Q1 2026 Capital Southwest Corp Earnings Call

Speaker #2: Thank you for joining today's Capital Southwest first quarter fiscal year 2026 earnings call. Participating on today's call are Michael Sarner, Chief Executive Officer; Chris Rehberger, Chief Financial Officer; Josh Weinstein, Chief Investment Officer; and Amy Baker.

Speaker #2: Executive Vice President and Accounting, I'll now turn the call over to Amy Baker.

Speaker #3: Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information, and management's expectations, assumptions, and beliefs.

Speaker #3: They are not guarantees of future results and are subject to numerous risks, uncertainties, and assumptions that could cause actual results to differ materially from such statements.

Speaker #3: For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances, or any other reason after the date of this press release, except as required by law.

Speaker #3: I will now hand the call over to our President and Chief Executive Officer, Michael Sarner.

Speaker #4: Thanks, Amy. And thank you, everyone, for joining us for our first quarter fiscal year 2026 earnings call. We are pleased to be with you today to discuss our first fiscal quarter.

Speaker #4: The June quarter was another productive quarter for the company. As we continue to strengthen both sides of our balance sheet, during the quarter, we reduced the investment portfolio weighted average debt to EBITDA from 3.5 times to 3.4 times.

Speaker #4: The investment revenue pick rate decreased from 7.6% to 5.8%, and our non-accrual rate decreased from 1.7% to 0.8% of the investment portfolio at fair value. These metrics, coupled with corporate leverage of 0.82 times and a weighted average yield on debt investments of 11.8%, provide shareholders with an attractive risk-return profile to support both our regular and supplemental dividends looking forward to the future.

Speaker #4: During the first fiscal quarter, we generated pretax net investment income of $61.00 per share. Additionally, as a result of harvesting $27.2 million in realized gains from two equity investment exits during the quarter, we were able to increase our undistributed taxable income balance to $1.00 per share.

Speaker #4: From $79.00 per share at the end of the prior quarter. Furthermore, as previously announced, we have transitioned our regular dividend payment frequency from quarterly to monthly.

Speaker #4: We believe that transitioning to a monthly regular dividend is a shareholder-friendly initiative that will benefit all stakeholders of Capital Southwest. Our Board of Directors has declared a total of $58.00 in regular dividends for the quarter, payable monthly in each of July, August, and September 2025.

Speaker #4: And it is also declared a quarterly supplemental dividend of $6.00 per share, bringing total dividends declared for the September quarter to $64.00 per share.

Speaker #4: On the capitalization front, we received final approval from the SBA for our second SBIC license during the quarter, which allows us to access up to $175 million in additional SBA ventures over time.

Speaker #4: Additionally, we increased our existing ING-led corporate credit facility by $25 million to bring total commitments to $510 million. Finally, we raised $42 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $20.50 per share, or 123% of the prevailing NAV per share.

Speaker #4: We are pleased with the progress we have made on the capitalization front and will continue to take measures to further improve our balance sheet as we look ahead.

Speaker #4: From an originations perspective, we took a conservative approach to underwriting this quarter due to the noise and uncertainty related to tariffs and government policies impacting healthcare and government services.

Speaker #4: Despite this noise, deal flow in the lower middle market remained solid this quarter, with $115 million in total new commitments to three new portfolio companies and 12 existing portfolio companies.

Speaker #4: Incidents continue to be an important source of originations for us, as approximately 55% of the total capital commitments during the quarter were follow-on offerings in performing portfolio companies.

Speaker #4: Over the last 12 months, add-ons of the percentage of total new commitments have been 38%. So, clearly, a strong source of origination volume in deals we know well and have experience with the management team and sponsor.

Speaker #4: Looking ahead, we have seen a distinct pickup in the volume and quality of deals in the past six weeks. As such, we are anticipating significant activity in terms of new platform company originations, as well as add-on activity in the existing portfolio.

Speaker #4: Finally, from a BDC perspective, there's been some long-awaited progress on the AFFB rule, or Affiliated Fund Fees and Expenses. On June 23, 2025, there was a unanimous House passage of the Access to Small Business Investor Capital Act, which corrects the misleading SEC disclosure requirement that overstates the actual costs of investment in BDCs.

Speaker #4: The bill will exempt funds that invest in BDCs from including the acquired fund fees and expenses calculation in the prospectus fee table, providing more accurate information for investors.

