have prepared our company well for future growth and performance, and we feel very good about how our shareholders' capital is positioned in the market. In summary, we are a credit portfolio predominantly made up of first-wing Swedish pure debt allocated across a broad array of companies and industries. Over 90% of which is backed by private equity firms while also enjoying participation in the equity upside of many of these growing lower-middle-market businesses.

Got it that's it for me thank you.

Thank you.

I'm showing no further questions in the queue.

I would now like to turn the call back over to bond deal for closing remarks.

Well. Thank you everyone as always we enjoyed talking about our business your business.

And answering questions.

We appreciate everybody's time and look forward to continuing to give you all quarterly updates.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

[music].

Operator: We have a well-capitalized balance sheet with multiple capital systems, very strong liquidity, and a flexible capital structure. This concludes our prepared remarks, Operator. We are ready to open the lines for Q&A, dot com. Thank you. Ladies and gentlemen, to ask a question, please press star 1-1 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. From, Our first question comes from the line of Mickey Schleien with Latin Birds Almond. Your line is open. Yes, good morning everyone.

Okay.

Yes.

Bowen, there was this theory that M&A volumes really wouldn't pick up until there was certainty that the Fed would cut rates, and I'm in the camp that, you know, we don't know, inflation is still not their target, and obviously rates have not come down yet. So from your perspective, what's driving this increase, which you mentioned has spilled over into the first quarter? Yeah, it's interesting. I mean, if you look at our projects, three of them were sales, and two of them were refinancings. On the sales, I mean, these are private equity backed firms, you know, there's a strategic interest in the assets. I think they were all strategic fails when looking at them.

You know, so they were just, it was just, you know, clearly it's private firms trying to print games in companies that are performing, so. There is a strategic interest in the assets. I don't know, I read the same press clippings you do, those trends are probably true as you laid out, but it's a little random. I mean, you know, our portfolio just had a number of sales in it. I attribute part of that to the general increase in M&A activities we've seen out there. We also see, You know, real pro as well, being really strong. So we've also seen the top half of our portfolio, the long-range ones, these companies; we have a significant number of companies that have key drivers, you know, underneath two times, even to the extent that they are, you know, half-terms or a hundred and a half, and so those guys, you know, will find potentially a lower yielding option than where maybe they were when they originated them. Yeah, that's more of a company performance aspect, that's true for sure, but the M&A activity, just look at these names. I mean, there just has been interest in those assets. Private equity firms obviously don't get paid until they sell and monetize their pay-per-carry, so they hit the bill. I understand. That's helpful.

I noticed there were a couple of two; there were two credit downgrades during the quarter. Can you describe, you know, the general terms and credit quality in the portfolio and, in particular, what these two were about? Yeah, I mean, if you kind of take a step back and look at trends in our portfolio, if you look at revenue and even dog growth, you look at the number of upgrades versus downgrades. Uh, you know. I'd say credit performance in our portfolio as a whole is excellent. Of the two downgrades, one was already a not-approval-worthy challenge.

We basically had a terminal in B and downgraded it; we downgraded the terminal in A. And the other one was a company that's kind of bumping along, and we decided to go in and downgrade it. It's a new terminal; it's not an existing one.

But again, if you look at, you know, 60-something million in upgrades and 30 million in downgrades, you know, I'd say, from a general trends perspective, it looks okay. Fair enough. And my last question, more housekeeping. Can you help me understand the net realized loss? Because on page 12 of the investor presentation, there's a realized gain, but there's a much more meaningful net realized loss on the income statement

Can you just reconcile that? You know, one of our portfolio companies had a reshuffle in which a portion of their debt was converted to equity. And so from a mechanical perspective, you'll see that show up as a realized loss for the quarter. And you'll see when the 10-Q comes out, you'll see a full reconciliation of, you know, for the quarter of kind of what happened to each of the companies. And that was one of our non-accruals that's been non-accrual, and I think we voiced on a prior earnings call that we expected to have that recruitment over a year, and in fact, it happened, and Michael the Q coming out tonight. Yeah, that's all right. Those are all my questions,

I appreciate your time, as always. Thank you. Thank you. Thank you.

Operator: Please stand by for our next question. Our next question comes from the line of Robert Dodd with Raymond James. Your line is open. You might be on mute, Robert.

Operator: Yeah. I apologize. I was on mute. Yeah, that's my bad. On leverage, right, you say you're below the bottom end of your target range, obviously some of that planning for I-45. Could you give us any input? Do you still feel more comfortable at the bottom or below the bottom of the target range for leverage? Or can you give us an update on where?

