CSWC - Earnings call transcript Q2 2020 | Capital Southwest Corporation

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Operator

Thank you for joining today's Capital Southwest Second Fiscal Quarter 2020 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP, Finance.

I will now turn the call over to Chris Rehberger.

Chris Rehberger

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

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

I to Diehl. our will Officer, off Bowen call Executive hand now President and the Chief

Bowen Diehl

fiscal refer year we found earnings our and remarks, various can presentation, at Throughout to www.capitalsouthwest.com. XXXX you Thanks, joining Chris, us quarter thank call. will in for our website be which everyone our slides on earnings for second our

be the are quarter with for results you to and XX, our quarterly morning this XXXX. second We pleased to fiscal September ended announce

to we portfolio prudently credit of a During underwriting building the strategy credit performing advance conservative our well late-cycle principles. utilizing quarter, continued

of lower We market investment strategy where we predominantly be upside our portfolio equity about exists. core equity continue building secured a consisting the committed to of debt senior loan portfolio, and excited first largely with across lien middle co-investments believe significant

cost shareholder-friendly our long-term team growth aligns dividends, closely sustainable efficiency. operating structure strategy preservation, recurring the our managed in investment of that per with management capital internally our Board through share of our and under fellow and Executing value NAV generating interests shareholders

pre-tax over investment $X.XX summarized per same XXXX generated the per in a income, on representing During share slide six, quarter, growth XX, ago. we year as the quarter the share $X.XX XX% generated net of September

or statement. deferred form share $XXX,XXX to for write-off expense the costs per a the operating previous into of $X.XX incurred registration the of one-time we related quarter, During our

per $X.XX per XXX% coverage quarter our during dividend investment out dividend regular share, We on achieving pre-tax the of paid income net a share.

our through generated dividend balance our excess or undistributed Additionally investment sizable we which from was income taxable and funded accumulated by supplemental to date. program, by strategy per distributed share income capital gains our $X.XX UTI,

approximately per UTI, September to dividend $X.XX XX program had share the we into or in quarterly of continuing providing XXXX, $XX.X million well visibility the future. As supplemental

dividends the For total total annualized $X.XX the based paid yield price. our in generated share of dividend September share September XX, out quarter, per on XXXX X.X% a

share, declared our as regular We $X.XX of are per dividend December of supplemental share also a and $X.XX share the per dividends to for pleased made dividend has Board quarterly $X.XX announce dividend. up again quarter our per a regular

new our million $XXX we basis During $XX and in prepayment the originating as to totaling portfolio approximately quarter, commitments XXXX, $XX September $XXX a million of one grew receiving net in million million proceeds. XX, June on from

Our loan annualized a value representing Capital for fair the fund I-XX senior fund on XX% Southwest, capital yield provided the our to quarter. in dividends at

additional $XX X-year we priced an $XX Subsequent to the million the we end, under aggregate same offering principal During quarter the institutionally $XX X.XXX%. bringing at outstanding million. million placed completed debenture quarter, successfully to a raised bond

Capital average premium In to ATM share, equity shares since quarter, shares our raising XXX,XXX the in approximately sold that initiation the gross Southwest ATM almost selling at our addition, book am million proceeds. I we value. per pleased program, during a at $XX gross similar a value, XX% over proceeds premiums to has $X of million representing raised program in weighted XXX,XXX equity to of through report book price $XX.XX

our and to raised on the flow to steady capital a just-in-time continues work. equity lockstep with program ATM put of Our to ability capital basis a thoughtfully provide equity

consistent yield, track seven record we launch strong eight, dividend coverage Since of and our creation slide continued strategy. our illustrate credit producing value to and Turning dividend of the a

since nine, reminder, consistent a investment Turning to -- since our in has remained our January, strategy launch XXXX. its as slide

providing We upper continue returns flexibility seek to assets and built strategic robust both we as in focus on have to the a blend us lower capability middle of market attractive both middle risk-adjusted markets. market

returns In core lower of important granular time, presence risk-adjusted us originate to market, same market highly middle aiding we ability debt middle share, of of liquid NAV in our credit upper directly to the while co-investments investments per a a performing attractive At mitigation in and the the losses. in co-investments. Building market and more when is growth the opportunities future opportunistically and our provides equity driving market, portfolio exist. consisting the out capability equity in invest

deal Overall, portfolio that market, the deals allowing generating us thoughtfully the origination our critical and that build will a competitive performance in in top funnel over to cycle. consider as maximizing it of that is wide markets we employ credit ensures economic of standards strong time a end conservative perform array we underwriting a investment through our both believe to

