Q2 2025 Capital Southwest Corp Earnings Call
Speaker Change: Please stand by. Your conference call will begin momentarily. Thank you for your patience and please stand by.
Speaker Change: The End
Speaker Change: Thank you for joining today's Capitol Southwest, second quarter, this Lear 2025 earnings call.
Speaker Change: are participating on the call today, our Bowen Diehl, Chief Executive Officer.
Speaker Change: Chief Financial Officer, Josh Weinstein, Chief Investment Officer
Speaker Change: and Chris Rehberger.
Speaker Change: Executive Vice President of Finance. I will now turn the call over to Chris Rehberger.
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.
Chris Rehberger: 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 material from such statements.
Chris Rehberger: 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.
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: 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 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 $0.64 per share, which fully covered our regular dividend of $0.58 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 $0.64 per share.
Bowen Diehl: As we look forward to the December quarter, we are pleased to announce that our Board of Directors has declared a regular dividend of 58 cents per share for the quarter ended December 31, 2024.
Bowen Diehl: Our board has also declared a supplemental dividend of $0.05 per share, bringing total dividends declared for the December quarter to $0.63 per share.
Bowen Diehl: Deal flow in the lower middle market continued at a healthy pace this quarter, while competition in the market for both bank and non-bank lenders for quality deals continued to be fierce.
Bowen Diehl: This has resulted in tighter spreads on quality new deals, as well as slower net portfolio growth over the last two quarters for Capital Southwest as we have maintained our credit discipline.
Bowen Diehl: That said, a current backlog of deals in which we have either signed up or have received an indication that we are likely to win would indicate that net portfolio growth should be very strong in the December quarter.
Bowen Diehl: The deals we are currently underwriting continue to have loan-to-value levels ranging from 35% to 50%, resulting in significant equity capital cushion below our debt, and reasonable leverage levels of around three times debt to EBITDA.
Bowen Diehl: Deal closings in the low-amount market have always been lumpy from quarter to quarter, and that is certainly the case these past few quarters.
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'm highly confident we will continue our track record in the current environment.
Bowen Diehl: Josh Weinstein will provide additional color on the market, our investment activity, and the performance of our portfolio later in our prepared remarks.
Speaker Change: Portfolio activity during the quarter consisted of 89.8 million in new commitments to four new portfolio companies and 11 existing portfolio companies, as add-on financing continued to be an important and highly attractive source of origination for us.
Speaker Change: Portfolio growth for the quarter was offset by $45.2 million in proceeds from four debt prepayments, which generated a weighted average realized IRR of 14.5%.
Speaker Change: On the capitalization front, during the quarter, we increased our ING-led corporate credit facility to $485 million from $460 million with the addition of one new bank lender.
Speaker Change: Additionally, we raised approximately 21 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $24.49 per share or 148% of the prevailing NIV per share.
Speaker Change: We have remained diligent in ensuring that we have strong balance sheet liquidity while also funding a meaningful portion of our investment activity with accretive equity issuances.
Speaker Change: We continue to maintain a conservative mindset to both BDC leverage and balance sheet liquidity. Balance sheet liquidity at Capital Southwest remains robust, which Michael will provide additional commentary on in a moment.
Speaker Change: 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 both growth capital and add-on acquisition for our existing portfolio companies.
Speaker Change: We believe this strategy allows us to continue to grow our balance sheet through any capital markets environment, while also maintaining the flexibility to opportunistically repurchase our stock if it were to trade meaningfully below MAV.
Speaker Change: On slides seven and eight, we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage, and solid value creation.
Speaker Change: Since the launch of our credit strategy almost 10 years ago, we have increased our quarterly dividend, regular dividend, 29 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividends with pre-tax net investment income.
Speaker Change: In addition, over the same period, we have paid or declared 26 special or supplemental dividends totaling $4.06 per share, all generated from excess earnings and realized gains from our investment portfolio.
Speaker Change: Dividend sustainability, strong credit performance, and continued access to capital from multiple capital sources are all core to our overall business strategy.
Speaker Change: 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 fellow shareholders.
Speaker Change: As a reminder, slide nine lays out the core tenets of our investment strategy in lending and investing in the rural middle market.
Speaker Change: The vast majority of our portfolio and deal activity is in First Million Senior Secured Loans to companies backed by private equity firms.