You think if the economy's maybe doing better than you thought, your credit quality should be hanging in very well. So I mean, can you give us some thoughts on where you see that in the medium term? Conceptually, I've been thinking about cyber-justice.

Sure, of course. So, you know, I-45 adjusted. I think we were more at.83 times.

I think for a go-forward basis, I would give you the range of.8 to really.95. That's essentially where we'd like to stay in. And, you know, at the moment, like you said, we have, you know, kind of clear skies ahead. At the moment, the portfolio is performing well. You can see us pick up closer to the higher end in the next several quarters.

But, you know, we're – honestly, if you look at our earnings relative to our NAV, we are one of the more productive companies in the VDC space. We're able to produce every two cents on.77 leverage. So, we don't really need to press the gas pedal.

So, you probably see us somewhere along in the middle of that range. Go ahead.

Then on I-45, it's got $27 million, I think, in unrealized appreciation in it currently. When the assets are onboarded, are they going to be onboarded at the existing cost and fair value basis, i.e.

The unrealized appreciation, I'll say, or is any of that going to be crystallized during the onboarding process? Sure, so a portion of the assets that are being assigned to each of our balance sheets will come over at cost and fair value. The amount of losses or gains that have been incurred in the proposed companies that have already exited, that will just get reclassified from unrealized equity to retain your income.

Thank you. Thank you. The dividend income was quite large, and it looked like there was maybe a $2 million non-returning, maybe to do with one of the portfolio company's sales. Was it a one-time kind of $2 million, or has something changed in one of the performance, the highly performing portfolio companies, where it's going to start paying you a consistent dividend, or was that... Now, so yeah, so this quarter we had one portfolio company, probably one of And so we participated in that dividend to the tune of $2.3 million, and that's a one-time occurrence. Got it.

Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Kyle Joseph with Jeffreys. Hey, good morning, guys.

Operator: Thanks for taking my question. I know that she's coming out, but do you mind running through any inflows or outflows to non-accrual? I know you mentioned there was a restructuring there, and on a fair value basis, I think it's picked up 20 basis points or whatever, but just help us out in terms of the inflows and outflows. Yeah, so for the non-accruals, we had one portfolio company that came off, and I think we noted it earlier, the portfolio company that was restructured that had a realized loss, that portion came off, and then we had a term loan A of another portfolio company that, where the D was already on non-accrual, I think Bowen mentioned it earlier, it went on non-accrual, so I think it was, I got it.

And then, you know, as you're thinking about the dividend going forward, obviously, the forward curve has adjusted pretty dramatically since the last time we spoke, but, and I know you guys have strong coverage, especially over the run rate dividend. But how are you thinking about the dividend? So, obviously, we bifurcated between the regular dividend and the supplemental dividend. So, in the regular dividend, you know, obviously, we had 72 cents this quarter, which would tell you the run rate after that cash dividend was really 69 cents.

So, if we drew that 69 cents to the 57 we paid, so it's still significant coverage there. You noted we're still in kind of a latency period to see what the Fed does, to see the pace of rate reductions. We feel comfortable that if the rates come down to a neutral spot in the next 18 to 24 months, we would expect that our NII, you know, would drop in the low 60s because there's still plenty of room for growth on the regular dividend. And having said that, we will wait to see how things play out. On the supplemental dividend, you know, we continue to thank UTI by over-earning our dividend. We have 90 cents of unrealized depreciation on the balance sheet that we would hope to anchor the portion, either 7.4 or beyond. And so, coupled with the 52 cents of UTI we have currently, we feel very comfortable that this program will continue into the future. You know, it's 6 cents today. That may vacillate, you know, up or down, but we feel comfortable about that program. Got it. Very helpful.

And then the last one for me, you know, we talked about credit, we talked about the ratings, but just in terms of, you know, categorized with revenue or EBITDA growth and any sort of changes since we last spoke. Yeah, I mean, as I noted in our remarks, we had, you know, across the portfolio, we had revenue growth, quarter over quarter, 3%, and EBITDA growth, quarter over quarter, 7%. So, you know, the portfolio was... You know, I feel pretty good about the portfolio's general performance, for sure. Guys, that's it for me.

Operator: Thank you for answering my questions. Thank you. Please stand by for our next question. Our next question comes from the line of Bryce Rowe with B-Rally. The line is open. Thanks, good morning.

