Capital Southwest Q1 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: During Q1 the Company reduced portfolio leverage metrics, lowering investment-portfolio debt/EBITDA from 3.5x to 3.4x, PIK income to 5.8%, non-accruals to 0.8% and maintained an 11.8% yield.
  • Positive Sentiment: Capital Southwest generated $0.61 per share in pre-tax net investment income, increased undistributed taxable income to $1.00, and transitioned to a monthly dividend, declaring $0.58 regular and $0.06 supplemental ($0.64 total).
  • Positive Sentiment: The company strengthened capitalization by securing a second SBIC license for up to $175 M in debentures, boosting its credit facility by $25 M to $510 M, and raising $42 M via an ATM program at 123% of NAV.
  • Positive Sentiment: Deal originations remained robust with approximately $115 M in new commitments (45% new platforms, 55% add-ons) and notable increase in high-quality deal flow over the past six weeks.
  • Positive Sentiment: Operating leverage fell to 1.7% (below the 2.7% BDC industry average), with a run-rate target of 1.4–1.5%, highlighting benefits of the internally managed model.
AI Generated. May Contain Errors.
Earnings Conference Call
Capital Southwest Q1 2026
00:00 / 00:00

There are 10 speakers on the call.

Operator

Thank you for joining today's Capital Southwest First Quarter Fiscal Year twenty twenty six Earnings Call. Participating on today's call are Michael Cerner, Chief Executive Officer Chris Reberger, Chief Financial Officer Josh Weinstein, Chief Investment Officer and Amy Baker, Executive Vice President Accounting. I'll now turn the call over to Amy Baker.

Speaker 1

Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward looking statements. These statements are based on current conditions, currently available information and management's expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC.

Speaker 1

The company does not undertake any obligation to update or revise any forward looking statements, whether as a result of new information, future events, changing circumstances, or any other reason after the date of this press release, except as required by law. I will now hand the call over to our President and Chief Executive Officer, Michael Sarner.

Speaker 2

Thanks, Amy, and thank you, everyone, for joining us for our first quarter fiscal year twenty twenty six earnings call. We are pleased to be with you today to discuss our first fiscal quarter. The June was another productive quarter for the company as we continued 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, the investment revenue pick rate from 7.6% to 5.8%, and our non accrual rate 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 dividend looking forward to the future.

Speaker 2

During the first fiscal quarter, we generated pre tax net investment income of $0.61 per share. Additionally, as a result of harvesting $27,200,000 in realized gains from two equity investment exits during the quarter, we were able to increase our undistributed taxable income balance to $1 per share from $0.79 per share as of the end of the prior quarter. Furthermore, as previously announced, we transitioned our regular dividend payment frequency from quarterly to monthly. 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 $0.58 in regular dividends for the quarter, payable monthly in each of July, August and September 2025, and has also declared a quarterly supplemental dividend of $06 per share, bringing total dividends declared for the September to $0.64 per share.

Speaker 2

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 175,000,000 in additional SBA debentures over time. Additionally, we increased our existing ING led corporate credit facility by $25,000,000 bringing total commitments to $510,000,000 Finally, we raised $42,000,000 in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $20.5 per share or 123% of the prevailing NAV per share. 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. 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. Despite this noise, deal flow in the lower middle market remained solid this quarter, with $115,000,000 in total new commitments to three new portfolio companies and 12 existing portfolio companies.

Speaker 2

Add on financings continue to be an important source of originations for us, as approximately 55% of total capital commitments during the quarter were follow on offerings in performing portfolio companies. Over the last twelve months, add ons as a 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. 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 2

Finally, from a BDC perspective, there's been some long awaited progress on the AFFP rule or affiliated fund fees and expenses. On 06/23/2025, 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 cost of investment in BDCs. 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. If BDCs are exempt from the AFFE rule, they 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 and P to remove BDCs from their indices.

Speaker 2

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 of our investment activity and the market environment. Thanks, Michael. This quarter, we deployed a total

Speaker 3

of $51,000,000 of new committed capital, including $50,000,000 in first lien senior secured debt and $1,000,000 of equity across three new portfolio companies. In addition, we closed add on financings for 12 existing portfolio companies consisting of $64,000,000 in first lien senior secured debt and $1,000,000 in equity. Our on balance sheet credit portfolio ended the quarter at $1,600,000,000 representing year over year growth of 21 from $1,300,000,000 as of June 2024. For the current quarter, 100% of the new portfolio company debt originations were first lien senior secured. And as of the end of the quarter, 99% of the credit portfolio was first lien senior secured, with a weighted average exposure per company of only 0.9%.

