CSWC - Earnings call transcript Q3 2020 | Capital Southwest Corporation

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Operator

Thank you for joining today's Capital Southwest Third Fiscal Quarter 2020 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, Vice President, 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 will year remarks, be earnings our and prepared to which earnings website Throughout refer at XXXX you www.capitalsouthwest.com. Thanks, joining Chris, us quarter thank call. we slides for on our can presentation everyone in various found our for third our

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

quarter, outcome such from while portfolio. the BDC, great by a volatility the equity a strengthening Capital removing the continued sale sale BDC the the our step a share advance middle final realized business for traditional large gain we does which a to holding credit oriented The transitioning achieving solely Recovery, yield as lender Southwest NAV investment the Media strategy, with capital in as of a market significant banner successful we SpotSee. reminder under to the as was more During company's position a potential in per

quarters, discussing later further been in likely several our recall, As the provide potential remarks. we've details sale prepared we'll you and for

equity a where have secured step across pursuit first lower the portfolio forward senior achieved we of lien loan significant predominantly to continuing building middle opportunity debt investment core and exists. excited co-investments upside with the look strategy portfolio market largely believe final of are consisting We of our to this equity

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

quarter, During out on per Slide $X.XX regular pre-tax per dividend net $X.XX and of share we laid income, X, generated the investment December a quarter. the share out as paid of during

us funded We also sizable, to-date. dividend undistributed paid from strategy out UTI, add share a XX, income and The accumulated December realized approximately gains total investment was gain allowed to supplemental share per balance, Recovery by per to income XXXX. balance approximately taxable per in generated our by quarterly our $X.XX for $X.XX bringing on the share $XX.X of which UTI excess sale as or Media capital of our to million $X.XX balance

quarterly future. of the program the into provides the supplemental well believe continuation visibility We to this dividend

Board dividend has During $X.XX We share, was out the distribution dividend quarter that were quarterly the declared of we Total were the for also to realized per to quarter, a shareholder our which of increase announce paid pleased our special of the dividends share. gain. per $X.XX $X.XX portion Recovery Media also to share. regular an per a

share also per total shareholders $X.XX March of our dividends Board quarterly for Our paid $X.XX bringing supplemental another share, to declared to quarter. per dividend the

September lower in million market. $XX which million net of as the the to of quarter, quarter, approximately were basis originating in During investments the for The the vast our end $XXX from on we middle the deployed million a majority December portfolio quarter. grew of $XXX

perspective, From maintaining continue derisk balance and the to capital a sheet capitalization we diversifying sources by liquidity.

institutionally on for our $XX this principal placed additional now debenture existing X-year XXXX. raised we due an amount The is quarter, During bonds million X.XXX% million. the $XX aggregate

Program during per selling XXXX share, premium ATM million $XX.X the asset raised a over average our of shares net at XXX,XXX in XX% proceeds the per we to a weighted value $XX.XX addition, quarter, In representing gross September Equity price through share.

ATM $XX Southwest Capital attractive million in value, sold at X.X proceeds. We are shares of has that to book the pleased report premiums initiation million to over our raising Program, since Equity approximately gross

available to facility, represents a This powder, balance $XXX future Our dry Equity had investments. of capital at cash increase quarter put we credit to steady ability continues sheet ATM of on XX% raised provide in portfolio equity dry investment and when deploy flow work. a our to on our in lockstep thoughtfully Including commitments assets. million invested, a just-in-time powder in basis end undrawn Program our the capital with to

value illustrate slides our continued to of producing yield, record dividend of strong our Turning creation X credit and consistent since coverage launch and track strategy. we the a dividend X,

Turning reminder, to its our investment has since consistent XXXX. Slide strategy as remained a January in launch X

risk market, We middle also invest market, attractive lower to continue on core focus adjusted in exists. ability middle returns while our when maintaining the upper the to

to opportunities directly per lower originate NAV equity credit future losses. any in co-investments. and investments of well the out growth equity we mitigation of In is in the of market, share co-investments consisting middle important driving portfolio Building debt performing a and granular aiding

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

maintaining value other terms superior loan find lower middle levels, opportunities loan leverage to continue the while We market, in land the documents. can and in adjusted return covenants we and where lower tighter risk to at

quarters especially of market primary middle NAV has been several in been the Over has upper true a source portfolio. this the as past our volatility

the as compared XX, end Slide I-XX million million quarter portfolio, $XXX to Turning the during credit the to our quarter. on-balance $XXX excluding as prior grew to of XX% of sheet

quarter in the again majority our vast continue We And were originations this market. lien to lower senior emphasize lending. secured middle heavily first of debt the

