Q4 2024 Capital Southwest Corporation Earnings Call
Okay.
Thank you for joining today's capital southwest fourth quarter and fiscal year 2024 earnings call.
On today's call are Bowen Diehl, CEO, Michael <unk>, our CFO, Josh Weinstein, CIO, and Chris Rehberger, VP Finance I will now turn the call over to Chris Reed.
Thank you.
Chris Rehberger: I'd like to remind everyone that in the course of this call we will be making certain forward looking statements.
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 see capital southwest's publicly available filings with the SEC.
The company does not undertake any obligation to update or revise any forward looking statements whether as a result of new information future events changing circumstances or any other reason after the date of this press release, except as required by law.
I will now hand, the call off to our President and Chief Executive Officer.
Thanks, Chris.
Thank you everyone for joining us for our fourth quarter and fiscal year end 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 over the last quarter as well as highlights of our performance over the last year.
Speaker Change: 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.
Before we begin I would like to take the opportunity to mention two recent promotions, which will broaden our executive team here at capital southwest.
Josh Weinstein, who joined capital southwest in 2015, it manages all of our deal sourcing and underwriting activity.
Been promoted to Chief investment Officer.
And Chris Rehberger, who also joined capital southwest in 2015.
As all of our Treasury and valuation activities has been promoted to executive Vice President Finance and Treasury.
Both of these gentlemen have been integral contributors to capital southwest in generating our strong track record over the last nine plus years.
Core to our culture is continually cultivating talent up and down our organization.
And these additions to our executive team illustrates a deep bench strength that our company has developed over the years.
We will now begin on slide six of the earnings presentation.
Where we have summarized some of the key performance highlights for the March 31, 2020 for fiscal year.
During the fiscal year, we grew our total investment portfolio at fair value at 22%.
215 billion up from $1 2 billion at the end of the prior fiscal year, while increasing our pre tax net investment income by 18% to $2 72 per share.
Up from $2 30 per share in the prior fiscal year.
We increased our regular dividend paid to shareholders to $2 24 per share for the fiscal year, representing an increase of 10% compared to $2 <unk> per share regular dividends paid in the prior fiscal year.
We continued our strong track record of covering our regular dividend with pre tax net investment income.
<unk> coverage for the year of 121%.
In addition to our regular dividend.
We paid a total of 23 per share in supplemental dividends during the fiscal year.
Compared to 10 cents per share in supplemental dividends paid in the prior fiscal year.
For our March 2020 for fiscal year, assuming reinvestment reinvestment of our quarterly dividends, we generated a total return for our shareholders, 56%, which was among the top performing public BDC. During this time period.
During the year, we strengthened our balance sheet through a variety of capital markets activities, which raised over $500 million in additional capital, while reducing our regulatory leverage 2.82 debt to equity at the end of the fiscal year.
Capital raised during the year included $184 million in gross equity proceeds through our equity ATM program.
A new senior secured SPV credit facility led by Deutsche Bank.
And an increase in commitments on our existing corporate credit facility led by LNG.
Speaker Change: During the fiscal year, we also completed an underwritten baby bond offering.
We obtained approval for the final amount of leverage on our <unk>, Our first FDIC license and we began the licensing process for our second <unk> license.
Michael will discuss further details around these capital raising activities later in our prepared remarks.
Turning to slide seven of the earnings presentation, we have summarized key performance highlights specific to the March quarter during.
During the quarter, we generated pre tax net investment income of 68 per share.
Which more than covered both our regular dividend of <unk> 50 per share and our supplemental dividend of <unk> <unk> per share paid during the quarter.
Portfolio earnings continued to be strong and as of the end of the quarter, we estimate that our undistributed taxable income was <unk>.
<unk> 64 per share.
Speaker Change: Net asset value per share ended the fiscal year at $16, 77, which was flat compared to the prior quarter and up <unk> 40 per share.
To the year ago quarter.
And we look forward to the June quarter, we are pleased to announce today that our board of directors has declared a regular dividend of <unk> 57 per share supplemental dividend of <unk> per share.
The total dividends declared for the June quarter of 2024 to.
To <unk> 63 per share.
Deal quality and activity in the lower middle market. During the March quarter continued at a healthy pace as private equity firms and business owners continue to transact and we continue to source attractive investment opportunities. While we are continuing to source and close deal at comfortable loan to value levels, averaging approximately 40%.
Leverage levels of approximately three five times debt to EBITDA.
Competition in the Florida market has increased resulting in spreads tightened to levels last seen over 18 months ago.
The increased competition for quality deal has come from both non bank lenders and the summit degree traditional banks.