I-XX June Our XXXX, on-balance of to excluding from XX, million XX, portfolio, sheet XXXX. credit as million $XXX shown $XXX grew XX, on slide September as as of

heavily first lending senior investment lien to secured our emphasize in in strategy. debt market middle continue the We lower

middle of first lower sheet portfolio in of XX% As invested our company, the debt. end the the in having we of secured credit of on-balance senior quarter, market while credit XX% lien the had portfolio

$X a company XX, lien lower market secured new committed portfolio last one the out equity an existing equity co-investment. slide first secured capital to and lien quarter, a and Turning The company senior we with companies. originated two loan to senior co-investment. $XX middle with first went The to million portfolio in debt in add-ons during portfolio million

an a average all add-ons XX.X%. market, lower other was Southwest middle while of One in also middle investor. upper lender and the equity maturity the The the originations in to Capital this was was company weighted market yield which in on sole the quarter is

$X.X first portfolio new $XX This million and $X commitments an in facility co-investment. Subsequent two to in million in credit million included unfunded revolving debt, $XX originated companies. to million quarter-end, we equity an secured senior have new in lien

diligence or additional three deals expect are it currently as by We today two the year-end. pleased in should with calendar stands pipeline close that and

As and we during cheaper with strategy, and gain shown of $XXX significant debt investment generating the co-investment total of a had total to it debt million a cumulative company $XX portfolio This giving Capital an realized strong refinance $XXX,XXX our The in on has continues the Southwest company record exits as with of also XX, since a to now IRR had in of generating equity quarter for invested credit full track prepayment unrealized have we proceeds on grown capital. XX portfolio one slide an million the exits of opportunity significantly, in proceeds, capital. of credit have its XX.X% launch successful IRR appreciation. our continues XX.X%. total

the On I-XX and market. slide break on-balance XX, upper middle we out between middle lower portfolio, again, market our excluding sheet

the as of of X.X quarter, average portfolio the middle our the a measured of times. as a million, $X.X ratio portfolio, end basis. was held weighted the and of lower approximately the of XX% lower of million, companies. equity of through end $XX.X We middle leverage a market EBITDA to the hold security our Within debt-to-EBITDA a As had the yield companies of in quarter, market and our weighted portfolio XX cost upper XX% XX% we lower size average to market weighted on average middle ownership total an with of portfolio XX% middle market

average an on-balance of million, times. EBITDA Our through of X.X% middle $XX.X upper size with million, of consisted a security yield X.X portfolio XX average of weighted of a sheet market companies a average $X.X ratio and leverage hold weighted our

to that the note our EBITDA ratios would middle middle market the upper meaningful of portfolio. the our are have challenges. American company investment shown not therefore, including and respect metrics as in the remainder the obscure market Addiction, American With should sheet We to excluding upper on-balance it Addiction of is continues

work company being abuse in communicating company, owned favorable lending the remains large company's -- will to the to we this quarters, public structure. their to continues prospects team The internal with due and all solutions quarter What effectively shareholders. the reasons the provide substance to lender that initiatives on appropriately to to and in want development to on As not Addiction Addiction was the careful and prior capital business on group to rated resolution. portfolio, position industry, American a our on of estate its say leading announce be optimistic management the prior savings developments non-accrual we real remain AX market American system. company's the cost is placed rating a

As a reminder, with and rating. investments two of rating are on being investment highest a an rating initially the lowest four upon the scale, origination X-point being one assigned all

a of performance the are we Overall, with investment whole. as pleased portfolio the

one, credit highest representing credit two, XX loans in XX three representing quarter, three, As loans portfolio. fair representing of the end XX% we at rated at we the of we four portfolio; at loan portfolio four, representing of loans credit the of value, the of X% XX% had and with had credit the rated one we had of the portfolio, of the the at X% the of had rated portfolio; rating

industries, debt. Further, our positioned have As believe portfolio economic is illustrated secured only security for which remains cycle. debt toward we debt, lien only first second on lien shareholders' should in heavily well we diversified X% portfolio subordinated mix XX, senior portfolio in weighted established for with our capital. The well senior across secured slide X% late a and the strong provide asset in