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

we lay out X On during million and them. of in in $XX market included invested portfolio equity new to and committed in This secured lower middle in lien first the debt $X million Slide capital X invested quarter. almost companies companies invested XX senior the co-investments in

$XX We capital existing our also to committed X additional the quarter, the million. quarter $X.X deployed capital to companies bringing million of portfolio over total during for

The were new on secured first new a one debt of maturity portfolio average yield to the out first company which participated a X.X%. position. funded alone All in quarter originations was as in lien with first lender being a -- bank senior this loans weighted out

diligence close We market. pipeline additional quarter. during as it March are stands lower vast and in the should pleased a Again, the with majority today several is this middle currently the in prospective of activity deals that investment expect

of million Slide quarter. XXXX. original gain a of summary the during show an and in XX.X% sale generated we proceeds exits Recovery realizing measured The of On of a Media in acquisition XX back million the IRR $XX.X the net $XX to

we closing. debt position subordinated full subordinated is remain During generating Chandler XX%. in the equity credit we our since that prepayment realized exits have co-investment a appreciated is well XXXX Signs. performing exit of IRR since now in exits of strong value XX debt continues of in track million launching investment in generated IRR XX.X%. The had invested proceeds an record cumulative our This in we and quarter, $XXX Chandler January an portfolio strategy back of our also as and a successful

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

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

in the portfolio XX% held lower as the companies. approximately middle our our of of portfolio, Within end we equity market quarter, ownership of

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

past of excluding shown obscure quarters rate basis at are degree portfolio portfolio. the we investment a run the remains American metrics remainder our that of market middle the middle in that upper should ratios as leverage As couple skew sheet the the to market would note Addiction our accurate improving of upper ratios would the in that a on a no-balance level while EBITDA

quarter. XXXX non-accrual, American the placed rating Addiction system internal on non-accrual have and remains on a been during September on X remains you our

X% had X loans upon rating rated portfolio fair of scale rated X X a reminder, which of represented the X lowest at fair the of value X of a of loans and out the X credit point XX portfolio the rated representing at of a we of XX% X loans rating. with fair assigned had the the representing of X% end As on being an initially the XX% highest at fair all had at are credit credit XX portfolio value. a X rating We rating the we We value. a had quarter X highest investments investment representing At being with loan X the portfolio portfolio the in the and X origination value.

the middle X The from Behavioral a and was country. status the which a to in Health. does December Addiction joined non-accrual quarter. Addiction, portfolio American Premier treatment as which services loans Delphi and business of upper rated business market Delphi the all as addiction during does the providing the and in across Global Teleconferencing, Addiction American American Delphi Intermediate, are American Both quarter in a X September patients include Delphi downgraded business the to during on X

due I detail would it status increasingly company migrating businesses of to face to addiction reimbursement public the a the in discuss to industry part call, on challenges each that will inappropriate an model. X say similar the insurance be in in-network While

reimbursement each this decreased short-term. challenges, results to has company opportunity materially companies number flow in provide to at larger cash While the Due results to these largely for it a also rates, in greater of high a both care reduced quality in patients.

both in we sheet And rapidly restructurings to in highest That said, care situations will patients. each the to that we balance quality to that believe benefit provide believe missions their cases, respective are their those the restructuring. company moving

the We believe provide will complete lender patient respective in investments businesses and the recovery their basis. the their these as that to grow groups also transition the and opportunity restructurings respective appreciation of realize

that is recoverable. companies each unrealized in both believe continue challenges facing are We depreciation to the our and addressable

first position lien of would if remainder in interest currently each portion expect recovery on As each a exists a the Southwest’s first would occur, as accrual. equity, debt coming today. of that be held restructurings, Southwest’s depreciation in of of The in result of loans reinstated which we then unrealized company anticipate we be these lien each will resulting source the the when they Capital back would that with portion that company on business of and be Capital

Our on to loan remained group for has a work the position, middle on rated business. the AG the quarters. continues in loan alternatives several market upper strategic the lender portfolio company this also much the with respect past X non-accrual has is to changed for Not with Kings. but The

status. you extent will to to company the calls We future we on attempt the comment can update on

a security the should late heavily with in well illustrated the our our portfolio and middle issues X% The of Further, Slide our for strong well Despite of portfolio debt in we were portfolio the in mix second senior market cycle. senior economic with dealing we investments. diversified today, upper As is positioned established have debt the lien remains idiosyncratic secured the first we across X% the XX, for few believe towards shareholders’ subordinated asset weighted portfolio portfolio debt provide portfolio portfolio only in secured lien only capital. industries.