Over the past decade, our team has done an excellent job generating attractive returns for our shareholders and all competitive environment and I am highly confident we will continue to our track record in the current environment.
Portfolio growth during the quarter was driven by a $157 5 million in new commitments to six new portfolio companies and five existing portfolio companies.
Offset by $13 $7 million in proceeds from two debt prepayments, which generated a weighted average realized IRR of 16, 5%.
On the capitalization front during the quarter. In addition to closing the SPV credit facility, we raised nearly $50 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average price of $23 80 per share or 142% of the prevailing NAV per share.
Speaker Change: Finally, consistent with our communication on last quarter's conference call. The I 45 Senior loan fund was dissolved and the assets were distributed to the joint venture partners in accordance with their respective ownership percentages.
We have remained diligent in ensuring we have strong balance sheet liquidity, while also funding a meaningful portion of our industrial activity with accretive equity issuances.
Speaker Change: We continue to maintain a conservative mindset to both BDC leverage and balance sheet liquidity.
Managing leverage to the lower end of our target range, while ensuring a strong balance sheet liquidity.
Before just the ability to continue to invest in new platform companies and to grow our balance sheet, even in periods of volatile capital markets when risk adjusted returns can be particularly attractive.
Additionally allows us the ability to support our portfolio companies by either providing growth capital or by financing add on acquisitions.
Speaker Change: While maintaining the ability to opportunistically repurchase our stock if it were to trade meaningfully below it maybe.
On slides eight and nine we illustrate our continued track record of producing steady 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 dividend with pre tax net investment income.
Additionally over the same time period, we have paid or declared 24 special or supplemental dividends.
Totaling $3 95 per share.
Speaker Change: All generated through excess earnings unrealized gains from our investment portfolio.
Dividends sustainability strong credit performance and continued access to capital for multiple capital sources are all core to our overall business strategy.
Our track record in all these areas demonstrates the strength of our investment in capitalization management strategies as.
As well as the absolute alignment of all our decisions with the interest of our shareholders.
Turning to slide 10, as a reminder, we lay out our 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 92% of our credit portfolio is backed by private equity firms.
Speaker Change: Which provide important guidance and leadership to the portfolio of companies as well as a potential source of new junior capital support if needed.
In the lower middle market, we often have the opportunity to invest on a minority basis in the portfolio company equity Parry 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 65 investments with a total fair value of $132 million.
Which was marked at 141% of our cost representing $38 $5 million and embedded unrealized depreciation for <unk> 85 per share.
Our equity portfolio, which represented approximately 9% of our total portfolio at fair value as of ended the quarter.
Can use to provide our shareholders participation in the attractive upside of these growing lower middle market businesses.
Which will come in the form of NAV per share growth and supplemental dividends over time.
As illustrated on slide 11, our on balance sheet credit portfolio ended the quarter at $1 3 billion, representing a year over year growth of 30% from $1 billion as of the end of March 'twenty three quarter.
For the current quarter, 100% of the new portfolio company that originations were first lien senior secured.
As of the end of the quarter, 97% of the credit portfolio was first lien senior secured.
During the year, we improve the granularity in our portfolio as the average industrial exposure per portfolio company ended the fiscal year at 9%.
Compared to one 3% as of the either the prior fiscal year.
We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management is it.
Grow our balance sheet.
We expect this metric will continue to improve in their asset base growth.
On slide 12, we detailed a $157 5 million in capital investigated and committed to portfolio of companies during the quarter.
Capital committed this quarter included $123 $5 billion in first lien senior secured committed to six new portfolio companies and.
And which we also invested $2 8 million in equity.
In addition, we committed a total of $31 1 million in first lien senior secured debt and 143000 in equity to five existing portfolio companies.
We are pleased with our strong market position that our team has established in the lower middle market is a premier.
Equity capital provider.
Evidenced by the consistency of our origination activity and the broad array of relationships across the country from which our team is sourcing quality opportunities.
As a point of reference currently there are 70 different private equity firms represented across our investment portfolio.
Since the launch of our credit strategy back in January of 2015, we have completed transactions with over 100 private equity firms across the country include.
Including over 25% of which we have completed multiple transactions.
Turning to slide 13, we continued our track record of strong returns on our efforts.
With two debt prepayments during the quarter.
In total these actions generated $13 7 million in total proceeds generating a weighted average IRR of 16, 5%.
Speaker Change: Since the launch of our credit strategy, we have realized 74 company exits representing $919 million in proceeds.
It has generated a cumulative weighted average IRR of 14%.
