CSWC - Earnings call transcript Q1 2021 | Capital Southwest Corporation

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Operator

Thank you for joining today's Capital Southwest First Quarter Fiscal Year 2021 Earnings Call. Participating on today's call are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, Vice President. I would now like to 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

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

Bowen Diehl

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

We morning safe their for to their I I and with everyone to ended to quarter continue first announce you XX, want June hope this are first fiscal results say our families our and that be well. employees be pleased to XXXX.

across that sponsors in risk we remain done at has work pandemic and management regular and safety teams of dialogue to of the the prioritize our Here our and Southwest, quick have We pleased the with with Capital of and employees portfolio been and the our the to continued health the financial company companies. responses portfolio. and have employees been portfolio cost-mitigation of

on to earnings good continues quality the about feel we in and portfolio. to general, market pandemic the the assets be our the of an of power overhang While continue

as $X.X During evidenced the of across appreciation portfolio. our performance million the net by stabilized portfolio quarter,

upgrades, non-accrual. investment we quarter, the two placed on downgrades had new no rating loans no rating investment For and

to the companies aligns have recurring that our our team continues for Executing to shareholder-friendly operating favorable the to Capital capital summarized in receive first-lien cost preservation of generating to ample of economics warranted value shareholders fellow and position our highlights opportunities Board long-term well-capitalized where with quarter. with our lender be As seek strategy portfolio management in attractive and sustainable liquidity, some structure so. interest Southwest earnings dividends, X the slide the internally-managed investment for efficiency. closely support under we presentation, our a of and through financial key performance and of On doing enhanced financing a provide

per investment we During pretax net a share. share per the quarter, of out income regular generated of $X.XX and dividend paid $X.XX

per also $X.XX paying sizable per yield continued share our of a of annualized supplemental quarterly dividends undistributed supplemental $X.XX NAV for an per share last funded XX.X%. and stock of annualized dividend Total the XX.X% on our represented share out program yield on quarter dividend taxable dividend by an balance. share income Friday's per We price

driven by included quarter X% we two equity of was originations portfolio XXXX. investing our $X.X Portfolio The two companies. $XX the the during million new total as total portfolio During million growth for in to five XX, to June companies existing loans. over alongside $XXX our in the commitments quarter, grew and total portfolio quarter million of

NAV. equity seventh the proceeds volatility, equity the BDC our million we ATM the representing program, permanent above raised straight raised judiciously market recent the gross front, through during the capital despite for we have quarter quarter on Additionally, $X.X capitalization in

of continues to today's flexibility contributors be quarter At in deploy limited the to amounts each Our financial quarter our one in the is price stock when and selling in of lockstep facility total with equity which the in our trading to million NAV environment. capital revolving in have to key diligence about credit balance sheet, companies above on $XX portfolio our cash million met. criteria end, we $XXX draws commitments unfunded having approximately our in had available revolver the for liquidity only while our been between ability

minorities, excited Capital we Small has Business a an green for to are SBA underserved U.S. veterans. an to in women Capital mission moderate-income with Capital owned to forward Southwest, the businesses SBIC license. apply areas that to issued announce providing to light their and letter Southwest Administration and priority we partnering low including strategic capital are Southwest, looking Operating SBIC markets, the in Finally, businesses a been of for subsidiary by inviting or

SBIC up the a companies look of rates a to to and program From fund cost in work SBA to SBIC the investments new levels, treasury SBA SBIC date perspective, per with final perfect close license today's as Each an the from middle draw to to would the if structure in of to be our market in completing forward X%. lower $XXX all-in issuance Southwest qualify the fit provide cost separately XX-year focus. a application continuing Capital will remain of lower is clearly represents with maturity between be draw. to a for and to a that program debt the million As X.X% definition. provide This approval commitment middle-market Capital reminder, the process. the And XX-year a with we debentures security debenture Southwest our businesses in small drawn capital debt from financing

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

of the supplemental dividend share dividends of consisting As share a per declared a again regular share. announced and a we previously $X.XX of $X.XX XX, reminder, Board ending that per dividend XXXX per our for September coming quarter total $X.XX

X. slide to Turning

our As investment in launch a since its reminder, remained has strategy XXXX. consistent January

economic on to believe that to consisting of In investments share also maximizing important of when ability as maintaining strong portfolio conservative critical risk-adjusted array while market, credit over origination is we allowing is to selective attractive upper portfolio capital, to Though, over it mitigation markets continue as us perform building thoughtfully wide the acquisitions per invest taking and in and end growth, middle a the are we well-performing growth we Overall, standards equity we support directly of that losses opportunities equity originate among both driving as a in middle the Building through deal the in We new invest focus taking deals, returns credit debt currently market, cautious normal other co-investments potential time the generating of to our have our core and we and to across and a performance capital to ensures of to middle that aiding employ risk, top towards are funnel lower pandemics our any approach extremely new market, time. account will well the of exist. any our cycle. lower markets. consider deploying NAV into pleased the out underwriting a co-investments. granular

We while have at been pursued where opportunities other levels, we that superior risk-adjusted documents. in loan-to-value find and excited leverage have can tighter the we closed. the to loan about opportunities return lend we in and and continue maintaining lower terms covenants lower the And middle market,

credit quarter, being $XXX weighted market resulting as As portfolio middle portfolio illustrated the on to I-XX to our to now million excluding compared million loans. during the the in credit our $XXX sheet of XX% end quarter XX, balance prior grew lower X% as slide of

We lending senior origination continue of first-lien this XXX% to with the quarter senior first-lien emphasize heavily secured debt being debt secured.

