Q3 2025 Capital Southwest Corp Earnings Call
Chief Executive Officer.
Michael <unk>: Michael <unk>, Chief Financial Officer, Josh Weinstein, Chief Investment Officer.
Chris Robert: Chris Robert.
Chris Robert: Does that give vice President finance I will now turn the call over to Chris Robert.
Chris Robert: Thank you I would like to remind everyone that in the course of this call we will be making certain forward looking statements.
Chris Robert: 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.
Chris Robert: For information concerning these risks and uncertainties seed capital Southwest's publicly available filings with the SEC.
Chris Robert: 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.
Speaker Change: I will now hand, the call off to our Chief Executive Officer bogie.
bogie: Thanks, Chris and thank you everyone for joining us for our third 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.
bogie: 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.
bogie: At Www Dot capital southwest Dot com.
bogie: You will also find our quarterly earnings press release issued last evening on our website.
bogie: We will now begin on slide six of the earnings presentation, where we have summarized some of the key performance highlights for the quarter.
bogie: During the quarter, we generated pre tax net investment income of 64 per share, which fully covered both our regular dividend of <unk> 58 per share.
bogie: Our supplemental dividend of <unk> <unk> per share paid during the quarter.
bogie: Portfolio earnings continued to be strong and as of the end of the quarter. We estimate that our undistributed taxable income was <unk> 68 per share.
bogie: Which is up from our prior quarter estimate of 64 per share.
bogie: As we look forward to the March quarter, we are pleased to announce that our board of directors has declared a regular dividend of <unk> 58 per share for the quarter ending March 31 2025.
bogie: Additionally, our board has declared an increase to the supplemental dividend to <unk> <unk> per share from the <unk> <unk> per share in the December quarter.
bogie: Bringing total dividends declared for the March quarter to <unk> 64 per share.
bogie: Deal flow in the lower middle market was very strong this quarter and the competitive environment.
bogie: <unk> quality deals continued at the feverish pace, we have seen for the past few quarters.
bogie: Portfolio activity during the quarter consisted of $317 $5 million in new commitments to nine new portfolio companies and 20 existing portfolio companies.
Add on financings continued to be an important component of many private equity firms investment theses and a highly attractive source of originations for us.
bogie: In fact over 41% of total capital commitments during the quarter were follow on financings and performing companies.
bogie: 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.
bogie: And reasonable leverage levels of around three five times debt to EBITDA.
bogie: Josh Weinstein will provide additional color on the market our investment activity and the performance of our portfolio later in our prepared remarks.
bogie: On the capitalization during the quarter, we issued $230 million in aggregate principal of convertible notes with a coupon of five 1% 5%.
bogie: At an initial conversion price of $25 per share.
bogie: Net proceeds from these convertible notes were used to redeem in full the $140 million January 2026 notes.
bogie: As well as pay down our senior secured revolving credit facility.
bogie: Importantly, there was no make whole payment associated with the repayment of the January 2026 notes.
Michael will walk through some additional important mechanics of the convertible bond offering in a moment.
bogie: Yes.
bogie: Additionally, we received a green light letter from the SBA, allowing us to submit our final application for our second <unk> license.
bogie: And we have been informed informed by the FDA that we will receive final approval any day.
bogie: We are excited about our continued participation in the SBA program is this program has been and will continue to be a very important component of our capitalization strategy.
bogie: Finally, we raised approximately $54 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $22 68 per share or 137% of the prevailing NAV per share.
bogie: We have remained diligent in ensuring that we have strong balance sheet liquidity, while also funding a meaningful portion of our investment activity with both unsecured debt and accretive equity issuances.
bogie: We continue to maintain a conservative mindset to both BDC leverage and balance sheet liquidity.
bogie: Balance sheet liquidity at capital southwest remains robust, which Michael will provide additional commentary on in a moment.
bogie: 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 acquisitions for our existing portfolio companies.
bogie: 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 an EV.
bogie: On slide seven and eight we illustrate our continued track record of producing steady dividend growth consistent dividend coverage and solid value creation.
bogie: Since the launch of our credit strategy, we have increased our quarterly regular dividend 29 times and have never cut the regular dividend.
bogie: All while maintaining strong coverage of our regular dividend with pre tax net investment income.
bogie: In addition over the same period, we have paid or declared 27 special or supplemental dividends totaling $4 12 per share.
bogie: All generated from excess earnings and realized gains from our investing investment portfolio.
bogie: Dividends sustainability strong credit performance and continued access to capital from multiple capital sources.
bogie: Our all core to our overall strategy.
Our track record in all these areas demonstrates the strength of our investment in capitalization management strategies.
bogie: As well as the absolute alignment.
bogie: Of all our decisions with the interest of our fellow shareholders.
bogie: As a reminder, slide nine lays out the core tenets of our investment strategy in lending and investing in the lower middle market.
As well as pay down our senior secured revolving credit facility.
Importantly, there was no make whole payment associated with the repayment of the January 2026 notes.
bogie: The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms.
Michael will walk through some additional important mechanics of the convertible bond offering in a moment.
bogie: Currently.
Speaker Change: Additionally, we received a green light letter from the SBA, allowing us to submit our final application for our second <unk> license.
bogie: Approximately 94% of our credit portfolio is backed by private equity firms.
bogie: Which provide important guidance and leadership to the portfolio companies.
Speaker Change: And we have been informed informed by the FDA that we will receive final approval any day.
bogie: As well as the potential for junior capital support if needed.
bogie: In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies.
Speaker Change: We are excited about our continued participation in the SBA program.
Speaker Change: As this program has been and will continue to be a very important component of our capitalization strategy.
Pursue with the private equity firm when we believe the equity thesis is compelling.
Speaker Change: Finally, we raised approximately $54 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $22 68 per share or 137% of the prevailing NAV per share.
bogie: As of the end of the quarter, our equity co investment portfolio consisted of 77 investments with a total fair value of $159 million.
bogie: Representing 9% of our total portfolio at fair value.
bogie: Our equity portfolio was marked at one at 143% of our costs representing.
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 both unsecured debt and accretive equity issuances.
bogie: Representing $47 9 million and embedded unrealized depreciation or <unk> 96 per share.
Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses.
Speaker Change: We continue to maintain a conservative mindset to both BDC leverage and balance sheet liquidity.
bogie: Often resulting from the institutionalization of the businesses by experienced private equity firms.
Speaker Change: Balance sheet liquidity at capital southwest remains robust, which Michael will provide additional commentary on in a moment.
bogie: As well as a significant value accretion accretion potential of strategic add on acquisitions.
Speaker Change: 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 acquisitions for our existing portfolio companies.
bogie: Equity co investments across our portfolio provide our shareholders with the potential for asset value appreciation.
bogie: As well as equity distributions to capital southwest overtime.
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 an EV.
bogie: To that end I would note that we have two equity investments currently in the final stages of sale processes, which should provide meaningful realized gains for capital southwest and the March 2025 quarter.
Speaker Change: On slide seven and eight we illustrate our continued track record of producing steady dividend growth.
bogie: Additionally, we are seeing some increased visibility in our portfolio on companies beginning sales processes in 2025 seven.
Speaker Change: <unk> dividend coverage and solid value creation.
Speaker Change: Since the launch of our credit strategy, we have increased our quarterly regular dividend 29 times and have never cut the regular dividend.
bogie: Several of which could result in material realized gains later this year for capital southwest.
bogie: We look forward to providing you updates as appropriate as they develop.
Speaker Change: All while maintaining strong coverage of our regular dividend with pre tax net investment income.
bogie: As illustrated on slide 10, our on balance sheet credit portfolio ended the quarter at $1 5 billion.
Speaker Change: In addition over the same period, we have paid or declared 27 special or supplemental dividends totaling $4 12 per share all.
bogie: Representing year over year growth of 31% from $1 2 billion as of December 2023.
Speaker Change: All generated from excess earnings and realized gains from our investing investment portfolio.
bogie: For the current quarter, 100% of our new portfolio debt originations were first lien senior secured and.
Speaker Change: Dividends sustainability strong credit performance and continued access to capital from multiple capital sources.
bogie: And as of the end of the quarter, 98% of the credit portfolio was first lien senior secured with weighted average exposure per company of only <unk>, 9%.
Speaker Change: Our all core to our overall strategy.
Speaker Change: Our track record in all these areas demonstrates the strength of our investment in capitalization management strategies.
bogie: We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture overall risk management as we grow our balance sheet.
Speaker Change: As well as the absolute alignment of all our decisions with the interest of our fellow shareholders.
bogie: I will 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.
Speaker Change: As a reminder, slide nine lays out the core tenets of our investment strategy in lending and investing in the lower middle market.
Speaker Change: The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms.
Josh Weinstein: Thanks ban on slide 11, and 12, we detail the $317 5 million of capital invested in and committed to portfolio companies during the quarter.
Speaker Change: Currently.
Speaker Change: Approximately 94% of our credit portfolio is backed by private equity firms.
Josh Weinstein: Capital committed during the quarter included $172 $3 million in first lien senior secured debt across nine new portfolio companies and which we also invested a total of $3 million in equity.
Speaker Change: Which provide important guidance and leadership to the portfolio companies.
Speaker Change: As well as the potential for junior capital support as 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 companies Parry pursue with a private equity firm when we believe the equity thesis is compelling.