Speaker Change: On slide 14, we detailed key statistics for our portfolios and we ended the quarter. The total portfolio of fair value ended the quarter weighted 88, 7% with first lien senior secured debt.
Two 3% second lien senior secured debt.
Speaker Change: 1% to sub debt and eight 9% to equity co investments.
The credit portfolio had a weighted average yield of 13, 3% and weighted average leverage through our security of three six times EBITDA.
Overall, we are quite pleased with the portfolio company performance across the portfolio.
Cash flow coverage of debt obligations across the portfolio remains at a healthy three two times, despite the higher base rate environment.
And quarter over quarter revenue and EBITDA growth on a weighted average basis was 3% and 5% respectively.
Yeah.
As seen on slide 15, our total investment portfolio continues to be broadly diversified across industries with an asset mix, which provide strong security for our shareholders' capital.
On slide 16, we have laid out the ratings migration across our portfolio during the quarter.
Speaker Change: 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 have four loans, representing almost $30 million in fair value upgraded this quarter.
Having four loans, representing about $14 million in fair value downgraded this quarter.
The portfolio remains healthy with 94, 7% of the portfolio at fair value rated at one of the top two categories of one or two.
I will now hand, the call over to Michael to review some specifics of our financial performance for the quarter.
Thanks, Bowen specific to our performance for the quarter as summarized on slide 17 pre tax net investment income was $29 8 million or.
<unk> 68 per share as compared to $29 8 million or 72 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 a supplemental dividend of <unk> <unk> per share for the June quarter.
Maintaining a consistent track record of meaningfully covering our dividend with pre tax net investment income is important to our investment strategy.
We continued our strong track record of regular dividend coverage with 121% coverage for the 12 months ended March 31, 2024, and 111% cumulative coverage since the launch of our credit strategy in January 2015.
As a reminder, our intent is to continue to distribute a 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 dividends.
Seeable future based upon our current UTI balance of 64 cents per share and 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 <unk> 85 per share and unrealized depreciation on the equity portfolio.
For the quarter total investment income decreased to $46 4 million from $48 $6 million in the prior quarter.
<unk> investment income included a significant onetime dividend from one of our portfolio companies.
Over quarter decrease in dividend income was offset by an increase in interest income from the growth in our credit portfolio as.
As at the end of the quarter our loans on non accrual represented two 3% of our investment portfolio fair value and the weighted average yield in the portfolio on all investments was 12, 7%.
As seen on slide 18, LTM operating leverage ended the quarter at one 7%, which compares favorably to the BDC industry average of approximately 3%.
We believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders.
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 as we continue to build a best in class BDC.
As we look forward, we expect further improvements in operating leverage as we continue to grow our balance sheet over time.
Turning to slide 19, the company's NAV per share at the end of the quarter was $16 77.
Which was flat from the prior quarter and up 40 <unk> per share from the year ago March 2023 quarter.
Turning to slide 20, we're pleased to report that we have significant balance sheet liquidity with approximately $398 million in cash and undrawn leverage commitments on our two credit facilities and our SBA debenture commitments, which altogether represented two eight times, a $140 million unfunded commitments.
We had across our portfolio as at the end of the quarter.
As Bowen mentioned during the quarter, we raised a new senior secured STB credit facility led by Deutsche Bank.
Facility has a $150 million in initial commitments, which will contractually increased to $200 million of total commitments by June 2024, and.
In addition, based on our current borrowing base, we have access to the full $460 million in total commitments for the IMG led corporate credit facility.
<unk> has an accordion feature allowing for the further increase in total commitments and this facility up to an aggregate of $750 million.
Allowing us to continue to grow our revolver capacity in lock step with the growth of our overall balance sheet.
We are actively working to further increase commitments in the corporate credit facility and provide updates on that process in the coming months.
In March 2024, we submitted a Mac application to the SBA, which has begun the process towards the second FDIC license, we look forward to providing updates on this process as they become available.
As to the end of the March quarter, 46% of our capital structure, our liabilities, where an unsecured covenant free bonds with our earliest debt maturity in January 2026.
Bowen alluded to earlier during the quarter. The I 45 board of managers approved the dissolution of the fund which included a full repayment of the I 45 credit facility and the distribution of the I 45 assets to the joint venture partners in accordance with their ownership percentages.
The assets distributed capital southwest from the I 45 fund are now included on our schedule of investments in our financial statements.
Our regulatory leverage as seen on slide 21 ended the quarter at a debt to equity ratio of <unk> eight.
Two to one down from <unk> 88 to one as of the year ago March quarter, 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 maintained significant liquidity and conservative leverage with adequate cover.