Speaker #4: If BDCs are exempt from the AFFB rule, it could significantly increase trading volumes in the sector, especially through mutual funds and ETFs. If you recall, the onset of this rule in 2014 precipitated the Russell and S&P to remove BDCs from their indices.

Speaker #4: So, we believe the impact of this corrective legislation could be meaningful. I will now hand the call over to Josh to review more specifics about our investment activity and the market environment.

Speaker #5: Thanks, Michael. This quarter, we deployed a total of $51 million of new committed capital, including $50 million in first-lien senior secured debt and $1 million of equity across three new portfolio companies.

Speaker #5: In addition, we closed add-on financings for 12 existing portfolio companies consisting of $64 million in first-line senior secured debt and $1 million in equity.

Speaker #5: Our on-balance sheet credit portfolio ended the quarter at $1.6 billion, representing year-over-year growth of 21% from $1.3 billion as of June 2024. For the current quarter, 100% of the new portfolio company debt originations are first-line senior secured, and as of the end of the quarter, 99% of the credit portfolio was first-line senior secured, with a weighted average exposure per company of only 0.9%.

Speaker #5: We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet.

Speaker #5: The vast majority of our portfolio and deal activity is in first-lien senior secured loans to companies backed by private equity firms. Currently, approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies, as well as the potential for junior capital support if needed.

Speaker #5: In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies, per pursuit with the private equity firm, when we believe the equity thesis is compelling.

Speaker #5: As of the end of the quarter, our equity co-investment portfolio consisted of 80 investments with a total fair value of $166 million, representing 9% of our total portfolio at fair value.

Speaker #5: Our equity portfolio was marked at 125% of our cost, representing $33.2 million in embedded unrealized appreciation, or $0.60 per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle-market businesses, often resulting from the institutionalization of the businesses by experienced private equity firms, as well as the significant value accretion potential from strategic add-on acquisitions.

Speaker #5: Equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation, as well as equity distributions to Capital Southwest over time.

Speaker #5: This is playing out in real time. As of this quarter, we harvested two sizable equity exits, which generated $27.2 million in realized gains. Over the past two quarters, our equity portfolio has produced $41.3 million in total realized gains.

Speaker #5: As noted earlier, these realized gains grow our UTI balance and thus support both regular and supplemental dividends going forward. Consistent with previous quarters, 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 #5: While this has resulted in tight loan pricing for high-quality opportunities that are not exposed to the macroeconomic uncertainty, 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 #5: As a point of reference, currently, there are 80 unique private equity firms represented across our investment portfolio. Additionally, in the last 12 months, we closed 13 new platforms with financial sponsors with which we had not previously closed a deal, demonstrating our continued penetration in the market.

Speaker #5: Since the launch of our credit strategy, we have completed transactions with over 119 different private equity firms across the country, including over 20% with which we have completed multiple transactions.

Speaker #5: Our portfolio currently consists of 122 different companies, weighted 89.6% to first-line senior secured debt, 1% to second-line senior secured debt, and 9.3% to equity co-investments.

Speaker #5: The credit portfolio had a weighted average yield of 11.8% and a weighted average leverage through our security of 3.4 times EBITDA. We continue to be pleased with the operating performance across our loan portfolio.

Speaker #5: We have recently changed our loan grade structure from a four-point scale to a five-point scale. We have made this change in order to provide additional transparency for our shareholders.

Speaker #5: All of our loans, upon origination, are initially assigned an investment rating of 2 on a five-point scale, with 1 being the highest and 5 being the lowest rating.

Speaker #5: Overall, the portfolio remains healthy, with approximately 92% of the portfolio at fair value, rated in one of the top two categories: a 1 or a 2.

Speaker #5: Cash flow coverage of debt service obligations across the portfolio remains robust at 3.5 times, with our loans across the portfolio averaging approximately 42% of portfolio company enterprise value.

Speaker #5: We believe these performance metrics are indicative of a well-performing and conservatively structured portfolio. Our portfolio continues to be broadly diversified across industries, and our average exposure per company is less than 1% of investment assets, which gives us great comfort in the overall risk profile of our portfolio.

