CSWC - Earnings call transcript Q2 2021 | Capital Southwest Corporation

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Operator

Thank you for joining today's Capital Southwest Second Quarter Fiscal Year 2021 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP Finance. I will now turn the call over to Chris Rehberger.

Chris Rehberger

Thank you. I'd 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 could to They're are risks, that subject guarantees to actual not of numerous uncertainties future and such materially from differ results and cause statements. results assumptions

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

Bowen Diehl

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

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

our pleased to have portfolio. the company Here of and employees with overall and and in financial Capital our remain teams prioritize the sponsors the management been portfolio we at portfolio have safety performance Southwest, dialogue continued regular employees health and the of our with companies. of We

protecting unprecedented while operating management We performance, all financial of sponsors' employees, have and ability increasing teams including manage the these aspects times. with during impressed to company efficiencies been most our

our for in uncertainty us, not earnings portfolio yet teams as are the the we to look the extremely and very all confident highly volatility, with and we so and portfolio of in much at and companies the also we We're quality While work grateful both by with pleased at team where power. financial its the sponsor Southwest XXXX done we clients. the performance here remain pandemic our the March back of Capital market and assets behind is were

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

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

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

of the our During we which $X.XX investment paid the for net earned share, generated than more of share. per income $X.XX regular quarter quarter per pre-tax dividend

income to out per per of ended and undistributed dividend annualized represented yield dividends announce a has quarter the $X.XX share dividends again paying declared per regular share, on $X.XX program that and value of per our XX.X%. XX, XXXX, an board sizable $X.XX share. total We asset I'm funded quarter supplemental net dividend share share $X.XX dividend a yield dividend also continued additional stock the on by consisting of of pleased also per December share of annualized of an balance. quarter our the our taxable per $X.XX supplemental price an XX.X% per of for Total share for

X which by offset in two will $XX to driven primarily in million Portfolio During a to companies over $XXX September review XXXX. quarter and prepayments million as loans new total from million moment. $XX.X XX, companies growth in X% commitments by portfolio by I of was investment in we a portfolio the quarter during grew existing bit X new portfolio more detail our the

Additionally, raised our $XX and par principal capitalization bringing million bonds successfully institutional on the $XXX we in on at to million. the front, bond this XX X proceeds total of outstanding unsecured existing issuance

continue mentioned Finally, officially FDIC. as the as we an licensed Administration we Small U.S. with towards last quarter, to becoming work Business

during look status pending submittal warranted. We our developments are as forward completed reporting that our final pleased report and of to our on shareholders to we license the the license quarter, to application

would to Capital of and issuance southwest debt invest strategy existing financing, vast the to As FDIC support this us growth $XXX our middle license lower of for XX-year deals a in over and million the We past small to our years in the up majority able giving approval, final Capital strategy. the drawn commitment financing to be capital we businesses Southwest market continue FDIC competence country. be fund estimate will employment a high have five to qualify would with that an we reviewed of in provide to a reminder, level investment across and that provide to in

the be in middle a and a with less lower a the the each all-in perfect from remain the date close work program From and term growth the long businesses. for of SBA's making security we a treasury draw, cost this XX-year today's our debt This in executing application to in fit program As separately truly X%. in the mission rates would supporting perspective, look is our than reminder, employment process a to focus Small clearly capital draw represents and debenture U.S. of maturity FDIC the if nature. forward continuing cost successfully of to market SBA new debentures in capital completing structure FDIC from level, with

credit the share our growth and launch both paid We X, to and dividend since and creating our our strategy. are shareholders. coverage NAV we paramount of value believe creation Turning a per per record of strong that dividend dividends yield, track illustrate value of producing term Slide share X strongly to consistent and the long maintenance for

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

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

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

to portfolio the originations middle down market a two prepayments XX% -- currently XX% weighted lower middle of market loans last the and lower quarter in the upper middle market market to loan during is quarter. in result Our slightly the middle as from two credit lower

with heavily continued quarter secured in first lending debt this senior secured. of originations We the firstly being emphasize senior XXX% to debt lien

the first of committed credit portfolio senior Slide debt. was debt invested end lay in companies. $XX.X and XX% companies and committed As secured result, million million first capital portfolio four in lien during existing additional $XX.X of quarter, This companies the to new as included $XX.X XX senior senior portfolio of to secured portfolio of six secured lien in the first a the debt to lien quarter. million out in committed the we On