Josh Weinstein: In addition, we closed add on financings for 'twenty existing portfolio companies, consisting of $141 1 million in first lien senior secured debt and $1 1 million in equity.
Speaker Change: As of the end of the quarter, our equity co investment portfolio consisted of 77 investments with a total fair value of $159 million.
Josh Weinstein: We are pleased with the strong market position that our team has established a premier lender to the lower middle market.
Josh Weinstein: This is evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities.
Speaker Change: Representing 9% of our total portfolio at fair value.
Speaker Change: Our equity portfolio was marked at one at 143% of our cost representing.
Josh Weinstein: As a point of reference currently there are 80 unique private equity firms represented across our investment portfolio.
Speaker Change: Representing $47 9 million and embedded unrealized depreciation or <unk> 96 per share.
Josh Weinstein: Additionally, in the last year, we closed 17, new platforms with financial sponsors with which we had not previously closed the deal demonstrating our continued penetration in the market.
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.
Josh Weinstein: Since the launch of our credit strategy, we have completed transactions with over 110 different private equity firms across the country, including over 20% with which we have completed multiple transactions.
Speaker Change: As well as the significant value accretion 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.
Josh Weinstein: As Bowen mentioned, the lower middle market continues to be quite competitive as this segment of the market is highly attractive to both bank and non bank lenders.
Speaker Change: As well as equity distributions to capital southwest overtime.
Speaker Change: To that end I would note that we have two equity investments currently in the final stages of sale processes, which should provide meaningful realized gains for capital southwest and the March 2025 quarter.
Josh Weinstein: While this has resulted in tight loan pricing for high quality opportunities the depth and strength of the relationships. Our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk return profiles.
Speaker Change: Additionally, we are seeing some increased visibility in our portfolio on companies beginning sales processes in 2025.
Josh Weinstein: On slide 14, we detailed key statistics for our portfolio as of the end of the quarter.
Speaker Change: Several of which could result in material realized gains later this year for capital southwest.
Josh Weinstein: The total portfolio consisted of 125 different companies with fair value.
Speaker Change: We look forward to providing you updates as appropriate as they develop.
Josh Weinstein: As of the end of the quarter weighted 89, 1% to first lien senior secured debt one 5% to second lien senior secured debt <unk> one.
Speaker Change: As illustrated on slide 10, our on balance sheet credit portfolio ended the quarter at $1 5 billion.
Josh Weinstein: 1% to subordinated debt and nine 3% to equity co investments.
Speaker Change: Representing year over year growth of 31% from $1 2 billion as of December 2023.
Josh Weinstein: The credit portfolio had a weighted average yield of 12, 1% and a weighted average leverage through our security of three six times EBITDA.
Speaker Change: For the current quarter, 100% of our new portfolio debt originations were first lien senior secured.
Speaker Change: And as of the end of the quarter, 98% of the credit portfolio was first lien senior secured with weighted average exposure per company of only <unk>, 9%.
Josh Weinstein: Overall overall, we are pleased with the operating performance across our loan portfolio. In fact as shown on slide 15, the number of portfolio upgrades were meaningfully more than the number of downgrades. This quarter. As a reminder, all loans. Upon origination are initially assigned an investment rating of two.
Speaker Change: We believe our.
Speaker Change: Portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture overall risk management as we grow our balance sheet.
Josh Weinstein: On a four point scale with one being the highest rating and four being the lowest rating.
Speaker Change: I will 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: We had nine loans in five portfolio companies, representing $99 million in fair value upgraded during the quarter, while having three loans and three portfolio companies, representing approximately $17 4 million and fair value downgraded during the quarter.
Josh: Thanks ban on slide 11, and 12, we detail the $317 5 million of capital invested in and committed to portfolio of companies during the quarter.
Josh: Capital committed during the quarter included $172 $3 million in first lien senior secured debt across nine new portfolio companies and which we also invested a total of $3 million in equity.
Josh Weinstein: Overall, the portfolio remains healthy with approximately 95% of the portfolio at fair value right and one of the top two categories of one or two and approximately 5% of the portfolio and the three or four category.
In addition, we closed add on financings or 20 existing portfolio companies consisting of $141 1 million in first lien senior secured debt and $1 1 million in equity.
Josh Weinstein: Cash flow coverage of debt service obligations across the portfolio remains at a healthy three five times with our loans across our portfolio, averaging approximately 41% of the portfolio company enterprise value.
Josh: We are pleased with the strong market position that our team has established a premier lender to the lower middle market.
Josh Weinstein: Quarter over quarter revenue and EBITDA growth on a weighted average basis were each approximately 3%.
Josh: This is evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities.
Josh Weinstein: As seen on slide 16, our portfolio continues to be broadly diversified across industries with an asset mix, which provide strong security for our shareholders' capital.
Josh: As a point of reference currently there are 80 unique private equity firms represented across our investment portfolio. Additionally, in the last year, we closed 17, new platforms with financial sponsors with which we had not previously closed the deal demonstrating our continued penetration in the market.
Josh Weinstein: In addition to industry diversification, our average exposure per company is less than 1% of assets, which gives us great comfort in the overall risk profile of our portfolio.
Josh: Since the launch of our credit strategy, we have completed transactions with over 110 different private equity firms across the country.
Josh Weinstein: Our investment committee members utilize our cumulative experience is navigating through various economic cycles to continually assess risk both on a company by company basis as well as on the overall portfolio.
Josh: Including over 20% with which we have completed multiple transactions.
Josh: As Bowen mentioned, the lower middle market continues to be quite competitive as this segment of the market is highly attractive to both bank and non bank lenders.
Josh Weinstein: In the current environment that includes being in close contact with our sponsors and portfolio companies to proactively assess any anticipated effects of recent and future policies on tariffs and immigration.
Josh: While this has resulted in tight loan pricing for high quality opportunities the depth and strength of the relationships. Our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk return profiles.
Josh Weinstein: I will now I will now hand, the call over to Michael to review the specifics of our financial performance for the quarter.
Michael <unk>: Thanks, Josh.
Michael <unk>: <unk> to our performance for the quarter as summarized on slide 17 pre tax net investment income was $37 million or <unk> 64 per share as compared to $30 million or <unk> 64 per share in the prior quarter.
Josh: On slide 14, we detailed key statistics for our portfolio as of the end of the quarter.
Josh: The total portfolio consisted of 125 different companies with fair value.
Josh: As of the end of the quarter weighted 89, 1% to first lien senior secured debt one 5% to second lien senior secured debt <unk> one.
Michael <unk>: For the quarter total investment income increased to $52 million from $48 7 million in the prior quarter.
Michael <unk>: Increase was driven primarily by a $3 $2 million increase in fees and other income compared to the prior quarter.
Josh: 1% subordinated debt and nine 3% to equity co investments.
Josh: The credit portfolio had a weighted average yield of 12, 1% and a weighted average leverage through our security of three six times EBITDA.
Michael <unk>: As at the end of the quarter, our loans on nonaccrual, representing two 7% of our investment portfolio at fair value.
Michael <unk>: And the weighted average yield in the portfolio on all investments was 12, 1%.
Josh: Over our overall, we are pleased with the operating performance across our loan portfolio. In fact as shown on slide 15, the number of portfolio upgrades were meaningfully more than the number of downgrades this quarter.
During the quarter, we paid out a <unk> 58 per share regular dividend and a <unk> <unk> per share supplemental dividend as mentioned earlier, our board has declared a regular dividend of <unk> 58 per share while also increasing the supplemental dividend to <unk> <unk> per share for the March quarter.
Josh: 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.
Michael <unk>: Management and the board has spent significant time contemplating the impact of a lower interest rate environment on future earnings.
Josh: We had nine loans in five portfolio companies, representing $99 million in fair value upgraded during the quarter, while having three loans and three portfolio companies, representing approximately $17 4 million and fair value downgraded during the quarter.
Michael <unk>: 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 <unk>: We continued our strong track record of regular dividend coverage was 115% coverage for the 12 months ended December 31, 2024, and 111% cumulative coverage since the launch of our credit strategy.
Josh: Overall, the portfolio remains healthy with approximately 95% of the portfolio at fair value weighted in one of the top two categories, one or two and approximately 5% of the portfolio and thats three or four categories.
Michael <unk>: We are confident in our ability to continue to distribute quarterly supplemental dividends for the foreseeable future based upon our current UTI balance of 68 per share and the expectation that we will harvest gains over time from our existing 96 per share and unrealized appreciation on the equity portfolio.
Josh: Cash flow coverage of debt service obligations across the portfolio remains at a healthy three five times with our loans across our portfolio, averaging approximately 41% of the portfolio company enterprise value.
Josh: Quarter over quarter revenue and EBITDA growth on a weighted average basis were each approximately 3%.
Michael <unk>: As Bowen mentioned earlier, we have two equity investments and sales processes, both expected to close within the next two weeks. These realized gains all else equal should increase our UTI balance by a further 10 to 15 per share as of the end of the March quarter.
Josh: As seen on slide 16, our portfolio continues to be broadly diversified across industries with an asset mix, which provide strong security for our shareholders' capital.
Michael <unk>: As seen on slide 18, LTM operating leverage ended the quarter at one 6% our operating leverage of one 6% continues to compare favorably to the BDC industry average of approximately two 8%.