Speaker Change: Currently 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 if needed.
Speaker Change: In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio company, Perry Pursue with a private equity firm, when we believe the equity thesis is compelling.
Speaker Change: As of the end of the quarter, our equity co-investment portfolio consisted of 72 investments, with a total fair value of $134 million, representing 9% of our total portfolio fair value.
Speaker Change: Our equity portfolio was marked at 132% of our cost, representing $32.5 million in embedded, unrealized appreciation, or 68 cents per share.
Speaker Change: Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing, lower middle market businesses.
Speaker Change: often resulting from the institutionalization of the businesses by experienced private equity firms, as well as the significant value accretion potential of strategic add-on acquisitions.
Speaker Change: Equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation, as well as equity distributions to Capital Southwest over time.
Speaker Change: As illustrated on slide 10, our on-balance sheet credit portfolio ended the quarter at $1.4 billion, representing year-over-year growth of 17% from the $1.2 billion as of September 2023.
Speaker Change: For the current quarter, 100% of the new portfolio company debt originations were firstly and secondly secured.
Speaker Change: As of the end of the quarter, 98% of the credit portfolio was first-lane senior security, with weighted average exposure per company remaining at 1%.
Speaker Change: 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.
Speaker Change: We expect this metric will continue to improve in our asset-based growth.
Speaker Change: I want to now hand the call over to Josh to review more specifics 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 an $89.8 million of capital invested in and committed to photo companies during the quarter.
Josh Weinstein: Capital committed during the quarter included $72 million in first-mean, 10-year secured debt across four new portfolio companies, in which we also invested a total of $975,000 in equity.
Josh Weinstein: In addition, we closed add-on financing for 11 existing portfolio companies, consisting of $16 million in first-year senior secured debt and $815,000 in equity.
Josh Weinstein: We are pleased with the strong market position that our team has established as a premier lender to the low and middle market. This is evidenced by 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 more than 70 different private equity firms represented across our investment portfolio.
Josh Weinstein: Additionally, in the last year we closed 10 new platforms with financial sponsors with which we had not previously closed a deal, showing our continued penetration in the market.
Josh Weinstein: Since the loss of our credit strategy back in January 2015, we have completed transactions with over 100 different private equity firms across the country, including over 20% with which we have completed multiple transactions.
Speaker Change: As Bowen mentioned, competition in the lower middle market over the last six months has been quite strong. This has resulted in tight loan pricing for high quality opportunities.
Speaker Change: We know the depth and strength of the relationships our team has cultivated over the years. We continue to source and win opportunities with attractive risk-return profiles, and we are very pleased with the current backlog of transactions that should close between now and the end of the year.
Speaker Change: Turning to slide 12, we continued our track record of strong returns on our exits with four debt prepayments during the quarter. In total, these exits generated $45.2 million in total proceeds, generating a weighted average IRR of 14.5%.
Speaker Change: During the quarter, the prepayment activity was driven by the robust financing market, as all four prepayments were refinancing transactions of portfolio companies with EBITDA in excess of $15 million.
Speaker Change: Two of the companies, ADS Tactical and WIS, were large syndicated credits formerly held at I-45 which were paid off at PAR.
Speaker Change: Over the past 10 years, we have realized 86 portfolio company exits, representing over 1.1 billion in proceeds that have generated a cumulative weighted average IRR of 13.9%.
Speaker Change: On slide 13, we detail key statistics for our portfolio as of the end of the quarter.
Speaker Change: The total portfolio consisted of 118 unique companies with a fair value as of the end of the quarter Weighed 89.2% to first leniency and secured debt 1.8% to second leniency and secured debt 0.1% to subordinated debt and 8.9% to equity co-investment
Speaker Change: The credit portfolio had a weighted average yield of 12.9% and weighted average leverage through our security of 3.8 times EBITDA.
Speaker Change: Overall, we are pleased with the operating performance across our loan portfolio. In fact, as shown on slide 14, the portfolio upgrades were meaningfully more than the downgrades this quarter.
Speaker Change: 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.
Speaker Change: We had five loans representing $80 million in fair value upgraded during the quarter, while having only one loan representing approximately $12 million in fair value downgraded during the quarter.
Speaker Change: The portfolio remains healthy with 93.5% of the portfolio at fair value, rated in one of the top two categories, a 1 or a 2, and only 6.5% of the portfolio in the 3 or 4 categories.