XX% SpotSee, than quarter, SpotSee portfolio. end process slower value progress, under expected The other does portfolio the banner in represented the which albeit investment represented all of the the investment while year. as X% MRI, of earlier co-investments of business continues of to the equity the fair at we sales for

with products should half SpotSee customer ensuring real-time long-term. the than valuable remote United less uncertainty. longer assets we with by These with very All we with next sale few beginning global completed both the benefits to in-transit. valuable expected the expect take having important customers trade our its outside a well process at to a of short many the provide that we States. that close of despite continue regarding is uncertainties to its perform of much have in their is is know, company the the than that the being information well-performing and us, environment the year. said, months. shareholders transaction condition all timing caused exciting term To we transaction that over and As complicated elements SpotSee revenue of continues current generated

I-XX Shown X.X% the diversity on I-XX the end portfolio of portfolio an and security and of of average through EBITDA slide $XX the first-lien with the I-XX size hold of weighted the of XX% The portfolio. average million X.X approximately was weighted as industries of leverage quarter, XX, average among times.

We also from for the Addiction ratios these reasons. American aforementioned excluded

review to performance specifics Michael I to quarter. of our the the financial the will now hand call over for

Michael Sarner

Bowen. Thanks,

As due received $XXX,XXX by a gain LIBOR represents of income decrease quarter seen decrease portfolio senior to I-XX reduction a I-XX in XX, decline $XX.X a the slide investment of on produced XX.X%. quarter. during weighted average million dividend during yield from from realized a all attributable Addiction A of our approximately during This placed on loan investment to in with income quarter being this previous is quarter. the and quarter. the prior large American This non-accrual fund investments the the on

quarter. was on As of yield of weighted XX% total on our million, portfolio the $XX.X non-accrual the the assets our credit of two quarter, were The value X.X% fair for average with of portfolio. a investment representing end there

Excluding interest the which approximately prior expense, expenses $XXX,XXX incurred quarter. was and from quarter, for $X.X decrease we a of million operating the

we related of costs statement. offering our $X.XX one-time share previous to registration the write-off $XXX,XXX, per or a During incurred deferred quarter, of Form-X

$X.X would approximately operating been charge, expenses one-time this million. Excluding have

regular prior We out increase share for For out per after This the quarter. investment regular or the $X.XX of $X.XX share quarter, per share, pre-tax quarter, in to in share the of we over during one-time dividends prior offering paid the the earned per $X.XX compared cost per $X.X the again per million deferred dividend income an quarter. net $X.XX $X.XX paid write-off. share

the of record regular XXX% coverage our our with meaningfully launch investment months demonstrated We strategy. XXX% of a by pre-tax regular dividend regular have dividend income and cumulative as continued credit the last covering track consistent since our net coverage XX over dividend

investment of $X.XX quarter part excess and earlier, the program. during quarter program paid continue This net funded program on dividend share our dividends. portfolio As in regular UTI well from meaningfully exits dividend realized of our of gains will each Bowen earned from shareholders The over supplemental to participate our of earned equity both investment time. income out be to as our as mentioned allows debt undistributed we the also as supplemental in successful a per

as we was leverage, illustrate X.X%. operating quarter our of end the which XX, slide of the On

deferred Excluding puts for the X.X%. our our off, offering target the have approximately leverage of been operating X.X%, which leverage onetime quarter aforementioned run write cost rate operating near would initial us

We are structure. managing should fully growth now our actively our infrastructure in place, of With set operating portfolio corporate improve our goal term will longer of costs portfolio better. largely and our operating senior operating committed in the investment achieving grows to target lockstep sights or due and leverage as with managed X% professionals to to internally on continue leverage

depreciation per quarterly portfolio decrease upper driven paid by the NAV $XX.XX equity of in as net appreciation slide per XX. net $X.XX the in in seen end quarter market on debt by offset per largely shareholders. to by middle share, quarter of was and as upper was The the our market portfolio. the Our well was as depreciation portfolio our as middle share market The our share middle from investment dividend lower prior

Our investment for net total was X.X%. return pre-tax on the quarter equity

multiple Slide On we our pockets laid XX, capital. of out

have $XX liability to end, is company, of at derisk that have million capital evaluate company while continually we calls, X-year to cycle. placed that priced mentioned economic To structure bond investable a institutionally offering, the priority we on the completed ensuring we the attractively adequate As the for X.XXX%. throughout our strategic prior approaches

institutional company BDC to performance XX transaction offering all by who testament the recent believe was with cap our raised $X with story. this by confirmation Southwest less investments Raymond new The JMP We offering the story to institutional led Capital our market investors. have investors as and included believe execution and bond James in billion we the runners first as BDC are history. Securities and to resonates of that are We in than book a strong in stands

of Bowen the ended during XX Southwest price program Capital earlier, stock weighted Cumulative mentioned a quarter shares As common share, per the XXXX, $XX.XX under we ATM average date, September at of sold XXX,XXX equity raising a ATM sold proceeds. $XX.XX, gross of million gross to XXX,XXX We under raising million Southwest of proceeds. program Capital $XX.X equity stock at of have weighted-average $X common of price the shares