Josh: In addition to industry diversification, our average exposure per company is less than 1% of assets, which gives us great comfort in the overall risk profile of our portfolio.
Josh: Our investment committee members utilize our cumulative experience is navigating through various economic cycles to continually assess risk both on a company by company basis as well as on the overall portfolio.
Michael <unk>: We believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders.
Michael <unk>: <unk> 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 grow and manage the best in class ADC.
Josh: In the current environment that includes being in close contact with our sponsors and portfolio companies to proactively assess any anticipated effects of recent and future policies on tariffs and immigration.
Michael <unk>: Turning to slide 19, the company's NAV per share at the end of the quarter was flat at $16 59 per share the.
Josh: I will now I will now hand, the call over to Michael to review the specifics of our financial performance for the quarter.
The primary drivers of the NAV per share bridge for the quarter or accretion from the issuance of common stock at a premium to NAV per share offset by the net realized and unrealized depreciation on our investment portfolio.
Michael: Thanks, Josh.
Michael: Civic to our performance for the quarter as summarized on slide 17 pre tax net investment income was $37 million or <unk> 64 per share as compared to $30 million or <unk> 64 per share in the prior quarter.
Michael <unk>: Turning to slide 20, we are pleased to report that our balance sheet liquidity is robust with approximately $412 million in cash and undrawn leveraged commitments on our two credit facilities, which altogether represented two one times the $193 million of unfunded commitments, we had across our portfolio as at the end of the quarter.
Michael: For the quarter total investment income increased to $52 million from $48 7 million in the prior quarter.
Michael: The increase was driven primarily by a $3 $2 million increase in fees and other income compared to the prior quarter.
Michael <unk>: As Bowen mentioned earlier in the December quarter, we issued $230 million in aggregate principal of $5, 125% convertible notes due 2029 with an initial conversion price of $25 per share.
Michael: As at the end of the quarter our loans on non accrual represented two 7% of our investment portfolio at fair value.
Michael: On the weighted average yield in the portfolio on all investments was 12, 1%.
Michael <unk>: These net proceeds were used to redeem in full the $140 million in January 2026 bonds as well as pay down our revolving credit facility.
During the quarter, we paid out a <unk> 58 per share regular dividend and a <unk> <unk> per share supplemental dividend.
Michael: As mentioned earlier, our board has declared a regular dividend of <unk> 58 per share while also increasing the supplemental dividend to <unk> <unk> per share for the March quarter.
Michael <unk>: At the end of the December quarter, 48% of our capital structural liabilities or an unsecured covenant free bonds with our earliest debt maturity in October 2026.
Michael: Management and the board has spent significant time contemplate the impact of a lower interest rate environment on future earnings. We have consistently maintained that of setting our regular dividend at a level that we believe will never be cut in any foreseeable interest rate environment is key to generate stable attractive shareholder returns over the long term.
Michael <unk>: A bit deeper into the convertible bond issuance. We believe there has been some confusion in the market regarding the issuance, which I would like to address.
Michael <unk>: We did not incur any make whole premium and the takeout of the January 2026 bonds.
Michael <unk>: We have always stressed the importance of balance sheet flexibility and staying well ahead of our debt maturities using this convertible issuance to redeem our January 2026 bonds as well as to pay down our credit facility.
We continued our strong track record of regular dividend coverage was 115% coverage for the 12 months ended December 31, 2024, and 111% cumulative coverage since the launch of our credit strategy.
Michael <unk>: Further dry powder to continue to originate attractive investment opportunities in all market environments.
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 68 per share and the expectation that we will harvest gains over time from our existing 96 per share and unrealized appreciation on the equity portfolio.
Moreover, based on today's five year treasury rate the rate on the variable note was approximately 200 basis points cheaper than the current market for traditional unsecured bonds, resulting in significant interest expense savings, which flow directly to pre tax NII. Additionally.
Michael: As Bowen mentioned earlier, we have two equity investments and sale processes, both expected to close within the next two weeks. These realized gains all else equal should increase our UTI balance by a further 10 to 15 per share as of the end of the March quarter.
Michael <unk>: Additionally, the convertible notes have a flex settlement mechanism.
Michael <unk>: This means that to the extent our stock trade significantly above the conversion price and certain holders of the notes elect to convert capital southwest would have the option to redeem the notes in cash shares or any combination thereof. This gives us the ability to actively manage balance sheet leverage the impact of any dilution and the.
Michael: As seen on slide 18, LTM operating leverage ended the quarter at one 6%.
Michael: Our operating leverage of one 6% continues to compare favorably to the BDC industry average of approximately two 8%.
Michael <unk>: In this instance to issue equity at <unk> share prices, which would be significantly above net asset value and thus be highly accretive to our shareholders.
Michael: We believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The <unk>.
Michael <unk>: Turning to our <unk> program in early 2024, we submitted a Mac application to the SBA, which began the process towards a second FDIC license.
Michael: Eternally managed model has and will continue to reduce fixed cost leverage while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage the best in class ADC.
Michael <unk>: In December 2024 received a green light letter from the SBA, allowing us to submit our final application, which we completed in January 2025, we expect to receive final approval for <unk> for SK ICT imminently.
Michael: Turning to slide 19, the company's NAV per share at the end of the quarter was flat at $16 59 per share the.
Michael <unk>: Our regulatory leverage regulatory leverage as seen on slide 21 ended the quarter at a debt to equity ratio of <unk> nine to one up from <unk> eight to one as of the prior quarter.
Michael: The primary drivers of the NAV per share bridge for the quarter were accretion from the issuance of common stock at a premium to NAV per share offset by the net realized and unrealized depreciation on our investment portfolio.
Michael <unk>: While our optimal target leverage continues to be an eight to <unk> 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.
Michael: Turning to slide 20, we are pleased to report that our balance sheet liquidity is robust with approximately $412 million in cash and undrawn leverage commitments on our two credit facilities, which altogether represented two one times to $193 million of unfunded commitments, we had across our portfolio as of the end of the quarter.
Michael <unk>: 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: As Bowen mentioned earlier in the December quarter, we issued $230 million in aggregate principal of five 5% convertible notes due 2029 with an initial conversion price of $25 per share.
Bowen: I will now hand, the call back to Bowen for some final comments.
Speaker Change: Thank you Michael and thank you Josh.
Bowen: And again, thank you everyone for joining us today.
Michael: These net proceeds were used to redeem in full the $140 million January 2026 bonds as well as pay down our revolving credit facility.
Bowen: As always we appreciate the opportunity to provide you with an update on our business our portfolio and the market environment.
Michael: As of the end of the December quarter, 48% of our capital structure liabilities or an unsecured covenant free bonds with our earliest debt maturity in October 2026.
Bowen: Our company and portfolio continue to perform well and we are pleased with the company's robust asset base deal origination and portfolio management capability as well as flexible capital structure.
Michael: Selling a bit deeper into the convertible bond issuance. We believe there has been some confusion in the market regarding the issuance, which I would like to address.
Bowen: The overall health and security of our portfolio is strong.
Bowen: Our credit portfolio is predominantly made up of first lien senior secured loans allocated across a broader array of companies and industries.
Michael: First we did not incur any make whole premium and the takeout of the January 2026 bonds.
Bowen: Weighted average exposure per company under 1%.
Michael: Second we have always stressed the importance of balance sheet flexibility and staying well ahead of our debt matures used.
Bowen: The vast majority of our portfolio is backed by private equity firms.
Michael: Using this convertible issuance to redeem our January 2026 bonds as well as to pay down our credit facility.
Bowen: Interest coverage of the debt obligations across our portfolio with a solid three five times.
Michael: Further dry powder to continue to originate attractive investment opportunities.
Bowen: With strong equity value cushion and support below our debt investments.
Michael: All market environments.
Bowen: Additionally, our equity co investment portfolio gives our shareholders participation in the equity upside of many of these growing lower middle market businesses, providing further enhancement to our long term shareholder returns.
Michael: Moreover, based on todays five year treasury rate the rate on the variable note was approximately 200 basis points cheaper than the current market for traditional unsecured bonds, resulting in significant interest expense savings, which flow directly to pre tax NII additions.
Bowen: Last but not least we have a very well capitalized balance sheet with multiple capital sources and significant balance sheet liquidity.
Michael: Additionally, the convertible notes have a flex settlement mechanism.
Michael: This means that to the extent our stock trade significantly above the conversion price and certain holders of the notes elect to convert capital southwest would have the option to redeem the notes in cash shares or any combination thereof. This gives us the ability to actively manage balance sheet leverage the impact of any dilution and the.
Bowen: All of which provides our company an exciting runway to continue to grow and generate strong shareholder returns.
Bowen: This concludes our prepared remarks, operator, we are ready to open the lines up for Q&A.
Bowen: Thank you Sir.
Speaker Change: As a reminder to ask a question you will need to press star one on your telephone.
Michael: Unity in this instance to issue equity at sheer share prices, which would be significantly above net asset value and thus be highly accretive to our shareholders.
Bowen: Your question. Please press star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: And I show. Our first question comes from the line of Mickey <unk> from Ladenburg. Please go ahead.
Michael: Turning to our <unk> program in early 2024, we submitted a Mac application to the SBA, which began the process towards the second FDIC life.
Mickey: Yes, good morning, everyone.