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

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

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

Michael Sarner

Bowen. Thanks

was attributable produced the of increase primarily The XX.X%. previous portfolio with quarter. from decreases average placed I-XX both and Recovery seen this income As and investment offset investment received an on average of from a sale XX, in dividend investment during Media approximately our income non-accrual and to weighted Recovery in Slide yield in in increase $XX This an with Media quarter. all debt on transaction the increase a income investments by million represents of fee quarter, $XXX,XXX connection being outstanding investments on Delphi the of

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

Excluding interest the expense, previous million the incurred $XXX,XXX was less quarter for $X operating expenses in than quarter. we which

in $X.XX share regular pre-tax during investment prior per or share the dividends quarter. million prior income regular This the $X.XX quarter $X.XX net per paid per For out $X.X share. share in $X.XX the quarter the paid of compared dividend we for out from We per quarter. earned flat to

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

As Bowen of mentioned a $X.XX dividend supplemental we out also the per during paid share quarter. earlier,

to were believe dividend the of $X.XX provides December share of supplemental of balance which well dividend supplemental able portfolio we time. continuation investment successful shareholders our to successful as sale allows participate distributions through from of the the to to reminder, XX, our UTI program level MRI, our in of our program our a over visibility the a replenish future. a UTI meaningfully balance into XXXX we per exit to Due As

The continue equity of excess net earned quarter realized income dividend. be and both from UTI to program debt as investment each well gains from as will funded undistributed on earned our in regular

a paid we dividend per and declared realized the Recovery a Media from portion of share special as $X.XX we addition, gain of In sale. the distributed

sub was our which operating end us we which puts Slide X.X% our operating of XX X.X%. of illustrate quarter initial as target of near the On leverage, the leverage

of our operating lockstep committed with growth achieving fully leverage portfolio set are managing or sight and better. X% to on longer We have our actively costs operating in term target

senior With our in should improve infrastructure operating grows managed investment professionals as place, and structure. internally due continue leverage the portfolio corporate largely to to

with per XX, over September NAV XXXX compared of Slide Flipping $XX.XX share company's to XXXX. the as XX, at December as $XX.XX to XX,

was the the as a a Given parts quarter the of of of share per a middle moving a market per that transition reset of achieved number the NAV this of NAV lender and in and the we fact BDC quarter-over-quarter walk step the share the thought of components sale to Recovery, change final of through the change. much result Media minute we the would through take

middle the we taxable we appreciation during our upper strong to of market the distributing partially dividend the from by in portfolio. while covering Moving our unrealized quarter, With fully offset time. right, lower earned over regular undistributed middle unrealized left in to our depreciation record track with income NII portfolio, investment market, systematically continued the respect saw

of Finally, share, a of the our paid of we special from the distributing a shareholders with $X.XX to respect capital Recovery, Media gains per to dividend the to shareholders. portion sale sale

shareholders we per expect For their a the we portion on tax letter the and will and on of Form retained resulting tax which cost XXXX. per from to step for capital retained, the of a further paid of basis, December us of $X.XX share as capital. with up we explanation gains credit share Shareholders be XXXX XX, the receive $X.XX a record

depreciation share. X the There Media Finally, of were we per components to Recovery recognized sale $X.XX the book from per $X.XX of share.

investor capital process, pursuant and adjustment and a transactional the banker $X.XX and the purchase buyer. to frictional with fees, accounting legal sale agreement working was from costs share per closing First, the including expenses, driven sale by

per discounts additional result recognized account transaction. from was million Southwest in $X.XX the required that both associated we to fact the proceeds Second, share and each the book outs $X.X Capital event. to with a is an it will in escrows gap the full, applied future receive potential sale receiving earn If in for company’s

received pursuant fee and share. as per success and the than proceeds which was recorded share. closing Third, Capital $X.XX Southwest fee management NII Media is approximately a rather the sales Southwest The place upon agreement in fee to Recovery, success Capital purposes NAV and per services finally, for of revenue between sale,

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

our pockets Slide we multiple out of lay On XX capital.

throughout ensuring bond, placed our on As we’ve strategic economic calls, to a raised priority had an $XX capital that adequate additional company investable mentioned on million prior coupon is continually liability to the company, To a have X.XXX%. evaluate for October end while that XXXX approaches our the institutionally which of cycle. structure the derisk we we

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

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

We that XXXX. our maturity are December pleased is liquidity earliest debt strong, dry and at report with to the significant powder

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

Bowen Diehl

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

attractive credit portfolio and team our robust experience for Our a credit while extensive matures it an managing demonstrating in as returns shareholders, our done also building loan portfolio, has excellent generating our job seasons.