Advisors to Turning we this lower XX, alluded X. had to, Trinity than Slide and market as two the Danforth quarter, I exits previously

generating Danforth at our million in loan XX.X%. debt by and of IRR full, proceeds of bank, repaying was Our traditional an a $X.X refinanced

case management excited original of to team in We quarter, large alongside Danforth participate continue New we we for watch performance. and In X, stellar larger deal Deal to funding's the continue Trinity refinanced the the in much also equity able to which a sponsor its for and this appears are our sponsor finance strategic Trinity hold loan club X. acquisition on a the were which and

weighted excluding XX very and of successful equity a middle are of middle continues We exits, its of the sheet we on-balance XX, $XXX the Slide end we as prospects between portfolio IRR out also proceeds. of and quarter continued market This I-XX. hold cumulative XX.X% forward. this On record upper our excited on break generated approximately about the generating our in average market, company growth in an interest date, have going portfolio exits. track million lower the To

upper-middle leverage basis. the Within across in average portfolio the market including lower leverage to of leverage as of primarily market, approximately as co-investments middle through the of during held had ownership the value approximately we X.Xx the the our two-thirds portfolio measured end average lower companies. equity EBITDA quarter, lower in X.Xx our weighted was We EBITDA driven the market with security ratio and the of XX to quarter. from quarter. prior total in a weighted the As by was portfolio, performance our debt of a lower companies market down reduction equity on the middle fair of weighted middle This market middle end to portfolio portfolio, quarter, XX% XX%

portfolio. average EBITDA balance the portfolio also quarter. security own consisted sheet across middle This companies through X.Xx decrease prior by our I-XX the of was weighted Our with quarter-over-quarter down excluding of leverage for leverage market primarily average ratio XX from improvement driven meaningfully an the X.Xx upper

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

downgraded. we two while having During the quarter upgraded no loans had loans

are X, four-point rated X the which rating upon portfolio As a loans were the based previously a company reminder, lowest The consisted initially and X all rating being rating. of upgrades two investment one on being assigned a origination at to much-improved to on scale, X rating with an loans upgraded of two highest performance.

one the in two categories As of the We representing the of our or of XX% top loans at and fair one quarter, of portfolio rated two at end seven a portfolio loans two. three X% rated value portfolio fair of a had value representing was four. of fair investment only at XX% the the value rated a

industries on portfolio in one strong provides portfolio heavily which first second lien mix Slide illustrated senior with secured the established security for towards debt X% portfolio capital. As we a with secured investment. only and only weighted debt The and portfolio well-diversified X% remains asset an debt, lien shareholders' subordinated XX remaining the have senior of across our of

X.XXx at the as or substantially X%. quarter now the appreciated I-XX the XX, from of $X.X Leverage March meaningful at quarter investment average improvement million to level XX, equity in which I-XX by debt is fund X.XXx. the improved Slide value, during portfolio is fair Turning I-XX to shows our

performance end quarter. of an secured in to to senior and hand lien average with portfolio review quarter, invested I diversity debt, the industries of over size call will XX% the X.X% Michael our the specifics of financial was I-XX the As of of portfolio. the first the the haul of among now for

Michael Sarner

quarter share from during regular This income We $X.XX Thanks, to $X.X Slide per a quarter $X.XX share for the our in increase as performance summarized or $X.X per Bowen. in September XX, pre-tax out the the XX% quarter. per for prior dividend flat paid share regular dividends per was net we share. are on from of Specific prior paid investment the $X.XX or earned the million the out $X.XX quarter. million

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

a supplemental During board per to our also and has dividend declared the our December paid the be share quarter, quarter. again, during maintained supplemental $X.XX we out per at $X.XX further dividend share

shareholders reminder, a distributions meaningfully dividend supplemental of our to through in As portfolio exits allows our investment participate UTI the program the from balance. our successful

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

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

we in increase Bowen our On had As run-rate annual compensation to new quarter. due of quarter. assets value our expenses basis, portfolio X.X% investment value. The expense fair operating as target for annual average based to our yield well of X.X% portfolio a we for quarter, forward. XX.X% overall of mentioned, to sub accrual on the at Slide to in lay as be up relating on an no remain going leverage slightly grant leverage Operating improvement quarter-over-quarter. this share-based representing a the of on weighted slightly the credit was true a performance within portfolio which three elevated bonus out the will up total was quarter, our mainly On were XX, expect our as non-accruals operating the with Currently, our $XX.X nonaccrual end million, fair employees. well we

NAV company's Turning the appreciation XX, we XX, upper-middle share XX, was out $XX.XX market to of the compared June million portfolio, portfolio. per XXXX, investment the Slide at as was of XX, pockets The increase $XX.XX of to main which much $X.X September our driver Slide multiple of On in as the XXXX. was NAV in share per of capital. lay

economic that on liability a is de-risk capital mentioned evaluate for ensuring of prior adequate investable our have throughout we company, the priority while the structure have company calls, cycle. continually the approaches we strategic As to to