On the additional and five As million and of portfolio debt. invested first-lien in million portfolio $XXX,XXX which XX, existing slide in companies senior as the to the This provided first-lien out first-lien to was $XX.X included of lay to senior new credit debt committed secured a of of portfolio million solid. during secured capital the $XX capital portfolio the quarter. senior secured included result, end of and the equity. of quarter end in $X.X quarter, remained XX% we flow companies Deal million has debt companies, the two since $X.X of

slide and quarter add-on originated end, of $X additional in Total post in an the On of in out at two included which lower fund commitments companies and portfolio of to end end middle $XX.X excluding million million sheet secured break as million our market $XX have I-XX. co-investments. portfolio million $X.X acquisitions between on-balance companies. quarter debt in existing market, quarter first-lien consisted the senior we XX, $XX middle we new and equity invested upper post million two the As portfolio commitments,

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

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

EBITDA, debt Directors. American the quarter the ratios leverage that our of that the of of end, portfolio with Delphi metrics would portfolio. investment Our Board a leverage secured Addiction at a in excluding post the Health court. on was Behavioral end the middle both accrual quarter the would this senior that should out company degree Delphi the the first-lien the rate representation portfolio obscure Capital holds in market on should market and skew back company's while come now remainder of improving Southwest the on-balance as remained in a sheet restructured basis, of upper quarter ownership are in position note on cases of run upper ratios to which levels equity shown an We aggregate company as and investments middle

patients pleased continue company's be improving high-quality provides that and financial We Delphi the to the with performance. care its

success filed the We for company's forward. balance step ultimate American the about financially in the case company necessary going restructuring set of the many very the our has and as up capital. Addiction, recovery a of bankruptcy, to you are future seen, company sheet optimistic of the have In

are in We that the with and care high-quality its American provides its performance. Addiction improving pleased financial also patients

rating within our to for quarter. out XX, we slide laid Turning migration the have the portfolio

downgrades. in to During the upgrades portfolio we companies two the continue that quarter, expectations, further while portfolio outperform had no having for significantly

and As one lowest the being being rating. assigned an two on investments upon the scale of all four-point upgrades and the The a a are four rating rating investment reminder, origination with initially highest included performance portfolio deleveraging. were rated now XX% that loans fair two one of highest at rating upgraded based the Almost superior our value at has investment previously a two rating. to on is

only quarter, value the As of two. fair XX% rated nine end investments had investments four. at XX% value fair loans portfolio or and of fair the remaining at X% the at of we of at at The three value two the rated rated the of at or loans remained

the portfolio of continues to of that are result as endured investment pleased economic pandemic, of two downturn Given over hold a the one top we investment quite the XX% our ratings. severity of our

secured I-XX industries among XX% debt portfolio with of of hold the average of portfolio I-XX first-lien also remaining The of signs size and X% diversity provide of As was of portfolio. heavily have in established the shareholder's first-lien of the across slide X% The that X.X% showed senior invested the the debt the towards an stabilization only secured weighted in an X% portfolio will capital. only investment performance our during our should investment. to remains the review illustrated $X.X of I quarter, subordinated hand security secured call financial over on well-diversified now second-lien Shown asset for the as the debt strong I-XX XX, in by we one our the slide appreciated end portfolio with industries or debt quarter. portfolio on a in senior of for XX, specifics million and Michael to senior quarter. mix as with portfolio the

Michael Sarner

was to Specific the in the quarter, for This we June quarter. performance dividend Bowen. as in paid the per share per quarter. out flat on net pretax with summarized the the income of share XX, share earned Thanks paid $X.X share. regular quarter, earned or the investment million our dividends out per $X.XX during during the $X.XX from -- for consistent slide prior prior $X.XX $X.XX regular We per

since a near dividend In mentioned have our consistent the has during declared net As track by a XX and our strategy. coverage regular Board of be $X.XX quarter. September the XXX% and dividend dividend coverage over income to paid earlier, dividend also the cumulative launch record further demonstrated current regular covering per we regular built long-term, investment out regular with share XXX% months last meaningfully of pretax credit as our our the