is Everyone of performance shareholders’ to value. good sustainable creating here deliver strong Capital our capital being to continuing and by stewards dedicated Southwest at shareholder totally long-term

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

Operator

from line from question Riley. B. Instructions]. our first FBR. [Operator of the Hayes And Tim comes

open. Your line now is

Tim Hayes

My accrual. is your and the is color a this the on the first a this expanding On results? would impact had investment portfolio was Bowen, you But to this bit next had that regular success after-tax dividend little mind excise Growth have on Just an you case And it drove income fee expect higher. more around congrats just decision helpful. dividend? transition. profound I quarter, much will was NII you onetime but the really and officially than on a quarter's regular quarterly question, completing growth tax you the $X.XX lower any raise be strong, basis, weighted would where also know back-end

Bowen Diehl

the those Thanks It's things. Sure. question. all of for

me I'm to comment components. Michael the let so let going -- And on

Michael Sarner

Sure, sure.

So XX/XX the non-recurring MRI I if full think quarter’s you per add and rate million then back were looking at rate, XX exclude during you for quarter a for quarter X.X our share. the the be $X.XX million originations in XX/XX the accrual, about run of the the impact would fees, run

So that have looking and originations quarter to-date will this doesn't that quarter. close end now include that closed the forward of between or

Tim Hayes

helpful. there increased and/or That's Delphi, the it. And Got the of what it this interest loan? principal as quarter. being to added on stop company then impairment? they new the Okay. Or likelihood you to exactly information actually gathered, paying which non-accrual did relates triggered Was

Bowen Diehl

they stopped So, paying income statement. but loan, our picking not interest on it's through the so going

non-accrual of it's So EBITDA. but deterioration not it's basically just

judgment it fact non-accrual. made cash that weren't so And on interest, we put on and the based receiving that the call to we

Michael Sarner

of so As Bowen process. potential Bowen part it be that discussed will was balance and principal into that restructuring said, restructuring, Tim, the I the picked value think

Tim Hayes

-- can restructuring that give us? just guess maybe up you the you know might timeline there be question rough And but that around I is this that answer, my any was, can was, process Right. on difficult to I follow

Bowen Diehl

both prepared that would I them in moving in I are like direction. said my rapidly that say remarks, of

simpler provide AAC -- the moving probably support quality you be going exist ultimately expect It's it’s both should like going patients, AAC. gets a in companies to their going high public. my quick I a because Delphi than to and companies to good both ultimately remarks, faster private healthcare said the little given to pretty prepared So, that's and is capital and what's for on to they're I'd be timeline that's done say But probably structure. that's that good

fairly quick is pace both cases. the but in -- So

Tim Hayes

$X how company market marks were drove And was net the Okay. million the largely on on middle any and this fundamental there value upper of related it was then performance? largely to that depreciation much -- marks? technical Or of and the were these factors investment, fair JV

Bowen Diehl

at on between looked depreciation depreciation the you half And half JV about it's sheet. -- that's the about those the say a JV on million. if X, and So companies mentioned, or $X.X -- we talked X -- the I I between X.X that balance and of and the at it's balance should the sheet sheet balance

I credits, I-XX, that loans or So of AAC. $X.X that kind all having the XX then million just including million fine, doing of I-XX $X.X other is along. that's then loans, depreciation would total out was The kind and And minuses. credit either X are companies the of XX say challenges in it bumping the or on essentially and were operational are pluses and of X other of great credits X doing

So general but the operational returns, you loans are working get some of out that there's some kind But conversations I equity of to very color. level and gives X probably are themselves that having XX of hope their hard challenges. are fine. the guys

Tim Hayes

would some you say being supportive seeing inject losers, some better describe I companies the, could to try you of of call that winners don't just color that to a draw sponsors bit kind on Are ones and in ditch sponsor does. liquidity would focusing maybe you struggling It of distressed on more companies be want you -- broadly are them just kind or to little helpful? just outcome? but working or Thanks. restructure for how investments would -- Are And a to they with Yes. behavior? help

Bowen Diehl

sponsors smart not good I just for and bad. making part after throwing money Yes, the so are most decisions think informed

thing in have to have supported do every companies. a over that's the over and half in timeframe, made when portfolio sponsors of keys those hand year, where rational the the them them lien year the last we lender sheet vast are a the majority i.e. our earlier. the time across couple of And for So to sponsors referenced a I the There to first balance as decision particular, restructured one one the instances. of

so that the And I do to was frankly, business, do case, rational a thing and and the the for -- in to the say lenders. probably but generally, So which I'd And senior And think smart thing right decision that for think right we I virtually first sponsors keep want we've seen in what happy, that make was decision support case, business. every lien decisions, to the is lenders frankly, but the them right doing.