Any questions.
Despite not having any maturities within our debt structure until 2026, we are always proactively planning our path forward to mitigate the risk of capital markets volatility. Finally, we are very pleased that both moodys and Fitch have recently affirmed our investment grade ratings I will now hand, the call back to Bowen for some final comments.
Thanks, Michael and again, thank you everyone for joining us today.
As always we appreciate the opportunity to provide you with an update on our business our portfolio on 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 dealer.
<unk> origination and portfolio management capability as well as a flexible capital structure.
Speaker Change: We believe we have prepared our company well for the for future growth and performance.
Overall health and security of our portfolio is strong.
Our credit portfolio is predominantly made up of first lien senior secured loans allocated across a broad array of companies and industries.
The vast majority of which are backed by private equity firms.
Interest coverage on our debt obligations across our portfolio is a strong three two times with our loans across our portfolio, averaging approximately 40% of the portfolio company enterprise value.
Additionally, our equity co investment portfolio gives our shareholders participation in the equity upside of many of these growing lower middle market businesses, providing further enhancement to our long term shareholder returns.
Last but not least we have a very well capitalized balance sheet with multiple capital sources strong liquidity.
Flexible capital structure, and an exciting runway to continue to grow our company generating strong shareholder returns for years to come.
This concludes our prepared remarks, operator, we are ready to open the lines for Q&A.
Thank you as a reminder, if you have a question at this time. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
While we compile our Q&A roster.
Okay.
Okay.
And our first question is going to come from the line of Mickey <unk> with Ladenburg. Your line is open. Please go ahead.
Yes, good morning, everyone.
Paul you mentioned spreads tightening, which is certainly consistent with everything we're hearing across the space. When you look at the vintages of your portfolio.
Much refinancing risk do you see going forward.
Yes, Thanks, Vicki I mean look if we think about the strengthening of the market liquidity in the market and if you look at our rated number one.
Companies rated number one companies.
Significantly outperform.
They are clearly in most all cases refinancing.
Candidates.
All that said I mean, there is something you should.
<unk> should understand I mean, there are ways that we can do.
Against in some respects refinancing risk on outperforming companies. Obviously, we can go proactively at the risk has materially changed we can go proactively and reduce interest rate on our loan to make it less.
Less incentive to haven't refinanced out.
We can do dividend recaps added additional debt on the business that still well underneath what you'd be comfortable with leveraging a very well performing business that we understand.
And in some cases me on one case, where the leverage is so low and the company's cash flowing so well, we actually have a situation where we let the sponsor to take cash dividends out each quarter, we take a lot of money to pay back the debt and they take a lot of money to put in our pocket.
And it's kind of removes the incentive for them to refinance us out.
A very very safe credit.
So there are things you can do us than anyone else in our position to defend against those those refinancing risk, but clearly when the market strengthens and you have companies that are outperforming you definitely have refinancing risk and so that's kind of just give you a flavor of some of the ways. We manage also I mean, just to quantify so it's about 200, and we would say of the portfolio was long grade one.
We fall in that category.
Many of which has been originated in the past 18 months so to them still have call protection on those loans and then the other piece too.
Notice.
Our all in yield.
8%.
Spread over over so far on our portfolio, which is obviously robust.
So if we have a question of that $200 million, we're not able to retain that comes back we don't feel like its a material downgrade.
<unk> yet to earnings going forward.
Thanks, Thanks for that that's very helpful.
Could you give us some highlights on what caused the net realized loss this quarter.
Okay.
Yes, so predominantly with the I 45 loss. So as you think about it we had depreciation embedded in I 45, it was unrealized as an equity position.
Speaker Change: And when I 45 dissolved that became a realized event into retained earnings. So that was about I think $16 million of it.
Yeah.
Speaker Change: I understand.
I also saw that the fair value of your non accruals went up a little bit was that caused by a new nonaccrual or was that valuation adjustments of the previous non accruals.
Yes, we are.
Two new names ones that are highly talked about syndicated name and other was a small company in the education space, where we had we had product.
And so yes, we have two new non accrual names.
Okay.
Great.
Both from the watch list.
Yes.
Is it really a degradation.
Just sort of two names that had some issues, but we would also say is when you look at our non accrual.
Our granularity and total portfolio is now 9% down from one 3%. So when you look at our portfolio a very granular portfolio. So no non accruals are painful and we don't.
You bet Mike.
<unk> seen them.
We do say that the impact to earnings is quite small those two non accruals accounted for about a penny of earnings per quarter.