XXXX During million $XX raised on subsequently X.XX% and we down due the bond additional due quarter, paid an our $XX X.XXX% our XXXX. million baby unsecured notes on

investment continue appropriate will net paying higher opportunistic in being optimize We income our price to structure. be while liability down maintaining of also in flexibility debt to mindful

this banks million capitalization sheet dollar with XXXX, at syndicate Our bond investors institutional undrawn credit in over banks borrowing with million maturing approximately liabilities revolving well XXXX. current secured $XXX includes XX% structure line credit XXXX. with December maturing four pleased our covenant XX on maturing a of $XX million maturity XX We're revolving XXXX, revolving as $XXX facility. XXXX, that baby report on institutional million of senior earliest debt our is and debt million in as maturing liquidity as end base to the balance capital strong, publicly-traded with $XXX with ample a I-XX at with in in of of commitments Approximately syndicate unsecured, our capacity today facility in a bond cash $XXX credit the are quarter cushions and

quarter equity ratio X.XX a XX leverage at as on debt Our ended X. of to the Slide sheet balance seen to

the actively up FDIC. the debt time which license, receiving million toward and the at to the year. an hopeful final us in to would attractively license end the to of are process our Finally, allow Bowen and of work of mentioned, believe access licensing calendar we SBA $XXX priced with We as in we're continue by our stages FDIC

growth strategy back capitalization be as to per some into net important capital highly U.S. hand the excited low businesses. allowing the to to to license integrate for cost to also income Bowen will acquisition the final our our share, continue FDIC Small are investment comments. call debentures of and while us should and now We to FDIC flexibility I provide accretive

Bowen Diehl

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

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

demonstrate Southwest at and merits of difficult debt lien fact, investment this secured of the senior our like team our acumen In Capital strategy. environments first the

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

Operator

from first Instructions] question from Smith comes line the [Operator sir. Our Riley. Michael comment or B. Yes, of

open. line Your is

Michael Smith

a quarter. Hey, strong on very congrats

my can seeing origination was some the activity a little you very you first despite attachment the wondering had of the COVID covenants, points, just question you're just So quality if pipeline, now, a good etcetera? would size of I terms maybe and be, in pricing about quarter deals of so headwinds, of talk bit

Bowen Diehl

thought the portfolio new Sure, acquisitions quarter is as pipeline say about thanks both add-on question. the companies, for four very at average. And it We well companies. origination was included the strong, as now, our right portfolio I'd

it's So it's but average. still solid, about

performance. still points covenants cases, has pre-COVID decreased. we and spread strong, points, but lot you we're in software, And descriptions do the pre-COVID, favor, companies deals, government in environment. respect adjustments, quality premium, say. the in As can't services, as if And certainly or the we're think below the quality far quality the pre-COVID attach quality if basis I that the quality premium all the originated But types amount EBITDA levels. of leverage the mean, seeing yield especially still and COVID should seeing still And credit certain really attachment of seeing what cyber really of not seeing think as I this strong we're the lenders deals, we we will, slight slightly a are marketing-type of With premium, too, models, to this all companies docs being deals. the things those is leverage if as a a There are business on most -- that underwrite see of COVID far disappeared. security, certainly basis deals, definitely or deals might there's interesting you business in look seeing we market, be in low still low fair across as internet that companies, are I defined quarter, you

So, a form our an network monetizing deal has flow. job, of relationships, done and got those relationships fantastic a the team they've of quality originating excellent a of through -- wide very job array they've network done

Michael Smith

That's color. very helpful

would sitting one So you're and, two. another not mistaken, think currently question to times X.XX target be I at on the previous was leverage, I'm if

with I'm target? it wondering, So you are forward leverage slightly just you thinking being here? how comfortable are above about moving And your

Bowen Diehl

I'll be Sure. as leverage level everything's to in another respect to a macro peak, marching we to go recessionary want willing one you in and make leverage like wonderful to might it economic a with just were be leverage environment, In year challenging a forward comment you relates ago, cycles. to a level.

at And manage can you that cycle end into the want leverage to with low, cycle. maximize so the to so at be cycle. to go you end willing the don't the leverage the of leverage And low down of the have in increase And might you want cycle. you high leverage

we leverage are. think the our you X.X up to to if X.XX, than gave pre-COVID. we means, with target about answer where is that comfortable higher yes, X.X all we're range It is, what So

high the and equal take If our down. in effect at portfolio range else top portfolio, the look to retracing you to you at keep re-appreciate COVID, of mind the all leverage we're as -- COVID come back if just portfolio that basically during on have depreciation so, end the in you that look a the that will level, leverage,

refinanced very comfortable why $XX million companies we've is well and are with next or point to coming where performing in are. we sold or one $XX The I million that thing what from being have are say of you. can that's we're got So on visibility pre-payments and portfolio

of in. cash think have you leverage, about if on visibility So we coming

for I cash you So we'll point. say And obviously in is, above think traded be that the third redeploying But originations. that's book well pre-COVID. about almost two we if -- would years thing another

our above a that strategy that believe more should we've in I trade normal business So proven our market model NAV. and

trade. NAV, trades very an program you got it's ATM if low at So above diligent that we've to accessing as about we're know, spreads

obviously figure a north the our XX.X% that's so. market yield XX%. on it's today out So the time. and our of or risk The on stock stock on And is premium will price, function NAV over

levels levels, will and normalize which out. comfortable we we're we'll record, based equity. play will those we But So market to and believe our are out strategy and not on be believe track NAV above yield those just the trade letting able really over where time, yield raise

points comfortable all those and So, or I in that are am are look at as the go, I X.XX of leverage not? with the my head, that