Maybe Bowen wanted to start on some of the exit activity. You've got, I guess, a couple of equity investment stubs that remain after those exits. What's the plan there? Is the plan to stay in those equity investments, or are those potential exit opportunities here over the near term? Yeah, thanks for the question. I mean, as a general matter, obviously, our company is a vast majority owned by our own private equity firms. And so they obviously sell the company, and we'll be we don't have equity stuff. So the equity stuff is ones that we've, Thank you for your time. Thank you for having me.

I appreciate it. And usually, if the company's been refinanced, it's probably growing and doing really well. And so, you know, just because it's marked as X today, I would say probably that it's before I'm owning it for another year or two. Probably is X, it's, you know, could be a little past, but it's pretty highly likely to be higher than that. Um, but we ride that curve or ride that train with the private equity firm and exit when they, Okay, that's helpful. And then maybe a couple more for me.

In terms of the assets that come on your balance sheet from I-45, you obviously have a different profile than what you might like to put in your portfolio today. Do you look for an opportunity to exit those to create some liquidity, or will you, in fact, ride those out as well? I would say, you know, they're over in I-45, but there are still assets that generate returns and future sources, so that won't change. Certainly, there are bigger companies for the most part, syndicated credits for the most part. On one hand, we don't need the liquidity, but on the other hand, you know, yeah, we'll look for opportunities to exit those names at attractive values. And over time, those names will get refinanced out, of course, as those companies grow and sell. And to spread the light on these assets, the yield is 6.5%, which is below the slightly lower end of our yield. It's a continuum, but it's certainly on the survey. Okay. That's helpful. And maybe one more for you, Michael.

You kind of laid out the potential, I guess, regulatory debt-to-equity range with the I-45 assets coming on balance sheet. Can you kind of give us a feel for what the economic leverage range might look like? I'm kind of thinking about, you know, the ability to now draw 45 million more on SBA debentures and kind of how that works into the equation. Thank you.

Yeah, I mean, kind of what I said earlier, and I would say it's not, I don't know that I have anything to add to it, is that, you know, we'll probably be in the mid-2080s, and we'll finish up this $45 million on the SBA probably by this summer. And so I think our leverage, economic leverage, will be around once with a, you know, regulatory, something in the.85 range. And it'll vacillate once there's an opportunity to raise capital that's preeminent to book today. And, you know, we'll be at certain points in time, deliver a bit when the opportunities are there, and then, you know, pull back the reins at other times. You know, I was just thinking of one of the things you just asked. I mean, you know...

There's a lot of liquidity on the balance sheet. So, the ability to fund the FDIP; consider it a borrower levy. That's a lot of cars.

Yeah, you know, one of the points I'd like to make just in the longer term is, like, we have an eye to the future. We look at 2026. We've got two bonds that will be paid, and we'll just hit the road. That's obviously two years away, but we're starting that planning today.

So, the collateral that comes back from I-45 goes on the balance sheet, and, you know, we're going to look for opportunities to increase our share in financing. So, to give us the ability to, you know, if and when we want to pay down those bonds, if we don't like what's going on in the capital markets in terms of, you know, unsecured markets, we can always fund it with a secured facility. So, the I-45 consolidation gives us, you know, additional collateral to work with to really continue to diversify our capital. Okay. I appreciate you guys taking the time.

Thank you. Please stand by for our next question. Our next question comes from the line of Erik Zwick with Hub-D Group. The line is open. Good morning.

Operator: I may have missed this in the earlier comments, but just in terms of the winding down of I-45, did you provide a timeframe? Will that be done at the end of this current quarter, or will it take a little bit longer? I'm not sure if I caught that earlier.

Our expectation is that we'll be here by the end of the quarter, but having said that, with some of these credits, when we essentially do the allocation and then we put in for assignment, some of the agents work faster than others. And so, to the extent that we are not able to get every asset assigned, it could live on on a very small basis for another quarter. But we are working in earnest at the moment to try to get that all accomplished.

And then I just noticed that the PIC income increased to just above $4 million or so in the quarter, higher than the run rate that we've seen recently. Is there something, I wonder if you could just talk about kind of what drove that higher and if it was anything kind of one-time, or should we expect something along that run rate going forward? Yeah, so, I mean, it's a little bit higher this quarter, but to put it in perspective, I mean, two of the companies in the portfolio are optioned up to pick tick toggles. We don't have a lot of tick toggles in our portfolio, but we've got a small handful. And so a couple of them were picked. One of them was a company affected by the writer's strike.

That's obviously behind us. And so the companies, you know, obviously, are turning around. It was actually one before the writer's strike.