Operator

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

Your line is now open.

Mickey Schleien

quarter? I've about larger the more lenders opportunities bigger for that impact direct to the that flow more did that have a deals, gravitate wanted led smaller quarter and trend syndicated and lenders focus borrowers ask fourth the liquid BDCs volatility in I markets deal hearing may that flow. during more on deal to you the toward caused BDCs. including Was your instead to larger saw larger been resulted that that in and market, the of calendar in

Bowen Diehl

Well, we certainly the saw a slowdown of activity market. in syndicated general

some that'll the about middle consistent market that of excited we’ve and as larger that has number a we've I club also think consistent at which comment that. be general matter, deals low. So deals, looked with upper been with But been is

at been in that it's low of I-XX number really not and refinanced hence capital And a been you growing been that fund. see, and has so looking new we've because -- -- deals

you -- we're said everything But I-XX with there. virtually was activity just say, that slow So I can would see slower, what you is certainly so seeing. in consistent

Mickey Schleien

first a And that your looks remarks I calendar mentioned busy. far the so slow you quarter. think quarter prepared that's at pretty usually in least And

it leading something that that on that from there fourth get the quarter, spillover didn't to is Or quarter? just this is So in going deals that's specific volume? done just

Bowen Diehl

lower and is, it's the frankly I've kind Yes, random. lumpy middle of it's as market honestly said always

say and we you would I they're essentially signed our and above it's down that deals if list look across see that -- ours say we've would want average. that pipeline I and category, them, I I up kind that so And if we're are the of look

but And quarter before so, they’re the was average. quarter strong -- very that two or originations, below December below obviously were of quarter

of if I I that I'm the so that line I wouldn't say we're And strains were our on that albeit in mean thinking deals working look working March it's just on, I’ve at quarter.

it's is be quarter's may be it random. quarter would latter to say be going average half I above to towards of but So expect It last -- a just it's the we that volume, the bit little and average. closing would pipeline above this the not probably quarter.

Mickey Schleien

additional follow say. But been that. I to additional agreement the extension just capital as by participate up lenders. you're can there about Did you into Okay. you appreciate on that provided know and AAC and I some news limited what has And of the a injection of in capital forbearance the AAC?

Bowen Diehl

outsized incremental dollars secured we participated loan it other that estate. a but I capital all in people and and are We did, And was very has our directly if that put incremental first don't. it’s frankly by are the priority economics real $XXX to we because mean it that so the going so in our, we our capital small there's split piece is million small,

to rational for So the fortunately do. are numbers us the it’s But thing small. relatively

Mickey Schleien

confirm is real Okay. there I the wanted just estate And in collateral, to correct?

Bowen Diehl

That's correct.

Operator

you. Thank

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

Kyle Joseph

Hey, good can a market competitive? to market. Yes, sounds sense get little explain discrepancy get what's the that seen upper driving get [AR], it been Most be to thanks market disappointed taking lower the a in -- middle of have maybe with you investments you're attractive I my just sense, some the morning but want I of the you things like there? is have it middle questions. more in for to guys upper continues the a very and and wanted answered, middle

Bowen Diehl

upper $X.X Yes. the look there's of together, it's million. That's add break Delphi, the in at just AG into take of I I those and middle if have mean market. kind King you you and you it million mean $X.X -- on our components, if if depreciation depreciation AAC

the go, I and them. we'd in a business. guy, well, middle made but in structured, story out wish choices the restructure we on that's certainly loans. just -- the myself never -- those work structure fine credit upper not were the hadn't we zero wish it’s frankly, at that's we those market. loans those So the going They long And I we I to done mean right? the defect but made mean run, is bad look loans

-- are that's middle so And those upper market so far. story the

the There We upper the last willing to do we've more years, really companies. middle think, larger people to is referenced the over pretty is consistently market as loan that more market really competitive. is where several win it

And so average, average ratios on on value lower you higher have to loan higher average, leverage across. yields on

so there's problem, of have a less And when degrees you freedom.

the nature middle of the market. that's So upper

So that way as now. a years kind versus more less it's of far for competitive few certainly competitive, as getting in

lower the portfolio this is market mean different. I side, by loan million quarter. we On have story $XXX our middle depreciated $XXX,XXX

flat. then lower basically it's by And middle equity market our million. portfolio So $X.X appreciated

is as far in so portfolio as those it's co-investments that the first designed. -- portfolio depreciation and the working designed, equity equity winners -- so with working are equity any And like lien outpacing co-investments and

Kyle Joseph

That's to my segue a good next question.