Speaker Change: Colin you mentioned that follow on investments.
Michael: In December 2024 received a green light letter from the SBA, allowing us to submit our final application, which we completed in January 2025, we expect to receive final approval for <unk> for <unk> two ml.
Speaker Change: We are an important part of your investment activity this quarter, but could you also give us some.
Speaker Change: Insight into the trends Youre seeing in terms of new investment M&A activity in your market.
Michael: Our regulatory leverage regulatory leverage as seen on slide 21 ended the quarter at a debt to equity ratio of <unk> nine to one up from <unk> eight to one as of the prior quarter.
Speaker Change: Wondering that the elections behind us now and maybe there is a little bit more certainty in the direction of interest rates.
Speaker Change: Yes, so obviously, the M&A market and our market was active in the fourth quarter, we've seen that activity.
Michael: While our optimal target leverage continues to be an eight to <unk> 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.
Speaker Change: <unk>.
Speaker Change: <unk> continues in the first quarter.
Speaker Change: Generally speaking.
Speaker Change: As we referenced we are seeing some visibility on some exits in our portfolio for the calendar 'twenty five.
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.
Speaker Change: Immediate ones and then we take some future one so the M&A market as we've all heard in the industry people talk about.
Speaker Change: Hoping that had increases in 2025, I think we're seeing some early signs of that actually might be the case as we look forward Hello, Josh anything to add to that.
Bowen: I will now hand, the call back to Bowen for some final comments.
Bowen: Thank you Michael and thank you Josh.
Josh Weinstein: Yes, I mean, I think you've covered most of it but I think we've obviously worked really hard over the last 10 years or so.
Bowen: 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.
Josh Weinstein: Create and cultivate relationships and that normal market and we feel like we're while it remains competitive.
Bowen: Our company and portfolio continue to perform well and we are pleased with the company's robust asset base deal origination and portfolio management capability as well as flexible capital structure.
Josh Weinstein: <unk> two <unk>.
Josh Weinstein: And be well positioned to.
Josh Weinstein: To participate in M&A activity in 2025.
Josh Weinstein: We did.
Josh Weinstein: $20 million of funded or I should say committed investments and the 12 31 quarter.
Bowen: The overall health and security of our portfolio is strong.
Josh Weinstein: And that had I think we had 11 new platform companies and 20 something add ons for.
Bowen: Our credit portfolio is predominantly made up of first lien senior secured loans allocated across a broader array of companies and industries.
Josh Weinstein: For this current quarter. We are also seeing the continuation of that seeing a lot of granularity in the deals we are seeing in the expectation that we're able to put on additional platform companies. So that's definitely something.
Bowen: Weighted average exposure per company under 1%.
Bowen: The vast majority of our portfolio is backed by private equity firms.
Josh Weinstein: We do expect our baseline originations in the near term to be higher than that.
Bowen: Interest coverage on the debt obligations across our portfolio was a solid three five times.
Josh Weinstein: Yes.
Bowen: With strong equity value cushion and support below our debt investments.
Josh Weinstein: Even though this tends to be a seasonally slower quarter Mike.
Josh Weinstein: Yes, no this quarter for certain I think.
Bowen: Additionally, our equity co investment portfolio gives our shareholders participation in the equity upside of many of these growing lower middle market businesses, providing further enhancement to our long term shareholder returns.
Josh Weinstein: We would tell you our normal quarter, I, probably would be somewhere between maybe 125 and 150.
Josh Weinstein: But I would also say to Josh as point, we've added on a lot of sponsors I mean, we've seen a lot of traction in the market. So we would expect our number to be something closer to $150 million to $200 million in originations for this coming quarter.
Bowen: Last but not least we have a very well capitalized balance sheet with multiple capital sources and significant balance sheet liquidity.
Bowen: All of which provides our company an exciting runway to continue to grow and generate strong shareholder returns.
Josh Weinstein: No.
Josh Weinstein: We had a number of deals that we're targeting closing by the end of the fourth quarter that leaked into the first quarter that I think will help mitigate some of that seasonality this year.
Bowen: This concludes our prepared remarks, operator, we are ready to open the lines up for Q&A.
Josh Weinstein: I understand you also had really low repayment activity.
Speaker Change: Thank you Sir.
Speaker Change: To what extent did call protection keep prepayments low and how much refinancing risk do you see in the portfolio given all the pressure there is on spreads.
Speaker Change: As a reminder to ask a question you will need to press star one on your telephone.
Speaker Change: Your question. Please press star one again.
Speaker Change: Please standby, while we compile the Q&A roster.
Speaker Change: Looking ahead I would tell you that we have had we've had calls.
Speaker Change: And I show. Our first question comes from the line of Mickey <unk> from Ladenburg. Please go ahead.
Speaker Change: I think we do expect to see some level of prepayments into the future to your point on our call protection. We had one repayment of size in the previous quarter that had call protection where regenerated.
Mickey: Yes, good morning, everyone.
Speaker Change: Colin you mentioned that follow on investments.
Speaker Change: We are an important part of your investment activity this quarter, but could you also give us some <unk>.
Speaker Change: Approximately $600000 in fees.
Speaker Change: Insight into the trends Youre seeing in terms of new investment M&A activity in your market.
Speaker Change: But some of the deals we're looking at are probably 'twenty two 'twenty three where you have some of that call protection or winding down or maybe it's only 1% and they are willing to pay that and get out of the credit.
Speaker Change: Wondering that the elections behind us now and maybe theres, a little bit more certainty in the direction of interest rates.
Speaker Change: So I think rule of thumb for us I mean, we're expecting probably maybe to see 10.
Speaker Change: Yes, I mean, so obviously the M&A market and our market was active in the fourth quarter, we've seen that activity.
Speaker Change: 10% to 15% of the portfolio.
Speaker Change: In the 2020 calendar year.
Speaker Change: <unk>.
Speaker Change: Based on the <unk> created over the years, we usually get to call before there is a repricing, where we have the opportunity to lower our president and CEO of <unk>.
Speaker Change: Continues in the first quarter.
Speaker Change: Generally speaking.
Speaker Change: As we referenced we're seeing some visibility on some exits in our portfolio for the calendar 'twenty five.
Speaker Change: Obviously.
Speaker Change: A situation by situation basis to see what we want to want to stay in the deal at lower pricing.
Speaker Change: Immediate ones and then we take some future one so the M&A market as we've all heard in the industry people talk about it.
Speaker Change: We would expect we would expect some pressure just given.
Speaker Change: Hoping that had increases in 2025, I think we're seeing some early signs of that actually might be the case and we look forward Hello, Josh anything to add to that.
Speaker Change: Potential competitive factors, but but we feel like you're pretty well positioned to continue to stay in the deal is not going to reprice down.
Josh: Yes, I mean, I think you've covered most of it but I think we've obviously worked really hard over the last 10 years or so.
Speaker Change: Also went out and I would add Mickey that as we as we referenced the UTI increase and the potential exits. This year those are obviously well performing companies, but oftentimes they also have debt.
Josh: Create and cultivate relationships and that normal market and we feel like we're while it remained competitive.
Two.
Speaker Change: If we haven't already been recapped out so I think I think it's probably fair to expect that a meaningful portion of our prepayments will be driven by M&A activity, which is not really a function of prepayment penalties that private equity firms selling the business because it's time to sell the business not because of the prepayment. So yes, no I understand that's helpful.
Josh: To be well positioned to.
Josh: Parts of our spin that M&A activity in 2025.
Josh: We did.
Josh: $20 million of funded or I should say committed investments and the 12 31 quarter.
I think we had 11 new platform companies and 20 something add ons.
Speaker Change: Last question, then I'll get back in the queue.
Josh: So this current quarter. We are also seeing the continuation of that seeing a lot of granularity in the deals we are seeing in the expectation that we're able to put on additional platform company.
Speaker Change: Investments in sectors like food and consumer machinery, how do you see tariffs, which I know are a moving target, but we seem to be moving in the direction of tariffs how do you see those tariffs impacting these companies or.
Josh: Definitely something.
Josh: We do expect our baseline originations in the near term to be higher than the previous.
Speaker Change: The portfolio in general.
Josh: Even though this tends to be a seasonally slower quarter Mike.
Speaker Change: Yes, I mean, you mentioned and we have 102125 portfolio companies liquidity, we're going to have some exposure based on our preliminary analysis to the cycle around 10% of our portfolio could see some impact and that being said we are first lien senior secured lenders. So we think that positioning in the capital structural will mute the impact to our portfolio.
Mike: Yes, no this quarter for certain I think.
Mike: We would tell you our normal quarter I, probably would be somewhere between maybe 120 550.
Mike: But I would also say to Josh as point, we've added on a lot of sponsors I mean, we've seen a lot of traction in the market. So I would expect our number to be something closer to $150 million to $200 million in originations for this coming quarter.
Speaker Change: And obviously were inferred.
Speaker Change: Information in real time, and we're continuing to monitor it.
Mike: No.
Mike: We had a number of deals that we're targeting closing by the end of the fourth quarter.
Speaker Change: As it comes through it but.
Speaker Change: The diverse portfolio with the first lien position feels like we're in good position.
Mike: That deep into the first quarter that I think will help mitigate some of that seasonality this year.
Mike: I understand you also had really low repayment activity.
Speaker Change: To mitigate that risk the other point I'd make too is during the 2020.