Speaker #5: For the deals we are currently underwriting, they continue to have tight covenant packages, loan-to-value levels ranging from 35% to 50%, resulting in a significant equity capital cushion below our debt, and reasonable leverage levels of two and a half times to four times debt to EBITDA.

Speaker #5: As Michael mentioned earlier, we believe our balance sheet is well-positioned with low leverage and significant liquidity, which should allow us to be opportunistic should the market become less competitive, resulting in more attractive risk-return profile deals.

Speaker #5: I will now hand the call over to Chris to review the specifics of our financial performance for the quarter.

Speaker #4: Thanks, Josh. Specific to our performance for the quarter, pretax net investment income was $32.7 million, or $61.00 per share. For the quarter, total investment income increased to $55.9 million from $52.4 million in the prior quarter.

Speaker #4: The increase was driven by a $5.2 million increase in cash interest and dividend income, offset by a decrease of $900,000 in fees and a decrease of $700,000 in PIC income compared to the prior quarter.

Speaker #4: Importantly, PIC is a percentage of our total investment revenue, decreased to 5.8% compared to 7.6% in the prior quarter. Additionally, as of the end of the quarter, our loans on non-accrual represented 0.8% of our investment portfolio at fair value, a decrease from 1.7% as of the end of the prior quarter.

Speaker #4: During the quarter, we paid out a $58.00 per share regular dividend and a $6.00 per share supplemental dividend. As mentioned earlier, we have transitioned the frequency of our regular dividend payment to monthly, with our board declaring a total of $58.00 per share in regular dividends for the quarter.

Speaker #4: Payable monthly in July, August, and September 2025, while also maintaining the quarterly supplemental dividend at $6.00 per share, bringing total dividends to $64.00 per share for the September 2025 quarter.

Speaker #4: We continued our strong track record of regular dividend coverage, with 106% coverage for the 12 months ended June 30, 2025, and 110% cumulative coverage since the launch of our credit strategy.

Speaker #4: We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of $1.00 per share and the expectation that we will continue to harvest gains over time from our sizable unrealized appreciation balance on the equity portfolio.

Speaker #4: LCM operating leverage ended the quarter at 1.7%. Looking ahead, we anticipate our run-rate operating leverage to be in the 1.4% to 1.5% range by the end of our fiscal year.

Speaker #4: Our operating leverage is significantly better than the BDC industry average of approximately 2.7%. We believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders.

Speaker #4: The internally managed model has, and will continue to produce real fixed-cost leverage, while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage a best-in-class BDC.

Speaker #4: The company's NAV per share at the end of the quarter was $16.59 per share, a decrease from $16.70 per share in the prior quarter.

Speaker #4: The primary driver of the NAV per share decline was the annual issuance of restricted stock compensation to employees during the quarter. We are pleased to report that our balance sheet liquidity is robust, with approximately $444 million in cash and undrawn leverage commitments on our two credit facilities, which represents two times the $223 million of unfunded commitments we had across our portfolio as of the end of the quarter.

Speaker #4: During the June quarter, we increased our corporate credit facility by $25 million, bringing total commitments on the facility to $510 million. Additionally, as of the end of the June quarter, 48% of our capital structure liabilities were in unsecured, covenant-free bonds, with our earliest debt maturity in October 2026.

Speaker #4: As previously mentioned, during the June quarter, we received final approval from the SBA for our second SBIC license. This license allows us to access up to $175 million in additional SBA debentures over time, which is a cost-effective way to finance our lower middle market investment strategy.

Speaker #4: Our regulatory leverage ended the quarter at a debt-to-equity ratio of 0.82 to 1, down from 0.89 to 1 as of the prior quarter. While our optimal target leverage continues to be in the 0.80 to 0.95 range, we are weighing the impacts of the macroeconomic landscape and intend to maintain a regulatory leverage cushion that will mitigate capital markets volatility.

Speaker #4: 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 construction with adequate covenant cushions.

Speaker #4: I will now hand the call back to Michael for some final comments. Thank you, Chris, Josh, and Amy, and all the employees who helped us tell this story on a quarterly basis.

Speaker #4: And thank you, everyone, for joining us today. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

Speaker #6: Thank you. If you have a question, you need to press star 11 on your telephone and wait for me to be announced. To address your question, please press star 11 again.

Speaker #6: Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Doug Harder from UBS.

Speaker #6: Your line is open.