middle yield for part I or of upper the upper question, think -- between broadly? and more this the you're guess but about middle about So trends lower a seeing as what means and market you in talk and lower is X portfolio kind pipeline that your market

Bowen Diehl

higher have may deal a in slightly tighter sponsored, that's to tighter recurring as same. has of revenue It So a or be low are basically other, maybe higher spread that based spread. sponsor be and So a going you would to And are deals a sector are market a right? a going but a of that those maybe not type high have loan loan yields the making say have relatively businesses, market, very right? range where value I recurring think I'd in loan deal. margin, that large maybe maybe to middle the that kind expertise loans to there's negatives a those a generally generally we're and you if loans value, business, of less same fund the not that within that's a the specific one the lower sandbox, the as that will, are yield or had of Yes,

ranges going yields. there's to be of So

of it we're move target up quarter-to-quarter, our should And deals. we so cost down. capital frankly, forward of that, safer expect we of coming the BDC, is -- do look And if leverage, lever do we as going all one to you if some to

so as long that itself long same much. But you over edge edge from -- like that upper has other sandbox one the But the the And competitive same quarter, haven't I several lower middle time. see seen I that move than may didn't the thing. mean, of see a the that say mean A And long would I sandbox of that much. for more I of been to it's we market meaning, market move sandbox the don't for quarters. time. really sandbox. competitive I don't it's been change it the I all a middle we defined years. couple been time, this last all

Operator

Rowe Bryce of from comes National from the line Security. question next Our

Your line is open. now

Bryce Rowe

to wanted source Michael, about dividend here. ask of income I the Hey, you

This you other income of obviously had I-XX portion was? that curious dividend. But dividend what the quarter,

Michael Sarner

Sure.

MRI was proceeds from other of about dividend a portion close. XXX,XXX sub the paid for that out The was before

Bryce Rowe

the can average over middle two? quarter Bowen, but dominated the quite I'm have seeing then was visibility visibility from prior repayment perspective. And in of the the market. wondering maybe if next by curious to any and this what be about being pipeline from terms you quarter just you or a Obviously, MRI, random above proceeds maybe Okay. repayments you're lower talk

Bowen Diehl

I'm think kind visibility coming we maybe two. -- relatively I now light. our expect that a or lower like aspect any quarter large phone right Yes, middle have to that about into quarter of of next don't have over certainly seeing be really are the I kind looking from prepayments one they're the Michael I mean prepayments of model, on next but would we thinking don't at our large prepayments business of constant just but we -- thinking companies, I'm prepayments, call obviously and some the away in that market

Michael Sarner

A stay potential worked refinancing And we're going there plus a a to we we through I performers And for on lender. think that what X as have did call existed. that where we've

see reason for part right we of don't any additional now we say So visibility the repayments. that's

Bryce Rowe

if what can MRI, Okay. And you -- this you what, then if not, you we speak talking know earn don't about there? mentioned out kind can or of are with that I guys to timeframe the

Bowen Diehl

fiscal will that's fiscal earn-out X/XX, MRI XXXX the a So year be earnings performance tested for on so with year basis, that year.

Operator

you. Thank

Our from York next Securities. question comes of from Christopher the line JMP

now line open. Your is

Christopher York

guys. for Thanks taking afternoon Good questions. my

your a from market upper security of to pickup in noticed average investments leverage to So Michael about the X.X. X.X I middle in to turn or weighted decent Bowen,

increase? you could that comment maybe big what So a on drove just

Bowen Diehl

basically. all thanks. Yes, Delphi It's

So if X.X the you is out, X.X. take Delphi

Christopher York

Very good.

a I Okay. And we so Delphi as Q, there I-XX look well? also in the have I've would in at then increase have decent to I-XX and

Bowen Diehl

No, not. it's

went X.X X.X. I-XX on last to from quarter leverage the So

we to they paid put issues in EBITDA the or leverage And credits times, X.X was the were basis prepaid the times X because deals, new where of $X.X were type During low new quarter, X.X like on performance. X.X on we down that of had the of leverage. million and companies mid X kind

so change. the basically that's And

Christopher York

Okay. I I-XX see sequentially. decrease dividend And for $XXX,XXX the then

decline the to there, should expecting this given be a recurring of is in that dividend Now the we level continue? portfolio

Michael Sarner

good and Yes, credits of right the portfolio going based think now cash is number are forward. the that the a rate I in the X.X run yield, number upon

Christopher York

middle allocating the the or Bowen Okay. middle And upper strategies? the you've step back, capital you to in has caused experienced the this upper taking between given reconsider then losses maybe pronged dual here a the in you that competition market, described strategy market,