Speaker Change: To what extent did call protection keep prepayments slow and how much refinancing risk do you see in the portfolio given all the pressure there is on spreads.
Speaker Change: 2016 Trump administration, they did increased tariffs as well then.
Speaker Change: Particularly with China, and so we saw that impact with some of our portfolio companies and honestly they were still able to thrive under the environment.
Mike: Yes.
Mike: Uh huh.
Mike: Looking ahead I would tell you that we have had we've had calls I mean, I think we do expect to see some level of prepayments into the future to your point on our call protection. We had one repayment of size in the previous quarter that had call protection where regenerated.
Speaker Change: Yes, obviously, it's a moving target as you said Mickey.
Speaker Change: We'll have to see where those go going on a cohort basis.
Speaker Change: But I think just point is a good one we're also in the boardroom during investment committee meetings, we're certainly discussing the impacts make certain any deals we're looking at on a prospective basis.
Mike: Approximately $600000 in fees.
Speaker Change: Taking into that into account on a downside scenario I mean, it's all happening kind of real time, obviously as we all know the goalposts are moving around but theres a lot of communication gathering as we referenced Josh referenced from our sponsors of our portfolio companies, but like.
Mike: But some of the deals we're looking at are probably 'twenty two 'twenty three where you have some of that call protection or winding down or maybe it's only 1% and they are willing to pay that and get out of the credit.
Mike: So I think rule of thumb for us I mean, we're expecting probably maybe 10.
Speaker Change: Josh referenced that was kind of our initial take over the weekend.
Mike: 10% to 15% of the portfolio.
Speaker Change: Understand I have some more questions, but ill get back in the queue and let some other folks.
Mike: And the 2025.
Mike: Calendar year.
Speaker Change: Take the microphone.
If you have created over the years, we usually get to call before there is a repricing, where we have the opportunity to lower our president and CEO.
Speaker Change: Thanks Becky.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Doug Harter from UBS. Please go ahead.
Mike: We obviously.
Mike: A situation by situation basis.
Doug Harter: Thanks, I was hoping to get a little bit more on the SPN SBA license.
Mike: See if we wanted to understand the deal at lower pricing.
Mike: We would expect we would expect some pressure just given.
Doug Harter: And I guess, how do you think about how long it might take to fill that up and what type of funding cost do you anticipate that being.
<unk> competitive factors.
Speaker Change: But we feel like you're pretty well positioned to continue to stay in the deals and that can reprice out I also went out and I would add Mickey that as we as we referenced the UTI increase and the potential exits. This year those are obviously well performing companies, but oftentimes they also have debt.
Doug Harter: Yes.
Doug Harter: I think well first of all I'll start by saying look we were expecting that license to come in any day now however, what's going on with the government right now.
Doug Harter: We understand that there is sort of a free for the next week or two or actually we don't really have a good timing on it.
Speaker Change: If we haven't already been recapped out so I think I think it's probably fair to expect that a meaningful portion of our prepayments will be driven by M&A activity, which is not really a function of prepayment penalties and ultimately private equity firms selling the business at this time to sell the business not because of the prepayment. So yes, no I understand that's helpful.
I'll come back to us, let's just assume that we do see that license in the next few weeks.
Doug Harter: We'd expect to be able to ramp that fairly quickly in the majority of our deals when we break it down 80 plus percent of our deals are lower middle market that fit the FDIC perfectly.
Speaker Change: Last question, then I'll get back in the queue.
Speaker Change: You have investments in sectors like food and consumer machinery.
Doug Harter: So.
Doug Harter: Our previous license we got in April of 2021, and we took US 253 years to fill it up I assume the same cadence maybe slightly quicker just because humana sponsors we wanted the deals we're doing.
Speaker Change: How do you see tariffs, which I know are a moving target, but we seem to be moving in the direction of tariffs.
Speaker Change: Do you see those tariffs impacting these companies who are or the portfolio in general.
Doug Harter: In terms of an expectation on pricing.
Doug Harter: I would expect somewhere and this is a big range, but I would imagine it would be borrowing somewhere between four and 5%.
Speaker Change: Yes, I mean, you mentioned and we have 120 125 portfolio companies liquidity, we're going to have some exposure.
Doug Harter: If you compare that obviously to our credit facility or what the bond market is.
Speaker Change: Our preliminary analysis to looks like around 10% of our portfolio could see some impact.
Doug Harter: Exceptional I mean, it's certainly not the 2% or 1% that you saw.
Speaker Change: Now that being said we are first lien senior secured lenders. So we think that's existing in the capital structural will mute the impact to our portfolio and obviously we're.
Doug Harter: Years ago, but it's still net accretive to our shareholders.
Speaker Change: Great and I appreciate the details you gave around the convert just wondering how you think about kind of the the option cost of the convert when you're kind of factoring that into may.
Speaker Change: Information in real time, and we're continuing to monitor it.
Speaker Change: As it comes through it but.
Speaker Change: The diverse portfolio first lien position feels like we're exporting goods issue.
Speaker Change: Maybe any sort of short term impact it has on kind of the trading of the stock when.
Speaker Change: To mitigate that risk.
Speaker Change: I think to us during the 2020.
Speaker Change: 2016 Trump administration, they did increased tariffs as well then.
Speaker Change: Into the calculus of.
Speaker Change: The decision to do convert forms of capital.
Speaker Change: Particularly with China, and so we saw that impact with some of our portfolio companies.
Speaker Change: I mean, I think if you look at the convertible over the long term well what we see.
Speaker Change: Honestly, they were still able to thrive under the environment.
Speaker Change: <unk> first of all it's very unlikely most bond traders are going to actually convert from into equity or <unk> situation actually just put it to us and give us the option for a cash or shares.
Speaker Change: Yes, obviously, it's a moving target as you said Mickey.
Speaker Change: We'll have to see where those go going on a cohort basis.
Speaker Change: But I think Josh Point's a good one we're also in the boardroom during investment committee meetings, we're certainly discussing the impacts make certain any deals. We're looking at on a prospective basis, we're taking into that into account on a downside scenario I mean, it's all happening kind of real time, obviously, we all know the goalposts are moving around but there is a lot of communication gathering is zero.
Speaker Change: So we're looking at if it's $25 on the conversion price.
Speaker Change: We're trading at $22 50 or $23. The expectation is there is first of all there's a lot of cushion between now and then.
Speaker Change: The convertible holders would have to see significant accretion above the $25 before they would actually call and ask for the conversion and at that point, they're taking the risk that we're going to just redeem their bonds and they lose any option value. So from our perspective, it seems to be a low risk.
Speaker Change: Josh referenced from our sponsors of our portfolio companies, but.
Speaker Change: Josh referenced that was kind of our initial take over the weekend.
Speaker Change: Understand I have some more questions, but ill get back in the queue and let some other folks.
Speaker Change: Microphone <unk>.
Becky: Thanks Becky.
Speaker Change: And when we compare that.
Speaker Change: Thank you.
Speaker Change: 12 months ago six months ago. So what we saw in the market which is.
Speaker Change: And I show. Our next question comes from the line of Doug Harter from UBS. Please go ahead.
Speaker Change: A lot of uncertainty with the change of administration.
Speaker Change: Thanks.
Speaker Change: Whatever's going on in the macro economy, it's kind of played itself out where if you look at the risk premium in five year treasuries.
Speaker Change: Hoping to get a little bit more on the SPN SBA license.
Speaker Change: And I guess, how do you think about how long it might take to fill it up and what type of funding cost do you anticipate that that'd be great.
Speaker Change: Where to go to market today, it looks like something in the seven 5% to 8% range.
Speaker Change: Even through a baby bond and maybe it's slightly better for an institutional bonds.
Speaker Change: You look that you compare it to a $5 eight.
Speaker Change: I think well first of all I'll start by saying look we were expecting that license to come in any day now however, what's going on with the government right now.
Speaker Change: Knowing all along that so far over the last.
Speaker Change: Nine months has come in over 100 basis points. This felt like this was from an accretion perspective, we're giving our shareholders a reduction in interest expense therefore, an increase in their dividend.
Speaker Change: We understand that there's sort of a free for the next week or two.
Speaker Change: Two or actually you don't really have a good timing on it but what I come back to US, let's just assume that we do see that license in the next few weeks.
Speaker Change: And if the risk is in two years or three years, we see some additional dilution.
Speaker Change: Added 26, or $727 share price, which is accretive to shareholders and therefore, we think that they are winning along the way and when if and when a conversion takes place.
Speaker Change: We would expect to be able to ramp that fairly quickly in the majority of our deals and when we break it down 80 plus percent of our deals are lower middle market.
Speaker Change: The FDIC perfectly.
Speaker Change: So.
Speaker Change: I think our previous license we got in April of 2021, and we took US 253 years to fill it up I assume the same cadence maybe slightly quicker just because the amount of sponsors we wanted the deals we're doing.
Speaker Change: Thank you great I appreciate it.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Erik Zwick from Lucid capital markets. Please go ahead.
Speaker Change: Thank you and good morning, everyone.
Speaker Change: In terms of an expectation on pricing.
Erik Zwick: Wanted to start with you mentioned, we've been hearing from others as well, it's just that the competition in the market is certainly driving some spread compression I'm wondering if you could quantify that a little bit if you take a look at the pipeline today and what the average spread is how that compares to maybe six months six months ago.