During per share supplemental $X.XX at the paid our we And supplemental $X.XX to a maintained again per the further be Board out quarter. during also current dividend September our quarter, share. declared dividend

gains participate to were our level portfolio As from maximum able balance a reminder, to late program of balance be to in realized as investment income dividend of from tax allows of program Media of our in UTI end both sale earned quarter excess the UTI dividends. well as regular program the meaningfully of net exits successful in replenish our the equity, and through the the successful to earned well longevity to of each we XXXX XXXX, UTI undistributed our allowable Due the the future. The supplemental as our on from continue time. providing over shareholders visibility into the distributions Recovery debt will funded on year, the investment

XX, XXXX UTI estimated June per $X.XX of share. balance our was As

yield of $XX.X from weighted million income quarter, a represents This an investments average of investment increase of XX.X%. this all investment $XXX,XXX quarter. on portfolio Our approximately produced previous the with

was mentioned, our of non-accrual there quarter. remains the million, the investment as weighted-average The for of of portfolio had Bowen portfolio the credit X.X% our of value. we new representing yield on total end quarter. XX.X% Currently, three non-accruals on with fair value assets fair at a $XX.X As no

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

our As for seen below leverage leverage operating on of operating puts target the slide X.X%. XX, we reported initial X.X% us of quarter, which

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

driver associated the of June should structure. per $XX.XX of the XXXX to internally-managed nature slide improve as to leverage Flipping share company's over the as portfolio decrease On of the annual supplemental quarterly per per March XX, employees from dividend to operating $XX.XX per slight per compared grows with grant XX, XXXX. The net out our to share due main on as $X.XX NAV continue operating offset the per was RSU paid. NAV we at share slide Our share portfolio costs the as fixed relatively share investment capital. the $X.XX appreciation The of pockets of to XX. the XX, lay share multiple our was

report is will on mentioned To derisk mentioned, company a for continually earlier, happy calls letter shareholders. increase have both company, long-term. be and to significant returns have capital, we capital prior structure more light deal our As as to which strategic a a we throughout priority Bowen a economic the competitive long-term access capitalization ensuring us allow that investable green the to that liability from adequate approaches From efficiently in our on total the the perspective, received cycle. we this this while originations Southwest for SBA. the to evaluate to we We are is of program end, provides Capital believe priced event to

one We toward goal, our the program our enhances is further We consistently diversifies stated achieve as have our funding long-term an sources. further investment-grade to that resume believe that of it accessing goals achieving rating. SBA

banks. institutional years, publicly with bond $XXX the revolving in on-balance a $XXX as as to license, includes credit a years, revolving four well with million up debt maturing syndicate investors a facility million accessing SBIC million in sheet capitalization with $XX today institutional our our banks, of $XX X.X at syndicate traded potential the baby I-XX million of credit bond to XX million addition In associated XX line four with $XXX maturing

as facility. report Additionally, senior we revolving of that ample million are capacity covenant liquidity the pleased approximately on with with cushions secured base in to $XXX commitments borrowing our cash our is strong end the undrawn credit and quarter and of

capital earliest maturity the XXXX. In addition, debt structure approximately with our at are December XX% of current liabilities unsecured

heightened leverage during now capital back past of ratio of the volatility $XX per We seen that at share diligently weighted proceeds. able stock under quarter, Our final despite XXX,XXX debt-to-equity common for on the $XX.XX our some to of to sell million have lockstep market raising I program seven $X.X we a the Capital quarters the the XX ended gross equity Bowen million as raised hand call X.XX:X.Finally, Southwest at price our balance now shares during over ATM slide sheet activity. average program of ATM in quarter comments. equity accessing quarter were in will period investment every the with

Bowen Diehl

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

excellent has an prepares job asset have environments us building few base, done over the well months. flexible robust as team both the we capital Our a that like a past as experienced one for tough structure

here the Operator, up not the in of our the what to should environment our about continuing of feel for economy a dedicated the to deliver as While competitive immune lines capital we Everyone invest the by strong troubled challenges today, environment. health open we good faces creating performance sustainable Southwest to and totally consider concludes present be are us we Q&A. times in are will ready being to at company opportunities prove to that as places and capital to less our prepared Capital good value shareholders' such to we these. stewards is remarks. long-term This the

Operator

comes first Jefferies. of Kyle Instructions] Our [Operator Joseph from question

line open. is Your

Kyle Joseph

my taking for quarter a question. morning, good on thanks Hey, guys. Congrats good and

a and didn't And given the trends repayment in environment you specifically just the see repayments. can us for we're level portfolio about for repayment in the current your the question quarter. I just First expectations give more in? sense actually on deal flow

Bowen Diehl

Yeah.

back were repayments and amortization revolvers virtually So other forth than and draws zero.