Speaker #7: Thanks. Can you just talk a little bit more about the competitive landscape right now and kind of how you see that sort of playing out over the coming quarters?

Speaker #5: Yeah. I mean, there's a bit of a supply-demand dynamic here. If you think about the supply, private equity sponsors have turned their attention away from consumer discretionary businesses a little bit, as well as companies with international supply chains.

Speaker #5: So there's been a little bit of a scarcity of quality assets out there. There has been a pullback in the supply a little bit. And then on the demand side, you have banks and non-bank lenders continuing to be aggressive in incentivizing the deployment of capital.

Speaker #5: So we've seen spread compression over the last six months or so. While we have seen that spread compression, the structures, which is something we focus on heavily, on loan-to-values, leverage, quality credit agreements, those kinds of things have stayed as we've stayed prudent on structuring.

Speaker #5: So, we've been able to continue to deploy capital and leverage the relationships to continue finding opportunities. So yes, it's continued to be competitive; it always has been competitive.

Speaker #5: But we've been able to compete candidly, and so we've got a lot of good traction in this upcoming quarter as well.

Speaker #4: Yeah. I mean, our overall weighted average spread two years ago was 8.50%. Currently, it's 7.50%. The deals that we saw in this previous quarter were around 7% over.

Speaker #4: And the deals that we're looking at in a very robust September quarter are around $7 million, a little north of $7 million as well. So, to Josh's point, even though things are compressed, we are still able to find our marks.

Speaker #7: Got it. I am, I guess how do you think about is whether there is actually a floor on that around do you think that's going to be able to hold 7 if kind of the supply-demand imbalance kind of continues?

Speaker #7: Just how do you think about kind of a floor on spreads?

Speaker #5: It feels like it is settled to some degree. What we've seen is that lower middle market credits that are extremely tight have been as low as 5.25%, which is 125 to 150 basis points tighter than what we're used to.

Speaker #5: But there still are plenty of deals that are somewhere between 5.25 and 7.50 to 8. We have a pretty wide group of sponsors that we work with.

Speaker #5: We're also willing to be originating deals on the smaller side, so $3 to $6 million EBITDA companies that are probably garnering closer to 6.50 or over.

Speaker #5: So again, still being able to find our marks. And I do think that as the spread comes down, history would tell us that the spreads will probably widen out.

Speaker #5: And so we might be at that kind of at the trough right now.

Speaker #7: Great. I appreciate that answer. Thank you.

Speaker #6: Thank you. One moment for our next question. Our next question will come from the line of Mickey Schleen from Clear Street. The line is open.

Speaker #8: Yes. Good afternoon, everyone. Michael, we received sort of mixed signals on the M&A market. Most folks are claiming it's still pretty muted relative to where it was a couple of years ago.

Speaker #8: But you're pretty optimistic, it sounds like, on your third calendar quarter. And the fourth calendar quarter tends to be the busiest. So, I'm assuming the second half looks pretty good.

Speaker #8: What's underpinning that optimism in a market that seems to be sort of trudging along?

Speaker #4: So I would say some of the deals that were in the June quarter bled over into the September quarter. I mean, I can tell you right now, we've closed $110 million of originations through this morning.

Speaker #4: And we have another $40 million in deals that are signed up, and that would be pending close later this month. So we already know we're probably at $150 million.

Speaker #4: And then there's number of deals that were in the mix for. So I think where we live in the lower middle market, we've en plenty of deal activity.

Speaker #4: And I think Josh's chime in as well. It feels like quality deals.

Speaker #5: Yeah. I think when I talk to other lower middle-market lenders, they are very surprised at how full our pipeline is. I really do think that speaks to the efforts we have put forth in the last three, four, and five years in cultivating private equity relationships.

Speaker #5: To put us in a position to see all their deal flow, and or the majority of their deal flow. I do think that that's paying dividends now.

Speaker #5: And we'll continue to in the future.

Speaker #7: And on the flip side, do you have any insight into prepayment or repayment activity in the third and fourth quarters?

Speaker #4: So, we just saw we had over $80 million of repayments in this quarter, so it was obviously a heavy quarter. We do have a few companies that we know are going to market.

Speaker #4: There were some larger holds, so that's probably closer than the December quarter. Aside from that, I mean, I don't think we have a beat on the September quarter.

Speaker #4: We really don't have much of anything in the pipeline at this point.