Michael Sarner

probably portfolio And profile it's our perspective, Yes, send low XX% just have just a sub year now company sub a of going probably the was the investments mix investment. first mid-XXs and is and debt percentage lane lien, XX%. a a say, three in we we our XX% today, different was it little on ago, was I first one were few [ph] asset from equity our had in sub to than the we two -- debt now probably to

than So profile then. was it is overall stronger lot a our

take you that leverage So could based probably little more profile. a on on

Michael Smith

a high all for And more is Yes, I question million $XXX portfolio size. very not think me, helpful. mistaken, I'm that's if record level then one

I'm just wondering size support origination the for an kind infrastructure? current can outlook given So what your with license, you the your portfolio environment, of and potential for SBA

Bower Diehl

think managed we're the so and number. the so looking Yes, leverage, operating look we leverage operating as at grows, costs, we we've portfolio at

we can our as in portfolio grows, staff So invest and resources.

percentage over up what of time, look at our but our will as dollar costs a go that's So assets. we

but FDIC, the that's the grow that add that layer because we operating to it leverage we're people, as from if overhead number, in portfolio, shareholders will, we is manage we income really we the you on continue care the as that drag, the should and portfolio what spending. will so, that about to And percentage

we that to So we at and metric as add we absolutely the look grow assets. resources

Michael Smith

Got Thanks. a it. somebody ask few. else let I'll Well, thanks questions. my taking for

Operator

you. Thank

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

line Your is open.

Mickey Schleien

Good I hear morning, Bowen from follow Michael, nice risk. you. up the and wanted prepayment to to on

I living of of everyone in haves still deal and think we're out quarter. limited companies. a have-nots when capital portfolio debt there some terms there's business rates, a constraints And on say, potential sell in the you could there orders world pipeline, I Meanwhile, this a the catalyze lot in would is private to of consider what chasing, has changes that underwriting. and now tax

is those remarks? your the mentioned mind, prepayment high the prepared do two in the already you of trends you've given in in your that strength with risk investments, So, how portfolio, feel some of besides

Bowen Diehl

lot of sales aging influence especially accelerate I it into lower days business, to I'm definitely are of people year. say launch we could as change, that across on million regime prepayment, now push quantify to I already the visibility make, going generating tax the Thanks as say that that also a you monetizing won't population don't business these pending [ph] the change. would get number, deal is what's changes With here the based move with would the it'd soon question. to If they decision, rash not absolutely we more makes election selling in theory potential for a visibility market. tomorrow a environment respect have retirement of were to the capital flow. founder it that to sale of tax on. thinking lifetime $XX middle of own treatment on end we and that have year, the this and because certain this or change, their of I about mean, know it's into would XX changes, the by and and know I a gains, theoretically end so their a right the million there that could be sold the I on entrepreneurial $XX businesses hopefully the year. some it process it or until after hard tax are

So long way that look, performers in changes tax change, certainly necessarily the middle traditional market these out. the traditional we of strongest of aren't And in are. that's ,where were a Danforth dramatically of then, lend lower maybe the especially But get know I to banks process. risks. lender, the pre-paid saying, a refinances willing case mean, companies as the there are to some I refinance, don't going to prepayment banks

small years, that And sense. end of star holding that there's couple you along, for just have universe makes a underperform, loans companies then vast if majority going guys of are have we a a portfolio so, of growing, and up the performers, and course, you

Michael Sarner

some also of are deals that on repay say, occur. set of were our deals to to And list the that Yes. could

that's taken off register. the being So

years. what we've over So lot refinanced that two of companies a left we're with is the last

be to $XX a next we that. million $XX sense the million actually So, like going feel not after there's in that quarter to good another we have

a So stuff lot feel of like right now. the I happening that's

Mickey Schleien

our And appreciate certain Bowen, And I wanted bankruptcy. in touch loans, mistaken, since if That's non-performing that. last to some movements there's of I'm helpful. I stages think on I call. they're been the not all

Is So correct? read, be from Addiction, sales. from like when a information you're sparse, cash little the on that asset will is that going to repaid starting that And in American with what it be? looks I've

Bowen Diehl

So public, from based emerge it's what's restructured. to bankruptcy on going relatively soon. be It'll

a then debt in security, new ownership debt first restructured which group, group, up part [ph] and personally equity end lien a of, of we the the company. the So in lender are will holding the lender security company,

board restructured, So it have will from a and seat. Southwest bankruptcy it'll actually be emerge Capital will

CPK, mean, that, talk recap, it AC. to well? as I and relatively will want various that's the so control, but and so, resolved restructuring, Anyway, basically taxes it's it's structuring not soon. in our you about And the that's be to things, all Kings got work through

Mickey Schleien

performing quarter? maybe Well, you end before point, AAC at of debt up a we go will some in with those, next into piece