Speaker Change: I would expect somewhere and this is a big range, but I would imagine it would be borrowing seven between four and 5%.
Speaker Change: If you prepare that obviously too on our credit facility or what the bond market is.
Speaker Change: That's exceptional I mean, it's certainly not the 2% or 1% that you saw.
Speaker Change: Five years ago, but it's still net accretive to our shareholders.
Speaker Change: I mean, I would say the market.
Speaker Change: Yes.
Speaker Change: Great and I appreciate the details you gave around the convert just wondering how you think about kind of the.
Speaker Change: From our perspective, the market moved about nine months ago, and it probably we've probably flex if you have 100 basis points.
Speaker Change: But generally pretty pretty flat this quarter to last quarter. It was nine months ago nine months ago.
Speaker Change: The option cost of the convert when you're kind of factoring that into it maybe.
Speaker Change: Maybe any sort of short term impact it has on kind of the trading of the stock when.
Speaker Change: And then kind of more of the same.
Speaker Change: Yes.
Speaker Change: Thanks for the color there and maybe just.
Speaker Change: Into the calculus of.
Speaker Change: The decision to do convert forms of capital.
Speaker Change: Is the competition spreading into structure at all as you go out and potentially compete with others in the market are you seeing some pending there and if so how are you dealing with that.
Speaker Change: I mean, I think if you look at the convertible over the long term well what we see.
Speaker Change: <unk>. This is first of all it's very unlikely most bond traders are going to actually convert.
Speaker Change: We have not seen as much pressure on the structure loan to values still remain pretty consistent from where they've been the last year or two.
Speaker Change: Into equity or in Orissa commit situation actually just put it to us and give us the option for a cash or shares.
Speaker Change: It's mostly been focused on the pricing.
Speaker Change: That's good to hear.
Speaker Change: So we're looking at it if it's $25 on the conversion price.
Speaker Change: And if I just switch gears, a little bit could you provide an update on the.
We're trading at 22, 50 or $23. The expectation is there is first of all there is a lot of cushion between now and then.
Speaker Change: The relationships that are currently on non accrual have there been any changes over the past three months in terms of anything maybe getting closer to a resolution or any company's improving performance that could potentially move them off non accrual in the next quarter or two.
Speaker Change: The convertible holders would have to see significant accretion above the $25 before they would actually call and ask for the conversion and at that point, they're taking the risk that we are going to just redeem their bonds may lose any option value.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: We are on non accrual one of our non accruals.
Speaker Change: So from our perspective, it seems to be a low risk.
Speaker Change: Restructure in the December quarter.
Speaker Change: And when we compare that.
Speaker Change: One of the other non accruals is now restructured and this quarter that's within non accrual as of the end of December So, let's now restructure.
Speaker Change: <unk> months ago, six months ago to what we saw it in the market which is.
Speaker Change: A lot of uncertainty with the change of administration.
Speaker Change: The non accrual group.
Speaker Change: Whatever's going on in the macro economy.
Speaker Change: Majority of the depreciation this quarter.
Speaker Change: Laid itself out where if you look at the risk premium in five year treasuries. If we were to go to market today with it looks like something in the seven 5% to 8% range.
Speaker Change: Depreciation is not not okay with us it's very frustrating at the same time, though that the main.
Speaker Change: Main depreciation is coming from companies that arent in NII.
Speaker Change: Even through a baby bond and maybe it's slightly better for an institutional bonds.
Speaker Change: So it's more of an effect on us as opposed to.
Speaker Change: Look that you compare it to a $5 eight knowing all along so far over the last.
Speaker Change: But that's hopefully helpful general color on what's happening.
Speaker Change: Nine months has come in over 100 basis points.
Speaker Change: And for those that did restructure or are they currently have they moved back to accrual in India.
Speaker Change: <unk> felt like just from an accretion perspective, we're giving our shareholders a reduction in interest expense therefore, an increase in their dividend.
Speaker Change: Equity positions or how did those play out.
Speaker Change: And if the risk is in two or three years, we see some additional dilution.
Speaker Change: So we restructured into varying levels of debt and the remainder of the debt and equity. So we have the ability as a company recovers to.
Speaker Change: At a 26 or $7 $27 share price, which is accretive to shareholders and therefore, we think that they are winning along the way and when if and when a conversion takes place.
Recoup our niv.
Speaker Change: Great. Thank you.
Speaker Change: Answer to say that's all for me.
Greg: Thank you Greg I appreciate it.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Robert Dodd from Raymond James. Please go ahead.
Speaker Change: And I show. Our next question comes from the line of Erik Zwick from Lucid capital markets. Please go ahead.
Robert Dodd: Good morning, Congrats on the quarter on a couple of questions.
Erik Zwick: Thank you and good morning, everyone.
Erik Zwick: Wanted to start with you mentioned, we've been hearing from others as well, it's just that the competition in the market is certainly driving some spread compression I'm wondering if you could quantify that a little bit if you take a look at the whats in the pipeline today and what the average spread is how that compares to maybe six months six months ago.
Speaker Change: Very very busy I mean somewhere around I think 30 30 deals between once the new platform this quarter.
No.
Speaker Change: How do you feel about it but my handful by the staffing levels with expanding the number of sponsors you're working with.
Speaker Change: The number of Adam.
Erik Zwick: I mean, I would say the market.
Speaker Change: Incredibly active.
Erik Zwick: From our perspective, the market moved about nine months ago, and it probably probably.
Speaker Change: And is.
Speaker Change: Is this kind of thing.
Speaker Change: <unk>.
Erik Zwick: Problem with flex, if you're a 100 basis points.
Speaker Change: As a sufficient level to keep going on.
Erik Zwick: But generally pretty pretty flat this quarter to last quarter like it was nine months ago six nine months ago, that's kind of been.
Speaker Change: That kind of pace in Q1.
Speaker Change: The active as well so I mean.
Speaker Change: Can you give us any color about that needs.
Speaker Change: Needs that need more increasingly that and put that in the short term.
Erik Zwick: Kind of more of the site.
Speaker Change: Thanks for the color there and maybe just.
Speaker Change: Yes.
Speaker Change: The expense ratio.
Speaker Change: Is the competition spreading into structure at all as you go out and potentially compete with others in the market are you seeing some pending there and if so how are you dealing with that.
Speaker Change: Yes, I'll just make a comment generally I mean, we feel like where we were.
Speaker Change: That's a good question and we're constantly thinking about that staffing is super important and we wanted to one of the reasons, we didnt mentioned that our deal flow has been up.
Speaker Change: We have not seen as much pressure on the structure loan to values still remain pretty consistent from where they've been the last year or two.
A factor I mean, it's all the things we've talked about but it's also.
Speaker Change: And our net across the country are extended as Josh has done a great job training upfront as folks with new people in the market over the last couple of years and gaining traction.
Speaker Change: It's mostly been focused on the pricing.
Speaker Change: That's good to hear.
Speaker Change: And if I just switch gears, a little bit could you provide an update on the the relationships that are currently on non accrual have there been any changes over the past three months in terms of anything maybe getting closer to a resolution or any company's improving performance potentially move them off non accrual in the next quarter or two.
Speaker Change: As a resulted in a wider net in the market.
Speaker Change: But I would say in Josh Michael can comment I don't know that were way off base, but it's something that we definitely we definitely are constantly looking at ways, we would probably expand it will be.
Speaker Change: Yes, I mean, I would tell you just on it.
Speaker Change: Yes.
Speaker Change: On a run rate basis, we typically add let's say on the deal side three professionals minimum a year that usually on the junior side and then I would say probably every other year, we'll add a somewhat the senior associate or.
Speaker Change: We are on non accrual one of our non accruals.
Speaker Change: Restructure in the December quarter.
Speaker Change: One of the other non accruals is now restructured and this quarter that's within non accrual as of the end of September So it's now restructure.
Speaker Change: The non accrual group.
Speaker Change: Or VP level on.
Speaker Change: On the deal not only accounting back office side, we probably also add around 1% to two people based on volume as well.
Speaker Change: Vast majority of the depreciation this quarter.
Speaker Change: Depreciation is not not okay with us it's very frustrating at the same time, though.
Speaker Change: So I don't think that this is there is a point, where we say it.
Speaker Change: Maine.
Depreciation is coming from companies that aren't in NII.
Speaker Change: Volume has caught up to a place where we can accommodate it I think that we're continually assessing as Bowen said, but we continually add to it.
Speaker Change: So it's more of an effect on us as opposed to.
Speaker Change: Earnings.
Speaker Change: But that's hopefully helpful general color on what's happening.
Speaker Change: If you look back when we started this adventure we had six or eight employees and now we have I think 36 employees today.
Speaker Change: And for those that did restructure or are they currently have they moved back to accrual in India.
Speaker Change: So the answer to your question is I think the asset base might be growing slightly quicker.
Speaker Change: Equity positions or how did those play out.
Speaker Change: Quicker than the employee base, which is why our operating leverages going down, but it's not because we are either a not hiring people or b not paying our people because.
Speaker Change: Yes, so it will be restructured into varying levels of debt and the remainder of the debt and equity. So we have the ability of the company recovers to.