Speaker #7: Well, that's good news. My last question relates to your operating leverage. I looked at the page in the presentation, and it looks like it's sort of bottomed out at 1.7%.

Speaker #7: Is that where we can expect it to stay? Or do you think there's some more leverage there that can be extracted as you continue to grow?

Speaker #4: Yeah, this is definitely coming down. So the metric for the quarter based on actual for the LTM was 1.7. The run rate was 1.6 trending down to 1.5.

Speaker #4: And we would tell you we sometimes accrue additional bonuses during the year. Before our final decision at the end of the year, where the board makes the decision on the bonus.

Speaker #4: So maybe we have an over-accrual. But we would tell you the run rate, when it all settles for this year, should be between $1.4 million and $1.5 million.

Speaker #4: And we still think there'll be room to continue to reduce that over time. While we're, and I would say this as well, is that while still reducing, we are increasing our staff and paying our people. We think that there's obviously this internally managed structure has a lot of benefits from that perspective.

Speaker #4: And we expect that to continue to be a strong point for us, especially with rates coming back in. That's going to be a big differentiator for our business model relative to, certainly, the externals.

Speaker #4: As rates come in.

Speaker #7: Yeah, I agree with that. And I just want to make sure I understood what you said: 1.4 to 1.5 run rate in the fourth calendar quarter?

Speaker #7: So, that's the fourth quarter annualized rate?

Speaker #4: So, for the March 31 quarter, the LTM number we believe will be $1.4 or $1.5. And Mickey, just to give you a sense for the current quarter, for the 630 quarter, the quarterized was 1.5%.

Speaker #4: So, we're just if the LTM has some overhang from some of the one-time expenses incurred in the prior quarter. So, we're already running sort of at 1.5, which we expect to continue to come down on an LTM basis, as Michael described.

Speaker #7: Okay. And in terms of leverage, Michael, you've tapped into the ATM, but the balance sheet leverage is not particularly high. Can we expect you to continue to issue common equity at sort of the pace that you've been at?

Speaker #7: Or do you prefer to leverage up the balance sheet a little bit and maybe optimize your returns?

Speaker #4: Yeah. Well, leverage came down this quarter, probably mainly because we had so much in repayments during the quarter, and some of that happened late stage.

Speaker #4: I think that Chris had said in the past, we're raising about $40 to $60 million in a given quarter. And I think that you should expect that each quarter will look like that.

Speaker #4: I think we'd like to be closer to 0.85 leverage. And I could also say that it wouldn't bother me if our portfolio isn't as good a shape as it is today.

Speaker #4: With our debt to EBITDA and our fixed charge covenants, we could maybe move closer to 0.9. So we're certainly at a low point for leverage at the moment.

Speaker #5: Yeah. And part of it, you know we try to be consistent, Mickey, and as Michael said, we're raising. If you look at the last kind of five or six quarters, it's about exactly an average of $40 million a quarter.

Speaker #5: So, we try to be consistently in the market. Some of the deals, as Michael described, were pushed into July, which optically made the June leverage a little bit low.

Speaker #5: I would expect we'll be in the 0.85 to 0.9 range sort of in the September and December quarters. That seems about right.

Speaker #7: And philosophically, most BDCs—or many BDCs—sort of run at more like 1.1. Obviously, you're the lower middle market, and maybe that causes you to be a little bit more conservative.

Speaker #7: But conceptually, you know, why not run the balance sheet with a little bit more leverage than you've been doing recently?

Speaker #4: Yeah. I think the fact of the matter is that we're able to find yield, kind of the way Josh described earlier, and meet or exceed analyst expectations.

Speaker #4: Have operating leverage where it needs to be. We don't really feel the need to reach for additional leverage unnecessarily. All of these metrics can move around over time.

Speaker #4: But generally speaking, we're going to take a more conservative bend, especially as we're a smaller BDC, right? I think we've earned our credibility in the market.

Speaker #4: But we still believe that having a conservative infrastructure and conservative leverage communicates to the market the way we do business here. We think that's probably going to help our price to book in the end.

Speaker #7: Got it. I understand. That's it for me this afternoon. Thanks for taking my questions.

Speaker #6: Thank you. One moment for our next question. Our next question will come from the line of Robert Dodd from Raymond James. Your line is open.