Speaker 3

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. 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. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies, paired to sue with the private equity firm when we believe the equity thesis is compelled. As of the end of the quarter, our equity co investment portfolio consisted of 80 investments, with a total fair value of $166,000,000 representing 9% of our total portfolio at fair value.

Speaker 3

Our equity portfolio was marked at 125% of our cost, representing $33,200,000 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. 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. This is playing out in real time, as this quarter we harvested two sizable equity exits, which generated $27,200,000 in realized gains. Over the past two quarters, our equity portfolio has produced $41,300,000 in total realized gains.

Speaker 3

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 banks and non bank lenders. 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. As a point of reference, currently there are 80 unique private equity firms represented across our investment portfolio. Additionally, in the last twelve months, we've closed 13 new platforms with financial sponsors with which we had not previously closed the deal, demonstrating our continued penetration in the market.

Speaker 3

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. Our portfolio currently consists of 122 different companies weighted 89.6% to first lien senior secured debt, 1% to second lien senior secured debt, and 9.3% to equity co investments. 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. We have recently changed our loan grade structure from a four point scale to a five point scale.

Speaker 3

We have made this change in order to provide additional transparency for our shareholders. All of our loans upon origination are initially assigned an investment rating of two on a five point scale, with one being the highest and five being the lowest rating. Overall, the portfolio remains healthy with approximately 92% of the portfolio at fair value rated in one of the top two categories, a one or a two. 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. We believe these performance metrics are indicative of a well performing and conservatively structured portfolio.

Speaker 3

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. 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 significant equity capital cushion below our debt and reasonable leverage levels of 2.5 times to four times debt to EBITDA. 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. I will now hand the call over to Chris to review the specifics of our financial performance for

Speaker 2

the quarter. Thanks, Josh. Specific to our performance for the quarter, pretax net investment income was $32,700,000 or zero six one dollars per share. For the quarter, total investment income increased to $55,900,000 from $52,400,000 in the prior quarter. The increase was driven by a $5,200,000 increase in cash interest and dividend income, offset by a decrease of $900,000 in fees and a decrease of $700,000 in PIK income compared to the prior quarter.

Speaker 2

Importantly, PIK as 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. During the quarter, we paid out a zero five eight dollars per share regular dividend and a $06 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 $0.58 per share in regular dividends for the quarter, payable monthly in each of July, August and September 2025, while also maintaining the quarterly supplemental dividend at $06 per share, bringing total dividends to $0.64 per share for the September 2025 quarter. We continued our strong track record of regular dividend coverage, with 106% coverage for the twelve months ended 06/30/2025, and 110% cumulative coverage since the launch of our credit strategy.

Speaker 2

We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of $1 per share and the expectation that we will continue to harvest gains over time from our sizable unrealized appreciation balance on the equity portfolio. LTM 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 current fiscal year. Our operating leverage is significantly better than the BDC industry average of approximately 2.7%, and we believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage our best in class BDC.

Speaker 2

The company's NAV per share at the end of the quarter was $16.59 per share, a decrease from $16.7 per share in the prior quarter. 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 $444,000,000 in cash and undrawn leverage commitments on our two credit facilities, which represents two times the $223,000,000 of unfunded commitments we had across our portfolio as of the end of the quarter. During the June, we increased our corporate credit facility by $25,000,000 bringing total commitments on the facility to $510,000,000 Additionally, as of the end of the June, 48% of our capital structure liabilities were in unsecured covenant free bonds with our earliest debt maturity in October 2026. As previously mentioned, during the June, we received final approval from the SBA for our second SBIC license.

Speaker 2

This license allows us to access up to 175,000,000 in additional SBA debentures over time, which is a cost effective way to finance our lower middle market investment strategy. Our regulatory leverage ended the quarter at a debt to equity ratio of 0.82 to one, down from 0.89 to one as of the prior quarter. While our optimal target leverage continues to be in the 0.8 to 0.95 range, we are weighing the impact of the current macroeconomic landscape and intend to maintain a regulatory leverage cushion, which will mitigate capital markets volatility. 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. I will now hand the call back to Michael for some final comments.

Speaker 2

Thank you, Chris, Josh and Amy, and all the employees who help us tell the story on a quarterly basis. And thank you everyone for joining us today. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q and A.