Speaker Change: Cash flow coverage of debt service obligations across the portfolio remained at a healthy 3.4 times despite the higher base rate environment. With our loans across our portfolio averaging approximately 43% of the portfolio company enterprise value.
Speaker Change: Quarter over quarter revenue in EBITDA growth on a weighted average basis was 2% and 1% respectively.
Speaker Change: Thank you very much. Thank you.
Speaker Change: As seen on slide 15, our portfolio continues to be broadly diversified across industries, with an asset mix which provides strong security for our shareholders' capital.
Speaker Change: In addition to industry diversification, our average exposure per company is 1% of assets, which gives us great comfort in the overall risk profile of our portfolio.
Speaker Change: Our investment committee members utilize our cumulative experiences navigating through various economic cycles to continually assess risk both on a company-by-company basis as well as on the portfolio.
Speaker Change: I will now hand the call to Michael to review the specifics of our financial performance for the course.
Michael: Thanks, Josh.
Michael: Specific to our performance for the quarter, as summarized on slide 16, pre-tax net investment income was $30 million, or $0.64 per share, as compared to $31.3 million, or $0.69 per share, in the prior quarter.
Michael: Net investment income after tax was $31.2 million, or $0.66 per share for the quarter.
Michael: The main driver of the tax benefits this quarter was $1.5 million in deferred taxes related to our taxable subsidiary, CSEI, which holds the majority of our equity investments.
Michael: For the quarter, total investment income decreased to $48.7 million from $51.4 million in the prior quarter.
Michael: The decrease was driven primarily by a $1.8 million reduction in one-time cash dividends from equity investments in the prior quarter, as well as a decrease of approximately $800,000 in fee revenue quarter over quarter.
Michael: The decrease in cash given in income was the result of three non-recurring dividend recap transactions which occurred in the prior quarter.
Michael: As of the end of the quarter, our loans on non-accrual represented 3.5% of our investment portfolio at fair value, and the weighted average yield in the portfolio on all investments was 12.7%.
Michael: During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend.
Michael: As mentioned earlier, our board has declared a regular dividend of $0.58 per share and a supplemental dividend of $0.05 per share for the December quarter.
Michael: Management and the board has spent significant time contemplating the impact of a lower interest rate environment on future earnings.
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 119% coverage for the 12 months ended September 30, 2024, and 111% cumulative coverage since the launch of our credit strategy in January 2015.
Michael: As a reminder, our intent is to continue to distribute to our shareholders the excess of our quarterly pre-tax NII over our regular dividend in 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 64 cents per share.
Michael: and the expectation that we will harvest gains over time from our existing 68 cents per share and unrealized appreciation on the equity portfolio.
Michael: As seen on slide 17, LTM operating leverage ended the quarter at 1.7%, which improved slightly quarter over quarter. Our operating leverage of 1.7% continues to compare favorably to the BDC industry average of approximately 2.8%.
Michael: We believe this metric speaks to the benefits of the internally managed BDC model and of absolute alignment with shareholders.
Michael: 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.
Speaker Change: Turning to slide 18, the company's NAV per share at the end of the quarter decreased slightly by 1 cent per share to $16.59 per share.
Speaker Change: The primary drivers of the NAB per share decrease for the quarter were net realized and unrealized depreciation on our investment portfolio, offset by accretion from the issuance of common stock at a premium to NAB per share.
Speaker Change: During slide 19, we are pleased to report that our balance sheet liquidity is robust with approximately $475 million.
Speaker Change: and Cash and Undrawn Leverage Commitments are two credit facilities.
Speaker Change: and our SBA Dems to Venture commitments, which altogether represent 3.6 times the $133 million of unfunded commitments we had across our portfolio as of the end of this quarter.
Speaker Change: During the September quarter, commitments to the ING-led corporate credit facility increased to $485 million, up from $460 million in the prior quarter.
Speaker Change: with the addition of one new bank lender.
Speaker Change: In addition, based on the current borrowing base, we have access to the full $485 million in total commitments.
Speaker Change: This facility has an accordion 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 in lockstep with the growth of our overall balance sheet.
Speaker Change: As a reminder, in March 2024, we submitted a MAC application to the SBA, which began the process towards a second SBIC license.