Bowen Diehl

correct; expectation. that's That's the

Mickey Schleien

similarly So and is happen? correct? CPK, looks like equity going And Is when it to that you're to debt. get going that

Bowen Diehl

Similar as far AC story perspective. as as from will what the happen bankruptcy

the I end going note we it'll think firs not announced, instance. and a but performing, it equity may a that board we'll up that's seat soon. be have to -- in happen We be will So with relatively company, in think lean

Mickey Schleien

lenders, I've value in restaurant of Right. world, that's CPK? must mean, despite that term where obviously surprisingly, the game there. everything going businesses And taking some the I been the these reading headlines what's plan there long thinking for are be in over on

think mentioned ahead, its well pandemic, to the run are to the for other the CPK? doing at hope course for that Or to in wait CPK going major I you any just with you've you're there owners expect prior changes looking and COVID to things improve? was past pretty implement but to

Bowen Diehl

brand that me other the the thing have tells a thing, with the and in And I'll good will of brand relevant, that understands And there, for very this it be question. come that. opened, to points it's seems company, that you say appreciate think and restaurants around that everybody I there's and the give of I one the the and obviously, my my demand concept desired, market. job to is so that business. but people But eat careful team couple and really doing confidentiality a view, I be the it's then want that of manager that is

there. unrest things may It's of and places, is the Clearly area -- respect areas. a that's an management unrest is any of kind retailers, all all interesting around So included election with restaurants, the doing in that the to bunch all creative CPK. result affecting the The some team affects those that, encouraging. noise COVID in out restaurants

clearly eat there's to there. be the So weekly we want grab job, to manager restaurants there. seem open, a are great the calls, is But is to doing and out team that people noise I have on thing

too of once that fades shall gives the concept a noise, the And as so, based lot on those which away, COVID two to of future encouragement pass. that me this pandemic noise things, all of market will, sort

challenges, that And there's still and concept and signs definitely team, relevance good so, some of of brand. but some

Mickey Schleien

on That's seen folks snooping that. great. another going I'm that. unless there Or bid stalking-horse through AG understand offer? come bid. Thanks there mistaken. Kings, around potentially that are and haven't a was Is obviously to I for other I And correct?

Bowen Diehl

sell actually it, the pretty Yes, and all in sale. signed the announced, best much That's evaluation agreement say around And about guess to closing/documentation a process. that's waterfall so is it's but really should our [ph]. on a analysis purchase they been the a on process Albertsons proceeds I of

Mickey Schleien

And Albertson announcement. And just balance that remaining that. any using facility Okay, I once for in positions on can help the contribute middle lower finally, question. Is to your a least the same Thanks to see base at there get fund time, existing your the sheet the the market license? portfolio restriction credit you didn't SBIC it? in you of borrowing part at capitalize

Michael Sarner

on get to going the the we FDIC. obviously from to forward, and assets, that's We're able draw will end between by flexibility start get expect the And collateral the the capital able And a we allocated equity. seen think of earlier, to focused plan are that's collateral revolver the draw. important solely said you've in and a they enough to that then license, and the originating I be a revolver have we'll things go when year, don't issue. flow as And Yes. bad, revolver the cash in other on BDCs think the FDIC, we fund and standpoint, to

be ramping originations up the both in accommodate forward. fact, that our going of are as to in not bonds, down as to the FDIC So will well pay X.XX% we revolver, some

Mickey Schleien

move and once sort now license warehouse the get Michael, to the you along? lower of understand, middle you contributing deals SBIC and to market can things I

Michael Sarner

guidance The answer actually actually answer the we've to weeks is We that We having given. do that's away we're the you go be going want been can, not but a kind process expect we're through, that there's but is of the to don't presumptive, application. from you that.

to wait January. start those probably we're going So assets allocating in to and probably FDIC, just the December until likely

Mickey Schleien

one. just subsidiary progress? start going out leverage SBIC on I in not day SBIC -- directionally, leverage you're going to guess in And much to one at the How how the has to two

Michael Sarner

Sure.

related leverage of notes one essentially you based on the FDIC. get of tech out the So and the gate, term it's

then drawing So essentially, as FDIC and we'll be $XX the of by million us first be from the funded thereafter, capital equity, will

Mickey Schleien

access $XX immediately debentures You have then? to of million

Michael Sarner

Yes.

Mickey Schleien

Thank patience your for me it time. That's Okay. appreciate I your this and morning. you.

Operator

Thank you.

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

Your line is open.