Michael Sarner

Yeah.

maybe think, result. $X.X the I million amortization it's

Bowen Diehl

of question second part was -- last what? And your the the

Kyle Joseph

Would you anticipate overall deal given environment? the repayment levels being fairly muted

Bowen Diehl

It's interesting.

yes in portfolios. pretty performing now our prepared companies moment so So, are very we activity no. and the is those that remarks, now have strong We of at at very, one, rated we portfolio seen deal mentioned see -- clearly XX% the as are I our well. but definitely have

and And in quickly, particular are that strong so refinanced to but think we any we see are those going refinanceable. don't very be

the would think yes So subject portfolio be are future, that slow of But that the relatively our in sizable that the but prepayments to generally I probably potentially. it's to question outperforming. fairly chunk

Kyle Joseph

Got it. outlook for like of is attractive quarter. there deals the you yields And the then obviously, in looks terms very mix had yields, shift. some new And on the portfolio in it

So can consolidated for deals, mix yield? environment outlook yields a rate just your of weighing shift you sense the us give the on new

Bowen Diehl

Yeah.

You to one? take want that

Michael Sarner

Yeah, sure.

LIBOR So we're obviously, during you to due mainly our period. yield volatility now XX around saw we to flattened Obviously have down the XX XX.X% to previous from to came basis quarter to now. We seems from the -- XX.X% And points. out. saw, it

up we the to assets you the some noted having it put number on that down were you investments slightly yield. us of see the will I'd quarter You quarter. a like higher due that tell bit, because for retrace during previous late-stage were also was the

was didn't see was the you it -- balance income. even weighted it average though in in balance the you didn't the So -- was it

quarter. the in subsequent that see you'll So

think saying right seems I whilst like it XX.X% forward. So bogey going that of all the

Bowen Diehl

in I market you'd I maybe now higher points say the right spreads to to as we would pre-COVID. period, XXX XXX market pre-COVID. say than say as environment basis points the now it's would than basis far XXX as the in while time earlier XX sit pandemic And here COVID probably higher Yeah.

a participants as far are that some in market. that You quite essentially are there they're market, but the disciplined the out still the People offering more being market. of market have few are as spreads in

your difference XXX of kind pre-COVID. the kind I point of of versus positive it's a it question now XX say I'd to was spread So feels like basis assume part too. that to

Kyle Joseph

Absolutely. Yes. questions guys. answering my for much Thanks very

Bowen Diehl

care. Take Thank you.

Operator

Hayes question Our F.B. Tim next of from Riley. comes

open. is line Your

Tim Hayes

taken I What guess Did this nonaccrual and exit real quarter. said Bowen you on that had happened loss, did? that guess a then this guess, quarter. off I'm was morning, credit status, -- And not less exit if credit because there but repayments that. was what nonaccrual I just just what you Michael, few one I questions if you one good to credit Hey, I'm I was realized assuming that were -- start. drove curious you no didn't the

Bowen Diehl

Yes.

So thanks for the question.

remarks that my in nonaccrual. on mentioned that court I back accrual. of out that it's We Delphi and on was So restructured

-- transaction restructured that realizable often taxable a And event. can and a like so a -- that's be

tax equity substantial on you So realize a ownership. got a the I but you -- board as -- we've realize then we've said, pretty the loss, And Board. got representation

recouping we over at our par And so pretty actually feel on time. that least good loan about

Tim Hayes

extended Okay. would that. Got of just forbearance the it. credits those requests you've say many how if wondering clarifying for type decline? in seen you then And portfolio some I'm been Thanks have modification? or

Bowen Diehl

play the kind everybody seen March of it's quarter. state definitely shocked of pandemic played the from in June, the the in decline we've -- out June kind then and it So of in of Well -- of request right? kind as kind COVID whole

we interest in company. to in pick idea, time. three exchange give the that of our an agreed So support I we of for portion as cases at to look And we for loans we a equity back period all -- of had had it you think a

for so cash they're but It's just and really It current amended then economics just more exchange essentially interest. a in interest for more we that we of And leeway. covenant and economics, extracted a had on -- covenants six little loans giving a them bit all issue we wasn't issue.

Tim Hayes

it. Got it. Got

quarter? and quarter, any this as participate inject just you requests you well, in for denied then sponsors you order all were or equity if Okay. this And sponsored credits? more follow-ons did require those And curious, the funded follow-on on you to

Bowen Diehl

put sponsors Well the yes acquisition in of both to add-ons, financed in we fund and equity acquisition. a the portion

and we forma for amount up what we'll the the in say -- bring particular level at market pro whatever the deem leverage company? So this as then appropriate a we is particular this to than acquisition look and level to finance at not that. And in we higher look leverage industry appropriate leverage this and leverage really frankly, leverage

putting the into results So in always acquisition. equity virtually more equity the

as any I said the significant we far we would finance sponsor that deal to want us all deals I don't recall we time. -- turned and As a that did request, pretty We you and think I certainly this into no. obviously down follow-on a deny be we acquisition of mean reasons. our called where host said companies I can't a bucket. would mean fall didn't that have any quarter

Tim Hayes

Okay. Got million in $XX upper You it. then quarter. market the last unrealized depreciation just middle can And you saw portfolio? reconcile the of help depreciation