Our quarter of a balance the to X.XX ratio X. ended sheet leverage at debt-to-equity

available maturity in with the We that liquidity are to balance undrawn and report between and approximately our million pleased cash our sheet XXXX. is with December strong I-XX, commitments at debt $XXX earliest

back to Bowen will some for I the comments. now call final hand

Bowen Diehl

the Thanks, the we Capital with us years shareholders Michael, thank you portfolio five business ago. and consistent our everyone for communicated joining and developed today. and strategy Southwest has vision to grown and almost have

has is our generating shareholders. sustainable job excellent totally here good returns deliver long-term our creating to of credit an portfolio stewards to -- strong to being dedicated and building value. by Southwest done Everyone a for team Our beginning shareholders' continuing and significant capital performance at Capital robust

This remarks. concludes lines the to ready we Q&A. our for are prepared open Operator,

Operator

comes the B. Hayes from comment FBR. Riley question first line from Our or Instructions] Tim [Operator of

is line open. Your

Tim Hayes

cautious investment at good can have Addiction, remind question, this you you've I on something and American whether may guys. what triggered the the just while, quarter rated that quarter My been coming? fiscal a this know was seen non-accrual was for actually first credit but on you on just placing first investment end what the us Hey, and the of morning,

Bowen Diehl

Yes. Tim. Hi,

it's company same paying obviously of so rating interest. kind not judgment it end, the last as quarter. a the was Non-accruals, at three a cash rated and it's was is it So is call the --

of judgment -- that through be accruing shouldn't part it So ought it -- to at it honestly -- wanted be on the we was moment. income it's we kind our to

Tim Hayes

Kings, on the non-accrual, have front AG in just there on is don't to we credit Was at the then And materially us. of queue -- or down other any or along? is pass up and that marked update all quarter investment and Okay. this

Bowen Diehl

It hasn't really kind XX the gotten -- down Yes, We -- this along. market it's It by worse. quarter. of a on did it's still points company is whole of lot same gotten bumping just hasn't better. kind

mid from XXs. mid XXs to down So the the

Tim Hayes

Okay.

just And okay. so

that we but average I increased up has rating lower Kings market middle market to little weighted in middle quarter, And are portfolios. get gone upper Addiction leverage so added non-accrual, guess, risk saw, this portfolio down, a marked your American bit and portfolio also healthy, metrics still and just company AG both has

So portfolio? can broader you why just in quality it is an the touch to on concerning trend? not you this And credit or is of or deteriorating indicator

Bowen Diehl

moving on of leverage Right. a that were has some it's Obviously, metrics something No, do Yes. to the portfolio. put good with question. new the the around deals

part that's of So it.

a small have Kings. couple of you of, a and handful, Addiction it's referenced portfolio, AG We it's but some had our like American

had question performance last So slightly would on the secured names, a the small it's what portfolio, about senior have is Across it. names. sitting portfolio. managing We're in an are couple the bit a on idiosyncratic EBITDA designed. first no some really I it's say, -- quarters, of softening softened perspective economy. generally in loan, as we it the of But now job performance. working everything maybe worry. yes, the the investor more not by of to certain little handful in from perspective think structures But first Most a from Obviously, lien of I less But us. worrisome. from lender some lien generally the speaking, I disappointing worries mean, our But company's was

Tim Hayes

more then Okay. And from me. one

recurring to ability but covered dividend? as me a of quarterly grow non-accrual think net it continue confidence to coverage tax. sustain these weighted you the is basis switching and headwinds to on maybe Just about relates your you yield and/or to The pre-tax remind average the what not in You LIBOR. quarterly to I how in it the your to has the dividend. assume dividend that Can related debt some due if persist, level come But down, lower largely dividend? of