Kyle Joseph

balance adjusted continue? that questions quarter, little nice shift any portfolio. given something a between off, to in those questions Hey, one a quarter two market there. my differences grew good look morning. between a in and could the upper upper Was the a you have lower of risk that answered. middle we But bit forward the of taking is returns been between Difficulty] on the Thanks markets? my percentage on Most I think as the Are [Technical seeing for

Bowen Diehl

I of it's market returns as No, to lower more will statement we why, the middle middle a -- much technically deal guess the And still, core can that do are X see upper the We market. now, And that's prepared we are we an funding middle because middle upper in that's market strategy, look for risk one put and upper upper remarks, market Trinity as a we larger. so -- middle there macro funded that at then, deals on is macro our as we I tried think other have deals adjusted my a attractive. really, anyone statement, quarter attractive market.

we'll upper on a deals, metrics upper value. fair too, we the our market well, are of market had because factor in also fair as so amount all that's middle that So find a appreciation

our upper adjusted know the We general the at middle we we risk certainly market generally looking that macro, actively middle better like return same. still know is deals. is for comment. are position lower as a So But macro market

Kyle Joseph

I refreshes on portfolio, given in of new well the are, in as floors where versus yielding give the but just got outlook consolidated as the think the your that you it. repayments? in And portfolio yield, quarter, on then, rates us I can investments seeing increased terms portfolio spreads you're

Michael Sarner

we're based to might up go see months ups would for two for grids. to But that tell Yes, not XX move grids, going some is. -- or I be step it other to I that, at what, be next, that's it the going And are but upon pricing mean, it's expect longer. you, years company or I might than our where would some floors. X.X those stable. There down it's performance you change that'll X.X pretty stable obviously,

Bowen Diehl

competition the in pre-COVID, And definitely world the post-COVID out market. instances, in most there's

say, bit would pre-COVID were back to pre-COVID are spreads a to level. than cases little lower points attachment I While close are, generally they kind of most in or

Kyle Joseph

you or until or Got it. One election origination of activity. last hold people the sort just quarter-to-date terms Have origination of strong? seen election disruption remained activity given one the me, any for in has on

Bowen Diehl

versus Certain in seen that differently origination lot far aggressive. like on off it I'd elections out concerned, say But a part strong a as looks. have or Democratic happens far reacted say a a remains the deals handful a in. we for certain deal lost election. We've instances, gentleman, might business had being industries as Yes, world we've activity the as I doesn't There pretty have And of certain have deals instances the as pending in definitely what might that's like Republican. But some live of pricing. to waiting as people things we've tomorrow. models wouldn't just that legislator shut are there halting, feel of people companies for

Kyle Joseph

That's for Got Thanks answering it. congrats good quarter. for and questions again much a on my me. very it

Operator

or from the question Bryce of National comment next comes Row line Our from Securities.

open. is line Your

Bryce Rowe

a Thanks. baby bonds, just are Bowen that baby a made continue Good to the out using comment redeem the questions traded revolver Michael, you ago there. bonds around the and follow-up morning, on to to couple wanted publicly

this those to the institutional a here measured out thought bucket are possibly quarter? you'll if at we to curious five-year and giving $XX pace, million $XX maybe And another you you measured are pace So redeem unsecured issuance? doing saw million, continue any extending this

Michael Sarner

that's or that we the $X.XX control It'll not. of term, we think would shift between per down. of two the do three the size risk-free next repayments. an when -- would we I pace you plan And powerful. revolver X% to pretty and to that done, I off we But you whether that it's the And pay at X%, when raise quarter probably the equity and that that'll then pay it, in increase have near over to we're with to the have of to uplift tell revolver tell do it's bond the extent that's bonds able to look the NII, the with quarters. in

in other few over grow think strategy this I the near question your years definitely the to that And going we'll So to do look term. to our next is unsecured, the about revolver. be

coming year two As go and at there's our sheet, moment, baseline quite we're bond I said, XXXX, we're to the assumption. look the and market hopeful years, the during market not bond for liquidity rate we or to perhaps. would going to our But as market thereabouts. cap over the need to back grade, the this utilize closer we this grow at investment balance FDIC next unsecured to X% we that a baby we If frankly, year get would that's hit

Bryce Rowe

accruals. compensation Michael, the bonus true-up that's you Then, mentioned the Okay, fair. for

quantify you rate forward. if run Just us so could a curious have that good we for going

Michael Sarner

Sure.

uncertainty based So last the actually we the accrual on quarter, market the COVID. down in brought bonus with $XXX,XXX by

So in run quarters. bonus to around about few we compensation this next quarter, to should X.X. going that back the going essentially rate be forward to on the the cash line looking should the bring pool $XXX,XXX into retrenched at you That's be is the bonus it expect so you run is rate and full usually

Bryce Rowe

Okay. last me. Then for

the on income Another statement. one

about of all the you that release quarter. You nonrecurring amendment saw in type the press in talked fees third

quarter, visibility expect fourth number with prepayment the So you with along you I could mentioned that. X, was you in quantify that? do prepays come this curious into to Then any if fees

Michael Sarner

break fees quarter probably like total for I'll so -- Yes, it the this. down

agencies on we So of or our have fees admin, debt $XXX,XXX recurring generally a quarter. and about

every we that's of companies, typically $XXX,XXX have $XXX,XXX fees. reoccurring XX a quarter. in between and tend portfolio have to So We with

of are that run think one-time a prepayments, of that probably does quarter, two. other above normal in fees small right one Then of the quarter maybe had $XXX,XXX-ish our terms there's and one have now I expectation we of three repayments this rate. I one -- between to with about or [indiscernible], not think So this one them the

said $XX,XXX-ish something you, so the tell number could but that would comes that it's I So quarter. there's end having the of that, up elevated by like always be

Bryce Rowe

Okay.