I in think values appreciation despite most XX% of cases. just quarter $X believe and than recovering in coming more only this asset million I spreads

So that the some mark-to-market depreciation was quarter? offset there company-specific gains this

Michael Sarner

$X is. -- know last that that you're No. delever of as I put two We we not happened. Main different from is missing saw actually credit in than where to Street I'm million piece alongside we reconciliation. your then that I'm what depreciation appreciation. the things trying to facility And then sure The question now. what -- with don't figure to seeing -- what that quarter, the have saw there's out capital

Tim Hayes

market. that's And of would markup question. I the was portfolio, nature guess have really market in of the a given more upper on middle just the -- what we've expected I my seen I

Bowen Diehl

the mean clearly. gives obviously takes in Sure. we and had portfolio Yes. I

middle portfolio a depreciation The not the liquid. specific the there not - middle upper in is some -- market, guys had as had know upper but -- spread. then we it's we it's and market is it's the candidly So market super secondary about thing market upper you

down to So in talked the bias come go faster than they It's And about that negative I a before. think just quotes tend up. we market.

could And it. so have on effect that some

Michael Sarner

depreciation what might And that actually had name It COVID. missing probably would you're have idiosyncratic that to that quarter other that would or at. related the you're significant now sort been the CPK think appreciation. of looking otherwise I the higher is muted one I piece That tell obviously for you what be is

Tim Hayes

it. Got Yes.

sense. I makes that think

Bowen Diehl

big Yes. good of it. point. That's it. a actually That's part a That's a big part of

Tim Hayes

yes thanks there. -- probably the piece That's Makes Michael. That's missing sense. exactly

have back I well the going you but I taking to thank Okay, am couple in more for my jump queue. question.

Operator

comes Bryce Rowe National question from of next Our Securities.

is line Your open.

Bryce Rowe

Michael. Thanks. Good and morning, Bowen

Bowen Diehl

morning. Good

Bryce Rowe

Yes. within the about if specific Maybe this driver Tim's quarter. question but but or fueled and depreciation there what there don't market lower I there just portfolio, know was follow-up that to middle on curious talking a Bowen -- Michael,

Bowen Diehl

Yes.

So portion of but lower look loan yield exercise thorough I the mean obviously a the a is if at the it's middle market, analysis. mean it's -- indices valuation, I more you modeling-type relative

quarter. And asked effects correctly and last most EBITDA asked -- quarter March a pandemic quarter about so as lot everyone the was from the June the last of about in the quarter, in not

EBITDA general on So right? got EBITDA portfolio And LTM flow a in basis. on usually It's matter went the the through down right? as LTM so an the to has python basis pig the

again the to migrate that you hence so of middle up lower pig our saw kind going through And X.Xx leverage is the market python. in which that

we've that stabilize seen improving the seeing. frankly is news of kind what a in that's real-time basis. but -- so But good and you're And

went leverage So up.

the affect value loan sense. values that makes loan loan more effect than to guess going affected that the that's if values So of I index the

Bryce Rowe

Yes.

credits Okay. X-rated to Delphi ratings. wanted ask to went that got Obviously understand about the and the from Yes. restructured. That's X I internal fair. X

update? saw curious in that's the there that moved any but So then And an was that add-ons I have I one -- if would AG was out, assume correct. quarter been I King. this might add-on to

too. there provide an could you maybe So update

Bowen Diehl

Sure.

part first was So question? the of what the

Michael Sarner

loan from from The going X?

Bowen Diehl

Yes. and Yes X X.

correct. you're Delphi was that So

Michael Sarner

X. to X

Bowen Diehl

went it debt security X -- so I'm X. X sorry a because X the that's from a it's rating to

because can it's So pandemic, the to just on don't and management at business what doing so in with you So team. I to it's exactly. AG the mean Kings, a that grocery mean work It's imagine, kind long I a that it's as want But in kind like comment through obviously company of far process to leave I going -- looks happy companies as well I'm obviously. particular. private right? of a restructuring still it

to grocery be and But can it's I want perspective. that. a that business probably So correctly -- speculate it's careful commentary just on doing about better you from that probably

Bryce Rowe

Yes.

playing kind might of Okay. debt that of for go might about you capitalizing in subsidiary? that tranche be you maybe SBIC and last through happen or me, envision you one And you how maybe able of that subsidiary, That's would talk when how out. can capitalizing us about then license Michael And accessing the helpful. relative walk -- to that terms possibly initial to one

Michael Sarner

Sure.