Speaker Change: We are actively working with the SBA and we continue to be optimistic that we will complete this process by the end of this calendar year.
Speaker Change: Finally, as of the end of the September quarter, 46% of our capital structure liabilities were in unsecured, covenant-free bonds with our earliest debt maturity in January 2026.
Speaker Change: A regulatory leverage, as seen on slide 20, ended the quarter at a debt-to-equity ratio of 0.8 to 1, up from 0.75 to 1 as of the prior quarter.
Speaker Change: While our optimal target leverage continues to be in the 0.8 to 0.95 range, we are weighing the impact 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.
Speaker Change: 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.
Speaker Change: From a capital markets perspective, BDCs have been very active in the unsecured debt market as investors remain constructive on new bond issuances.
Speaker Change: Despite not having any maturity within our debt structure until 2026, we are actively evaluating financing transactions to mitigate future capital markets volatility, while also being mindful of the current interest rate environment.
Speaker Change: I will now hand the call back to Bowen for some final comments.
Bowen Diehl: Thank you, Michael, and thank you, Josh.
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.
Bowen Diehl: 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.
Bowen Diehl: Diehl Origination and Portfolio Management Capability, as well as a Flexible Capital Structure.
Bowen Diehl: We believe we have prepared our company well for future growth and performance.
Bowen Diehl: The overall health and security of our portfolio is strong.
Bowen Diehl: with weighted average exposure per company of only 1%.
Bowen Diehl: The vast majority of our portfolio is backed by private equity firms.
Bowen Diehl: Interest coverage of the debt obligations across our portfolio is a strong 3.4 times, with strong equity cushion and support below our debt indefinite.
Bowen Diehl: Additionally, our equity co-investment portfolio gives our shareholders participation in the equity upside of many of these growing lower middle market businesses.
Bowen Diehl: providing further enhancement to our long-term shareholder returns.
Bowen Diehl: Last but not least, we have a very well capitalized balance sheet with multiple capital sources and significant balance sheet liquidity, 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 ready to open the lines for Q&A. Certainly. 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. And one moment for our first question.
Speaker Change: Our first question will be coming from Brian McKenna of Citizens GMP. Your line is open.
Brian McKenna: Okay, great. Thanks. Good morning, everyone. So I heard the commentary around some deals that got pushed into calendar 4Q. Is there any way to quantify this? And then it's great to hear that the pipeline is also robust. So how should we think about the magnitude of net portfolio growth into year end and then also into calendar year 2025 as well?
Speaker Change: Yeah, so, I mean...
Speaker Change: Generally speaking, we had Diehl push into the fourth quarter, and as I said in the commentary,
Speaker Change: You know, if you look at the deals that we've either signed up, so they're in heavy diligence, or we've been told that we're going to win, likely, and so the deal has to close, right?
Speaker Change: But those two things, I mean, it would be, you know,
Speaker Change: very significant net portfolio growth in the quarter. Yeah, so I'd say also, relative to the 930 quarter, our originations were mostly late stage. This quarter, if we were going to quantify, we'd probably see, I mean, on the
Speaker Change: conservative side we probably expect to see 150 to 200 million of net portfolio growth for the quarter and probably say half of the originations are either have closed or will close shortly so we expected a pretty strong portfolio growth both from income as well as balance sheet
Speaker Change: Yeah, okay, got it. That's helpful. And then maybe just a bigger picture, bigger picture question. You know, what are you seeing just within kind of the lower middle markets and then, you know, really just the markets more broadly in terms of new deal activity? You know, I think deal flows remain largely stable the last several years and kind of the lower middle markets and, you know, broader sponsor M&A has been pretty muted. So I think we've seen some larger players moving down market. So
Speaker Change: You know, thinking about sponsor M&A specifically in the larger end of the market, you know, that should be picking up here. So, I guess, what does that mean for transactions and yields in your space? And then, are you seeing any early signs of some of these larger firms moving back up, you know, moving back up market a bit?
Speaker Change: Yeah, so it's a really interesting question and one we think about and ask other firms about quite often I think
Speaker Change: You know, over the last several years, we've seen an enormous amount of capital being raised, you know, initially in the private equity market and then in the private credit market.
Speaker Change: When you read about the quantity of capital raised, obviously, that tends to lean more towards the large market, probably for no other reason than that's just a lot more capital.
