Q1 2025 Capital Southwest Corp Earnings Call
Speaker Change: Thank you for joining today's Capital Southwest First Quarter.
Operator: School Year 2025 earnings call.
Operator: 2025 earnings call. Participating on the call today are Bowen Diehl, Chief Executive Officer, Michael Sarner, Chief Financial Officer, Josh Weinstein, Chief Investment Officer, and Chris Rehberger, Executive Vice President of Finance. I will now turn the call over to Chris Rehberger.
Operator: Participating on the call today are Bowen Diehl, Chief Executive Officer; Michael Sarner, Chief Financial Officer; Just Weinstein, Chief Investment Officer; and Chris Rehberger, Executive Vice President Finance.
Chris Rehberger: Fiscal Year 2025 Earnings Call. Participating on the call today are Bowen Diehl, Chief Executive Officer, Michael Sarner, Chief Financial Officer, Josh Weinstein, Chief Investment Officer, and Chris Rehberger, Executive Vice President of Finance. I will now turn the call over to Chris Rehberger.
Chris Rehberger: I will now turn the call over to Chris Rehberger. Thank you. I would like to remind everyone that, in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information, and management's expectations, assumptions, and beliefs. 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.
Chris Rehberger: Thank you. I would 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 data. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC.
Chris Rehberger: Thank you. I would like to remind everyone that in the course of this call we will be making certain forward-looking statements.
Speaker Change: 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.
Speaker Change: For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC.
Chris Rehberger: 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 Chief Executive Officer, Bowen Diehl.
Chris Rehberger: Whether in the results of new information, future events, change circumstances, or any other reason after the date of this press release, except as required by law.
Speaker Change: The company does not undertake any obligation to update or revise any forward-looking statements.
Speaker Change: 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 Chief Executive Officer, Bowen Diehl.
Bowen Diehl: I would now hand the call off to our Chief Executive Officer, Bowen Diehl. Thanks, Chris. And thank you, everyone, for joining us for our first quarter fiscal year 2025 earnings call. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our investment strategy as stewards of your capital. Throughout our prepared marks, 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.
Bowen Diehl: Chris, and thank you everyone for joining us for our first quarter fiscal year 2025 earnings call. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our investment strategy as stewards of your capital. Throughout my 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.
Bowen Diehl: Thanks, Chris, and thank you, everyone, for joining us for our first quarter fiscal year 2025 earnings call. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our investment strategy as stewards of your capital.
Bowen Diehl: 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.
Bowen Diehl: You will also find our quarterly earnings press release issued last evening on our website. We will now 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 net investment income of $0.69 per share, which more than covered both our regular dividend of $0.57 per share and our supplemental dividend of $0.60 per share paid during the quarter. Our portfolio earnings continue to be strong, and as of the end of the quarter, we estimate that our undistributed taxable income was $0.50 per share.
Bowen Diehl: You will also find our quarterly earnings press release issued last evening on our website. We'll now begin on slide 6 of the earnings presentation, where we have summarized some of the key performance highlights for the quarter.
Bowen Diehl: You will also find our quarterly earnings press release issued last evening on our website.
Bowen Diehl: We'll now begin on slide six of the earnings presentation where we have summarized some of the key performance highlights for the quarter.
Bowen Diehl: During the quarter, we generated pre-tax net investment income of $0.69 per share, which 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. Portfolio earnings continue to be strong, and as of the end of the quarter, we estimate there was undistributed taxable income of 50 cents per share. As we look forward to the September quarter, we are pleased to announce that our Board of Directors has declared a one-cent-per-share increase to our regular dividends, $0.58 per share for the quarter ending September 30, 2024. Our board also declared a supplemental dividend of $0.06 per share, bringing total dividends declared for the September quarter to $0.64 per share.
Bowen Diehl: During the quarter, we generated pre-tax net investment income of $0.69 per share, which 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.
Bowen Diehl: Portfolio earnings continue to be strong, and as of the end of the quarter, we estimate that our undistributed taxable income was $0.50 per share.
Bowen Diehl: As we look forward to the September quarter, we are pleased to announce that our board of directors has declared a one-cent per share increase to our regular dividend to $0.58 per share for the quarter ending September 30, 2024. Our board also declared a something little dividend of $0.6 per share, bringing total dividends declared to the September quarter to $0.64 per share. Deal quality and activity in a little bit of market during the June quarter continued at a healthy pace, as private equity firms and business owners continued to transact. That said, liquidity in the market and competition from both bank and non-bank lenders for quality deals has increased, meaning play over the past couple of course.
Bowen Diehl: As we look forward to the September quarter, we are pleased to announce that our Board of Directors has declared a $0.01 per share increase to our regular dividend to $0.58 per share for the quarter ending September 30, 2024.
Bowen Diehl: Our board also declared a supplemental dividend of $0.06 per share, bringing total dividends declared for the September quarter to $0.64 per share.
Bowen Diehl: Deal quality and activity in the Louisville market during the June quarter continued at a healthy pace as private equity firms and business owners continued to transact. That said, liquidity in the market and competition from both bank and non-bank lenders for quality deals have increased meaningfully over the past couple of quarters. This has resulted in tighter spreads on quality deals and, to a lesser extent, slightly higher leverage levels.
Bowen Diehl: Deal quality and activity in the Louisville market during the June quarter continued at a healthy pace as private equity firms and business owners continued to transact.
Bowen Diehl: That said, liquidity in the market and competition from both bank and non-bank lenders for quality deals has increased meaningfully over the past couple of quarters.
Bowen Diehl: Instead of resulted in tighter spread on quality deals, enter lesser extent slightly higher leverage levels. We have built a tremendous nationwide network of deal sources, and our team has been doing an extraordinary job sourcing deals in this market. We continue to close deals at low value levels of 40 to 50 percent, resulting in significant equity capital cushion below our debt. In a reasonable leverage level to go around three and a half times debt to either of us.
Bowen Diehl: This has resulted in tighter spreads on quality deals and, to a lesser extent, slightly higher leverage levels.
Bowen Diehl: We have built a tremendous nationwide network of deal sources, and our team has been doing an extraordinary job sourcing deals in this market. We continue to close deals at undivided levels of 40 to 50 percent, resulting in significant equity capital cushioned below our debt and a reasonable leverage level of around three and a half times that of the other doctors. Over the past decade, our team has done an excellent job generating attractive returns for our shareholders in all competitive environments, and I am highly confident we will continue our track record in the current environment.
Speaker Change: We have built a tremendous nationwide network of deal sources and our team has been doing an extraordinary job sourcing deals in this market.
Speaker Change: We continue to close deals at loan-to-value levels of 40 to 50 percent, resulting in significant equity capital cushioned below our debt, and reasonable leverage levels of around 3.5 times debt to even out.
Bowen Diehl: Over the past decade, our team has done an excellent job generating attractive returns for our shareholders in all competitive environments, and I am highly confident we will continue our track record in the current environment. Joshua Weinstein, our Chief Investment Officer, will provide additional color on the market, our investment activity, and the performance of our portfolio later as our prepared remarks. Our portfolio activity during the quarter consisted of 108.1 million new commitments to 3 new portfolio companies and 11 existing portfolio companies, as add-on financing continued to be an important and highly attractive source of originations for us.
Speaker Change: Over the past decade, our team has done an excellent job generating attractive returns for our shareholders in all competitive environments, and I am highly confident we will continue our track record in the current environment.
Bowen Diehl: Josh Weinstein, our Chief Investment Officer, will provide additional color on the market, our investment activity, and the performance of our portfolio later in our prepared remarks. Portfolio activity during the quarter consisted of 108.1 million new commitments to three new portfolio companies and 11 existing portfolio companies. As add-on financings continue to be an important and highly attractive source of rich nations, portfolio growth in the quarter was offset by $77.2 million in proceeds from eight debt prepayments, which generated a weighted average realized IRR of $12.6 million.
Josh Weinstein: Josh Weinstein, our Chief Investment Officer, will provide additional color on the market, our investment activity, and the performance of our portfolio later in our prepared remarks.
Josh Weinstein: Portfolio activity during the quarter consisted of 108.1 million in new commitments to three new portfolio companies and 11 existing portfolio companies, as add-on financings continue to be an important and highly attractive source of rich nations for us.
Bowen Diehl: Our portfolio growth in the quarter was offset by 77.2 million in proceeds from 8 debt prepayments, which generated a weighted average realized RLR of 12.6%. On the capitalization front, we raised over 38 million in growth equity proceeds during the quarter through our equity ATM program at an estimated average price of $25.50 per share or 153% of the prevailing NAV per share. During the quarter, we also increased commitments under our FPV credit facility by 50 million to 200 million. 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 issues.
Josh Weinstein: Portfolio growth for the quarter was offset by $77.2 million in proceeds from eight debt prepayments, which generated a weighted average realized IRR of 12.6%.