Speaker #9: Hi, guys. If I can go back to kind of the competitive environment for a moment. And to our point, with the leverage you're doing 2.5 to 4, I mean, banks can kind of play in that market and keep those loans on the balance sheet.

Speaker #9: You mentioned, obviously, that it can be attractive to them. Where would you know that the banks tend to be boom and bust, though, whether they're actually targeting in market?

Speaker #9: So, where would you say the competitive pressure from banks is right now in terms of how it flows through a cycle? I mean, are they being pretty pushy right now?

Speaker #9: And is that one of the factors driving down the spreads? Or are they more moderately placed as to where you'd view their level of aggression, if I can put it that way?

Speaker #5: Yeah, you're spot on. They're boom or bust. And right now, they're boom. They're risk-on. From what I'm seeing, they're competing with us because you're right.

Speaker #5: The leverage profiles that we generally are seeing banks can be can be competitive there. We have other ways to compete with banks. But you ow candidly, you ow it's tough for sponsors to turn down 150 or 200 basis points lower pricing when they have the opportunity to do it.

Speaker #5: So right now, banks are being competitive. It definitely is one of the factors driving the lower spreads. But you're right; they will be risk-off at some point.

Speaker #5: It's pretty tough for me to predict when that'll be. But they will be, and that might be a factor for spreads to widen out a little bit.

Speaker #9: Got it. Got it. Thank you. Yeah. And then one of the other advantages of being an internally managed BDC is, as we see from some of your internally managed peers, you can run an asset manager.

Speaker #9: And you've talked about that. And that feeds from the asset manager accrued to shareholders' benefit rather than some external managers' benefit. You've talked about that before.

Speaker #9: Are there any updates on efforts in in in that on that front about adding an asset manager kind vehicle within the BDC to to to benefit ROE, lower you ow your effective efficiency ratio, you know et cetera?

Speaker #9: Any updates there?

Speaker #5: Yeah, so yes, we're continuing to pursue those types of options. We're probably also looking at a strategic initiative to maybe enhance earnings and origination capabilities on some of the larger deals, which you know I don't want to formally state now.

Speaker #5: But certainly, it would help capture additional yield while winning deals within our same bailiwick. So, lower middle markets feel that maybe between $8 million and $15 million, which we typically have to share those companies out with no economics.

Speaker #5: Finding ways to structure those assets with other partners to basically maintain the assets and maybe bring in a scrape and the management team.

Speaker #4: So you might also.

Speaker #9: That's one of the formally articulated ones, but that's formal enough for me. So thank you on that one. And then the last one, because I'm not going to touch AFFB, I don't want to jinx it.

Speaker #9: On to your point on deployments, it seemed like you were saying you likely could be 150-plus in September with moderate repayments. The indication from leverage, maybe not going up that much, the 0.8 to 0.9, would tend to imply that you might be running the ATM at like the high end of the range this quarter, rather than the average, which is more the low end of the range.

Speaker #9: I am, am I doing my math right there?

Speaker #4: Yeah, I think that's right. I think this quarter, you know, if we say 40 to 60 and we've sort of been running at 40, you're probably looking at more like 50.

Speaker #4: But obviously, we'll make that judgment as the knock on wood as some of these deals look like they're going to close. But yeah, it's probably more in the 50 range this quarter.

Speaker #4: That's right.

Speaker #9: Got it. Thank you.

Speaker #6: Thank you. One moment for our next question. Our next question will come from the line of Eric Zwick from Lucid Capital Markets. Your line is open.

Speaker #10: Good afternoon, everyone. And just curious that you ioned the strong pace of origination so far, this quarter. I'm curious if you could maybe provide a little color in terms of the breakout between that from new versus add-on opportunities.

Speaker #10: You know.

Speaker #4: This quarter, it feels like it's fairly robust on the new. So last quarter, it was like what, 65% new versus 35% add-ons. This quarter, yeah, the 930 numbers look like what, 75% new versus 25% add-ons.

Speaker #10: Got it. No, it's an interesting change because I think, as I've looked across here, some of your competitors in the rest of the industry have been fairly heavy on the add-ons recently.

Speaker #10: So a switch back to new would indicate maybe kind of more market activity and a little more confidence there. So interesting to hear that.