Speaker 4

Thank you. Our first question will come from the line of Doug Harter from UBS. Your line is open.

Speaker 5

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 3

Yeah, I mean, there's a bit of a supply demand dynamic here. And if you think about the supply, there's private equity sponsors that turn their attention away from consumer discretionary businesses a little bit as well as companies with international supply chain. So there's a little bit of a scarcity of quality assets out there. So, and there's a bit of a pullback in the supply a little bit. And then on the demand side, have banks and non bank lenders continue to be aggressive and incentivized to deploy capital.

Speaker 3

So we've seen spread compression over the last six months or so. While we have seen that spread compression that the structures, which is something we focus on heavily on loan to value leverage, quality credit agreements, those kinds of things have stayed as we stayed prudent on structuring. So, we've been able to continue to deploy capital and leverage the relationships to continue to find opportunities. So yes, it's continued to be competitive. It always has been competitive, but we've been able to compete candidly.

Speaker 3

And so we've got a lot of good traction in this upcoming quarter as well.

Speaker 2

Yeah, I mean, our overall weighted average spread has been two years ago with eight fifty. Currently it's around seven fifty. The deals that we saw in this previous quarter were around 7% over. And the deals that we're looking at in a very robust September are around 7%, a little north of seven as well. So to Josh's point, as even though things are compressed, we still are able to find our marks.

Speaker 5

Got it. I mean, guess, how do you think about is whether there is actually a floor on that around, do you think that's going be able to hold seven if kind of that supply demand imbalance kind of continues? Just how do you think about kind of any floor on spreads?

Speaker 2

It feels like it is settled to some degree. What we've seen is lower middle market credits that are extremely tight have been as low as five and a quarter, which is 125 to 150 basis points tighter than what we're used to. But there still are plenty of deals that are still somewhere between the five twenty five and seven fifty to eight. We have a pretty wide group of sponsors that we work with. We're also willing to be originating deals on the smaller side.

Speaker 2

So 3 to $6,000,000 EBITDA companies that are probably garnering closer to $6.50 over. So again, still being able to find further marks. And I do think that as SOFR comes down, history would tell us that the spreads will probably widen out. And so we might be at that kind of at the trough right now.

Speaker 5

Great. I appreciate that answer. Thank you.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Mickey Schleien from Clear Street. Your line is open.

Speaker 6

Yes, good afternoon, everyone. Michael, we received sort of mixed signals on the M and A market. Most folks are claiming it's still pretty muted relative to where it was a couple of years ago. But you're pretty optimistic, it sounds like, on your third calendar quarter. The fourth calendar quarter tends to be the busiest.

Speaker 6

So I'm assuming the second half looks pretty good. What's underpinning that optimism in a market that seems to be sort of trudging along?

Speaker 7

So I would say some

Speaker 2

of the deals that were in the June bled over into the September.

Speaker 7

I mean,

Speaker 2

I can tell you right now, we've closed $110,000,000 of originations through this morning. And we have another $40,000,000 in deals that are signed up, and that would be pending close later this month. We already know we're probably at 150 and then there's a number of deals that we're in the mix for. So I think where we live in the lower middle market, we've seen plenty of deal activity. And I'd like Josh chime in as well.

Speaker 2

It feels like quality deals.

Speaker 3

Yeah, I think when I talk to other low middle market lenders, they are very surprised at how full our pipeline is. And I really do think that speaks to the efforts we put forth in the last three years, four years, five years in cultivating private equity relationships to put us in a position to see all their deal flow and or the majority of their deal flow. And so I do think that that's paying dividends now and will continue to in the future.

Speaker 6

And on the flip side, do you have any insight into prepayment or repayment activity in the third and fourth quarter? So we just saw we

Speaker 2

had 80 repayments in this quarter, so it was obviously a heavy quarter. We do have a few companies that we know are going to market. There are some larger holds, so that's probably closer to the December. Aside from that, I mean, don't think we have a beat on the September. We really don't have much of anything in the pipeline at this point.

Speaker 6

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%. 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 2

This is definitely coming down. So the metric for the quarter based on actuals for the LTM was 1.7. The run rate was 1.6 trending down to 1.5. And we would tell you, we sometimes accrue additional bonus during the year before our final decision at the end of the year where the board makes the decision on bonus. So maybe we have an over accrual, but we would tell you the run rate when it all settles for this year should be 1.4 or 1.5.