Bowen Diehl

opportunistic lower No, I core market. market, than mean, middle market, the our beginning from strategy been upper has market the

it's now very right competitive. so, And

upper a really been risk or mean I’ve said the from returns. credit the our said view in more value middle finding differently market over market, I value years, -- couple middle in adjusted so think in of much challenging than certainly lower last finding has in the I perspective

-- so strategy changed. don't And I that hasn't

we a core our middle lot I teams have deal of our -- what just done deals. market, a lower had given so, And business said, and great job originating of

cracking look X% We’re deals of kind at. of closing we about -- the

for originating look they've done us to So, great at. a job opportunities

so is more earlier okay, sheet to middle so market, at balance challenging it mean and And Doesn’t upper I the it’s still for more this in challenging. X it I'm I it's there's our in quarter, market. mentioned exist, market we did lower middle not the doesn’t deals I value our exist, find that -- demand X doesn't our there's like just deals mean like, lower look in but I-XX,

upper that -- putting situations of in mean So on market are X we've I the now noise obviously challenged couple and of the flow statement thrown going the changed. I strategy on has that markets. say where changed. and and in credit That's that to hasn't middle capital restructured. got But being those laid strategy top out. we're just that adjusted on see where we're is returns we allocating wouldn't based But money the I risk ebb

still us think certainly So bit And I a quite market. important we’ve why lower the the to lower it's middle talked for we market. middle maintain about like

But there's immediately the moves to market, result can will. think said, we when So middle with market because as upper Journal, evaluate move you necessarily to the upper market, we've you if always look Street it ability quote perspective, consider from moves assets and opportunities. things in the in certainly Wall we want maintain buy. the it doesn't at around do and a middle And

future. going for so it's be And to opportunistic us the in

those But maintain continue to in -- find it's look just right in market. -- that contacts if at So to still we're you maintain it's value will it's harder it, going now that the to market. just capability,

Christopher York

And you you such then that? invest these a potentially have deal? what of recoverable of maybe one to today. of said the approached is your as characteristics unrecognized to upper you secondly, in some question. outcome middle made you led investments, then market from like less to when me, there last a you is confidence describe some the depreciation But it's [indiscernible] that, ability may that gives given could the value not that of And you part syndicate two were if than some that say control part the Maybe

Bowen Diehl

Yes.

think done investment of first are doesn't treatment is in an it you wished positive. not we investor industry. opioid talk people most to value, And saved Kings you go it, in certainly come the minute. we'll right? you a and So story the industries, respect of back which in country growing. But all industry, that. here, addiction comment. the mean I I make a say an agree industry, lives on with buy unfortunately, never is a to right? would this that's drug help But -- on need is those So I'll would So anytime or I in that all, the and epidemic general the being it addiction, you might And question stock,

cost. So your is it is industry an fortunately, on growing. with But that or unfortunately, depending that increased perspective comes

so to And burden. that payers have bear

have a the industry business their -- Both out-of-network making businesses out-of-network. in from is moving portion of And these so of a had transition network.

a And that's it. piece of or management large challenges, of there's otherwise, number then different but a

never investments firm my my business. one invested former one mean, in in I say better we do of addiction I so, wish former of treatment I And my the made was the can't No, in that. treatment industry? I -- addiction

recoverability we and in platforms a viable it I viable that platforms like we growing these industry. so, believe, your we that but suppose I could question. that to are certainly, We And is through theoretically are change, transition. gets a industry think think going mean still these

that still of So majority certainly be should not view if I vast of the unrealized all recoverable. depreciation that,

so -- And why kind said that's and of that. I

those I just I And it's is so, to -- that. and industry just It's think addiction invest all factors no, horrible don't laid out. place that a

it's business. that. consumer -- larger a staple opening I are there's a grocery the up one eating that's geographies. increasingly and is that’s they on And But business side, a competitive very and stores I good. stop in mean it’s then There's know more always the more larger product. chance -- don't and mean people always we grocery type a competitors, so

frankly is we so it's pace made anticipated loan. faster we that years several moving that And than ago just when

And not why recover that's so, is going appreciation a X, a X. -- and that's unrealized that be it's to to harder

any making other excited super a about And different situation. loans it's quite grocery Not so frankly.

are answer situations, a with very respect question challenged it, different. than about that the addiction hearing two -- question but industries all to the you're space, hopefully addiction treatment So three to different are no

Operator

from Robert Our Dodd line next question James. the Raymond comes of from

line is now Your open.