I appreciate that and that's certainly something I watch carefully lastly, Michael the new SPV credit facility has a higher spread than the existing corporate credit facility. So well notwithstanding that what what are the advantages of putting that into place.
Sure well first I would tell you this so the spread.
And that itself is higher but the fees and the unused or lower so is there actually a parity the two facilities.
So Joe the other benefit we would tell you, but we wanted to expand our.
<unk> of our sources.
Thanks, we've been told over the last few years, we're looking for something of an SPV variety because it better from a capital charge perspective, rather than the on balance sheet credit facility.
So that's one of the reasons why we were pursuing an SPV structure, yes, I think we would.
Tell you is that the lenders that we're involved in I 45.
Who wouldn't want too much dissolved we're still very interested in doing business with capital southwest.
So they were looking for a way to get back in.
This was one way to ensure you took down the $150 million plus the additional 50 guys coming onboard in June.
But the other lenders in there have some interest as well.
So when we're looking for we're looking at our maturities out in 2026, and we're thinking about it today, so we'd like to build out the secured.
Dry powder at secured facilities that allow us to take down a portion is a dose.
Most maturities if the capital markets were closed.
We do anticipate probably paying it down prior to getting within six to 12 months, but having diversity.
<unk> sources that we can draw.
Especially the refinance is really helpful in terms of flexibility.
No I understand and that makes sense.
All my questions. This morning.
Appreciate your time as always thank you.
Thank you Vicky.
Thank you and one woman as we move on to our next question.
And our next question comes from the line of Vilas Abraham with UBS. Your line is open. Please go ahead.
Hi, everyone and thanks for taking the question I wanted to ask about the mix of originations in the March quarter. It looks like the top three about 70 million or so in fundings, where consumer products and consumer services can you update us on just how youre feeling about more cyclical industries and in general what kind of internal.
Framework.
Might have on managing industry concentrations across the portfolio.
Yes, well first of all I'll say, we look at.
Economic sensitivity the same across all our companies, we look at past recessions and what that customer base.
Yes.
Type companies in the industry did from a economic earnings volatility so.
It's the same way, we look at consumers and so.
I think.
And we lever accordingly, so these consumer companies I mean, they are kind of interesting names its lower leverage high fixed.
Free cash flow high variable costs.
Ponant on their cost structure, and one cases enthusiasts.
Type products.
The other case, it's an incubator for new fragrance lines and things in the industry. So interesting consumer place daily consumer services company.
Speaker Change: <unk> made it a truck franchise that basically both of their businesses moving renters from apartment to apartment in local markets. So.
Obviously.
Okay.
Segment that may perhaps less less cyclical, but ultimately we look at the businesses.
We would match leverage to potential economic.
Volatility so.
Speaker Change: With respect to your question on sectors, Yes, we look at that I mean, clearly I'd say.
Consumer consumer is an area that is probably close to the top four we'd be doing is from a weighted perspective.
But we're constantly Josh micro constantly looking at that for.
Risk management perspective, we don't want something in the market ex exit to exit central in the market to basically move the credit picture of our portfolio meaningfully.
Got it and you don't necessarily have any hard feelings in terms of concentration for for particular industries right.
No I don't think so I mean look I think.
Our sectors.
We've got some of the larger concentration sectors.
On a relative basis.
You probably would look at us increasing those made meaningfully but I don't feel I mean, we don't feel like there is like.
Of course, it's not just the sectors. The actual companies that are in there and what they do within that sector.
But we don't think we're overweighted in the sector.
And to the sector.
The consumer is something that has a higher bar I think Bob had mentioned earlier in his statement just now that our leverage levels on those really in the two to three times and with loan to values.
40%.
So these are companies that we feel like the financial profile.
And their cash flow history.
Withstand.
The cycle well, yes, given I mean, obviously, we all have sensitivity to consumer sectors.
Starts with us having sensitivity to that as well I think to your point.
All three of these.
Speaker Change: Consumer names are with private equity firms that virtually all they do is consumer.
They are very deep and what's interesting about our sponsor who has.
Deep expertise in the sector, especially like consumers is if you look across our portfolio to have relationships across cut.
Customers or suppliers or sales.
Sales channels like retail or whatever.
Across the other companies that they use of leverage to support and enhance the consumer company that they are buying and so it's interesting how you really can't say that about a generalist private equity firm necessarily.
One is deeply rooted in the consumer sector health care sector, but consumer, especially.
They can really leverage their relationships across our portfolio to enhance and thats kind of partner playbook Kelly.
To leverage those relationships to enhance each new platform they bought.
Okay.
Got it okay. That's helpful.
And my next question.
Yes.