I that's I all think Thanks. had.

Michael Sarner

Thanks, Bryce.

Operator

you. Thank

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

Your open. line is

Robert Dodd

guys. Hi,

Bryce. $XXX,XXX terms there fee to of First, me that -- housekeeping kind in one income like like in anything than seems to interest from on line? anything rather accelerated something line Trinity the amortization roughly that, and the of income in follow It of Was a material to terms Danforth.

Michael Sarner

the originations of of that Now the the were that up lot were with pickup quarter. line. this to of in the quarter. income fee showed late $XX do was the quarter, of stage on early as million them from A in had all in in All income well some interest as origination previous

Robert Dodd

just kind Then Got pipeline. the of the it. on

it describe You as average.

This number obviously, acquisitions, in the quarter, a existing portfolio. add of on

on of at pace? of available quick now, that Can from the and Can you might give kind and closed color there market a that before. outlook Can the of was add-ons is acquisitions there major buy of be happen? us faster of four out the appetite the how those Of more troubled much new but how refinanced companies can on what's happen add right versus cycle a length again, described given think to more any there out there. are that us weren't acquisitions in you you for give acquisition there got acquisition. that add-on -- for much I out how color normal a effectively portfolio because add an company? any Trinity a on

Bowen Diehl

why pace, offer portfolio numbers same then of team. imagine, our in the They're an Yes, company, times can we're It's the come just other can are do so industry, less -- more model. sponsor your Clearly, there's on we have to and faster pace. do they same point, ways space, look together to synergies, more tend those The the add-on and and of knows to which I types acquisition. reasons management management to team the than business you companies financial as the at not as two you if work things generally think, the it that. speaking, to do It's your much Clearly, question. the integration these speaking the figuring figure together, focused going out to industry generally to take things, what out. work don't generate behind time those risk, well,

get add would as trying gentlemen core us easier sponsor the done other and/or do where so generally them platform, we business to are to the they are statements things in opposed which faster is on to help acquisitions we BDC and to financial portfolios some model say of some provide about the great So the sense than new figure happen companies and both happen out a make source a and I and verify back of too, do our portfolio that faster. capital other acquisitions. one that's the and things

them So of natural out background I of there environment, add-ons. there potential or That's efficiencies managing industry. the think that, it's of that we've the acquisitions ago, where they company as this of it's case kind our two other are value portfolio seen, strategy like in combining seen portfolio margin. important the businesses the often not many have ours every our underperforming, that but We've equal, the things COVID, operating year company I maybe are industry, every a and than the that thing. a at current BDCs more do. appreciate All but of did or more you maybe really said have like hum like event In well, in and of our efficiency as companies kind an think like, companies are after the portfolio in maybe else okay, nature

on flow on to definitely add front. deal Probably mean but a So deal activity result? as the not that tailwind positive the does it's triples

Robert Dodd

on the Got Thanks. and it. quarter, appreciate congrats I guys. that

Bowen Diehl

Thank you.

Operator

Thank you.

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

open. is line Your

Chris McCampbell

guys. Morning,

drove trend and to the place again? getting asset y'all do think visibility quickly, part you Just factors are grow dividend a value we're into of that getting to have where growth a net do

Bowen Diehl

big Yes, us current be so a been created in many for as will environment. NAV that's I the uplift including BDCs far NAV as of noise market by think re-appreciation the just

we to based certainly Then that to which equity down expect on we've some I have had write companies of companies with think we to a growing, the see portfolio it to are COVID, re-appreciate. nice appreciation certainly that. we expect that that a couple decrease

there clearly from talked sit growth know don't So wants some the to Mike I With today, I we've that things tailwinds NII FDIC there if to we about NAV definitely other forward. talk -- and that effect the are are respect should support going think of where about.

Michael Sarner

two next we NII. do from those I in of NII. eye to the the -- have that's drawing points to XX% time, long we transition When going fully to on getting increase the think to Yes, there, feel regular growing unsecured turn. and that fully see $X.XX comfortable quantify the on sort is next mature term, in start on year, last three notes, to up bonds, we we'll see think in five To run we dividend we immersed next origination think it the the revolver rate our said I once we in the FDIC, using an in this the on we bit make and in of question, away bonds this the be a of we dividend to probably quarter $X.XX based increase or an think When terms over quite out inch have in transition I've to two those a date the full of direct call years. I XX% relative deployed, and the

increasing that we're ahead slowly steadily. dividend looking definitely So and towards

Chris McCampbell

guys. job, Great Fantastic.