So to process now through that week maybe we should X -- of we're through December. should the We'll get that the this November application be or by go based just process as feedback X successfully that getting process from as between hopefully really a on expect to we week and SBA late going submitted.

put we'll capital drawing. So are work start to million before that as We'd to start able $XX therefore which investing the our we of tier inside first to be have said SBIC. our -- first you

we meaningful a NII. rates XXXX. they levering by -- today So we'd start then see And are or of are start fairly I large where expect move March as to mean to up this April if the

less X% X%. the SBA or rates obviously, without shut. assuming baby have and seen the open markets are predictable you're you'd that are bonds vacillated using which you've assume when debt We And between are

to around usually whole an once go the this going on think to ramped asset current this So average pretty of -- when basis. we we a ROE is our XX% $XXX is a an that put work our year. up at look on asset-by-asset NII $X.XX our think $X.XX Using XX% mover cost. it it's SBIC fully have at over is significant we to ROE when once the you And million

So something very meaningful.

terms tell get we probably of XXXX. So somewhere in and going fully to when to you XXXX ramp would that's be the end of between you

Bowen Diehl

Yes. putting Yes. to of It's function money just a work. the

Bryce Rowe

in that if statutory does of terms leverage Yes. kind That's of level of of helpful. debt? on kind And here adding you're basis, a change targeted that

Michael Sarner

total a to range From to X.X% to between You -- be know that leverage. that regulatory on you to still going think X.X% economic probably perspective we're in what? X.X%. X.X% I'm a wide I probably give -- be you'll a probably going X.X%

Bryce Rowe

you Okay. so All right. Thank much.

Michael Sarner

bet. You

Operator

Our from Dodd next James. of Raymond question Robert comes

Your line is open.

Robert Dodd

yeah, the on And guys. quarter. congrats Hi,

the pandemic is exited with beyond Can pipeline the deals the produce what that versus proportion a change consider seen the of them right last for the and those i.e. with second. the pipeline way a were sticking you've to if over you've deal? in got targeting -- SBIC on Just of is that SBIC-eligible you XX next any So already? eligible months necessity say there just to that SBIC data

Bowen Diehl

mean It's I strategy estimation of good at our the SBIC we to fit Yes. change have majority mean, a it's definition question. it's a vast so them I our by XX%-plus. efficient interesting to program allows invest and flexible the in is exact That's It's we so out us. go us to in why the all. financing that that invest financing -- today. don't market

Robert Dodd

realized then I the loss If all it. don't you. just full presume investments equitization to we related and the have yet. for on And the – details obviously, of was Thank that of Got that Delphi the $X.X seems except a Delphi. I-XX. means if for had million of the appreciation net your debt of million to have kind -- $X.X from been unrealized you that reversal schedule

rest any quarter? for kind valuation potential But narrowed last NAV about some us there made how color where of trends that kind quarter somewhat? played and depreciation of give some like this or in the give XX you outweigh, of dynamics in on spreads Can there the any your the comments that. trailing So EBITDA what Could of, in the market kind drivers us things out was given to you book. multiples on deterioration were rebound you came have out

Bowen Diehl

Sure. Yes.

valuation ago relates index, influencer. loan I indices market-credit loan the across The said leverage middle as the lower a LTM EBITDA. course, really debt portfolio are minute a valuation a So to to obviously is of and it's influencer that's positive component larger as a it the

the pandemic the as the portfolio June quarter opposed so March through most And March was the -- in and you in of the the as economy move the effect to quarter. pandemic on on

python-type thing. through So it's going pig really a the

-- LTM on basis EBITDA portfolio -- and June. the March across So you to went as an down

down, so up But -- now right performance. And our middle in and improving leverage frankly our the stabilization in in we're fairly as the June lower EBITDA was pandemic for come the EBITDA, as the months market the X.X where as greater like as to where had see quarter, LTM times the valuations. LTM of end you of had you measured percentage so encouraging seeing you a and stood went of

$X.X March. million it And million, down it outcome, what Frankly, of went pretty you expected debt, as amount. slightly, so huge not a good down a thought expect, -- it a portfolio given might one reason. that a so, went primarily as it market, middle have in in sitting by we down But although for lower went the $XXX would I'm was portfolio actually, on

Robert Dodd

I just, I Got one point, your appreciate to obviously, it. -- back forgot can, if to the other flip because I mean, And the SBIC, then, questions. it, that. you of yes. when got I

license, there's to and commitments reference $XX you made final the received You million. capital

put So million mechanism funding would be in? you I of mean, particular around plenty any do is the now? have plans but for got the you'd that? $XX that the an expectation initial that And liquidity, case, that's Obviously, if right what you've

Michael Sarner

Sure.

into the the So, with have million, capital $XX you on using that we I originate those assets -- you cash. and place the available way -- your invest fund. and $XXX you it works in assets the mean, Obviously, million have just revolver

the we'll opportunistic attractive. book. opportunities program, And be trading bond continue equity the above as looking assuming presents market, we're that will We it are at ATM

check. fund certainly we continue we'll all-in-all, liquidity think, certain I we're raise have to that additional ample equity ready capital So, to And today. that to make