So it's a very healthy company. You know, they did pick Convo. The other one is a company that's, you know, is very effective in their shares. And so it's gonna have a big, you should have a very big share this year. So they picked a quarter.

So if you take those two, those are pick income aspects. But if you wanna look at, okay, what's the trend? If you were to look at the rest of the pick income, it's about 5% of our income. And so the cash portion is 95%. If you look back over the last several quarters, kind of always in the 95, 96% cash. And so, you know, just don't put that in perspective.

It's kind of how we're trending. And also, the cash, the pick-to-pick toggles are generally only for a few quarters. Those are not indefinite for the loan. So those will either roll off because they've reached the end, or they will be choosing to pick up a lot of cash along the way.

And then one, this last one for you, you seem fairly optimistic about the opportunity to, you know, make new commitments and fund new loans, you know, each for the next quarter. So wondering if, as you look at the pipeline, if you could just provide a little commentary, are there any commonalities in terms of the industries where you're seeing strength today? Or is it more broad-based? It's pretty broad-based. It's an interesting question.

It's pretty broad-based. The activity is pretty robust right now. I wish you a good day and, you know, the vast majority of the deals are about the vast majority of our businesses, family owned, entrepreneur-owned businesses that are selling to private equity firms that are buying controlling interests in the businesses and heavy rollovers from the bounders and that kind of situation. But it's pretty..., pretty broad.

The other thing is we've got a decent amount of add-ons going on in the portfolio too, which has been kind of a semi-grumpy thing over the last several quarters and should be continuing in the future. I mean, just add-ons are probably a third of our originations on kind of a regular basis. And so, yeah, the activity is quarter-end since quarter end is definitely on the new platform, but it's all coming out. And that's been a trend. We've seen that over the last four quarters, and I think with all the times it is today, we'd expect that to continue. Yeah, it's an aspect of the business model. I mean, it's probably actually formed by a controlling interest in the founder of a family-owned business.

And, you know, again, when our founder rolls over a big chunk of their equity to the business, as we talked about, and then one of the things that founders and families like is the ability to then have a private equity firm buy three or four of their competitors. And it's one of the reasons they want to roll over and keep that equity in the business because of the accretion and the opportunity that entails. And so because that's generally the nature of our deal flow, we should expect to continue to see a meaningful amount of add-ons. And that's great because it's an additional credit commitment from businesses that we know. It's not new platforms that we have to learn about, but it's services we know and have seen performance of. And so it's a very attractive portion of dual-flow in general. And these are generally not the way to draw short-term loans, i.e. We are doing diligence on these add-ons and making them new events.

Operator: Yeah. Thanks for taking my questions today. Thank you. Thank you. Please stand by for our next question. Our next question comes from Alana Bemis-Abraham with UBS. Your line is open. Hey everybody. Just one from me.

You guys mentioned your Prepare to Mark competition coming back to where it was about 12 to 18 months ago. Can you just give a little bit more color on the nature of that competition and how you think that translates into Spread 2 over the next few quarters? Yeah, confidence is definitely strength in the market. It's just a reflection of overall health in the financial markets. You know, it is mainly from non-bank lenders.

But it's kind of like I said, it's kind of back to where it was 18 months ago, which is, you know, competition we've been dealing with for eight years, so it's not really necessarily new players. And so, you know, I feel pretty good about the spreads. I mean, kind of where they are this quarter is kind of where they'll stay.

So it's not like they're tightening to a point where we have an earnings issue or anything like that. You know, I wanted to express that, you know, for the last several quarters, the competition has been lighter, and it's starting to, you know, it's coming back, which is really, I think, a bad thing.

We truly, based on our cost of capital and our, you know, our, our education, we can compete well for quality deals and so generate nice risk-adjusted returns. But I would say spreads are kind of where we should expect them to be for the next few quarters. Yeah, when we actually looked at it, the last 12 months, we had 24 deals that closed, and the spread was essentially $7.50-ish. But the last nine deals since September have been just a little over $700. And the LTDs for the first half of the year were 25%-30%, and the overall is around 30% now. So we saw the LTDs kicking up to 35% and 40%. So just think, I think what Bowen said is correct; it's about where it usually is. But it was significantly lower for a period of time.

Operator: Alright, that's it for me. Thank you. Thank you. I'm showing no further questions in the, and I would now like to turn the call back over to Bowen Diehl for closing remarks. Well, thank you, everyone. As always, we enjoy talking about our business, your business, and some questions. And so I appreciate everybody's time and look forward to continuing to give you all quality updates. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.