Speaker Change: I think we've also heard, and you've read in the papers, etc., that DealFlow, as you just referenced, has been muted in the last year and a half, say.
Speaker Change: And so what we've heard is, you know, there's two things going on. It doesn't take a whole lot of change in the competitive balance, if you will, between supply and demand of capital in the lower middle market.
Speaker Change: to disrupt pricing. So the deal flow in the lower middle market, you know, as we've, as you know, is not private equity firms selling businesses to each other, but it's private equity firms buying, controlling interests in founder or family owned businesses that are aging and want to diversify their holdings.
Speaker Change: And so the deal flow has been relatively, you know, flat.
Speaker Change: And so when you have decreased deal flow in the upper market and relatively flat deal flow in the lower middle market, you know, we have seen, you know, certainly the private equity parties that I've talked to have seen some of the competition, increased competition from larger market private equity firms.
Speaker Change: It's a cascading effect, right? Large market private equity firms starting to justify deals a little bit smaller, and then mid-market justifying deals a little bit smaller, and it kind of cascades down.
Speaker Change: And then, you know, as you just referenced, Brian, I mean, that, that.
Speaker Change: you know, when the deal flow picks back up.
Speaker Change: that should cascade back. Now, there's an enormous amount of liquidity in the market, so the speed at which that cascades back is a question mark, but I think it would tend to cascade back up. The other effect is, you know, in our market is we're seeing more competition recently from banks.
Speaker Change: As we all know, banks come and go. They're here now, and they worked here a year and a half ago. And it's a certain handful of regional banks.
Speaker Change: So, you know, that somewhat disrupts the market from a pricing perspective. We haven't seen a lot of deterioration in credit.
Speaker Change: like leverage up, you know, Covenant's worse, you know, a little bit around the edges, but not as much as pricing has changed.
Speaker Change: And so, you know, I think those two factors, again, it doesn't take a lot to disrupt the pond, if you will, from a pricing perspective.
Speaker Change: perspective. Probably three quarters ago and back, our spread over SOFR was 750. Two quarters ago, the June 30 quarter, it was 700, and this quarter it was just a shade over 650. So we've seen, you know, obviously somewhere in the, you know, 50 to 100 basis points tightening on spread at the moment.
Speaker Change: All right, great. Thank you, guys. I'll leave it there.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: And our next question will be coming from Doug Harder of UBS. Your line is open.
Doug Harder: Thanks. Can you talk about your appetite to continue to raise capital, given the combination of the premium to book and the increased pipeline that you talked about?
Speaker Change: Sure, so we'll start by saying we've done a lot of the hard work, you know, coming, you know, to Purdue today. We have close to 500 million of those.
Speaker Change: Michael Rehberger, Joshua Weinstein, Sam Zenona. The ATMs are constantly raising capital on a daily basis.
Speaker Change: We would say that we are always opportunistically looking to raise additional capital and certainly with an eye towards our fund in 2026.
Speaker Change: sort of re-pronounce those in time. So I would tell you, yes, we're active there. You'll probably see us increase security capacity a little bit. You certainly should expect over the next six to nine months.
Speaker Change: to see some unsecured activity and, you know, raising ATM money will probably look like something in the $20 to $49 a quarter.
Speaker Change: Great. Appreciate that. Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: And our next question will be coming from Bryce Rowe of B Riley. Your line is open.
Speaker Change: Thanks. Good morning.
Bryce Rowe: Maybe wanted to start around the discussion topic of the portfolio, robust portfolio, and a couple more questions around that. So, Bowen, maybe touch on the mix of the backlog, whether it be kind of newer portfolio companies versus existing portfolio companies. And I'm kind of curious.
Speaker Change: Have you seen incremental spread, compression, you know, since the end of September with some of the New Deal activity that's kind of bled over into the fourth calendar quarter?
Bowen Diehl: Yeah, so, I mean, the new Diehl activity is...
Speaker Change: what do you say, two-thirds new platform companies and about a third. I was gonna say, yeah, third add-ons, which has kind of been the mix historically in the last several quarters, so it's about the same. I'd say spreads have tightened slightly since September, but that's not the biggest.
Speaker Change: items of our concern, that change. It's kind of the same, but it's probably slightly tighter for quality credits.