Bowen Diehl

has we economy. XX-year of day, million provide of the our that SBIC refine performance, the perspective, my certainly, continue do and the to need irrespective the need from of we And commitment to So $XXX at to anyway. need assets a the capital, end we to but

really that, that debt cost-effective. obtain. it's on And that we markets commitment of top or the on to And have so, to like capital extremely anything rely a don't it's

a we And just commitment. and new anything the It's a then same very from XX-year differently which have today. know is capital do draws, long-term I provider also future. that It's attractive. now bond, sandbox it each the in play we don't we so, a that with time And It's commitment it's cost-effective in a the same long-dated pipeline.

see kind We're doing attractive. to doing. us that's So going capital we're different keep what at just -- It's But very all. doing of don't anything we so really I have an source. additional

Michael Sarner

And the Yes. a but perspective -- from next few years we'll no, bonds. start raise over we'll capitalization

away the existing pay as As also noted, we'll of revolver. We'll at well. bonds peck our sort I down

we're maturity on ample as a as terms the in making well those revolver, on that isn't liquidity the certain making we're closer maturities So, dates. bonds keeping as to large cliff there certain get of we

Robert Dodd

are that only grow one Would the for it all license appreciate first Got get be they Obviously, term it. could, even is one. the mean, to going of that. and forward last be this perpetual principle, in capital one might not this presume to second the in licenses. going that more I not mean, with a I the is be SBIC you structure this be license? I part business I and decade. long maybe that than One is XX-year the just a and fair? intended of

Bowen Diehl

lending market what mean, team decade a program That's here first-lien I there. the lower mean, middle has we the half been that's We've have middle for lower we're lenders. that long supporting I SBIC, and case. the are. And and they plus. as Yes. -- doing been we're market investing that absolutely as

important Obviously, to getting the for license. of criteria first but one performance our the biggest we shareholders, license to is the us that's of that's also perform things license want license. want second we the first really the on to because So perform, the the

of And license. so, we're already looking ahead second the

strategy. of part is absolutely. It's answer question So to your the a permanent our foundational

Michael Sarner

entity always -- are part to heard we first stage put nascent with up, And we the is They when of did going And was just do back from it's process be started going together today. us our resume. we XXXX, this them the process. build through we They see in us certainly they're post-spin. resume to the our backing of what wanted glad, impressed and we've this more been

definitely, was -- is of is going this forward. part So the and strategy

Robert Dodd

Thank guys it. appreciate I you, it. Got

Operator

Securities. from comes Chris question next of JMP York Our

Your line is open.

Unidentified Analyst

Hi, income drove any sort dividend the Kevin [ph] further of this do from My first out the is but CSWC? the The expect yet on Fultz question you for quarter. And pressure to dropped Q on again isn't Chris. second decline? consecutive the SLF for what that

Michael Sarner

Yes.

LIBOR. impact for So biggest I-XX the there was

facility in took end, floors it crossed pretty think in loans to basis we X% the where floor So be in XX started on the terms quarter about you but weighted LIBOR And the that points. where average floor is if on and tend X% lower the market our – on the see big over a the to middle companies credits. hit – a somewhere to you'll lower of floors the lot syndicated it

$XXX,XXX you all almost hit. about So saw That's LIBOR. a due to

Unidentified Analyst

what injection sense. the did And concession did then fees equity was the you your to sponsor along form in or How portfolio That then amendment? amendment borrower is secondly, question. And next makes quarter? provide amendment? you amendments Okay. much companies, in of two-part receive an And made a my question the when most common with

Michael Sarner

of first part onetime So was the amendment $XXX,XXX approximately fees.

to description. I think the speak Bowen can

Bowen Diehl

Yes.

there's materially earlier that pass the pretty referenced eventually. often few effect a most the that the uncertainty confidence the and future So companies future will that about affected about but I COVID the on concern COVID

okay, usually like it's a portfolio liquidity we'd kind at so request Fed store the to up of And company. well of

then the quarters. you increased like little covenant well that. issue a but of few just covenants would those We'll the in – for covenant like usually all case kind we're grid. there of bit interest do lender so enhanced the relief couple two of to for And bit that. few a next a there's economic economics quarters. a of a there's it A period getting had we we'll was you And quarters? slight fee wasn't We'd or And And your for liquidity where in exchange X times pay company cases And in one tight. a put base you companies pick will time the that's to contribute for I leverage. conversation. of that's couple owner And fees paid. for a rate other maybe little lot then mean really next in

let's say loan. up let's make scenario LIBOR, So XXX LIBOR a

get to through going covenant. negotiated even the it's or close previously Now break

travels they covenant where widened. the as and meaning goes And the relief, So our leverage covenants in to that want yield to some rate range, want goes sponsor comes spread up. allowed the put a grid up we'll new us our up, then

then into also that to that leverage the may certain spread where XXX, makes they what their maybe And lower level in a was can it original it something the to closer perform and be have XXX as them LIBOR and back continues goes if LIBOR deal allows way a COVID then XXX to earn you. the So LIBOR company it passes sense.