Bowen Diehl: On the capitalization front, we raised over $38 million in gross equity proceeds during the quarter through our Equity ATM program, at a weighted average price of $25.60 per share, or 153% of the prevailing NAD per share. During the quarter, we also increased commitments under our SPV credit facility by $50 million to $200 million.
Josh Weinstein: On the capitalization front, we raised over $38 million in gross equity proceeds during the quarter through our equity ATM program at an weighted average price of $25.60 per share, or 153% of the prevailing NAV per share.
Josh Weinstein: During the quarter, we also increased commitments under our SPV credit facility by $50 million to $200 million.
Bowen Diehl: 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 issues. We continue to maintain a conservative mindset with respect to both BDC leverage and balance sheet liquidity. In fact, balance sheet liquidity at Capital Southwest is at an all-time high, which Michael will provide additional commentary on in a moment. Managing leverage to the lower end of our target range while ensuring strong balance sheet liquidity affords us the ability to continue to invest in new platform companies, as well as provide financing for growth capital and add-on acquisitions for our existing portfolio companies. This is especially true in periods of volatile capital markets, when risk-adjusted returns can be particularly attractive.
Josh Weinstein: 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.
Bowen Diehl: We continue to maintain a conservative mindset to both BDC leverage and balance sheet liquidity. In fact, balance sheet liquidity at Capital Self-Less is at an all-time high, which Michael will provide additional commentary on in a moment. Managing leverage to the lower end of our target range, while ensuring strong balance sheet liquidity, affords us the ability to continue to invest in new platform companies, as well as provide financing for growth capital and add-on acquisitions for our existing portfolio companies. This is especially true in periods of volatile capital markets when risk-adjustive returns can be particularly attractive. We also believe the strategy allows us to continue to grow our balance sheet while also maintaining flexibility to opportunistically repurchase our stock if it were to trade meaningfully below NAV.
Josh Weinstein: We continue to maintain a conservative mindset to both BDC leverage and balance sheet liquidity.
Josh Weinstein: In fact, balance sheet liquidity at Capital Southwest is at an all-time high, which Michael will provide additional commentary on in a moment.
Michael: Managing leverage to the lower end of our target range while ensuring strong balance sheet liquidity affords us the ability to continue to invest in new platform companies, as well as provide financing for growth capital and add-on acquisitions for our existing portfolio companies.
Michael: This is especially true in periods of volatile capital markets when risk-adjusted returns can be particularly attractive.
Bowen Diehl: We also believe this strategy allows us to continue to grow our balance sheet while also maintaining the flexibility to opportunistically repurchase our stock if it were to trade meaningfully below NAB. On slides 7 and 8, 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 2015. Since that time, we have increased our quarterly regular dividend 29 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pre-tax net investment.
Bowen Diehl: On slide 7 and 8, 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 2015. Since that time, we have increased our quarterly regular dividend 29 times and have never cut the regular dividend. All while maintaining strong coverage of our regular dividend with pre-tax net investment income. In addition to the same period, we have paid or declared 25 special or supplemental dividends totaling $4 and 1 cent per share, including the newly declared 6 cents per share supplemental dividend for the September quarter.
Michael: On slides 7 and 8 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 2015.
Michael: Since that time, we have increased our quarterly regular dividend 29 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pre-tax net investment income.
Bowen Diehl: In addition, over the same period, we have paid or declared 25 special or supplemental dividends totaling $4.01 per share, including the newly declared $0.06 per share supplemental dividend for the September quarter, all generated from excess earnings and realized gains from our investment portfolio.
Michael: In addition, over the same period, we have paid or declared 25 special or supplemental dividends totaling $4.01 per share, including the newly declared $0.06 per share supplemental dividend for the September quarter.
Bowen Diehl: All generated from excess earnings and real-life gains from our investment portfolio. Dividend sustainability, strong credit performance and continue that source to capital from 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 strategy as well as the absolute alignment of all our decisions with the interest of our shareholders.
Michael: All generated from excess earnings and realized gains from our investment portfolio.
Bowen Diehl: Dividend sustainability, strong credit performance, and continued access to capital from multiple capital sources are all core to our overall business strategy. Our track record in all these areas demonstrates 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 lower-middle market, the vast majority of which is in first lien and senior secured loans to companies backed by private equity. In fact, approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio company, as well as the potential for junior capital support if needed.
Michael: Dividend sustainability, strong credit performance, and continued access to capital from multiple capital sources are all core to our overall business strategy.
Michael: Our track record in all these areas demonstrates 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.
Bowen Diehl: Curtis. Turning this slide 9, we lay out the core tenets of our industrial strategy. Our core strategy is lending and investing in the lower middle market, the vast majority of which is in firstly senior secured loans to companies backed by private equity firms. In fact, approximately 93% 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 junior capital support needed. In the lower middle market, we also have the opportunities to invest on a minority basis in the equity of our portfolio company, hurry to pursue with the private equity firm when we believe the equity thesis is compelling.
Michael: Turning to slide 9, we lay out the core tenets of our investment strategy. Our core strategy is lending and investing in the lower middle market, the vast majority of which is in first lien and senior secured loans to companies backed by private equity firms.
Michael: In fact, approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio company, as well as the potential for junior capital support if needed.
Bowen Diehl: In the lower-middle market, we also have the opportunity to invest on a minority basis in the equity of our portfolio company, as you would with a private equity firm, when we believe the equity thesis is compelling.
Michael: In the lower-middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies, how you pursue with a private equity firm, when we believe the equity thesis is compelling.
Bowen Diehl: As of the end of the quarter, our equity co-investment portfolio consists of 69 investments with a total fair value of 133 million, representing 9% of our total portfolio at fair value. Our equity portfolio was marked at 134% of our costs, representing 33.8 million in embedded unrealized appreciation for 72 cents per share. Our equity portfolio 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 asset value appreciation, as well as equity distributions to Capital Southwest over time. In fact, over the past 12 months, we have received 5.6 million in cash distributions from our equity portfolio, representing 13 cents per share in pre-tax NII.
Josh Weinstein: As of the end of the quarter, our equity co-investment portfolio consisted of 69 investments, with a total fair value of $133 million, representing 9% of our total portfolio at fair value. Our equity portfolio is marked at 134% of our cost, representing $33.8 million in embedded unrealized appreciation, or $0.72 per share. Our equity portfolio 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 asset value appreciation as well as equity distributions to Capital Southwest over time.
Michael: As of the end of the quarter, our equity co-investment portfolio consisted of 69 investments with a total fair value of $133 million, representing 9% of our total portfolio fair value.
Michael: Our equity portfolio was marked at 134% of our cost, representing $33.8 million in embedded unrealized appreciation, or $0.72 per share.
Michael: Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses.
Michael: which will come in the form of asset value appreciation as well as equity distribution to Capital Southwest over time.
Josh Weinstein: In fact, over the past 12 months, we have received $5.6 million in cash distributions from our equity portfolio, representing $0.13 per share in pre-tax NII. As illustrated on slide 10, our on-balance sheet credit portfolio ended the quarter at $1.3 billion, representing year-over-year growth of 20% from $1.1 billion at the end of June 2023. In the current quarter, 100% of the new portfolio debt originations were first-line senior security, and as of the end of the quarter, 98% of the credit portfolio was first-line senior security.
Michael: In fact, over the past 12 months, we have received $5.6 million in cash distributions from our equity portfolio, representing $0.13 per share in pre-tax NII.
Bowen Diehl: As illustrated on slide 10, our own balance sheet credit portfolio ended the quarter at 1.3 billion, representing the year-over-year growth of 20%. Our 1.1 billion has at the end of June 2023. In the current quarter, 100% of the new portfolio debt origination were firstly in senior security, and at the end of the quarter, 98% of the credit portfolio was firstly in senior security. The weighted average exposure per company remains granular at 1%. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet.
Michael: As illustrated on slide 10, our on-balance sheet credit portfolio ended the quarter at $1.3 billion, representing year-over-year growth of 20%, from $1.1 billion as of the end of June 2023.
Michael: In the current quarter, 100% of the new portfolio debt originations were first lien senior security. And as of the end of the quarter, 98% of the credit portfolio was first lien senior security.
Josh Weinstein: The weighted average exposure per company remains granular at 1%. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. We expect that this metric will continue to improve as our asset base grows. I will now hand the call over to Josh to review more specifics on our investment activity, the market environment, and the performance of our portfolio for the quarter.
Michael: The weighted average exposure per company remains granular at 1%.
Michael: We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet.
Bowen Diehl: We expect that this metric will continue to improve with our asset-based growth.
Joshua Weinstein: I will now hand the call over to Josh to review more specifics of our investment activity, the market environment, and the portfolios of our portfolio for the quarter. Thanks, Boeing. On slide 11, we detailed 108.1 million of capital invested in and committed to portfolio companies during the quarter. Capital committed during the quarter included 47.3 million, and first being senior security debt across three new portfolio companies, in which we also invested a total of 2 million in equity. In addition, we closed add-on financing for 11 existing portfolio companies consisting of 57.8 million in first-line senior security debt and 1 million in equity.
