CSWC - Earnings call transcript Q2 2022 | Capital Southwest Corporation

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Operator

Thank you for joining today’s Capital Southwest Second Quarter Fiscal Year 2022 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.

You may begin.

Chris Rehberger

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

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

Bowen Diehl

for And fiscal XXXX. which for September quarter thank ended you, Chris. quarter Thanks, our us second everyone, call earnings March for XX, the which ends the of XXXX, our XX, joining is year, XXXX

Slide the we of quarter. can X some on our highlights at of are this look you on will where you giving our be progress earnings have in We’ll to the and performance as refer morning summarized update strategy of your portfolio which our to www.capitalsouthwest.com. the to earnings stewards Throughout prepared for pleased found investment remarks, on begin our forward presentation, of an be performance executing various and slides our website capital. on our key our we the We presentation, company, with

dividend net during the share. than an the $X.XX Total generated income quarter asset earned annualized dividend. quarter of we per for investment $X.XX which on our quarter paid Total a X.X% quarter, annualized the trading supplemental stock and on $X.XX the day last dividends of dividends share of price the per dividend were per quarter XX.X%. per included on share of During yield net yield represented our $X.XX which more for share, regular value an per of the share pretax

announced in increase from reflects This we of regular the earnings previously $X.XX reductions XXXX in for reminder, ended paid dividend portfolio quarter recurring in cost continued $X.XX December portfolio, our to September share of resulting declared the per a quarter. per through an increased regular As structure. in capital in our the improvements dividend and our growth, power our share that managed leverage internally per our continued the achieved our increase share Board operating from

of accelerated also December be $X.XX of Board declared had a been dividend Our supplemental dividend per payout represents supplemental the This dividend supplemental an program, distribution which prior to for that UTI paid paying our balance the share quarter. accelerated out We $X.XX past quarter of several years. our over per believe while the into today maintaining future. UTI also this maximizes shareholders value per share an adequate on

time. over forward, we portfolio portfolio we participate exits unrealized continue distributions shareholders as in investment successful expect our of the in appreciation to the through monetize Going will that special our

$XX.X X primarily $XXX companies million During quarter, million unrealized $XXX.X funded unrealized proceeds grew total growth we commitments X.X% million gains driven during in realized prepayments was X the exits generated net portfolio by which basis was the the the quarter. close. This $XX.X of X equity in during in our during by The portfolio net co-investment and depreciation from at debt equity and investment to was million a X of $X.X primarily portfolio portfolio. offset by to million. quarter, new our by driven of a companies, existing portfolio on quarter Portfolio and

plus XXX decreasing the facility, ING extending XXX August and maturity down to the LIBOR points, credit the XXXX our amendment to basis to LIBOR from capitalization we front, On basis interest completed plus an points. rate

program launch strategy. of producing $XX.XX average of per our growth, believe of per steady continued consistent the demonstrated We aggregate Additionally, creation X solid to full through we October share. and deal X.XXX% an XXXX of representing -- in Maintenance shareholder value illustrate and of and we creating we an the X.XXX% value strength at core of XXX% repaid million both prevailing of with of due average principal our of raised dividend the October long-term tenets coverage due $XX.X objective in strong long-term capital million portfolio our investment XXXX. value and strategies. notes pipeline, credit NAV record ATM of dividend our shareholders. capitalization On of asset our management has our and markets dividends X, our sustained and aggregate remain access Furthermore, equity our notes as price an track share net Slide $XXX issued growth for since in and the performance our the share, investment per company’s of lockstep our

to Slide Turning X.

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

is losses is lower opportunistically the per our of over lien many upper mitigation senior equity while time. on that alongside middle invested secured this from powerful strong BDC when attractive aiding credit market any providing lead middle driving also made Building believe in strategy smaller maintaining for security risk-adjusted in returns upside portfolio We out also vast provides invest we important directly loans originate with first We and while opportunities a NAV a these capital of NAV lower co-investments market consisting growing the in and In majority to combination in share, our investments market, while for equity businesses. as well-performing equity the our core of lending of to middle exist. continue loans. focus growth of primarily the the ability co-investments it to granular

$XX.X of equity in companies. embedded had quarter, portfolio approximately $X.XX the of unrealized investments or the half portfolio per share. our appreciation fair equity included of The As portfolio value XX of end of co-investment which million approximately across million a our consisted $XX.X

shareholders quarter, end Our businesses. X% provide our continues of to value of from market the which equity portfolio, growing at represented attractive middle our the fair portfolio upside lower of as the

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

committed end, out $XXX.X lien all million portfolio Capital the secured. were quarter, company secured. the quarter. senior was of of the For the lay XX, in and $XXX.X credit portfolio $XXX,XXX and portfolio new first capital included alongside $X.X during companies invested debt XX% portfolio million originations On quarter committed portfolio one committed company we lien invested X first the senior first the of as existing debt of this new And secured in quarter million we companies. of senior lien $X first lien sub-debt to Slide debt; one in secured million investments and to also companies, X senior in in existing in equity debt to our equity X follow-on committed which