Michael Sarner

we recurring of a I run net rate look think we've and investment income past, said in the going forward. at income

quarter, we back incurred posted this was as number. we'd I run think, that and add a that $X.XX at We to expense the So our rates. of look onetime, our

really if on our actually CSCI, varies blocker. So net the -- the was taxable $X.XX, future blocker investments note and sort $X.XX. held of taxes, are the the and the that's those of accrual cash it, our period of our most on in is I'd at of part NII a also based taxes estimate our you look on $X.XX not expense which income for of for

we tell I'd And forward, NII probably run above be the quarter. -- of the to are our going this slowing dividend. has you, MRI $X.XX going So as certainly our we also think potentially for to well. expectations is do our dividend pace the We announced for current as future rate just with level in of then in

Bowen Diehl

and on year. the originations, we expect be or got since Clearly, it that end tried right of diligence end the closed to close September so in to it, the in we've now originations we drives deals two the and quarter by that obviously, we've would transparent three and

So pretty good we as feel about the pace well. origination

Michael Sarner

drop and other this And to the to quarter half XX.X%, point, from also, the LIBOR your half was from was that the from yield the XX.X% in of non-accrual

Tim Hayes

know. to Good Okay.

Okay. I appreciate the comments.

I'll of You queue. hop back the in others, so a have couple

Bowen Diehl

Thanks.

Operator

Thank you.

question Mickey next Schleien from comment or Ladenburg. line comes from Our the of

Your open. line is

Mickey Schleien

in and that's companies, showing up the of downgraded look we and the deterioration we're the proportion like of consistent fundamentals the some in metrics loans and in growth when revenue larger performance seeing Guys, everyone. morning, margins. good Yes, leveraged generally at declines being of

performance is middle hand, segments? think be market in pretty perform in to On well. companies curious, the the general, that seem continuing those of other causing divergence two the I'm you what to

Bowen Diehl

performance in in -- I market, mean, lot market. a It's loans deterioration with the in to question. middle the good Yes. levels upper has the of the in a the do middle market deteriorating leverage upper

market the have as respect the is to that's performance In structure -- desk both that the quote and as the you not the on really mark deal. change of the in of fundamental loan sitting an the performance a a obviously, the market, well to with So, just a decides function paper company upper oftentimes agent necessarily trading. middle of

you upper the middle So the lower dynamic have market. a you in middle have market, in don't

we middle that's release saw that quarter. that, thing. million you flat think up give market $XXX,XXX the probably main includes our $X.X made I portfolio, quarter, you press the held that this MRI being -- for appreciation of mean, was reference saw I on portfolio, lower-middle portfolio, the $X that our I debt on that's to remarks lower think referenced and in portfolio a I just in lower-middle our market portfolio the million, mean, equity a market

indicator did the look the fundamental of So more you one so pretty is bunch of frankly, performance companies if accompanying loan. co-investment equity every of this a performance a quarter. And little well of of -- because book I a at equity loan our those that's -- bit a real-time investments

American another So, talk market. upper middle market, I portfolio, we a market quarter, Delphi upper we the mean, in if We've this It's names you the space look I at our in I certain three the the is of kind mean, made is in upper quarter. Kings got it's market. in right. middle about health that middle mean, also Addiction middle behavioral each a company upper

I to I you your would that -- but more how how dynamic Mickey, question, if the -- And be it I'd and the structures so divergency look quote react market think middle the would at upper to really of -- see that you in attribute referenced. it's mainly, I

Mickey Schleien

Just one Bowen. follow-on

see adjusted to that leverage in a that's So opportunity. upper with specifically providing of in are recent your liquid interesting general, also market looks more what if basis? if market portfolio, about a more bit caused general. we And the you middle the And upper bucket. thinking I'm case, in trends But to of you pockets market do you seeing risk your in weakness their the just curious on performance. middle little in has are added loan larger trends companies I bifurcation not weakness the the

Bowen Diehl

does mean interesting that… market look general, far upper just the middle in risk adjusted is -- I as Yes,

Mickey Schleien

a weakness, be There that market, has seems there that of there some generally the bifurcation. volatility, given in it and has results Yes. been opportunities. in fear that there's -- some lot been and there may

Bowen Diehl

Yes, slow trades. a the necessarily always market generally in flow referenced index deal you lot by and accompanied speaking, we've middle that the not paper of seen frankly deterioration upper is

So, I as necessarily supposed said their trade agents what earlier, but doesn't they're which can judgment, it's do, there. changing mean, I at quotes, that desk by mean you paper their to is it

just of in you interesting. So on amount said the we really asset market, what of class we those like. floor that because lot the middle a opportunities opportunities fair seen capital an that is for a not are think our wrong, frankly, whole in assets, ground lower for we demand of but haven't market, really we've that And our the had