Michael: We expect that this metric will continue to improve as our asset base grows.
Michael: I will now hand the call over to Josh to review more specific of our investment activity, the market environment, and the performance of our portfolio for the quarter.
Josh Weinstein: Thanks, Bowen. On slide 11, we detailed 108.1 million of capital invested in and committed to portfolio companies during Capital committed during the quarter included $47.3 million in first lien senior secured debt across three new portfolio companies, in which we also invested a total of $2 million in equity. In addition, we closed add-on financings for 11 existing portfolio companies consisting of $57.8 million in first lien, senior secured debt and $1 million. 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. This is evidenced by the consistency of our origination activity and the broad array of relationships across the country from which our team is sourcing quality operations.
Josh Weinstein: Thanks, Bowen. On slide 11, we detail the $108.1 million of capital invested in and committed to portfolio companies during the quarter.
Josh Weinstein: Capital committed during the quarter included $47.3 million in first lien senior secured debt across three new portfolio companies, in which we also invested a total of $2 million in equity.
Josh Weinstein: In addition, we closed add-on financings for 11 existing portfolio companies consisting of $57.8 million in first lien, senior secured debt, and $1 million in equity.
Joshua Weinstein: We are pleased with a strong market position that our team have established in a lower middle market as a premier debt and equity capital provider. This is evidenced by the consistency of our origination activity and the broad array of relationships across the country from which our team is sourcing quality up. As a point of reference, currently there are 73 different private equity firms represented across our investment portfolio. Since the loss of our credit strategy back in January 2015, we have completed transactions with over 100 private equity firms across the country, including over 27% with which we have completed multiple transactions.
Speaker Change: 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. This is 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.
Josh Weinstein: As a point of reference, currently, there are 73 different private equity firms represented across our investment portfolio. Since the launch of our credit strategy back in January 2015, we have completed transactions with over 100 private equity firms across Canada, including over 27% with which we have completed multiple transactions. As Bowen mentioned, competition in the lower-middle market has increased over the past six months, resulting in spreads tightening, particularly for high-quality, sponsored backed opportunities.
Speaker Change: As a point of reference, currently there are 73 different private equity firms represented across our investment portfolio.
Speaker Change: Since the launch of our credit strategy back in January 2015, we have completed transactions with over 100 private equity firms across the country, including over 27% with which we have completed multiple transactions.
Speaker Change: As Bowen mentioned, competition in the lower-middle market has increased over the past six months, resulting in spreads tightening, particularly for high-quality sponsor-backed opportunities.
Joshua Weinstein: Particularly for high quality sponsor back opportunities. However, due to the depth and strength of our relationships, our team has cultivated over the years, we continue to source and win opportunities with attractive risk-return profiles. For many of the private equity sponsors we work with, they are looking for a lending partner they know and trust. While we may not always be the cheapest financing option, our reputation for being dependable, thoughtful, and constructive partners are key differentiators in winning deals. During the slide 12, we continued our track record of strong returns on our access, with eight debt prepayments during the quarter.
Josh Weinstein: However, due to the depth and strength of our relationships our team has cultivated over the years, we continue to source and win opportunities with attractive risk return. For many of the private equity sponsors we work with, they're looking for a lending partner. They know Intro.
Bowen Diehl: However, due to the depth and strength of our relationships our team has cultivated over the years, we continue to source and win opportunities with attractive risk return profiles.
Bowen Diehl: For many of the private equity sponsors we work with, they are looking for a lending partner they know and trust. While we may not always be the cheapest financing option, our reputation for being dependable, thoughtful, and constructive partners are key differentiators in winning deals.
Josh Weinstein: While we may not always be the cheapest financing option, our reputation for being dependable, thoughtful, and constructive partners is a key differentiator in winning. Turning to slide 12, we continued our track record of strong returns on our exits with eight debt prepayments during the quarter. In total, these exits generated $77.2 million in total proceeds, generating a weighted average IRR of 12.6%. During the quarter, all prepayment activity was a result of the robust financing market, as all eight of these prepayments were refinancings rather than company sales, and six of the eight prepayments were companies with EBITDA north of $30 million. In fact, two of the companies, Intermedia and Vita, were large syndicated credits formerly held at I-45, which were paid off at PAR.
Bowen Diehl: Turning to slide 12, we continued our track record of strong returns on our exits with eight debt prepayments during the quarter. In total, these exits generated $77.2 million in total proceeds, generating a weighted average IRR of 12.6%.
Joshua Weinstein: In total, these access generated 77.2 million in total proceeds, generating a weighted average IRR of 12.6%. During the quarter, all prepayment activity was the result of the robust financing market, as all eight of these prepayments were refinancings rather than company sales, and six of the eight prepayments were companies with EBITDA at north of 30 million dollars. In fact, two of the companies, Intermediate and Vita, were large syndicated credits formerly held at I-45, which were paid off at par. I'll note that since the loss of our credit strategy, we have realized 82 portfolio company exits representing over one billion in proceeds that generated a cumulative weighted average IRR of 13.9%.
Bowen Diehl: During the quarter all prepayment activity was a result of the robust financing market as all eight of these prepayments were refinancings rather than company sales and six of the eight prepayments were companies with EBITDA north of thirty million dollars.
Bowen Diehl: In fact, two of the companies, Intermedia and Vita, were large syndicated credits formerly held at I-45, which were paid off at par.
Josh Weinstein: I'll note that since the launch of our credit strategy, we have realized 82 portfolio company exits, representing over $1 billion in proceeds that have generated a cumulative weighted average IRR of 13.9%. On slide 13, we detail key statistics for our portfolio as of the end of this course. The total portfolio fair value ended the quarter weighted 88.9% to first lien senior secured debt, 1.9% to second lien senior secured debt, 0.1% to subordinated debt, and 9.1% to equity co-investment.
Bowen Diehl: I'll note that since the launch of our credit strategy, we have realized 82 portfolio company exits, representing over $1 billion in proceeds that have generated a cumulative weighted average IRR of 13.9%.
Joshua Weinstein: On slide 13, we detailed key statistics for our portfolio as of the end of the quarter. The total portfolio fair value ended the quarter weighted 88.9% to first lean seniors to your debt, 1.9% to second lean seniors to your debt, 0.1% to subordinated debt, and 9.1% to equity co-invest. The credit portfolio had a weighted average yield of 13.3% and a weighted average leverage through our security of 3.8 times EBITDA. The decrease in our weighted average EBITDA across the portfolio for the quarter was driven entirely by the refinancing activity among the larger EBITDA companies in the portfolio.
Bowen Diehl: On slide 13, we detail key statistics for our portfolio as of the end of the quarter.
Bowen Diehl: The total portfolio fair value end of the quarter weighted 88.9% to first lien senior secured debt, 1.9% to second lien senior secured debt, 0.1% to subordinated debt, and 9.1% to equity co-investment.
Josh Weinstein: The credit portfolio had a weighted average yield of 13.3% and a weighted average leverage through our security of 3.8 times even. The decrease in our weighted average EBITDA across the portfolio for the quarter was driven entirely by the refinancing activity among the larger EBITDA companies in the portfolio, as run rate EBITDA in our portfolio continues to grow.
Bowen Diehl: The credit portfolio had a weighted average yield of 13.3% and a weighted average leverage through our security of 3.8 times EBITDA.
Bowen Diehl: The decrease in our weighted average EBITDA across the portfolio for the quarter was driven entirely by the refinancing activity among the larger EBITDA companies in the portfolio.
Joshua Weinstein: As run rate EBITDA in our portfolio continues to grow. Overall, we are quite pleased with the company performance across our portfolio. Cash flow coverage of debt service obligations across the portfolio remains at a healthy 3.3 times despite the higher base rate environment. With our loans across our portfolio averaging 44% of the portfolio company enterprise value. Quarter over quarter revenue and EBITDA growth on a weighted average basis was 5% and 4%, respectively.
Bowen Diehl: As run rate EBITDA in our portfolio continues to grow.
Josh Weinstein: Overall, we are quite pleased with the company performance across our portfolio. Cash flow coverage of debt service obligations across the portfolio remains at a healthy 3.3 times despite the higher base rate environment. With our loans across our portfolio averaging 44% of the portfolio company enterprise, quarter-over-quarter revenue and EBITDA growth on a weighted average basis were 5% and 4%, respectively. As seen on slide 14, our total investment portfolio continues to be broadly diversified across industries, with an asset mix that provides strong security for our shareholders' capital.
Bowen Diehl: Overall, we are quite pleased with the company performance across our portfolio.