Speaker Change: So as we also make it a point to promote from within which has worked wonderfully honestly over the last decade, which has allowed us to be able to add the people at the local levels and be trained up by the people that have been through the system and understand our underwriting process, yes, Michael touched on I mean, it's not all it's part of it is activity as you referenced Robert but it's all.
Speaker Change: Recoup or NID.
Speaker Change: Great. Thank you for all that.
Speaker Change: Answer to say that's all for me.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Robert Dodd from Raymond James. Please go ahead.
Speaker Change: Good morning, Congrats on the quarter on a couple of questions.
Speaker Change: Also just constantly looking at the size of the portfolio and specifically the number of portfolio companies.
Speaker Change: Very very busy somewhere around I think 30 30 deals between once the new platform this quarter.
Speaker Change: Josh his team and we think about who's who is monitoring those companies and managing those loans do we have enough people and Michael on the back office side as he referenced.
Speaker Change: Hum.
Speaker Change: How do you feel about it but my handful about staffing levels with expanding the number of sponsors you're working with.
Speaker Change: Infrastructure to manage that portfolio of 125 companies, which is grow some get prepaid some some new ones come on.
Speaker Change: The number of items.
Speaker Change: Incredibly active.
Speaker Change: That's how we're looking at looking at that.
Speaker Change: And.
Speaker Change: Is this kind of thing.
Speaker Change: Got it. Thank you I appreciate that color.
Speaker Change: <unk>.
Speaker Change: As a sufficient level to keep going on.
Speaker Change: And I'm wondering if.
Speaker Change: You mentioned, obviously carrots and immigration.
Speaker Change: That kind of pace it sounds like Q1.
Speaker Change: What percentage of your portfolio has.
Speaker Change: Pretty active as well so I mean can.
Speaker Change: Exposure is kind of federal contractors, because it looks like.
Speaker Change: Can you give us any color about that needs that need more increases is that when you put that in the short term.
Speaker Change: Efforts there to cut some.
Speaker Change: Impact the expense ratio.
Speaker Change: Some payments how sticky those cut song is a wildcard.
Speaker Change: Yes, I'll just make a comment generally I mean, we feel like where we sit.
Speaker Change: Do you have any significant or any portfolio companies with any material exposure to.
Speaker Change: That's a good question and we're constantly thinking about that I mean staffing and super important when we one of the one of the reasons, we Didnt mentioned that our deal flow has been up.
Speaker Change: More federal contracting and government contracts in general.
Speaker Change: Yes, so I'm sitting here on the slide thinking about that looking at my colleagues here.
Speaker Change: A factor I mean with all the things we've talked about but it's also.
Imagine or the 125 companies that can come up in my head.
Speaker Change: And our net across the country has expanded as Josh has done a great job training up somebody spoke.
Speaker Change: Three of them to definitely have.
Speaker Change: Who do business with federal with contract with the federal.
Speaker Change: With new people in the market over the last couple of years and then gaining traction.
Speaker Change: I guess government.
Speaker Change: As a resulted in a wider net in the market.
Speaker Change: The other one.
Speaker Change: Indirectly so most of those are a subcontractor.
Speaker Change: But I would say in Josh Michael can comment I don't know that were way off base, but it's something that we definitely we definitely are costs. We're looking at we would probably.
Speaker Change: We're actually not federal government workers so.
Speaker Change: I think that's a good point, it's probably it's very small and even within those three I'm not sure. If it's going to have a directed Mohammad if I'm at the C level thinking about the portfolio at risk to the company I think that that is not the first thing we are worried but it's a good question, but what you should have.
Speaker Change: And as we grow.
Speaker Change: I would tell you just on it.
Speaker Change: On a run rate basis, we typically add let's say on the deal side three professionals minimum a year that usually on the junior side and then I would say probably every other year, we'll add a somewhat.
Speaker Change: Got it. Thank you one last one if I can I mean, obviously spillovers built back up 68 sounds like Thats going to go up again.
Speaker Change: Senior associate or.
Speaker Change: In Q2.
Speaker Change: Or VP level on.
Speaker Change: On the deal not only accounting back office side, we probably also add around 1% to two people to based on volume as well.
Speaker Change: And in the March quarter.
Speaker Change: Uh huh.
Speaker Change: In the past.
Speaker Change: You did run that and then you distribute it.
Speaker Change: So I don't think that this is there is a point where we say.
Speaker Change: It's like maybe 2021.
Speaker Change: Volume has caught up to a place where we can accommodate it I think that we're continually assessing as Bowen said, but we continually add to it.
Speaker Change: But.
Speaker Change: To keep the absolute level of spill over down and reduce.
Speaker Change: If you look back I think.
Speaker Change: Excise tax et cetera.
Speaker Change: Starting with adventure, we had six or eight employees and now we have I think 36 employees today.
Speaker Change: Have you changed your mind and now you're going to you're going to build it back up police that.
Speaker Change: Some level, where you'd want to distribute that again to keep the spill at local level now.
Speaker Change: So the answer to your question is I think the asset base might be growing slightly.
Speaker Change: Quicker than the employee base, which is why our operating leverages going down, but it's not because we are either a not hiring people or b not paying our people because.
Speaker Change: Yes, the existence the convert now change any dynamics that the competency extra dividends yes.
Speaker Change: Don't really want to say there was a change I think if you go back to the first program. We put in place we had an extremely large gain that we couldnt even hold all of it.
Speaker Change: Of course, we also make it a point to promote from within which has worked wonderfully honestly over the last decade, which has allowed us to be able to add the people at the local levels and be trained up by the people that have been through the system and understand our underwriting process, yes, Michael touched on I mean, it's not all it's part of it is activity as you referenced but it's all.
Speaker Change: Reckoned BDC restrictions.
So we distributed what we had to upfront and then we paid over time and when we no longer thought we had the pathway to continue the program, we decided to distribute back to shareholders. So that was sort of the natural natural evolution I would tell you now we're at 68, we see ourselves climbing into the 80 range by.
Speaker Change: Also just constantly looking at the size of the portfolio and specifically the number of portfolio companies.
Speaker Change: And as Josh his team and we think about who is who is <unk>.
Speaker Change: <unk> those companies and managing those loans do we have enough people and Michael on the back office side as he referenced I mean, how do we have the infrastructure to manage that portfolio of 125 companies, which grows some get prepaid some some new ones come on.
Speaker Change: Next quarter.
Speaker Change: And we do anticipate distributing probably a little more than our run rate today walking walks through it we've gone down to five six week, we anticipating walking that up slowly.
Speaker Change: That's how we're looking at looking at that.
Speaker Change: And then I think the point that we've all made today that there is there's a pathway to some sizable gains towards the end of the year.
Speaker Change: Got it. Thank you I appreciate that color.
Speaker Change: And I'm wondering if you can.
And if that was the case, we'd be back in sort of the same territory, where we have significant UTI bucket.
Speaker Change: You mentioned, obviously carrots immigration to me what percentage of your portfolio has.
Speaker Change: We would intend to increase the supplemental and continue to pay our shareholders on a quarterly basis.
Speaker Change: Our exposure is kind of federal contractors, because it looks like.
Speaker Change: Efforts there.
Speaker Change: That would be a larger percentage of the total distributions. So that's sort of the plan going forward.
Speaker Change: Some.
Speaker Change: Some payments how sticky those cut some of it is the wildcard.
Speaker Change: Thank you for that.
Speaker Change: Do you have any significant or any portfolio companies with any material exposure to more federal contracting and government contracts in general.
Speaker Change: That's it for me.
Speaker Change: Thanks, a lot.
Speaker Change: You.
Speaker Change: And I show. Our next question comes from the line of Mickey Schlein from Ladenburg. Please go ahead.
Speaker Change: Yes, so I'm sitting here on the slide thinking about that looking at my colleagues here.
Mickey Schlein: Yes, it's a follow up I wanted to get a sense of what drove the increase and increase in fee income this quarter.
Speaker Change: Imagine or the 125 companies that can come up in my head.
Speaker Change: Three of them to definitely have.
Speaker Change: Sure.
Speaker Change: Who do business with federal with contract with the federal.
Speaker Change: So theres a number of things on it first we had mentioned earlier, we had a prepayment penalty for approximately 600000.
Speaker Change: I guess government.
Speaker Change: The other one.
Speaker Change: Indirectly so most of those are a subcontractor.
Speaker Change: We also had.
Speaker Change: Recall the bonds that we raised we so we brought that $230 million in.
Speaker Change: Really not federal government workers so.
Speaker Change: I think that's a good point, it's probably it's very small and even within those three I'm not sure. If it's going to have a directly but if I'm at the C level thinking about the portfolio at risk.
Speaker Change: Most of that was used to pay down our redeem the 2026 bonds, but there was a 30 day redemption period. So we essentially held cash on the balance sheet.
Speaker Change: I think that that is not the first thing we are worried but it's a good question because what you should have.
Speaker Change: 30 days, which came out to about $1 two and in income. So thats one eight between those and then on top of that there was some.
Speaker Change: Got it. Thank you one last one if I can I mean, obviously spillovers built back up 68 sounds like that's going to go up again.
Speaker Change: Few member amendment fees waiver fees and some a range of fees as well on some directly led deals.
Speaker Change: In Q2 alone.
Speaker Change: Okay.
Speaker Change: And then in the March quarter.
Speaker Change: My other another follow up is what will be the main drivers of the realized realized loss this quarter.