Michael Sarner

you. Thank

Operator

Thank you.

question next of comment comes Investment. from David or Confluence the line Our Miyazaki from

open. Your is line

David Miyazaki

Hi, good morning, guys.

make managing of people your the and grow loan, done nicely. how be where like outsized the I you underwriting portfolio fully being is guys through seems been COVID those able point engaged obviously, when Danforth and the you so a to the where guys were returns there's talk you've portfolio along won't taking in couple you they good where thus something they questions. happened which go of get in in to interested time really and were made, of I'm willing It lines a far, go then to can't crisis kind a or and banks, that think wondering when by observations Just refinanced tend have about job not getting they out.

they guys would them you come can mind talk So and it, your with specifically just banks into what about to refinance companies change if that them? not Danforth, but generally their happens the make that

Bowen Diehl

that's certain would a of bank the is I and things but for that things. here say with bank's not its David, obviously. two I'm quantify good will of look company, One respect necessarily really question. the just Hey, performance to a risk Yes. is appetite a to certain the one company, the and banks and at performance, that,

time financial as to a it size. is in bank an it in lending the market get part to bring that Again, bank a -- banks with are story the but that graduate part with Others just it's particular So lender. that banks it. market bank. the particular it's from The particular appetite, courting gets evolves. company because clearly wanting in sponsor, industry, just in are company a particular, ultimately that a to of those not it's comment, as company particular the and of whole particular EBITDA these they capital, would grows point relationships, appetite non-bank where cheaper that companies sponsors would a industry, financial rather for In it's some who can to a level consider macro

part of is evolution that to dynamic within natural financing. non-bank lower middle it's of bank the market, the So

David Miyazaki

where of part would to the taken have out positioning? by banks? your company can that be a it Is Is strategic strategy exit to grow that point your be

Bowen Diehl

definitely, certain I it not as macro It exist. but necessarily. strategy, situations, So dynamic, described, in it's is does a a

a things, the That But underwriting, it XXX is more into like our at there the expensive moves a on the financing -- other value next and Things be amortization. that various is RR can of diving provider, companies, scheduled moves things points which is and of but don't are more leverage to cash is we're not changes sense? looking that need that the like operating banks more amortization, enterprise business, that and trying need also needle, non-bank what that might necessarily not into business. different. we that need especially companies. acquisitions is a So growth bank, speaking drive of needle as as Does business than generally of goes RR the in necessarily they every industry other flows basis flexible these as of every banks is what be what lenders. the capital and and the make much than the really deal companies, discussion is are XX, capital the Some sponsors

within is be corporate sitting it certain years So saying, okay, going want It's think it's to of part of situations. around the to banks. quite not be by say, a hard out we taken we that macro, are do we're conversation that a strategy deals in definitive, can but to couple

David Miyazaki

versus want bit little lot and I but SBA talk the within sure an can basis participate leverage basis you on get progress on statutory just far. about about and you been If Thanks. I they of economic don't chickens might you if your a work How the a post and you about there's leverage that that in ability thus the FDIC? debentures. targeted ranges should talked FDIC, congratulations ask, the not discussion to a shift to great. count gears could hatch Okay, I'm before great

Bowen Diehl

were tell still where I environment overall, feel or pointing think in with. to be you short probably this the be board not X.Xx term. equity that able mandated max we that comfortable to the we may say would we beats I that the leverage We leverage raise in would may

David Miyazaki

statutory? economic or that Is

Bowen Diehl

somewhere X more time, That with probably that maybe what we in like. we actually where we regulatory wouldn't going leverage you the to will economic be focused be we'll living look as X.Xx a the would look tell a economic. at But be be I X.Xx forward. probably in target to X.X in

David Miyazaki

the helpful. queue I very now. will That's and great. of I and Well, you. your appreciate Okay, out congratulations, Thank step comments

Bowen Diehl

Thanks, David.

Operator

very you much. Thank

or next of comment Our line from from Devin JMP question Securities. the Ryan

open. line Your is

Kevin Fulton

and debt of floors? investment for floating-rate Fulton one Hi, more have of outstanding this LIBOR average Kevin answered have is the floor question. for percent just is I the Devin. already. what weighted portfolio have Most mine been LIBOR What

Bowen Diehl

LIBOR on average weighted X.Xx. asset is The portfolio the

Michael Sarner

a a Maybe originations than new floor. little lower the bit that because lower have

Bowen Diehl

Yes, maybe X.XX. What was the other question?

Kevin Fulton

What investments floors? percent LIBOR of floating-rate have

Bowen Diehl

all of Yes, much them. pretty

Kevin Fulton

Congrats Okay, the a great. on only strong That's question. quarter.

Bowen Diehl

Thank you.

Operator

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

Bowen Diehl

forward the progress for questions. Thanks all thanks, we'll for Again, not quarter. it everybody you guys robust We operator. appreciate posted to keeping on call. Thanks, look the and and Great. before we our talking will be next

Operator

in participating for conference. you This the thank program. today's gentlemen, concludes and Ladies

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

Capital Southwest (CSWC) 2 Nov 202021 Q2 Earnings call transcript