Bowen Diehl: Cash flow coverage of debt service obligations across the portfolio remains at a healthy 3.3 times despite the higher base rate environment, with our loans across our portfolio averaging 44% of the portfolio company enterprise value.
Bowen Diehl: Quarter over quarter revenue and EBITDA growth on a weighted average basis was 5% and 4% respectively.
Joshua Weinstein: As seen on slide 14, our total investment portfolio continues to be broadly diversified across industries. With an asset mix which provides strong security for our shareholders' capital. Asset and industry diversification has been and always will be a core tenet of our investment strategy. We continually assess risk, both on a company-by-company basis, as well as on the overall portfolio. Having originated over 150 deals since we re-launched Capital Southwest as a middle market lender back in January 2015, we are able to leverage our experiences to assess our successes as well as the lessons learned across all industries.
Bowen Diehl: As seen on slide 14, our total investment portfolio continues to be broadly diversified across industries with an asset mix which provides strong security for our shareholders' capital.
Josh Weinstein: Asset and industry diversification has been and always will be a core tenet of our investment strategy. We continually assess risk both on a company by company basis as well as in the overall portfolio. Having originated over 150 deals since we relaunched Capital Southwest as a middle market lender back in January 2015, we are able to leverage our experiences to assess our successes as well as the lessons learned across all industries. We believe that continually improving our institutional knowledge and underwriting process is key to driving long-term value for our shareholders.
Bowen Diehl: Asset and industry diversification has been, and always will be, a core tenet of our investment strategy.
Bowen Diehl: We continually assess risk both on a company-by-company basis as well as on the overall portfolio.
Bowen Diehl: Having originated over 150 deals since we relaunched Capital Southwest as a middle market lender back in January 2015, we are able to leverage our experiences to assess our successes as well as the lessons learned across all industries.
Joshua Weinstein: We believe that continually improving our institutional knowledge and underwriting processes is key to driving long-term value for our shareholders.
Bowen Diehl: We believe that continually improving our institutional knowledge and underwriting processes
Joshua Weinstein: On slide 15, we have laid out our ratings migration across 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 had three loans representing 17 million in fair value upgraded during the quarter, while having three loans representing approximately 35 million in fair value downgraded during the quarter. The portfolio remains healthy, with 92.4% of the portfolio at fair value rated in one of the top two categories, a one or a two.
Josh Weinstein: On slide 15, we have laid out our ratings migration across 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. We had three loans representing $17 million in fair value upgraded during the quarter, while having three loans representing approximately $35 million in fair value downgraded during the quarter.
Bowen Diehl: is key to driving long-term value for our shareholders.
Bowen Diehl: On slide 15, we have laid out our ratings migration across our portfolio during the quarter.
Bowen Diehl: 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.
Bowen Diehl: We had three loans representing $17 million in fair value upgraded during the quarter while having three loans representing approximately $35 million in fair value downgraded during the quarter.
Josh Weinstein: The portfolio remains healthy, with 92.4% of the portfolio at fair value, rated in one of the top two categories, a one or a two. I will now hand the call to Michael to review the specifics of our financial performance.
Bowen Diehl: The portfolio remains healthy with 92.4% of the portfolio at fair value, rated in one of the top two categories, a 1 or a 2.
Michael Sarner: I will now hand the call to Michael to review the specifics of our financial performance for the quarter. Thanks, Josh. The specific tour performance for the quarter, as summarized on slide 16, pre-tax net investment income was $31.3 million or $69 per share, as compared to $29.8 million or $68 per share in the prior quarter. Net investment income after tax was $28.9 million or $63 per share for the quarter. The main driver of the increased tax expense this quarter was 2.2 million in deferred taxes related to our taxable subsidiary, CSEI, which holds the majority of our equity investments.
Michael Sarner: Specific to our performance for the quarter, as summarized on slide 16, pre-tax net investment income was $31.3 million, or $0.69 per share, as compared to $29.8 million, or $0.68 per share, in the prior quarter. Net investment income after tax was $28.9 million, or $0.63 per share for the quarter. The main driver of the increased tax expense this quarter was $2.2 million in deferred taxes related to our taxable subsidiary, CSEI, which holds the majority of our equity investments.
Bowen Diehl: I will now hand the call to Michael to review the specifics of our financial performance for the quarter.
Michael: Thanks, Josh. Specific to our performance for the quarter, as summarized on slide 16, pre-tax net investment income was $31.3 million, or $0.69 per share, as compared to $29.8 million, or $0.68 per share, in the prior quarter.
Michael: Net investment income after tax was $28.9 million, or $0.63 per share for the quarter.
Michael: The main driver of the increased tax expense this quarter was $2.2 million in deferred taxes related to our taxable subsidiary, CSEI, which holds the majority of our equity investments.
Michael Sarner: These deferred taxes relate to the current cumulative appreciation on our equity portfolio versus the portfolio's current tax basis and are not payable until we realize gains on portfolio company access. Moreover, changes in the deferred taxes, positive or negative, do not impact our undistributed taxable income balance at Capital Southwest. During the quarter, we paid out a $57 per share regular dividend and a $6 per share supplemental dividend. As mentioned earlier, our board has declared an increase to the regular dividend to $58 per share and a supplemental dividend of $6 per share for the September quarter. Management and the board have spent significant time contemplating the impact of a lower interest rate environment on future earnings.
Michael Sarner: These deferred taxes relate to the current cumulative appreciation on our equity portfolio versus the portfolio's current tax basis and are not payable until we realize gains on portfolio company equity. Moreover, changes in these deferred taxes, positive or negative, do not impact our undistributed taxable income balance at Capital Southwest.
Michael: These deferred taxes relate to the current cumulative appreciation on our equity portfolio versus the portfolio's current tax basis and are not payable until we realize gains on portfolio company exits.
Michael: Moreover, changes in the deferred taxes, positive or negative, do not impact our undistributed taxable income balance at Capital Southwest.
Michael: During the quarter, we paid out a $0.57 per share regular dividend and a $0.06 per share supplemental dividend.
Michael: As mentioned earlier, our board has declared an increase to the regular dividend to $0.58 per share and a supplemental dividend of $0.06 per share for the September quarter.
Michael: Management and the board have spent significant time contemplating the impact of a lower interest rate environment on future earnings.
Michael Sarner: Our belief based on the earnings power of our investment portfolio through steady growth and improved operating leverage is that increasing the regular dividend by a penny this quarter is in the best interest of our shareholders. We have consistently maintained that setting a regular dividend at a level that we believe will never be cut in any foreseeable interest rate environment is key to generating stable, attractive shareholder returns over the long term. We continued our strong track record of regular dividend coverage with 122% coverage for the 12 months ended June 30, 2024, and 111% cumulative coverage since the launch of our credit strategy in January 2020.
Michael: Our belief, based on the earnings power of our investment portfolio through steady growth and improved operating leverage, is that increasing the regular dividend by a penny this quarter is in the best interest of our shareholders.
Michael Sarner: We have consistently maintained that setting a regular dividend at a level that we believe will never be cut in any foreseeable interest rate environment is key to generating stable, attractive shareholder returns over the long term. Our operating leverage of 1.8% continues to compare favorably to the BDC industry average of approximately 2.8%. During the June quarter, commitments to the SPV credit facility increased to $200 million, up from $150 million in the prior quarter. From a capital markets perspective, BDCs have been very active in the unsecured debt market over the past few months as investors remain constructive on new bond issuances.
Michael: We have consistently maintained that setting a regular dividend at a level that we believe will never be cut in any foreseeable interest rate environment is key to generating stable, attractive shareholder returns over the long term.
Michael: We continued our strong track record of regular dividend coverage with 122% coverage for the 12 months ended June 30, 2024, and 111% cumulative coverage since the launch of our credit strategy in January 2015.
Michael Sarner: 2015. As a reminder, our intent is to continue to distribute to our shareholders a portion of the excess of our quarterly pretext net investment income over our regular dividend and a quarterly supplemental dividend. We are confident in our abilities continue to distribute quarterly supplemental dividends for the foreseeable future based upon our current UTI balance of 50 cents per year. 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 72 cents per share in unrealized appreciation on the equity portfolio.
Michael: As a reminder, our intent is to continue to distribute to our shareholders a portion of the excess of our quarterly pre-tax net investment income over our regular dividend and a quarterly supplemental dividend.
Michael: We are confident in our ability to continue to distribute quarterly supplemental dividends for the foreseeable future based upon our current UTI balance of $0.50 per share.
Michael: 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 $0.72 per share, an unrealized depreciation on the equity portfolio.
Michael Sarner: For the quarter, total investment income increased 11% to $51.4 million from $46.4 million in the prior quarter. The increase was driven primarily by a $3.1 million increase in cash interest income, as well as a $900,000 increase in the amendment and other fees quarter over quarter. At the end of the quarter, our loans are not a cruel represented 1.9% of our investment portfolio or fair value, and the weighted average yield in the portfolio on all investments was 13.5%. As seen on slide 17, LTM operating leverage ended the quarter at 1.8%, which was up slightly quarter over quarter due to some one-time expenses during the quarter.