Great your remarks on competition.
Tightening has there been any impact to our structure that that youre seeing at this point and is it any harder now to get the the equity co invest that in the past.
So on the structure I would tell you and you got some market increases in competition you have some erosion of structure, but the good news is that we always talked about and I know you know this but lower than our markets.
I mean, our documents are tight covenants are tight reasonable EBITDA add backs were very sensitive to that.
So sometimes credit performance obviously credits.
I mean, it's wrong to say it doesn't change at all when the marketing.
It gets more competitive but in our market I mean, it's already well within.
One would be comfortable with and so it doesn't really deteriorate that much but it's not zero.
And then.
Your first question equity common.
Equity co investment is usually a function of that private equity firms.
The size of their check versus the size of the fund where they are in their fund life and that type of thing, it's not necessarily a function of how competitive the market is it's more of a function of the individual private equity fund, where they are where they are on their liquidity profile.
And then you will see though is our checks.
We havent really grown our whole size that much obviously, we talked about the granularity but to the extent we have maybe our debt goes up from $12 million to $15 million or maybe $80 million.
The equity check it's still difficult to get a large equity investment equity co investment from OE sponsor toy Boeing has indicated and other cases honestly.
While we get the desktop, but we don't get the equity story, so that all being said, we would expect our <unk>.
Equity holds.
Portfolio would probably be in the 8% to 10% probably not to be able to grow it beyond 10%.
Yes.
Okay I'll hop back into queue. Thank you.
Thank you and one moment as we move on to our next question.
And our next question is going to come from the line of Bryce Rowe with B Riley. Your line is open. Please go ahead.
Hi, Thanks, good morning.
Maybe maybe wanted to start on with a couple more questions about I 45, I'm just curious.
What was the impact on the on the debt portfolio.
That resolution or desk solution and just trying to understand.
The quarter over quarter increase in the debt portfolio, what what percentage of that or what dollar amount was.
Coming from the <unk> 45 assets sure. So there were 17 portfolio companies that came over from approximately $80 million.
And just the yield on those were about ASP, plus six step D. So not materially lower than our.
But obviously the $80 million is a very small percentage. So it had a very little impact.
As mentioned on other calls that the impact to earnings.
Is it because we're getting rid of a lot of frictional costs associated with trust fees and audits et cetera.
You can consider this a net impact too.
Earnings.
WC.
Okay.
Michael I mean, whats the inclination to to hold those are just to be opportunistic if you see an opportunity to get out I assume youre not youre not in control of the situation so to speak.
So youre more more along for the ride is that the right way to think about it.
We've got the right cost.
Right.
Right right the story.
Okay.
Yes.
And then.
Bowen and Michael you mentioned that.
Dividend income for the quarter and it being more onetime in nature.
Can any any color around that.
So that dividend and then help us quantify.
How much impact yet.
So actually what I was indicating with last quarter, we had a $2 $4 million one time dividend.
For the 12 31 quarter and then this quarter.
<unk> had some dividends, but we certainly didn't have anything of that materiality. So I think given an income came down about $2 million quarter over quarter and at the same time, our interest income one because you had assets coming over from <unk> 45 into the portfolio as we just noted there was additional interest income.
Plus we had net portfolio growth during the quarter.
Okay.
And so the was there any I 45 dividend income in the quarter I assume theres not but maybe there was.
Yes, there was a spirit better than I think it was around 500000, there wasn't significant for the quarter.
Okay.
Last one for me.
The comp line down a bit it sounds like from the press release that there was just.
Speaker Change: The difference in bonus accrual quarter over quarter.
Any thoughts on kind of what a good run rate might be from a from a comp perspective.
Sure sure so cash comp I would expect for this coming quarter.
Fiscal year to be on a quarterly basis around $2 8 million for cash comp.
Probably the <unk> expense around one 5 million and G&A is about $2 5 million a quarter. So the total you'd expect about $6 $8 million as a run rate quarterly and obviously vacillate up and down but that's what you should expect maybe on at.
That times four would be your annualized amount.
Okay, and what was the reason for the lower.
Bonus accrual in the quarter sure so in that previous quarter. They indicated that we had that $2 $4 million dividend at that point, we accrued.
Additional bonus accrual above the target.
And then in the fourth quarter, we had accrued probably above where we.
Sided to payout to the company and so there was a back out of some accrual for the Dod.
Okay Alright.
That's it for me I appreciate it.
Thanks, Brian Thanks Bryce.
And one woman as me move on to our next question.
And our next question is going to come from the line of Erik Zwick with Hovde Group. Your line is open. Please go ahead.