Mickey Schleien

equal, returns in So, versus upper, now, risk-adjusted lower all the middle right the is else market prefer you right? that

Bowen Diehl

of are there That's the inherently which market companies. often do. is view lot opportunity interesting I times equity, company -- frankly the companies larger an are capitalized than we invest frankly, time in are equity in lower appropriately analysis. the many obviously, we the I your size market middle Yes, mean, But that the in market, smaller of that safer we of honestly, when the not mean, the element upside, and to we a then in like like. have companies the really

upper the yes, now. market right class better middle overall, like a So we that certainly basis from than risk-adjusted asset

Mickey Schleien

time. understand. appreciate my you. Okay, questions. Those I your I Thank all are

Bowen Diehl

Thanks, Mickey.

Michael Sarner

Mickey. Thanks,

Operator

Thank you.

the line Kyle Jefferies. comment Joseph of from or question comes next Our from

Your open. line is

Kyle Joseph

middle Most the of forward in between either you the there is term a longer sense perspective, there Hey, shorter-term from my just questions just And also for balance there parts, for both rate a your sheet. good and curve. middle can follow-up. -- a heading. some is me lot more But upper portfolio, and then to your us you a shift equity that two been yield on moving you obviously, a morning, have lower is asked, of market, where trying see guys give is But market this think guys. then just about from have

Bowen Diehl

our about last market, over I certainly certainly think kind the that to I -- right are would from going mean LIBOR six I say, of you I XXX what mean, ago know, months. mean, down or can yield most of down couple have we ago year-and-a-half our XXX anywhere kind We to in down. less over the they years, if them mean two the Michael, over to I and I LIBOR, probably in XXX last -- deals, yields, yields the range gone of years forward. so XXX saw XXX. I trend from don't mean, of I mean they XXX is

six So over in really the it last, seeing XXX probably the last months. couple less deterioration, XXX points -- over call slightly basis of years, but marketwide

Michael Sarner

think I XX.XX% I right, And that's the think down to XX%.

debt that on tell less slightly are But be yielding. probably our assets we that think forward. so down, we I putting I going you of come -- is XX% has will right cost be probably will may

and I can operating think our overall our be leverage coming cost down.

income. see pick should a net up actually it investment we -- should So net on

Bowen Diehl

credits, probably not level off. And a time yield trade that's obviously, if can structured I better even bad for safer of over trade some

a for we we important want leverage can dynamic that's compete to areas, And that credits. to in on. one -- flowing lower And are really reasons that our want loan model the tighter value, decrease add are margin so capital, efficiency that business reasons to in we operating expenses improve our market that we we going time are all the of deals of market of companies can there that's because in and the -- those to one cost safer we there the at higher to price are our spend cash the definitely

Michael Sarner

we LIBOR floors. other the And thing pushing been probably I X% that have for noted

at think of had we've floors X.X. at XX% And about So of proportion the then X%. we'd at lately is say, then another a I portfolio majority and our one probably

So is protection any drop some should lower. there LIBOR

Kyle Joseph

color. that's And question. Thanks. Sure, to one thing great then, good up a my Michael, was segue you second brought

would your environment, quarter. Or bond On side very to the guys liability a be did from forward, you rate more how are side, thinking going liability rate of we deal the you the expect facility and attractive forward? But the floating type? credit further increases going this about obviously, given

Michael Sarner

Yes.

we I -- where probably around XX going And million we're that the let's be commitments $XXX call XX it the total that months. going for to in we're think be I next, was to think, the think to on revolver.

if in think X.XX%. to -- there take that we at see side older the version on anything I the bonds debt raises out capital will that our period don't the But opportunistic I of does look maturity, are to we the there's the an foreseeable on think so if call reduce to fixed if look of the end this cost side. extend certainly will in a year, future. that is rate opportunity like and there December is

Kyle Joseph

very Got answering for questions. it. my much Thanks

Bowen Diehl

you. Thank a good Sure. Have day.