Speaker 2

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, while still reducing, 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. 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 as rates come in.

Speaker 6

Yeah, 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. So that's the fourth quarter annualized rate?

Speaker 2

So for the March, the LTM number we believe will be 1.4 or 1.5. So maybe just give you a sense for the current quarter for the sixthirty quarter, the quarter eyes was 1.5. So we're just the LTM has some overhang from some of the one time expenses incurred in the prior quarter. So, we're already sort of at 1.5, which we expect to continue to come down on an LTM basis, as Michael described.

Speaker 6

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? Or do prefer to lever up the balance sheet a little bit and maybe optimize your returns?

Speaker 2

Well, so leverage came down this quarter, probably mainly because we had so much in repayments during the quarter. And so that happened late stage. I think that I think Chris has said in the past, we were raising about 40,000,000 to $60,000,000 on a given quarter. And I think that you should expect that each quarter will look like that. I think we'd like to be closer to 0.85 leverage.

Speaker 2

And I can also say that it wouldn't bother me if our portfolio is in as good a shape as it is today with our debt to EBITDA and our fixed charge covenants. We can maybe move closer to 0.9. So we're certainly at a low point for leverage at the moment. Yeah. And part of it, we try to be consistent, Mickey.

Speaker 2

And as Michael said, we're raising the last kind of five or six quarters. It's about exactly an average of 40,000,000 a quarter. So we try to be consistently in the market. Some of the deals, as Michael described, pushed into July, which optically made the June leverage a little bit low. I would expect we'll be in the 0.85 to 0.9 range sort of in the September and December quarters.

Speaker 2

Seems about right.

Speaker 6

And philosophically, most BDCs or many BDCs sort of run at more like 1.1. Obviously, you're in the lower middle market, and maybe that causes you to be a little bit more conservative. But conceptually, why not run the balance sheet with a little bit more leverage than you've been doing recently?

Speaker 2

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, have operating leverage where it needs to be. We don't really feel like the need to reach for additional leverage unnecessarily. All of these metrics can move around over time. But generally speaking, we're going to take a more conservative bend, especially we're a smaller BDC. Think we've earned our credibility in the market, but we still believe having a conservative infrastructure, having conservative leverage communicates to the market sort of the way we do business here.

Speaker 2

And we think that's probably help our price to book in the end.

Speaker 6

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

Speaker 4

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 7

Hi, guys. If I can go back to kind of the competitive environment for for a moment. And to your point, with with the leverage you're doing, you know, two and a half to four, I mean, banks can kind of play in that market and and keep those loans on balance sheet. And you mentioned, I mean, obviously, that it can be attractive to them. Where would you know, that though banks tend to be boom and bust, though, whether they're actually targeting in the market.

Speaker 7

So where where would you say the the competitive pressure from banks is right now in terms of how it flows through through a cycle? I mean, are they being pretty pretty pushy right now, and is that one of the the factors driving down the spreads or are they more moderate placed as to where you'd view their level of aggression, if I can put it that way?

Speaker 3

Yeah. You're spot on. They're boom or bust. And right now they're boom, they're risk on and from what I'm seeing, and they're competing with us because you're right. The leverage profiles that we generally are seeing, banks can be competitive there.

Speaker 3

We have other ways to compete with banks, but candidly, it's tough for sponsors to turn down 150 or 200 basis points lower pricing when they have the opportunity to do it. 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 3

It's pretty tough for me to predict when that'll be, but they will be. That might be a factor for spreads to widen out a little bit.

Speaker 7

Got it. Got it. Thank you. Yeah. On the and then one of the other advantages of of being an internally managed BDC is we see from some of your internally managed peers is you you can run an asset manager, and you've talked about that.

Speaker 7

And that and it feeds from the asset a manager accrued a shareholder's benefit rather than some external manager's benefit. You've talked about that before. Are there any updates on on efforts in in in that on that front about adding an asset manager kind of vehicle within the BDC to to to benefit ROE, lower your effective efficiency ratio, etcetera. Any updates there?

Speaker 2

Yeah. So yes, we're continuing to pursue those types of options. We're probably also looking at a strategic initiative to maybe look to enhance earnings and origination capabilities on some of the larger deals, I don't nothing I want to formally state now. But certainly, that would help capture additional yield while winning deals within our same bailiwick. So, lower middle markets feel that maybe between 8 and $15,000,000, which we typically having to share those companies that with no economics finding ways to structure those assets with other partners to basically maintain the assets and maybe bring in the scrape and the management team.