Thank you and good morning, everyone. Just one question for me today when it was a good nice to see that.
You know kind of the dollar value of investment upgrades was a little bit more than twice what was downgraded.
Speaker Change: And I guess my question is more towards that those downgrades there's three.
Relationships you have there if you could just talk maybe about the circumstances are characteristics that.
Those downgrades in terms of company performance or whether theyre facing some industry challenges or anything you could provide there would be interesting.
Yes.
Looking at the list here I mean, they are all.
Speaker Change: Idiosyncratic.
<unk>.
Two of them were.
Our new non accruals.
One of them was another company that's relatively a socratic so.
Speaker Change: It's hard to really put a like a.
Oh, there is a point on the economy that we see.
One of them was broad and one of them to large syndicated deals.
Seems to be over Levered.
So.
They are not really any trends in those names.
But I can point to.
Okay. No. That's helpful. I appreciate it and then maybe then.
Kind of one quick follow up on that point, if you look at the interest rate futures curve. It seems that we're likely to be and that's higher for longer interest rate environment for a while and I guess how are your companies coping records were there any of that were holding out hoping that we would see a decline in interest rates are most managed well and have continued to be able to grow.
EBITDA and hopefully delever over time, how are they handling that's best interest rate environment.
Yes.
Couple of comments I'll make on that.
In the last 12 months of our 12 to 18 months or this kind of cycle comment on some of the things that we've seen these private equity firms do.
Cutting operational costs, because our interest burden is going up.
And they've been doing that and if you look at our and then we're also.
Leverage levels that were elaborating companies.
Fixed charge coverage is a very important metric right, obviously and so as rates come up leverage on new loans can come down.
And so if you look at ultimately be zoned out and say, okay. What's the health of the engine, that's generating earnings and dividends for our shareholders things like EBITDA to interest coverage metrics on a weighted average basis of three two times pretty healthy, especially in the <unk>.
And the current interest rate environment.
Loan to values, which is not so it's ex charges shippers absolute leverage issues.
40% is pretty healthy so we feel like as a portfolio. We look at Narratively, we look at what the private equity firms are doing in the portfolio too.
To manage the business at a higher interest rate environment.
Speaker Change: And we look at the kind of portfolio.
<unk> levels test metrics and you feel pretty good.
A small problems here there are a small handful of companies we.
Talk about but overall our portfolio looks pretty good from an engine, creating earnings for our shareholders perspective, and then the longer we go into this the longer the industries companies private equity firms have kind of gotten their sea legs, if you will and the higher interest rate environment and they manage the business for the longer we're in this environment the last <unk>.
Kind of wake up thinking something is going to blow up.
Does that mean youre going to have the one thing I will say that as interest rates are higher it brings problems to the table faster and our <unk>.
<unk> teams can get in front of the private equity firms.
And insist that they put money in the businesses and support anything from liquidity, but also they want to continue to increase their capex.
Budgets may be higher than what we have in our credit agreement and sponsors that have good equity yet. So they can continue to focus there on the growth those types of things and so when the system gets tighter because the interest burden is going up.
And the whole system and brings conversations to the table faster.
Before there is a kind of a material problem or a shift in the thesis of the business that makes sense.
We always I think the lever that is available probably to all bdcs.
Pik toggle, we haven't seen that across the portfolio, but certainly there's probably one or two for that has come into play.
I'm sure that our tech number came down significantly from the previous quarter.
We're still at a very low level, but again, that's a lever you can utilize.
If the companies have a short term issue with interest coverage, yes, I can't really.
So some of the analysts have asked us questions about that.
Early on like 18 months ago like what do we expect.
Speaker Change: We would have expected more.
Pik toggles in a rising interest rate environment than we've seen and I think some of that is the profitability of our companies but.
Yes.
Oregon, the sponsor's willingness to support the businesses rather take on additional kind of interest burden on the business but.
Michael's right.
And also.
A lot of the deals I would say the majority of the deals that we originate the interest coverage is well above three it's three to five times at close so the fact that it's ours is $3 two right now.
Thats had degradation because of base rates, but you can compare that to the syndicated market, where those guys are living at two times in a normal environment and so they're going to get crushed a lot harder and a lot sooner than our lower middle market portfolio as well.
Yeah that was a great commentary and insight thanks for taking my questions today.
Thanks, Eric Thanks, Eric.
Thank you one moment for our next question.
And our next question is going to come from the line of Robert Dodd with Raymond James Your line is open. Please go ahead.
Hey, guys. Good morning. This is Sean Paul items on the line for Robert Dodd.