Robert Dodd

Hi guys.

housekeeping fee earlier X.X the you detailed total ones. I fee non-recurring. $X.X be dividend million that because Michael, quick from couple mentioned of success includes to otherwise -- your the ones MRI or income? it'd I call presume then than more some and $X.X million in Just it's MRI think million like on more a related

Michael Sarner

That’s the sub right. for $X.XX million it was $XXX,XXX for the success dividend. and fee approximately

Robert Dodd

And questions I that? going to the the when can shareholders if I'm your this, XXXX, form, got right, expect about I get but then, know number on the

Michael Sarner

the we week, the think the it to definition gain should It'll have of tax help them that will their next correctly. the in has the deemed describe provide tax tax, I as long-term information the and advisors get full description to distribution it treatment. done

Robert Dodd

then last one. And it. the Got

were taking? the for distribution, the On right, XX.X in undistributed amount deemed income, that's adjusted million you the

Michael Sarner

Yes, that's correct.

Robert Dodd

which that shrunk has XX, looking a I last up. Leverage I’m So I-XX gone very little at just and over to helpful, it’s the bit. mean looking going few the and page level, it's at year -- obviously portfolio

I do that are get with likely shrinking, portfolio a obviously that what borrowers have end a And X and repay mentioned the not in leverage gone repayments. course point they selection while up You as when shrinking. successful But are? some you borrower, going a mix portfolio. portfolio have -- of more on wanted any that we successful we good about or the assets remaining mean low to you’re of the Should more we upfront? some the is year, it's early the be has out adverse given Should up you might pay. had there's the you over the worried leverage

Bowen Diehl

Well, certainly earlier. and a leverage loan I clearly think portfolio the repaid any that outperform, gets goes ones as down, portfolio,

quality portfolio. by academically just lesser it in are ones the credits definition the then So that's the

on depreciation. are balance portfolio, kind So of those say to of look of that which kind loan unique having ones aren't loans issues are our AAC, I really but going X or said through the that, I I-XX, companies just the sheet. would X operational being across the is as the other it's bulk that of They're

and the leverage affecting that's And well. -- so as also

mean and I would loans I'm I the a agreeing that we doesn't left payoff telling that it like what's a from think so, level, I-XX. older of portfolio, loans quality loans than the then think but yes, issue your with general in comment, that's that other the don't faster just, and But some a disaster. better newer get I'm recycled you And high is but dramatic then say, of

Robert Dodd

And company the of in in you I then the appealing earlier, terms lower slightly said more the out the deals and owners, on have for strong seen they're middle on market that borrowers the middle market you? as maybe to shifted any quarter is or makes ask the what looking the it the lower very anything originations in market, But could you mean be on lumpy.

Bowen Diehl

I Well, lot industry right? I the say is the industry, different, every a Every mean, mean, is I different. of ask mean there's when ask right? -- every variables, company I

different there of levels, So economic industries profit are the to the different have the profit drivers, -- economic cycle. levels sensitivity different

view business the very engineering. of always financial for improvements appropriate they that I of ultimately we that last by mean company. are were look measured, sponsors sponsors aggressive, ask the and good nickel in so, the they be quite a mean, are ask, our is levels the there given of other don't that IRR industry I more that Some less it much given driven and at of sponsors, most right? for aggressive and I go provide and And by their leverage, is from think sponsors because -- are want varying behavior they operational

our of respect second, in sandbox I don't in more bringing comments portions think of leverage -- do the better a the sense. with an shareholders, surprising. to if can side in certainly as category, we I generally the it's and sandbox, latter maybe We that in the the pricing, compete it’s books what's changed. has up attractive to general, ultimately not sandbox, And safer of But allows it which move sandbox play at us Again, assets the important if to makes we with ROE different as is capital cost same you I the it’s it's down, made will. our on mean, leverage, and the put

Robert Dodd

The I what that leverage If increasing I that But can size of you asset and X.X? to do be necessarily for X.X when getting not own down get you -- level sustainably that? what and sub shareholders. to trending needs to for question time, operating do obviously mean much you one OpEx be is can more. then that been target it's you your sub so returns think ratio think

Bowen Diehl

it in we you next Honestly, the quarters close can I'll the balance give Robert, timing XXX I the it. sheet. can the on and achieve think to I’d and think amounts tell somewhere achieve that you think amount, I we million of we be two in can assets

Operator

Thank call I’m you. At back time, would Bowen I turn to remarks. showing this no closing for Diehl further over questions. the like to

Bowen Diehl

great look to you today that us updates analysts forward Those all questions thanks the thanks Thank everybody's move forward. joining and And support you we were giving as to operator. asked and everybody the and appreciate questions. we for us

Operator

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

now may You disconnect.

Capital Southwest (CSWC) 4 Feb 202020 Q3 Earnings call transcript