Michael: For the quarter, total investment income increased 11% to $51.4 million from $46.4 million in the prior quarter.
Michael: The increase was driven primarily by a $3.1 million increase in cash interest income as well as a $900,000 increase in the amendment and other fees quarter over quarter.
Michael Sarner: Our operating leverage, but 1.8%, continues to compare favorably to the BDC industry average of approximately 2.8%. 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 be invested in people and infrastructure as we continue to build and manage 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. During slide 18, the company's NAD per share at the end of the quarter decreased by $17 per share to $16.60, representing a decrease of 1%.
Michael Sarner: The primary drivers of the NAD per share decreased for the quarter were net unrealized appreciation on our investment portfolio and delusion from the annual issuance of restricted stock to employees, partially offset by accretion from the issuance of common stock at a premium to NAD per share. Turning to slide 19, we're pleased to report that our balance sheet liquidity is at an all time high with approximately 485 million in cash and on draw on leverage commitments on our two credit facilities and our SBA adventure commitments, which altogether represented 3.1 times the 158 million unfunded commitments that we had across our portfolio as at the end of the quarter.
Michael Sarner: Through in the June quarter, commitments to the SPV credit facility increased to 200 million dollars, up from 150 million in the prior quarter. In addition, based on the current borrowing base, we have access to the full 460 million in total commitments on the ING-led corporate credit facility. This facility has an inquiry in feature allowing for the further increase in total commitments up to an aggregate of 750 million, allowing us to continue to grow our revolver capacity and lockstep with the growth of our overall.
Michael: During the June quarter, commitments to the FPV credit facility increased to $200 million, up from $150 million in the prior quarter.
Michael Sarner: Volunteer. We're actively working to further increase commitments to the corporate credit facility, and we provide updates on that process in the coming months. As a reminder, in March 2024, we submitted a Mac application to the SBA, which began the process towards a second SBAC license. We're actively working with the SBA and are hopeful to complete this process by the end of the calendar year, at the latest. We look forward to providing updates on this process as they become available. Finally, as to the end of the June quarter, 49% of our capital structure liabilities were an unsecured, covenant-free bond, with our earliest debt maturity in January 2026.
Michael: We look forward to providing updates on this process as they become available.
Michael Sarner: Our regulatory leverage, as seen on slide 20, ended the quarter at a debt-to-equity ratio of 0.75 to 1, down from 0.82 to 1 as of the prior quarter. While our optimal target leverage continues to be in the 0.8 to 0.95 range, we are weighing the impacts of future base rate reductions and maintaining adequate cushion levels to allow us the flexibility to potentially increase leverage to support future earnings and dividend growth. 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 maintain significant liquidity and could serve to balance the leverage with adequate covenant cushions.
Michael: Our regulatory leverage, as seen on slide 20, ended the quarter at a debt-to-equity ratio of 0.75 to 1, down from 0.82 to 1 as of the prior quarter.
Michael: 0.8 to 0.95 range, we are weighing the impacts of future base rate reductions and maintaining adequate cushion levels to allow us the flexibility to potentially increase leverage to support future earnings and dividend growth.
Michael: 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 maintain significant liquidity and conservative balance sheet leverage with adequate covenant cushions.
Michael Sarner: From a capital market perspective, EDCs have been very active in the unsecured debt market over the past few months as investors remain constructive on new bond issuances. Despite not having any maturities within our debt structure at total, in 2026, we are actively evaluating financing transactions to mitigate future capital markets volatility, while also being mindful of the current interest rate environment.
Michael: from a capital markets perspective.
Michael: BECs have been very active in the unsecured debt market over the past few months as investors remain constructive on new bond issuances.
Michael: Despite not having any maturities within our debt structure till 2026, we are actively evaluating financing transactions to mitigate future capital markets volatility, while also being mindful of the current interest rate environment.
Bowen Diehl: I will now hand the call back to Bowen for some final comments. Thank you, Michael, and thank you, Josh. And again, thank you everyone for joining us today.
Michael: I will now hand the call back to Bowen for some final comments.
Bowen Diehl: Thank You Michael and thank you Josh
Bowen Diehl: As always, we appreciate the opportunity to provide you with an update on our business, our portfolio, and the market modern. A company in portfolio continues to demonstrate strong performance, and we continue to be impressed by the job our team is doing 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 the future growth, for future growth and performance. The overall health and security of our portfolio is strong. Our credit portfolio is predominantly made up of firstly insured loans allocated across a broad array of companies and industries.
Bowen Diehl: 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, and the market environment.
Michael Sarner: Our company and portfolio continue to demonstrate strong performance, and we continue to be impressed by the job our team is doing in building a robust asset-based business with a significant equity cushion to support all our debt investments, providing further enhancement to our long-term shareholder returns, with multiple capital sources and balance sheet liquidity that is at an all-time high.
Speaker Change: Our company and portfolio continue to demonstrate strong performance, and we continue to be impressed by the job our team is doing in building a robust asset base.
Diehl: Deal Origination, and Portfolio Management Capability, as well as a Flexible Capital Structure.
Diehl: We believe we have prepared our company well for future growth and performance.
Diehl: The overall health and security of our portfolio is strong.
Diehl: Our credit portfolio is predominantly made up of first lien senior secured loans allocated across a broad array of companies and industries.
Bowen Diehl: The vast majority of which are backed by private equity firms. Further, interest coverage of the debt obligations across our portfolio is a strong 3.3 times. With significant equity cushion and support, all our debt investments. Additionally, our equity toll investment portfolio gives us our shareholders' participation in the equity upside of many of these growing, lower-than-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 and a balance sheet and balance sheet liquidity that is at an all-time high. All of which provides our company an exciting runway to continue to grow and generate strong shareholder returns for years to come.
Diehl: the vast majority of which are backed by private equity firms.
Diehl: Further, interest coverage of the debt obligations across our portfolio is a strong 3.3 times, with significant equity cushion and support for all our debt investments.
Diehl: Additionally, our equity co-investment portfolio gives our shareholders participation in the equity upside of many of these growing lower-middle market businesses.
Diehl: providing further enhancement to our long-term shareholder returns.
Diehl: Last but not least, we have a very well capitalized balance sheet with multiple capital sources and balance sheet liquidity that is at an all-time high.
Diehl: All of which provides our company an exciting runway to continue to grow and generate strong shareholder returns for years to come.
Speaker Change: This concludes our prepared remarks operator. We are now ready to open up the lines for Q&A.
Bowen Diehl: Thank you.
Operator: As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by where we compile the Q&A roster.
Speaker Change: Thank you. As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
Operator: And our first question comes from Mickey Schleien from Latimber, the Thalman. Your line is now open.
Speaker Change: One moment for our first question.
Mickey Schleien: December the Thalman. Your line is now open. Good morning, everyone.
Speaker Change: And our first question comes from Mickey Schleien from Latimburg, Thalman. Your line is now open.
Bowen Diehl: Bowen, how would you characterize your interest in non-sponsored deals in the current market to help offset spread compression in the sponsored finance segment? And would those deals, how would those deals compare to the sponsored deals in terms of the size of the portfolio company and the deal structure? Yeah, we've always been. Thanks, Mickey. We've always been open to non-sponsored deals, and we have a few of them in our portfolio. So, you know, we know the space. It can be attractive. It's going to be, you know, we would need them to be higher equity cushions, maybe not lower.
Mickey Slean: Yes, good morning everyone. Bowen, how would you characterize your interest in non-sponsored deals in the current market to help offset spread compression in the sponsored finance segment?
Speaker Change: And how would those deals compare to the sponsored deals in terms of the size of the portfolio company and the deal structure?
Bowen Diehl: Yeah, we've always been, thanks Mickey, we've always been open to non-sponsored deals and we have a few of them in our portfolio.
Bowen Diehl: You know, we know the space.
Bowen Diehl: It can be attractive. It's gonna, they tend to be, you know, we would need them to be higher equity cushions maybe, not lower.
Bowen Diehl: And, you know, we typically would experience slightly higher, although not always, but slightly higher yield for compared to funded sponsor and tighter, tighter credit documents. So, I'd say an interesting question. We're definitely open to it. You know, we've been, I mean, our deal flow from the sponsored community has been very strong. I mean, we've referenced the increased competition in the market. So, this last quarter, we've, you know, lost the handful of deals both on not being willing to deliver the companies, what other lenders are, and also pricing. And so, you know, on the non-sponsored side, sure.
Bowen Diehl: And, you know, we typically would experience slightly higher...
Bowen Diehl: Although not always, but slightly higher yield compared to a funded sponsor and tighter credit documents. So, I'd say to answer your question, we're definitely open to it. You know, we've been...