Speaker Change: Okay, that's helpful. And then maybe speak to, I think you guys have talked in the past about how the loan rate resets kind of lag, what we see from a short-term rate perspective. We saw a little bit of,
Speaker Change: yield compression for the portfolio here in the September
Speaker Change: quarter, maybe Michael or Bowen, can you can you kind of speak to, you know, what percentage of that was non-accrual inflows? What percentage of that was
Speaker Change: So for compression driven, and then what your expectation is for the portfolio yield, you know, given that given that lag.
Speaker Change: Sure.
Speaker Change: or so.
Speaker Change: We saw SOFR come in from essentially 5.1% in the previous quarter to an effective, well, I guess the...
Speaker Change: 12 basis points. It came in effectively for the 930 quarter versus the 630 quarter. Compression on yield came in about 15 basis points, and then there was some compression due to elevated non-accruals during the quarter.
Speaker Change: So that brought our yield on the debt from 13.3% down to 12.9%. For the 12-31 quarter, we're expecting, based on the reset date, which was October 1st, was 4.6%, so down from the 5.1% in the previous quarter. So another 50 basis points.
Speaker Change: anticipates. So that kind of gives you a sense where we are on the two questions today.
Speaker Change: Yep, okay, helpful. And then maybe just.
Speaker Change: Michael S. Rehberger, Joshua Weinstein, Bowen Diehl, Michael S. Rehberger, Joshua Weinstein,
Speaker Change: Non-accruals flow into that non-accrual bucket. Can you give us a little commentary around that, kind of what the expectation is for those particular assets?
Speaker Change: Yeah, I mean it's two new non-accruals. Obviously that's frustrating. It's part of our business. It's frustrating to see both of those names were threes last quarter, so they were already on our watch list.
Speaker Change: One is a closeout sale company to lower-end consumers, and I think that's, you know, my view of that. I think our view of that is that's the lower-end consumer that's affected more acutely by the cost of eggs and gas and milk.
Speaker Change: with inflation, and so that's hurt that business.
Speaker Change: You know, and then the other one is it serves the, it's a video, the video content.
Speaker Change: that's streamed through Hulu, Netflix.
Speaker Change: Prime, those types of things, or a video digital editor company, and so that's been affected by the strike.
Speaker Change: That's over, but the business, the industry is still down. And then it's just the comeback of that business will be a function of quantum of streaming content volume and how fast that recovers. Both non-accruals will most likely be restructured by the end of December.
Speaker Change: Both are in discussions right now, and I'm pretty confident that they'll be
Speaker Change: struck restructured by the end of December. So they'll be off off that list anyway, but there'll be companies where we'll own equity in and we'll continue to work with the manager teams and turn around those businesses. Hopefully, it's gonna be that portion just to be clarified to a portion of
Speaker Change: The asset will be a debt and the push will be equity. Some of it will come back on a cool. I can't give you those percentages now, but that's anticipated.
Speaker Change: Yep, okay. Last one for me, just a modeling question. You saw the comp line kind of come in, let's call it 40% or so, quarter over quarter. Michael, can you help us think about what that comp line might look like for the balance of the fiscal year?
Speaker Change: Yeah, I would tell you that the run rate for compensation, for cash compensation, is $3 million.
Speaker Change: Stock Comp number should be about one and a half, so four and a half million for compensation on the normal basis, run rate basis, and then, you know, SG&A is another two and a half million on run rates, so total of SG&A at seven million dollars is the run rate you should be working off of.
Speaker Change: All right. Thank you all. Thanks, Bryce.
Speaker Change: One moment for our next question.
Speaker Change: Our next question will be coming from Matthew Harris of VP. Your line is open.
Speaker Change: Hi there, this is Matt Herwood from Jeffries. Congrats on the quarter. Just to follow up on the non-accrual list, are you able to provide any detail on
Speaker Change: Some of the NPAs from last quarter like Gage, American Nuts, Research Now, or StatinNet.
Speaker Change: Thank you.
Speaker Change: Yeah research now, let's start with that because that's easy, that's gone. You know that was you know restructured and sold and so that's actually the net realized loss this quarter. And then American nuts, you know, it's kind of flat the better.
Speaker Change: business. So, and then what was the other one?
Speaker Change: Yeah, Stattmetz. Stattmetz, that's our one name that's a four.
Speaker Change: and that company, you know, continues to kind of struggle.
Speaker Change: And one moment for our next question.