On the downgrades in the risk ratings in the portfolio. It looks like it was primarily driven by the non accruals I'm just asking for a little bit more color on the non accruals it seems like the education.
Based upon could be related to the student resource Center is that just an accreditation issue or is there a path forward for getting that back on accrual.
So I would summarize the challenges there is.
The education partner in one of the education partners.
We work with in place students.
And there were some broad involved as well in that deal so.
So, it's a little bit idiosyncratic to that particular company and situations.
Got you great.
Alright.
Along with research now is just obviously it broadly held in BDC portfolios across the board.
That.
That one we have limited information because the first lien lenders are.
Negotiating it does look like it's going to be a great outcome for the second lien lenders.
And it will end up with a small equity ownership in the business.
And then secondly, lender probably most of these situations work out.
And we will.
To your question I also tell you we just had our watch list meeting.
Days ago, and we went through all the list of companies.
On that watch list, but we actually saw a lot of those companies are either stable or slightly positive.
And there is a host and I Wouldnt say its in the next one or two quarters, but where are some of the non accrual names might actually turn around.
So let me come to go back to when you go back on accrual.
Other than seeing any of those watch list names in the near future going on macro that's not a prediction or a projection, but that's just an observation based upon the information.
Yes.
Got it got it that's perfect and on the outlook for the next fiscal year.
Have there been any shifts in the long term target range concerning leverage given like changes in the forward curve. It seems like you guys just tap the lower end of the short term target you guys were talking about last quarter.
For leverage.
Yeah, I mean, I wouldn't say, it's a change and I think what I would tell you is that leverage is going to be probably as low as <unk> eight on a regulatory basis or as high as 95.
Speaker Change: That's probably where our comfort level is.
We're at <unk> 82 at the moment I would anticipate based on how we feel about our portfolio that we might lever that up closer to the middle of the range.
But as we've shown during the course of the last few years, we are mindful of where the economy is.
<unk> got to make certain that we've escalated.
And.
At the same rhythm.
The economy itself.
Got it. Thank you for the color that's perfect. Thank you.
Sure. Thank you.
Thank you and one moment as we move on to our next question.
And our next question is a follow up question with BLS Abraham with UBS. Your line is open. Please go ahead.
Hey, I'm just.
One more follow up here more of a high level question and I know, we've talked about this a little bit before in the past, but do you guys think about.
The internal management structure and the flexibility. It provides can you give us any thoughts on how you might be thinking about any potential partnership sidecar vehicles that kind of thing.
Okay.
I mean, that's obviously something that we've been thinking about it.
Honestly, probably working on behind the scenes.
As our portfolio has grown our hold size can grow as well there's a lot of deals that we share with other partners. We are that we could be putting maybe having a separate accounts separately managed account, where they would be we'd manage that capital that would be a portion of what of.
Originations we hold.
We would earn a fee tend to carry so we'd be honestly it'd be strategic but it would also be.
It would work well within what we're already doing today, so it wouldn't require us to grow our balance sheet.
So that is something we're considering I think that that's kind of a.
I hear people say you have to kiss a lot of frogs in that.
In those ventures in order to actually.
Meeting kind of closed on a partnership so I don't think Thats the calendar year 2024 event.
But we would definitely expect that that would be something in the.
Future debt, we were able to be able to incorporate into the balance sheet.
Yes, I'd say its an interesting opportunity for us there is definitely institutions out there, we shouldn't investing and our track record of our asset class, but don't want to pay above NAV net asset value. So if they can partner with.
With us and are funding the concept of investing in some of our deals directly its interesting, but its all of those types of things are always for us I mean, we're all about the shareholder long term shareholder returns.
There is a lot of opportunities organically doing what we're doing.
Continuing.
Yes.
Slightly a higher hold sizes by sharing less of deals.
Speaker Change: Our guys getting either mid level.
Growing up in the industry.
Increasing their franchise personally of relationships, it's really broadening the top end of our follow up deals. We look at there's a lot of organic growth really in front of us and we don't want to distract ourselves from that.
But but it's absolutely it's absolutely opportunity to rethink this.
Okay.
Great. Thank you.
Thank you and I would like to hand, the conference back over to Bowen Diehl for closing remarks.
Thanks, operator, and thanks for all the questions today and we appreciate the opportunity to update you on the business. So we look forward to continuing to execute and talking to you all next quarter. Thank you.
This concludes today's conference call. Thank you for participating and you may now disconnect.
Okay.
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Speaker Change: Okay.
Yes.
Okay.
Yes.
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Yes.
Sure.
Okay.
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Speaker Change: Yes.
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