Speaker #10: Thanks for sharing. And then you know, I think it was Chris speaking about your confidence in maintaining the dividend, both the regular and the supplemental, given the spillover of a dollar, plus the expectation for continued ability to harvest gains from the equity portfolio.

Speaker #10: Within that expectation, does that also include, I guess, the futures curve? Looking at slide 24 in your deck, it would indicate that if the futures curve, silver futures curve, is right, and we do get about 100 basis points of reduction, there would be, you know, maybe a 6 cents or so per quarter headwind to the run rate of NII.

Speaker #10: So, is that incorporated in kind of this dividend comments earlier?

Speaker #4: Yeah. Yeah. I'll answer the question. So I am, when we're looking ahead, we're anticipating, to your point, a 100 basis points drop between, you know, in the next 15 months.

Speaker #4: We've kind of talked about where we expect our spreads to be, you know, 7 plus percent. And receiving some of those operational efficiencies, we believe that we're going to be able to maintain, you know, a 58% NII to cover our regular dividend.

Speaker #4: You know, looking ahead, the biggest risk I see is if the future turns over in the spring of next year and rates, instead of you know, troughing at 3.50%, end up you know, troughing at 1.5%.

Speaker #4: Now that's a different you ow that's a different story altogether. And we'd have to rethink our our regular dividend policy. But short of that, we feel that we'll be able to maintain that balance.

Speaker #4: Plus, you know we're a dollar UTI now. We would anticipate that to grow sizably in the next 6 to 9 months as well, which would be a support for both the supplemental and the regular.

Speaker #4: You know, our viewpoint is that if we're performing well, even in the draconian scenario where we woke up at $0.56 or $0.57, it wouldn't be because of non-accruals.

Speaker #4: It wasn't because of portfolio performance, but rather about macroeconomic issues that we thought we could row out of. We may use our UTI bucket to support that $0.58 regular dividend and not grow it.

Speaker #4: The other thing I would say, Eric, is, you know, Michael sort of touched on the operational efficiencies, which is an advantage, you know, as you look at that slide.

Speaker #4: But compared to the reality of the ROE, with operating leverage coming down, the other thing is we still have the full $175 million of debentures to draw on, which obviously, you know, I can't predict where the 10-year is going to be.

Speaker #4: But right now, we would sort of 5% type fixed paper. So, as we're deploying assets with spreads that you know we are today at 7.75% range, with a 5% sort of fixed debentures being our main source of growth on the liability side, we think that's going to also enhance those NII's that we show on the table.

Speaker #10: Yeah, no, those are all good points. Thank you. That's all I have today.

Speaker #6: Thank you. One moment for our next question. Our next question will come from the line of Sean Paul Adams from B. Riley Securities. Your line is open.

Speaker #11: Hey, guys. Good afternoon. On non-accruals, it seemed that the non-accruals decreased quarter over quarter. Though, on the investment rating schedule, it seemed that it was pretty much flat with a risk rating of 5 at $3.8 million fair value.

Speaker #11: Generally, there was a general improvement in the risk rating. So, there was a slight convergence towards the 2 to 3 mark. Was there a specific reason for some of that change?

Speaker #11: And where are we at with the remaining non-accrual runoff?

Speaker #10: Sure. So this quarter, we had...

Speaker #4: Zips. Oh, sorry. It came back on accrual, which was a large position. I think that was around $25 million. And then we had a small second-lean piece, which I think was like $3 million.

Speaker #4: That actually went on non-accrual. So, net, you know, we picked up $22 million, although the numbers stayed flat. What was your second question? I apologize, Sean.

Speaker #9: Correct. The migration towards the 2 from the top rating of 1—was there any general degradation in the top credit quality portfolio? And was there any idiosyncratic or just thematic trends toward that?

Speaker #4: I don't think so. I mean, I think there might have been a credit where typically when a company ends up looking towards an exit, it may be upgraded to a 1.

Speaker #4: And it might be that the sale didn’t go forward, and it's moved back to a 2. But it was performing in either case. That might be what you're referring to.

Speaker #9: Got it. That's perfect. Thank you for the color.

Speaker #4: Sure.

Speaker #6: Thank you. I’m not showing any further questions in the queue. I would now like to turn it over to Michael Sarner, President and CEO, for closing remarks.

Speaker #4: Well, I appreciate everybody joining us. We look forward to speaking to you next quarter. Have a good day.