Speaker Change: And our next question will be coming from Robert Dodd of Raymond James, your line is open.
Robert Dodd: Hi guys. On the net deployments, obviously that is not what drives bonus accruals or anything like that, you know, it's just the point. But, I mean, with the number that you're looking at for the December quarter, I mean,
Robert Dodd: And you gave kind of some run rate comp numbers and stock comp numbers, Michael. But, I mean, should we expect anything unusual in the fourth quarter, given the level of...
Robert Dodd: of Deployments, which is...
Speaker Change: Healthy, to say the least.
Robert Dodd: I mean, I would say so, Robert. I think that...
Speaker Change: You know, from quarter to quarter, we assess what the bonus accrual will look like at year-end and then make, you know, just to remind everybody, we accrue for the first three quarters based on what we think the run rate will look like at the end of the year, and then the fourth quarter will be the true up towards the final bonus payment, as bonuses are only paid at one time at the end of our fiscal year.
Speaker Change: So, I mean, certainly as...
Speaker Change: We definitely don't pay people based on origination, so the answer to that question is...
Speaker Change: It will depend on what's going on with the company, how's our credit looking, what we think we're able to pay out first and foremost to our shareholders for dividends for the remainder of the year, but also with the eye of being able to continue to pay out supplemental dividends and build up the UTI bucket. So I wouldn't expect anything dramatic because that is not how we compensate employees.
Speaker Change: Got it, got it, thank you. And then on, so just credit in general, I mean, to your point, Brenton, I think you said, you know, you've got a low-end consumer business that's a new non-accountable business this quarter, digital,
Speaker Change: I mean, these are not related industries, obviously. But, I mean, is there any... I mean, I would expect the low-end consumer and any other exposure that should be under pressure, but any other areas where...
Speaker Change: there's any kind of emerging sign of weakness. I mean to your point on the revenue and EBITDA, I mean EBITDA I think you said was up one percent quarter over quarter, so there's got to be a
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Any themes on where those pressures are and any incremental concerns given low levels of EBITDA growth, which means some portion declining?
Speaker Change: Yeah, thanks, Robert. I would say, look, I mean, there's idiosyncratic stories all throughout any portfolio, right? So I would say if I were to zone out and think about what are the economic related or trends or things that show up that would be on an economic general list.
Speaker Change: I mean, one is the lower-end consumer, no question about it. We don't have a lot of businesses in that area, but that's something that we've seen. Not necessarily, yes, to our non-accrual, but if you look across the portfolio, another one or two discretionary, low-end consumer-type purchases.
Speaker Change: that it's slow, not necessarily becoming a credit problem, but you see that in the portfolio. And then the other I would say is just businesses that are serving other businesses, business to business.
Speaker Change: that, you know, decisions are slower to make, slower to make purchase decisions.
Speaker Change: as, you know, candidly, probably as much, you know, businesses, you know, cautious about the future.
Speaker Change: And so that, you know, I don't know that that's like material if you zone out and look at our overall portfolio, but you definitely, there's definitely narrative out there in that respect. And then I think about, I think a step back, I'm like, all right, well, our rating migration, as you and Bryce both referenced, our rating migration, we have significant amount of upgrades, not a lot of downgrades.
Speaker Change: you know strong interest coverage in the portfolio, our pick interest this quarter.
Speaker Change: is a percentage of income is down. So our cash, our income is a higher percentage cash and it's a higher percentage recurring. So you look at that and you feel pretty good about the engine that's paying the dividend and that's benefiting our shareholders.
Speaker Change: But at the margins, as you referenced there, you know, if you look at negative stories...
Speaker Change: other than just idiosyncratic, very fixable problems, bad management decisions, all those types of things that show up in any loan portfolio that are very fixable. If you think about what general themes are, those would be the two, kind of the low-end consumer and B2B, you know, slower investment decision or slow purchase, slower purchase decisions.
Speaker Change: Got it. Thank you.
Speaker Change: Bowen
Speaker Change: And I would now like to turn the conference back to Bowen Diehl for closing remarks.
Bowen Diehl: Thanks, Operator, and thanks, everybody, for joining us today. We appreciate the opportunity to give you an update on our company and portfolio, and we look forward to keeping you updated on events in the future.
Speaker Change: And this concludes today's conference call. Thank you for participating. You may now disconnect.