how goes. And conversation so that's typically the

Unidentified Analyst

Okay. weren't That question, makes quarter. you appreciate to ATM then sense. And expecting insight. the next active this I we the be in And

your approach how desire appreciate primary capital investors allocation for should at we historical prices? think we future and but your Now management think these to equity about

Michael Sarner

a go market primary large whatever out a equity plan go us discounts subject would on on where X% we to ATM XX%. to cliff, what happen to discount NAV to is deal we something deal want to going see the we program the to to don't raise that be stay and is negotiated the to basically whether have An we'd and would and to on on. before, said above with We've we Yes. be – be turn that – need don't a take because average create

a fee. at it raising we're So X%

process So we think use that's our quite shareholders. of to frankly better better – a for a

on continue time. over And to and and we're build base I turn to leave going – an so going we're to equity it it think continually up on use

Bowen Diehl

every – wouldn't of full everything I sell not is – going it's at look long-term to at I as at just NAV I above share a kind above. NAV. of mean, But price we it cycle. be you capped can stock okay, Yes. slightly about it's now and full our a mean or think matter

not the X% diligently of And us like a again, quarter small and marketed want on equity raise, spread, And lockstep said, a like each we're capital – we amounts to just so X% large of to spread putting just it, Michael work. taking deal. diligently a to we explained XX%

we period that -- can't and spread that a out we than a of And we deal we would so lot raised, million. you lower it the over a $XX you it time, if raised size. marketed of at on went that we look long at referenced on markets. if And Well, rely raised top have capital

be presumptuous be can't the the need will offering. you that there exactly when markets You

And so, long-term each we quarter. think it's better for little our out shareholders take pieces just to

Michael Sarner

had that that. at a we we off. -- need because turned out, it actually We -- to we week About raised And our more. had I we uses didn't point to ability looking and million. would point $X.X the before We the do window than more closed, sources,

not we're trying So, bring to, can. Bowen's point, dollar home every that we

Kevin Fultz

but see some think shortfall dividend could That investors. last core of safe, sense. to makes And question, coverage worry most my investors we then be Okay. your the

coverage to your dividend? at looking way, think adjust different need you So would conditions your under you a what do

Michael Sarner

to to is we right are to earnings now, it $X.XX stable we relative next that notion going quarters. the see the our and our you is. non-accruals, expect XX where XX dropped barring to power is With what LIBOR you everything where that is Well, down to we tell the and for with having the jump be months, read, stable NII over few would next LIBOR up

would coverage. build time. comfortable the and it is. probably up dividend point retain $X.XX dividend at to And tell we would so, There the we have feel no likely at But be very in plans dividend we'll level you, to where any cut additional

Kevin Fultz

Okay. my quarter. questions, reassuring, it and Thank that's for the on taking you for me. That's congrats and very

Michael Sarner

Thanks.

Operator

next Mason Management. question Greg of comes Ares from Our

open. is line Your

Greg Mason

impact realized are if spillover UTI are things, Hi. How of a and guys. was this as had restructure continue losses just really Good through characteristic? will the the left tax taking that you the impact to And ultimately of I going realized pandemic income. one losses further forward? morning, undistributed from how question. there and Thanks that kind that the that impact on my taxable the for UTI will

Michael Sarner

question. the for Thanks Right.

So, you additional of not an before realized the pennies by have the realized What to having UTI good to create bucket. news into gains with is overcome does sort the UTI that is you're losses. balance affected book that able you it have amount is

$X.X to retain and/or million be over on bank. will to time So, this piggy need put back the dividend million to by we'll gain into holding our have to $X.X a capital have UTI continue --

Bowen Diehl

No. capital of out, But, equity junior definitely Delphi, business become is and what's lender, ownership couple gets important In structure lost capital first-lien the business retracing then successful is extent the that the is realized obviously, the first-lien lenders recoup the the then succeeds a gets the turns meaning the valuations collapses wiped in and loss. as around, mechanism to the that equity the case out. of seeing wiped next that, owners a our to we're and years which as in

UTI And kind makes were everything we of loss starts and that sense. else so, additional to can to if then if recoup realized that contribute

to types company. of So, it's to that able end pretty to be that important to be able get to -- in owning piece those get of up situations a

Michael Sarner

Yeah.

any like good to those to I think of gains against interruption. we to apply we've three losses to that create runway is, those this continue on the I without feel mean program $X.XX news years with balance, got the two

Greg Mason

Great, guys. it. thanks Appreciate

Michael Sarner

You bet.

Operator

for There any Bowen like to further questions. the remarks. turn are call no Diehl I'd closing to back over

Bowen Diehl

you And on we to next all. joining forward for support, everybody your our business. We keeping posted and work quarter updating us. look for appreciate you hard continue we'll Well, to thanks on us

Operator

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

now may great day. Everyone You have disconnect. a

Capital Southwest (CSWC) 4 Aug 202021 Q1 Earnings call transcript