Speaker Change: In the past.
Speaker Change: You did run that and then you distribute it.
Speaker Change: The realized loss was a restructured deal.
Speaker Change: It's like maybe 2021.
Speaker Change: Okay that was <unk> I think it was $12 $7 million. So most of that was just to be clear was in depreciation was reversed and a portion of that was new depreciation that was taken during the quarter.
Speaker Change: But.
Speaker Change: To keep the absolute level of spillover down would you.
Speaker Change: Excise taxes.
Speaker Change: Have you have you changed your mind and now you're going to you're going to build it back up or is there some level, where you'd want to distribute that again to keep the spillover level now.
Speaker Change: Understand.
Speaker Change: So you had this diversion in.
Speaker Change: Portfolio Company performance, which was a nice increase in companies performing above expectations, but you also had some below expectations are there.
Speaker Change: Yes, the existence the convert now change any dynamics that the competency extra dividends, yes, no I don't really want to say there was a change I think if you go back to the first program. We put in place we had an extremely large gain that we couldnt even hold all of it.
Speaker Change: Can you help us understand what are the trends that drove that movement.
Speaker Change: So as I look down the list here I mean, it's.
Speaker Change: Reckon BDC restriction.
Speaker Change: The idiosyncratic honestly.
Speaker Change: So we distributed what we had to upfront and then we paid over time and when we no longer thought we had the pathway to continue the program, we decided to distribute back to shareholders. So that was sort of the natural natural evolution.
Speaker Change: Grades and downgrades, there's one that's in the shipping space, where spot rates have moved in to the company's detriment to that was that was a negative to that.
Speaker Change: Another company is a.
Speaker Change: A little bit weather related.
Probably cover some based on that.
Speaker Change: Now we're at 68, we see ourselves climbing into the 80 range by next quarter.
Speaker Change: <unk> of recent.
Speaker Change: And then the other the other downgrade was just one of our non accruals.
Speaker Change: And we do anticipate distributing probably a little more than our run rate today walking walks through it we've gone down to five <unk>.
Speaker Change: This will.
Speaker Change: Yes.
Speaker Change: Trouble.
Speaker Change: Okay.
Speaker Change: And lastly.
Michael gave us guidance on regulatory leverage targets could you also give us a.
Speaker Change: We anticipating walking that up slowly.
Speaker Change: And then I think the point that we've all made today that there is there's a pathway to some sizable gains towards the end of the year.
Speaker Change: An idea of where youre expecting your economic leverage or total leverage.
Speaker Change: What is your target in the current market environment.
Speaker Change: And if that was the case, we'd be back in sort of the same territory, where we have significant UTI bucket.
Speaker Change: So I think we've been between one <unk> and $1 one.
Speaker Change: We would intend to increase the supplemental and continue to pay our shareholders on a quarterly basis.
Speaker Change: For economic leverage and we've been on a regulatory basis within between really eight nine or even lower I would tell you. We're at nine on regulatory we'll start there and we would tell you we're going to keep an eye on what's going on obviously in the Macroeconomy.
Speaker Change: That wouldn't be a larger percentage of the total distributions. So that's sort of the plan going forward.
Speaker Change: Thank you for that.
Speaker Change: That's it for me.
Speaker Change: Thanks, a lot.
Speaker Change: Political scene, just determined whether there is more or less risk.
Speaker Change: Thank you.
Speaker Change: And I show. Our next question comes from the line of Mickey Schlein from Ladenburg. Please go ahead.
Speaker Change: But we feel comfortable right now that the <unk> leverage that we have right now and the one point OA, that's about a decent place to be.
Speaker Change: You have to follow up I wanted to get a sense of what drove the increase and increase in fee income this quarter.
Speaker Change: And yes, we're looking down the road, we would tell you as we look back.
Speaker Change: Sure.
Speaker Change: So theres a number of things on it first we had mentioned earlier, we had a prepayment penalty for approximately 600000.
Speaker Change: We did the convertible bond offering we're seeing all of things that are happening in the world that was one reason why we took risk off the table by bringing these bond incident on our balance sheet earlier.
Speaker Change: We also had.
Speaker Change: Recall the bonds that we raised we so we brought that $230 million in.
Speaker Change: And then we can make decisions.
Speaker Change: In terms of leverage going forward. So we feel like we're in a really good place, especially.
Speaker Change: Most of that was used to pay down our redeem the 2026 bonds, but there was a 30 day redemption period. So we essentially held cash on the balance sheet.
Speaker Change: Especially with trades significantly below book and so we are active in the ATM market.
Speaker Change: To manage that metric going forward.
Speaker Change: 30 days, which came out to about a million two in income. So thats one eight between those and then on top of that there was some a few members amendment fees waiver fees and some a range of fees as well on some directly led deals.
Speaker Change: Okay, and just to make sure I understand the income on idle count your cash some of that's accruing into fee income as opposed to other income.
Speaker Change: No I think the lineup Youre looking it says fee and other income.
Speaker Change: Okay and.
Speaker Change: Other income because it's not portfolio interest income that's actually money market income interestingly it falls into other and I would probably tell you I wouldn't anticipate seeing that happen ever again.
Speaker Change: My other another follow up is what will be the main drivers of the realized realized loss this quarter.
Speaker Change: Realized loss was a restructured deal.
Speaker Change: This is a one off.
Speaker Change: Okay.
Speaker Change: <unk> I think it was $12 $7 million. So most of that was just to be clear was in depreciation was reversed and a portion of that was new depreciation that was taken during the quarter.
Speaker Change: So it's a yes.
Speaker Change: That's why it fits into the other rather than interest income.
Speaker Change: Hey.
Speaker Change: Those are all my follow ups I appreciate your time, thanks, so much.
Speaker Change: Thank you.
Speaker Change: Understand.
Speaker Change: Thank you.
Speaker Change: So you had this diversion in.
Bowen Diehl: And I show no further questions in the queue at this time I would like to turn the call back to Bowen Diehl for closing remarks.
Speaker Change: Portfolio company performance with a nice increase.
Speaker Change: And companies performing above expectations, but you also had some below expectations.
Bowen Diehl: Thank you operator, thank you everybody for joining us we appreciate it I appreciate your time and look forward to giving you further updates in the future have a great rest of the week.
Speaker Change: So.
Speaker Change: Can you help us understand what are the trends that drove that movement.
Speaker Change: Thank you. This concludes today's conference call. Thank you for participating you may all disconnect.
Speaker Change: So as I look down the list here I mean, it's.
Speaker Change: The bit idiosyncratic honestly.
Speaker Change: Grades and downgrades Theres, one thats in the shipping space, where spot rates have moved in to the company's detriment to that was that was a negative to that.
Speaker Change: Another companies.
Speaker Change: A little bit weather related.
Speaker Change: Probably cover some based on the risk.
Speaker Change: Snow of recent.
Speaker Change: And then the other the other downgrade was just one of our non accruals.
Speaker Change: This.
Speaker Change: Yes.
Speaker Change: Trouble.
Speaker Change: Okay.
Speaker Change: And lastly, I think Michael gave us guidance on regulatory leverage targets could you also give us.
Speaker Change: An idea of where youre expecting your economic leverage total leverage.
Speaker Change: What is your target in the current market environment.
Speaker Change: Sure. So I think we've been between one point and 1.1.
Speaker Change: For economic leverage and we've been on a regulatory basis, we havent between really eight nine or even lower I would tell you. We're at 0.9 on regulatory we'll start there and we would tell you we're going to keep an eye on what's going on obviously in the macro economy geopolitical scene.
Speaker Change: Determined whether there's more or less risk.
Speaker Change: But we feel comfortable right now that the <unk> nine leverage that we have right now and the one point OA, that's about a decent place to be.
Speaker Change: Thank you.
Speaker Change: We're looking down the road, we would tell you as we look back.
Speaker Change: Get the convertible bond offering.
Speaker Change: All of things that are happening in the world that was one reason why we took risk off the table by.
Speaker Change: These bonds incident on our balance sheet earlier.
Speaker Change: And then we can make decisions.
Speaker Change: In terms of leverage going forward. So we feel like we're in a really good place.
Speaker Change: Especially with trade significantly above book and so we are active in the ATM market.
Speaker Change: To manage that metric going forward.
Speaker Change: Okay, and just to make sure I understand the income on idle count your cash some of that is accruing into fee income as opposed to other income.
Speaker Change: I think the lineup and Youre looking at said fee and other income and other income because it's not portfolio interest income that's actually money market income interest income.
Speaker Change: And the other and I would probably tell you, but I wouldn't anticipate seeing that happen ever again right. This is a one off.
Speaker Change: So it's.
Speaker Change: That's why it fits into the other rather than interest income.
Speaker Change: Okay.
Speaker Change: Those are all my follow ups I appreciate your time, thanks, so much.
Speaker Change: Thanks Nicky.
Speaker Change: Thank you.
Operator: And I show no further questions in the queue at this time I would like to turn the call back to Bowen Diehl for closing remarks. Thank.
Speaker Change: Thank you operator, and thanks, everybody for joining us we appreciate it I appreciate your time and look forward to giving you further updates in the future have a great rest of the week.
Speaker Change: Thank you. This concludes today's conference call. Thank you for participating you may all disconnect.
[music].
Speaker Change: Yes.
Speaker Change: [music].