Speaker 7

Formally articulate it, but that's formally enough for me. So thank you on that one. And then last one, because I'm not gonna touch outside AFFE because I don't wanna jinx it. On to to to your point on, like, deployments, it seems like you were saying, you you're likely you could be could be a 150 plus, in September with moderate repayments. The indication from from leverage maybe not going up that much, the point eight to point nine, would tend to imply that you might be running the ATM at, like, the high end of the range this quarter rather than the the the average, which is more the low end of the range?

Speaker 7

I mean, it's am I am I doing my math right there?

Speaker 2

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. But, obviously, we'll 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 2

That's right.

Speaker 7

Got it. Thank you.

Speaker 4

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 8

Good afternoon, everyone. Just curious, you mentioned the strong pace of originations 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 2

This quarter feels like it's fairly robust on the new. So the last quarter was like, what, 65, 35. This quarter yeah. The $9.30 numbers look like, what, 75% new versus 25% add ons.

Speaker 8

Got it. It's interesting change because I think as I look across here some of your competitors in the rest of the industry it's been fairly heavy on the add ons recently so switch back to new would indicate maybe kind of more market activity, a little more confidence there. Interesting to hear that. Thanks for sharing. And then going, I think it was Chris speaking about your confidence in maintaining the dividends, 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 8

Within that expectation does that also include I guess the futures curve and just looking at slide 24 in your deck would indicate if the futures curve, silver screen covers right and we do get about 100 basis points of reduction. There would be maybe a 6¢ or so per quarter headwind to the run rate of NII. So, is that incorporated in kind of those dividend comments earlier?

Speaker 2

Yeah, I'll answer the question. So, I mean, when we're looking ahead, we're anticipating to your point, 100 basis point drop between in the next fifteen months. We've kind of talked about where we expect our spreads to be seven plus percent and receiving operational efficiencies. We believe that we're going be able to maintain a 58¢ NII to cover our regular dividend. Looking ahead, the biggest risk I see is if share turns over in the spring of next year and rates instead of troughing at three fifty end up troughing at 1.5%.

Speaker 2

Now, that's a different story altogether. And we'd have to rethink our regular dividend policy. But short of that, we feel that we'll be able to maintain that balance. Plus, we're at a dollar at UTI now. We would anticipate that to grow sizably in the next six to nine months as well, which would be a support for both the supplemental and the regular.

Speaker 2

Our viewpoint is if we're performing well, and even if in the direct loan scenario we woke up at $0.56 or $0.57 but it wasn't because of non accruals, it wasn't because of portfolio performance, but rather about macroeconomic issues that we thought we could grow out of, we may use our UTI bucket to support that $0.58 regular dividend and not grow it. The other thing I would say, Eric, is Michael sort of touched on the operational efficiencies, which is an advantage as you look at that slide, but compared to sort of the reality of the ROE with operating leverage coming down. The other thing is we still have the full $175,000,000 of debentures to draw on, which obviously I can't predict where the ten year is going to be. But right now that would be sort of 5% type fixed paper. So as we're deploying assets with spreads that we are today at seven, seven fifty 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 8

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

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Sean Paul Adams from B. Riley Securities. Your line is open.

Speaker 9

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 risk rating of five at 3,800,000.0 fair value. Generally, there was a general improvement in the risk rating. So there was a slight convergence towards the two to three mark.

Speaker 9

Was there a specific reason towards some of that change and where are we at with the remaining non accrual runoff?

Speaker 2

So, this quarter, we had zips came back on accrual, which was a large position. I think that was around $25,000,000. And then we had a small second lien piece, which I think was $3,000,000 that actually went on non accrual. So the net, we picked up 22,000,000, although the number stayed flat. What was your second question?

Speaker 2

I apologize, Sean.

Speaker 9

Correct. The migration towards the two from the top rating of one, was there any general degradation in the top credit quality portfolio? And it was was there any idiosyncratic or just dramatic themes towards that?

Speaker 2

I don't think so. I mean, I think there might have been a credit where it was a typically, when a company ends up looking towards an exit, it may be upgraded to a one, and it might in the cell might not have gone forward, and it's moved to back to a two, 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 5

Sure.

Speaker 4

Thank you. And I'm not showing any further questions in the queue. I would now like to turn it back over to Michael Sarner, President and CEO, for closing remarks.

Speaker 2

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

Speaker 4

Thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

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