Operator

you. Thank

next comment of or question from York Chris JMP from the Securities. line comes Our

Your open. line is

Chris York

taking thanks and guys, morning, Good for questions. my

So, of Bowen churn and in a the about the Michael, investors are downturn. understandably cycle worried

of approach a when So positive toward in staff middle credit or resolution you as defaulted can for market and agent lower you restructuring an to apply terms out the investors? your can are credit a us remind internally that working to managed BDC, you resources of achieve a

Bowen Diehl

the Yes. Thanks for question.

lot decisions. decades to important committee the through of months And -- helps help in spent and junior the can we've a organization. last the the the cycles mean, I levels have myself multiple things. leverage mid of the and kind our kind primarily because that staffing have XX of couple of make restructuring that a on over guys in investment increases experience So of that's been

that. mean, mean, do. have XXX% capacity have you definitely on calorie of burning we us a But our consultants. -- it's a say increased you restructuring every I so what And also credit, can guys do troubled I outsource I doing when would not the

in ground the company. You be at bring to on consultants the

to and have around but is of capital make those companies, decisions to analysis intellectual the respect We strategy that's done. with based the turning on being decisions

decisions. Recession, you is And can in produce going what's saw and the and help actually this at so we the our can you Great Great understand spreadsheets make investment based that consultants analysis in you I that operating Recession, -- can can right. the you on level, bring and on in mean, you good portfolio

we're think to it's -- our that junior But always staff junior as add are because well on operating said, that in targets. But growth manage our mid-level mainly I continue portfolio we that we've we described. our we think set very you with lockstep I I -- intent I think, -- to side. hitting So are on people, dynamic to leverage the going our up will think

So it. hopefully we about to as that's helpful think how

Chris York

And helpful. interesting comment there. is one I gather It

So you would help fair? consider to there, hiring that you is consultants

Bowen Diehl

you Yes. Well, asked. so

the operating the bad, going first business, if right. on, a So right? foremost of things mean, loan I goes right. of is couple there's One, and a

what -- and and take potential month we us turnaround kind being on And you obviously, of that's of and are strategic go fishy what and team are on a businesses we're companies, being the every forecasts of But is out that going to told covenant, exactly a life, is how We what's to the in figure down so that thing the and going right. companies. on what We trip And financial hopefully right of the the like. decisions shows monitor then getting when you're of and do is as and myriad and under out operating in then first and a the to done of we statements now is the versed profession in enough flow in long get now well we're with kind and is cash there the and covers sit business need that more. there have we company, pretty on on, heck what's guys made. and and you going and the through operating what and decipher girls this have flow dig industry of all cash recreating really fundamental and are the and forecast the consultants and x take will side the operations the advise it can their the business understand

do to are those and all to when of point on the protect have, to we're at And our we our to making where from with upside capital things that create we that have frankly what cycle. capital that shareholders' decisions

operating deal I'd said And be I anyone skeptical these any you hey, you -- that. a tell the it's like be to I a to of we're that that, going of mean I I BDCs mean, that. turn around. guys so do don't that's mean, -- would guys can pretend who we're of lot think and not companies

do And you is cost outside or expense to what obviously situations that's in lot of turnaround attributable so restructuring portfolio a the or labor that particular company.

Chris York

Very it. helpful. Got

quarterly proceeds expectation color you gears, of expectations investors have pay it exit we and MRI the in those Bowen, financials? to. on to asset sizable your debt? Okay. some of so, Switching a Bowen, use Can Michael it's and the for take likely MRI can you the remind the impacts earning of Questions prepared the on do you're appreciate from Because that down remarks. then of to

Michael Sarner

Yes.

current $XX dividend the back. proceeds we're to be going from into dividend. to X% about are about be our debt $X be those debt million used of million there'll coming initially go and some deemed the level so dividend of quarter going will going to on down those going it use X%. leakage MRI, that initially, about a There's assets. debt away, a approximately to obviously, yield is that's Majority be distribution but come proceeds when of -- special So -- are pay then down, to depending is for or But of we is cost pay just redeployed be -- to

we then the redeploy, then lever up. and will as a will back fully will at end. transition, when we NII flat front be there we it And So when be slight reduction grow

Chris York

Got it. guys. sense. That That's makes me. from it Thanks

Bowen Diehl

Thanks, Chris.