Bowen Diehl: I mean, our deal flow from the sponsor community has been very strong. I mean, we've referenced the increased competition in the market. So this last quarter, we've lost a handful of deals, both on not being willing to lever the companies, what other lenders are, and also pricing.
Bowen Diehl: You know, we certainly have an app type for it, and we could call it for those.
Bowen Diehl: And so, you know, on the non-sponsored side, sure. You know, we certainly have an appetite for it, and we get calls for those. It hasn't been a major...
Bowen Diehl: It hasn't been a major focus of ours, but it's definitely a market that we understand and are open to.
Bowen Diehl: The other thing Mickey I'd mentioned is that, you know, when we look sort of a little bit higher level at what our yields look like and what our returns require returns to grow the dividend. In the last 24 months, our average yield on our fuller company, new platform companies was at 7.5%. And so, over the last two quarters, that has come down to just, just south of 7%. But we still say that those spreads are robust. And so, we're not probably in the market of looking for additional spread just because of the tightening in the near term.
Bowen Diehl: focus of ours, but it's definitely a market that we understand and are open to. The other thing, Mickey, I'd mention is that, you know, when we look sort of
Mickey Slean: a little bit higher level at what our yields look like and what our returns look like.
Mickey Slean: required returns to grow the dividend. In the last 24 months, our average yield on our portfolio company, new platform companies, was at 7.5%.
Mickey Slean: And so, over the last two quarters...
Speaker Change: that has come down to just south of 7%. But we'd still say that those spreads are robust. And so we're not probably in the market of looking for additional spread just because of the tightening in the near term. Cuz overall, when you look at the blended return spreads.
Mickey Schleien: Because overall, like, you know, when you look at the blended return spreads, they're quite healthy across the board. I appreciate that, Michael.
Mickey Schleien: I appreciate that, Michael. And one follow-up question: could you give me a sense of the average SOFR floors in your debt investment for...
Michael Sarner: And one follow-up question. Could you give me a sense of the average sofa floors in your debt investment portfolio. I mean, all of our new deals have had pretty much all of them at 2% worse, but it's not a way to get out of it. I'm sorry, can you repeat that? Sure, it was about 1.5% across the total portfolio. Okay, thanks for that. Those are all my questions. Appreciate your time.
Speaker Change: They're quite healthy across the board.
Michael: I appreciate that, Michael. And one follow-up question. Could you give me a sense of the average SOFR floors in your debt investment portfolio?
Speaker Change: I mean, all of our new deals have had, pretty much all of them, had 2% more, but it's on a weighted average, not a weighted average, but more than half.
Speaker Change: I'm sorry, can you repeat that?
Speaker Change: Sure, it was about one and a half percent across the total portfolio.
Bryce Rowe: And thank you, and one moment for our next question. And our next question comes from Bryce Rowe from B. Riley. Your line is now open. Thanks a lot. Good morning.
Speaker Change: Okay, thanks for that. Those are all my questions. Appreciate your time.
Speaker Change: And thank you. And one moment for our next question.
Speaker Change: And our next question comes from Bryce Rowe from B. Reilly. Your line is now open.
Bowen Diehl: Maybe Bowen or even Chris, you appreciate the details and the prepared remarks around kind of repayment activity, especially calling out those that came out of the I-45 portfolio. Just kind of curious, how do you kind of size up or handicap the portfolio as it sits right now? I assume, you know, those refinanced investments were kind of lower hanging fruit and more obvious and just kind of trying to think about what the potential for continued refinanced activity might be. Well, I think, I mean, we talked about this yesterday. I think what we've seen in the last quarter was maybe very well pulled forward of a lot of pre-payment activity, very robust markets, spreads or why or spreads or a lot of liquidity in the market, a lot of refinancing activity. Given the current volatility and capital markets, you very well may see that kind of slowed down a bit.
Bryce Rowe: Thanks a lot. Good morning.
Bryce Rowe: Maybe...
Speaker Change: Bowen, or even Chris.
Bryce Rowe: I appreciate the details and the prepared remarks around kind of the repayment activity, you know, especially calling out those that came out of the I-45 portfolio. Just kind of curious, how do you kind of size up or handicap
Bryce Rowe: The portfolio as it sits right now, I assume, you know, those refinanced investments were kind of lower hanging fruit and more obvious and just kind of trying to think about what the potential for continued refinance activity might be.
Speaker Change: Well, I think, I mean, we talked about this yesterday, I think what we've seen in the last quarter was maybe very well a pull forward of a lot of prepayment activity, very robust market, spreads are wide, or spreads are, you know, a lot of liquidity in the market.
Speaker Change: A lot of refinancing activity, given the current volatility in the capital markets you very well may see that kind of slow down a bit. We've got one or two companies that are in sale processes, but we don't really have a lot of prepayments staring us in the face right now.
Bowen Diehl: We've got one or two companies that are in sale processes, but we don't really have a lot of pre-payments like staring us in the face right now. And so I would tell you that I would expect pre-payment activity in the near term, maybe even the intermediate term versus what it was last quarter to slow down a bit. But I would say for this quarter specifically, I expect it to be somewhere in the $20 to $30 million disc order and to both point. I think that the information we're getting is that some of the portfolio companies will look to have access sometime in mid 2025 or the end of 2025.
Speaker Change: And so, I would tell you, I would expect...
Speaker Change: Pre-payment activity in the near term, maybe even the intermediate term, versus what it was last quarter to slow down a bit.
Michael Sarner: Specifically, I expect it to be somewhere in the $20 million to $30 million range this quarter, and to Bo's point, I think that the information we're getting is that some of the portfolio companies will look to have exits sometime in mid-2025 or the end of 2025. So we might have a little bit of a reprieve, having seen so many happen just this quarter.
Speaker Change: I would say for this quarter specifically, I expect it to be somewhere in the $20-$30 million this quarter, and to Beau's point, I think that the information we're getting is that some of the portfolio companies will look to have exits sometime in mid-2025 or the end of 2025, so we might have a little bit of a reprieve.
Bowen Diehl: So we might have a little bit of a preview and haven't seen so many happen just this quarter.
Michael Sarner: Okay, that's helpful. And then any commentary around the out more elevated dividend income for the quarter should we consider that to be more one time? Yeah, so this quarter we had about 1.4 million of the dividend income were from dividend recaps, so obviously that's going to be one time in nature. But there was another almost 600,000 of recurring dividends coming off of our equity portfolio. And we have seen that, and we have somewhere between a half a million and $2 million equity investments. And many of these companies do produce some level of dividend income on a quarterly basis.
Speaker Change: and I haven't seen so many happen just this quarter.
Speaker Change: Okay, that's helpful. And then, any commentary around the more elevated dividend income for the quarter? Should we consider that to be more one-time?
Speaker Change: Yeah, so this quarter we had about $1.4 million of the dividend income were from dividend recaps, so obviously that's going to be one-time in nature.
Speaker Change: But there was another, you know, almost $600,000 of recurring dividends.
Speaker Change: coming off of our equity portfolio and we have seen that and we have you know somewhere between a half a million and two million dollar equity investments and many of these companies do produce some level of dividend income on a quarterly basis.
Operator: Okay. That's helpful, Michael. And then last one for you, Michael.
Michael Sarner: Okay, that's helpful, Michael.
Michael Sarner: And then last one for you, Michael, in terms of maybe a comp guide for us, we've had some volatility in the compensation expense lines. So just any thoughts around that would be super helpful. Yes, so this quarter we saw a total comp at 4.7 million, which I would tell you was high with some one-time expenses. So I would say the run rate is around 4.3 million on a quarterly basis. And I'd also tell you that for GNA, we had a number of one-time expenses this quarter, it being our proxy insurance or meeting quarter, as well as having a comp study done every two years for management and the board.
Speaker Change: Okay, that's helpful, Michael. And then last one for you, Michael. In terms of maybe a comp guide for us, you know, we've had some volatility in the compensation expense lines. Any thoughts around that would be super helpful.
Michael: Yes, so this quarter we saw a total comp at $4.7 million, which I would tell you was
Michael: High with some one-time expenses, so I would say the run rate is around $4.3 million on a quarterly basis.
Michael: And I'd also tell you that, you know, for G&A, we had a number of one-time expenses this quarter, it being our proxy and shareholder meeting quarter, as well as having...
Michael Sarner: So run rate for GNA should be something more like 2.5 million. Million. So total, just 7.6 total expenses for SGNA really should be around 6.8 on a go-forward basis. Okay.
Michael: a comp study done every two years for management and the board. The run rate for GNA should be something more like two and a half million.
Michael: So, total, just have a...
Michael: 7.6 total expenses for SG&As really should be around 6.8 on a go-forward basis.
Michael Sarner: Awesome. Thank you so much.
Sean Paul Adam: And thank you. And one moment for our next question. And our next question comes from Sean Paul Adam from Raymond James.