Operator

you. Thank

McCampbell from line the or Our next Hilltop Chris from of question Securities. comes comment

open. line Your is

Chris McCampbell

call. Thanks for the morning. taking Good

can color factors but of at it's the give the of forward to growth cycle you contributed or dividend guess, talked really level some at where You've point we the keeping maybe about hard should goals whether kind that the I your to on, quarter-over-quarter, year-over-year growth we are say? the going dividend of same kind expect

Bowen Diehl

a of of focus dividend It's growth. performance my a on. really say, what's is is can with portfolio dividend the rely to be growth portfolio and shareholders policy would have growth, But going portfolio look, to function that view important dividend I Well, a in a a bunch factors. of

don't so then and decrease to to security, it, increase just its just want And increase it right? we

kind So quarter, of very of there's as as that's kind So the we in we terms which a quarter we a at late why the But that quarter, run right? quarter, earnings, closed in -- Michael would in exit if earnings. deals exit always of following a would first the than a there been that quarter the full a talked done recurring perspective rate might those quarter. of run from would higher we they rate of off loans income had of be be be

certain those are have you and a you've fees loans, you've that you loans onetime got that recur assume that will various really can't you exited, So in prepayment things have next quarter quarter.

have be expenses $X.XX this of quarter like quarter. won't we You also also a share, had expenses next that

available just watermark high So in we portfolio go to frankly look of it are deals. of And have a level and try the you where credit that forward. will our to as on as level, will, rely watermark, a going to shareholders if that us a facility grows It's based at set level and availability. a should, based good need at on matter find hopefully we we can and the all a liquidity we that cash that deals leverage is dividend we our are that on that then increase

makes in find find diligent dividends close. We been and and or a and earnings. ones to careful opportunities rush the actually really never deals, which very portfolio want and we've be thoughtful that the to we or If increase to sense. So grow hustle

the have of a the amount of of capital substantial would so lot liquidity, we have find available function to manage have I when those going continue we say, good things a it's we So, forward. that a we and deals. news is,

So effort right? and of just Michael of on the in said, we've as risk cost availability sheet, sources balance of to right of the capital being a levels side risk the made lot decrease, capital, then So capital. covenant

having the can So investable on concentrate capital cycle. we substantial throughout

result we that the the as So the increase. grow is portfolio, should earnings of then

Michael Sarner

we now, the we absorb exit, where stabilize to as capital Bowen's probably would we well dividend you, but that I as dividend the the it level right for we tell definitely And received, potential redeploy grow we the to as capital. as exactly MRI as just moment that you described an as for expect is would tell the may

Bowen Diehl

Yes.

important when So I point. -- it's an

in investment growth portfolio, I when in growth. say, net obviously, growth So the the portfolio's

a amortization assets risk. prepaid. minus $X We're So that it's companies lien have of so new our payments we're in, lot prepayments every lenders, first come asset were we and on and -- things being being because put quarter

flow, asset and capital. obviously to earlier, we'd so would and it Chris then exits that -- oftentimes goes redeploy have you and question And then immediately York's that's lender lower MRI lien big large us. capital our potentially inflows be company first generates our first be capital when that it an that cash And -- base have that exit be to to like would the would

hopefully that So helps.

Chris McCampbell

of you point be three, being to were Would more years little conservative at it though ago. four you're that the say Yes. than this maybe two, a safe cycle, -- it's

so, well? of portfolio be likely would slower the pace And as the the of growth

Bowen Diehl

Yes.

need prepare the think mentality what were a had the large think, matters expect since that happen, whether for. prepare that's didn't for the back 'XX, next a kind for and 'XX 'XX of doesn't it none for in it, is didn't prepare matter same and we and doesn't that it. it that session starting thought beginning for or recession I of XXXX, of right. not, didn't that what of we thing super the everyone hope we we doing for happy now phone 'XX prepared obviously, happen, and We We've in and it matter, obviously to prepare we years think, couple always preparing -- bad we we we it us on that we for but we're

all for hopefully happen prepare you but doesn't mean, our preparing it, in your about years, portfolio, it in never know. be portfolio look, rate, to client cycle that. goes for that none stock several know, going the to another are loan And of of the for to it's every I So, economic end but year have right. to When us by we happen, closer

said, that we've taken of so, at and year we're each things, the more that get of to closer at would and yeah, look some say theoretical level conservative the but mentality we that kind all I the So, from end how cycle, we beginning.

Kyle Joseph

for Thanks guys. stewards good being

Bowen Diehl

Thanks very much.

Operator

Thank queue at the like back to closing showing Mr. the over remarks. any to over time. conference in I'd this you. additional no I'm -- Diehl for questions turn Bowen

Bowen Diehl

time, you Great. for Thanks, everybody support focus look joining thanks to quarter. great Hey, and your next to your all and appreciate talking Have forward your we we week. operator. and us a

Operator

conference Ladies participating. call. Thank today’s for and gentlemen, this you concludes

may have now Everyone, day. disconnect. wonderful You a

Capital Southwest (CSWC) 5 Nov 192020 Q2 Earnings call transcript