Speaker Change: Okay, awesome. Thank you so much.
Michael: And thank you.
Speaker Change: And one moment for our next question.
Joshua Weinstein: Your line is not open. Good morning. On the downgrades and the risk ratings in the portfolio, last quarter we had touched on, you know, kind of the watch list, turning positively with, you know, turnaround potential in some of the non-accruals within the portfolio. Now, given the relative, you know, downgrades of a couple of companies to level three and four, going from 5.3% quarter to now six, I mean, 7.6. Has there been any incremental pressure among previously low-risk holdings within the portfolio? So, as a watch list, as a group, I think the watch list is a group is improved slightly.
Speaker Change: And our next question comes from Sean Paul Adams from Raymond James. Your line is now open.
Operator: In terms of maybe a comp guide for us, you know, we've had some volatility in the compensation expense lines. Any thoughts around that would be super helpful.
Operator: So total, uh, December.
Speaker Change: Good morning.
Speaker Change: On the downgrades and the risk ratings in the portfolio, last quarter we had touched on, you know, kind of the watch list trending positively with, you know, turnaround potential and some of the non-accruals within the portfolio.
Speaker Change: Given the relative, you know, downgrades of a couple companies to
Speaker Change: level 3 and 4, going from 5.3% last quarter to now 6, I mean 7.6. Has there been any incremental pressure among previously low-risk holdings within the portfolio?
Speaker Change: So, as a watch list, as a group, I think the watch list as a group has improved slightly. The two new, we have no new non-accruals this quarter.
Joshua Weinstein: The two new, not the two new; we had no new non-accruals this quarter. The two downgrades to three. So from a two down to three rating, both of those companies are, are the equity backed in both cases, the private equity firm was put meaningful amount of money in those firms in those companies. You know, they've each got kind of more of an idiosyncratic story. One of them is referencing flight software consumer demand or software consumer demand, which is interesting. But they're both being backed by the private equity firm of Meaningful Capital, which obviously means that private equity firm thinks that there's, there's a turnaround and some upside from where they put money and right.
Speaker Change: The two downgrades to three, so from a two down to a three rating, both of those companies are private equity-backed, and in both cases, a private equity firm has put a meaningful amount of money in those firms, in those companies.
Speaker Change: You know, they've each got kind of more of an idiosyncratic story. One of them is referencing slight soft consumer demand or softer consumer demand, which is interesting.
Speaker Change: But they're both being backed by the private equity firm of Meaningful Capital, which obviously means that private equity firm thinks that there's
Joshua Weinstein: And then the down to the downgrade to four is a situation that we opted not to participate in a liquidity ground, just because we felt like it was at this point where we sit too high of potential of being good money after that. And so we downgraded it to four, and we'll just kind of see what happens going forward.
Speaker Change: There's a turnaround and some upside from where they put money in, right? And then the downgrade to a four is a situation that we opted not to participate in a liquidity round, just because we felt like it was, at this point where we sit,
Speaker Change: have too high of a potential of being good money after bad, and so we downgraded it to a four, and we'll just kind of see what happens going forward, small for us, but that's kind of that story, so it's in the more in the...
Joshua Weinstein: Small forest, but that's kind of that story. So it's in a more and a pharmaceutical services space. Another capital did come in to support that deal. So there is definitely value there. They definitely had capital coming in to support it on a, you know, on a prying basis in that case. And so that's why we downgraded it, and we did not participate. So, but other than, other than those, the watchlet group as a group, the watchlet is improved. Consistent with that work.
Speaker Change: They definitely had capital coming in to support it on a priming basis in that case.
Speaker Change: And so that's why we downgraded it and we did not participate.
Speaker Change: Other than those, the watch list, as a group, the watch list has improved.
Bowen Diehl: Turning over to, you know, kind of your thoughts on leverage levels and whether or not you guys are overlaying that with the Ford curve, which has really moved around quite a bit. I think we're looking at like a 100, 100 bits reduction in the three months over by January. To what extent are your thoughts around the shifting the leverage dependent on these changes in the curve? Or, what are your general thoughts operating with those two in tandem? So, I mean, I think we've said it in an earlier remarks that we have to make a decision from a quote perspective to D-labor, knowing that, you know, with rates coming down, we're expecting, you know, in everybody's guess on this, but eight cuts over the next 18 months, which is obviously going to put pressure on earnings.
Speaker Change: Consistent with last year.
Speaker Change: Turning over to, you know, kind of your thoughts on leverage levels and whether or not you guys are overlaying that with the forward curve, which is really moved around quite a bit. I think we're looking at like a 100% 100 bits reduction in the three months over by
Speaker Change: January . To what extent are your thoughts around the shifting the leverage dependent on these changes in the curve or what are your general thoughts operating with those two in tandem?
Speaker Change: So, I mean, I think we've said it in earlier remarks that we we have made the decision from a corporate perspective to de-lever Knowing that, you know, with rates coming down, we're expecting, you know, in everybody, anybody's guess on this, but eight cuts over the next
Bowen Diehl: Seeing how our portfolio is pretty robust. Now, we're able to create strong earnings. Staying unlearned at the moment while we have significant liquidity is going to allow us to pick up investments. As things kind of get difficult in the workshop in the market, we'll be able to originate when others might be pulling back. And we'll be able to continue to lever up also modestly and improve earnings and therefore the dividend. So, that's sort of the thought process looking ahead. Got it. So more of a wait in the seat and wait until, you know, the forward curve stabilizes more before you deploy, or you guys just looking for any opportunities that come up from now to stabilization.
Speaker Change: 18 months, which is obviously going to put pressure on earnings, seeing how our portfolio is pretty robust now. We're able to create strong earnings.
Speaker Change: staying unlevered at the moment.
Speaker Change: while we have significant liquidity is going to allow us.
Speaker Change: to pick up investments as things kind of get difficult or choppy in the market, we'll be able to originate.
Speaker Change: when others might be pulling back, and we'll be able to continue to lever up also modestly and improve earnings and therefore the dividends. So that's sort of the thought process looking ahead.
Speaker Change: Got it, got it. So more of a wait and see and wait until, you know, the forward curve stabilizes more before you deploy? Or are you guys just looking for any opportunities that come up from now to stabilization?
Bowen Diehl: Let me clarify. You asked about our portfolio company investments; are you asking about the BDC corporate leverage? The BDC corporate leverage. Okay. Thank you. Yeah.
Speaker Change: Let me clarify. Are you asking about our portfolio company investments or are you asking about the BDC corporate leverage?
Speaker Change: the BDC corporate leverage.
Bowen Diehl: Well, I would also make mention like we increased the dividend in this quarter. And the reason we did that, we had held it flat for several quarters because we were taking a wait-and-see approach to the rate environment. And because rates did stay higher for longer, we were able to build out the portfolio proper operating leverage, which gave us further confidence that where the low point might be. If and when those rate the rate cycle of bottoms out, which might be, you know, obviously in the low to mid threes or somewhere in the net area. Got it.
Speaker Change: Okay, thank you.
Speaker Change: Yeah, well, I would also make a mention, like, we've increased the dividend this quarter, and...
Speaker Change: The reason we did that, we had held it flat for several quarters because we were taking a wait-and-see approach to the raid environment.
Speaker Change: And because rates did stay higher for longer, we were able to build out the portfolio, drop our operating leverage, which gave us further confidence that where the low point might be, if and when those rates, the rate cycle bottoms out, which might be, you know, obviously
Speaker Change: in the low to mid threes or somewhere in that area.
Bowen Diehl: Thank you. I appreciate the car. And thank you.
Operator: And thank you.
Doug Harder: And one moment for our next question. And our next question comes from Doug Harder from UBS. Your line is now open.
Speaker Change: Got it. Thank you. I appreciate the call.
Speaker Change: And thank you. And one moment for our next question.
Bowen Diehl: On the downgrades and the risk ratings in the portfolio, last quarter, we touched on, you know, kind of the watch list trending positively with, you know, turnaround potential in some of the non-accruals within the portfolio.
Speaker Change: And our next question comes from Doug Harder from UBS. Your line is now open.
Cory Johnson: Hi, this is actually a core Johnson one for Doug. You mentioned that competition has increased and that spreads have tightened. Can you talk about what you see as possible, you know, other lenders may be giving up in the market in terms of, you know, possibly covenants in order to be able to win deals, or is the quality of these covenants as strong as they were, you know, previously. Yeah, so I mean, first of all, in general matter, we have not really seen the meaningful deterioration in covenants in our new deals. I mean, it's kind of, you know, it's it.
Bowen Diehl: Um, but they're both being backed by the private equity firm of Meaningful Capital, which obviously means that the private equity firm thinks too highly of a potential to be good money after bad. And so we downgraded it to a four, and we'll just kind of see what happens going forward. It's small for us, but that's kind of the story, so it's in the more.
Speaker Change: Hi, this is actually Cory Johnson on for Duck. You mentioned that competition has increased and that spreads have tightened. Can you talk about what you see as possibly, you know,
Speaker Change: Other lenders may be giving up in the market in terms of possibly covenants in order to be able to win deals. Is the quality of these covenants as strong as they were previously?
Bowen Diehl: Another capital did come in to support that deal, so there is value there. They definitely had capital coming in to support it on a priming basis, so that's why we downgraded it, and we did not. So, other than those, the watch list, as a group, is improved.
Speaker Change: Yeah, so, I mean, first of all, in a general matter, we have not really seen any meaningful deterioration in covenants in our new deals. I mean, it's kind of, you know, covenants go up, covenants go down slightly with a pretty tight band in the lower middle market. You know, I think...
Bowen Diehl: Covenants go up. Covenants go down slightly, with a pretty tight band in the lower middle market. You know, I think what I think you may be getting at when we lose deals generally it's most often because we, we tell a sponsor we will put a certain leverage level, and a lot of times that might be lower than the sponsor's asking for, and then another lender comes over the top and offers them exactly what they want. And so I would say, in the last couple of quarters, is when Josh touched on. I mean, spreads have tightened.
Bowen Diehl: Turning over to, you know, kind of your thoughts on leverage levels and whether or not you guys are overlaying that with the forward curve, which has really moved around quite a bit. I think we're looking at like a 100 bps reduction in the three months over by January. To what extent are your thoughts around the shifting of leverage dependent on these changes in the curve, or what are your general thoughts operating with those two in tandem?
Bowen Diehl: So, I think we've said in earlier remarks that we have made the decision from a corporate perspective to de-lever, knowing that, you know, with rates coming down, we're expecting, you know, in everybody's guess on this, but eight cuts over the next 18 months, which is obviously going to put pressure on earnings. But seeing how our portfolio is pretty robust now, we're able to create strong earnings. Staying unlevered at the moment, while we have significant liquidity, is going to allow us to pick up investments as things kind of get difficult.
Bowen Diehl: And if we're chopping the market, we'll be able to originate when others might be pulling back, and we'll be able to continue to lever up, also modestly, and improve earnings and, therefore, dividends. So that's sort of the thought process looking ahead.
Operator: Got it, got it. So more of a wait and see and wait until, you know, the forward curve stabilizes more before you deploy? Or are you guys just looking for any opportunities that come up from now until stabilization?
Speaker Change: What I think you may be getting at, when we lose deals, generally it's most often because we tell a sponsor we'll put a certain leverage level, and a lot of times that might be lower than the sponsor's asking for, and then another lender comes over the top and offers them exactly what they want.
Operator: Let me clarify, are you asking about our portfolio company investments, or are you asking about the BDC corporate?
Speaker Change: And so, I would say in the last couple of quarters, and Josh touched on it, I mean, spreads have tightened, and so we've lost more deals, a percentage of our lost deals on pricing than we would typically see. So pricing has definitely tightened.
Bowen Diehl: And so we've lost more deals; the percentage of our lost deals on pricing than we would typically see. So pricing is definitely tight. And so, you know, we're kind of just doing what we did. I mean, we're risk, we're risk managers, credit managers, and we have to make judgment calls on the risk-adjusted returns and pricing of risk on a deal. And so we're continuing to do the same thing; just the market, when it tightened up, and we've been doing this a long timeāon 20-something years. You know, competition comes and competition goes. Spreads tighten and then spread widen.
Speaker Change: And so, you know, we're kind of just doing what we do. I mean, we're risk managers, credit managers, and we have to make judgment calls on the risk-adjusted returns and pricing of risk on a deal.
Speaker Change: And so, we're continuing to do...
Speaker Change: do the same thing. It's just the market, when it tightens up, and we've been doing this a long time, I don't know, 20-something years.
Speaker Change: You know, competition comes and competition goes, spreads tighten and then spread widen.
Bowen Diehl: I would tell you my experiences: rates tend to fall; spreads tend to widen. And there's a lot of market volatility; increases spreads tend to widen.
Speaker Change: I would tell you my experience is rates.
Speaker Change: tend to fall, spreads tend to widen, and as market volatility increases, spreads tend to widen.
Bowen Diehl: So we'll see what the future holds, but, you know, that's hopefully give you a taste of what the competitive environment looks like. And the other thing to point out is like, we're all the lower lower middle market. And so when you talk about covenants, the covenants are there. I mean, you'll see that not a percent of our deals will have strong covenants. It's not like this indicated market where, you know, you'll see strong addbacks or covenants being dropped, or no covenants at all. So, the lower middle market is going to be very consistent in that way.
Speaker Change: So, we'll see what the future holds, but hopefully give you a taste of what the competitive environment looks like. And the other thing to point out is that we are the lower middle market, and so when you talk about covenants, the covenants are there. I mean, you'll see that in 100% of our deals we'll have.
Speaker Change: Strong covenants. It's not like the syndicated market where you know, you'll see
Speaker Change: you know, strong ad backs or, you know, covenants being dropped or no covenants at all. So the lower middle market is going to be very consistent in that way. So just echoing Bowen's comments, but making certain you understand it.
Bowen Diehl: So just echoing Bowen's comments, but making sure you understand that that'll be consistent in our business plan.
Bowen Diehl: Great. Thank you.
Bowen Diehl: That'll be consistent in our business plan.
Operator: And thank you. And I'm showing no further questions.
Speaker Change: Great, thank you.
Speaker Change: and thank you.
Bowen Diehl: I would now like to turn the call back over to Bowen Diehl for final remarks. Thanks, operator. And thanks for joining us. We appreciate your time and always love telling you about the words of our business, and we look forward to talking to you next work.
Speaker Change: And I'm showing no further questions. I would now like to turn the call back over to Bowen Diehl for final remarks.
Operator: The BDC corporate leverage
Bowen Diehl: Yeah, well, I would also make a mention, like, we've increased the dividend this quarter. And the reason we did that, we had held it flat for several quarters, because we were taking a wait-and-see approach to the rate environment. And because rates did stay higher for longer, we were able to build out the portfolio, and drop our operating leverage, which gave us further confidence about where the low point might be, if and when the rate cycle bottoms out, which might be, you know, obviously, in the low to mid-threes or somewhere in that area.
Operator: Got it. Thank you. I appreciate the call.
Bowen Diehl: Thanks, Operator, and thanks, everybody, for joining us. We appreciate your time and always love telling you about the performance of our business, and we look forward to talking to you next quarter.
Operator: And thank you. And one moment for our next question. And our next question comes from Doug Harder from UBS. Your line is now open.
Cory Johnson: Hi, this is actually Cory Johnson, the one for Doug. You mentioned that competition has increased and that spreads have tightened. Can you talk about what you see as possibly, you know? Other lenders may be giving up in the market in terms of possibly covenants in order to be able to win deals. Is the quality of these covenants as strong as they were previously?
Bowen Diehl: Yeah, so I mean, first of all, as a general matter, we have not really seen any meaningful deterioration in covenants in our new deals. I mean, it's kind of, you know, covenants go up, and covenants go down slightly with a pretty tight band in the lower middle market. You know, I think what you may be getting at is when we lose deals, generally, it's most often because we tell a sponsor we'll put in a certain leverage level, and a lot of times that might be lower than the sponsor's asking for, and then another lender comes over the top and offers them exactly what they want.
Bowen Diehl: Thanks, Operator, and thanks, everybody, for joining us. We appreciate your time and always love telling you about the performance of our business, and we look forward to talking to you next quarter.
Bowen Diehl: And so I would say in the last couple of quarters that Josh touched on, spreads have tightened, and so we've lost more deals as a percentage of our lost deals on pricing than we would typically see, so pricing has definitely tightened. And so, you know, we're kind of just doing what we do.
Bowen Diehl: I mean, we're risk managers, credit managers, and we have to make judgment calls on the risk-adjusted returns and pricing of risk on a deal. And so, we're continuing to do the same thing; just the market, when it tightens up, and we've been doing this for a long time, 20-something years, you know, competition comes and competition goes, spreads tighten, and then spreads widen I would tell you from my experience that rates tend to fall, spreads tend to widen, and as market volatility increases, spreads tend to widen.
Bowen Diehl: So, we'll see what the future holds, but, you know, that's hopefully giving you a taste of what the competitive environment looks like. And the other thing to point out is that we are in the lower middle market, and so, when you talk about covenants, the covenants are there. I mean, you'll see that 100% of our deals will have strong covenants. It's not like this indicated market where, you know, you'll see, you know, strong add-backs or, you know, covenants being dropped or no covenants at all. So, the lower middle market is going to be very consistent in that way, so just echoing Bowen's comments, but making sure that you understand that that'll be consistent in our business plan.
Operator: and thank you. And I'm showing no further questions. I would now like to turn the call back over to Bowen Diehl for final remarks.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you very much.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.