Turning XX. to Slide

IRR proceeds. we million We proceeds, approximately XX.X% the continued in continued quarter, was million X have our in with its IRR activity. These average representing of resulting To cumulative date, refinancing capital track perspective, generated exits, of record XX.X%. gains quarter. average of successful and momentum robust into total portfolio December exits macro a of a has in for a in generated origination and and weighted $XXX weighted million and strong $X.X the the exits XX heavy refinancing this both on quarter, realized From acquisition market volume exits $XX.X during

quality as pipeline, have for which the top investment the and team number consider. the previous deals calls, we the continues in Our we robust has deal deal earnings maximizes of mentioned deals. end in our an to job do of and review been The opportunity both have of to excellent the market which volume on funnel broadening

critical a always portfolio quality we contended, maintaining market. a building and a As in investment have component of this competitive is

Finally, on-balance fund. over our a our more in loan we exits the sheet merits investment On proven years key we the the and on our portfolio of strategy consolidate returns Slide believe investment on on-balance lower as our sheet term. give again, stats XX, our of to that portfolio out quarter, of we investment reporting of have several middle and illustrate shareholders senior for generating concise quarter, market decided middle excluding the our the to the upper team end strong of this long Beginning acumen order has total. some market I-XX view in the in risk-adjusted returns loans over past makeup realized

X.X% second As the X.X% fair debt value investments at total of weighted investments, first in end quarter, on-balance lien co-investments. of to sheet subordinated lien and X.X% to investments, was equity portfolio to XX.X% the the

to XX. Slide Turning

portfolio. our We rating out have within the migration laid

X a X quarter, to and X downgraded a the a a to a X X; During loan a X from we upgraded loan X had to X. X; from downgraded from loans

reminder, a being loans As lowest signed and rating. a of with an highest initially investment origination being all X are X the X on the scale, X-point rating rating upon

X the had end rated portfolio of fair or the we had rated we X at X. a at X; value, X of portfolio representing the the top of our the than of X; value, a representing a categories, investment rated loan, quarter, loans, As and of representing X% XX% XX X.X% less X loans, approximately in at of fair X portfolio,

on loan with the nonaccrual of the fair first finalized, restructuring in is we the term in placed date, coming working of so near company the weeks. on a X.X% quarter, a come or through Based total post-restructure should $XX.X the secured the its place to off on currently nonaccrual portion value loan on portfolio. conversations nonaccrual terms. have balance a this the sheet, we loan of clarity more lien the is we restructuring During decided investment pending loan which to once million expect This company X senior completed of to be with

shareholders’ with our portfolio be in total well only lien of As debt senior strong of across senior to weighted portfolio remains heavily debt. continues illustrated industries towards Slide Portfolio first secured in investment portfolio lien an our security on XX, secured second mix the asset the only for and which X% provides X% with capital. debt, diversified subordinated

Turning performance. to continues solid fund Slide its I-XX XX. The loan senior

I our of specifics have financial I-XX to the of Portfolio and in was I-XX I-XX to now the the diversity performance size more average was XX% review equity. hold across over the continues currently of is at an at companies $XX the respectively, down secured debt average the to X.X% the hand quarter. senior Michael will portfolio quarter. portfolio. of to the Leverage Weighted from debt. lien X.Xx industries level X.Xx, EBITDA of the call among slightly million leverage for in end quarter, first the of last portfolio As fund or invested

Michael Sarner

our as to share Specific paid performance million XX, dividends increase we investment $X.XX per net earned from for for Bowen. quarter, of the on Thanks, pretax paid regular $X.XX $X.XX share. dividend quarter, the the per the regular September We share quarter. income per Slide $XX in June an summarized out or in out

declaring increased As quarter, this our quarter. dividend Board for the December share again, regular $X.XX mentioned the earlier, per has dividend, quarterly of a

Additionally, during paid out per our quarter. Board declared supplemental of will previously share, dividend $X.XX be final the which December a also

gains Our quarters the special investment accelerating dividends and and Though past net forward, supplemental in current generating December X $X.X are going appreciation dividend realized as XX, continues program we portfolio distribute this $XX.X to portfolio. monetize XXXX, very million. as perform quarter, of over gains continue bringing will unrealized unrealized in the to we we well, to unrealized the net million realized the the

regular consistent investment As with net record investment income a Maintaining per of dividend our balance meaningfully September $X.XX to is pretax UTI important our our XX, track covering of estimated was share. XXXX, strategy.

XXXX, to record last dividend since maintain XX strategy cumulative in the of January for our XX, ended and of September XXX% continue our track strong credit coverage with launch regular XXXX. months XXX% We the

There investment X.X%. Our quarter increase higher $XX.X investment Investment of income all in weighted fees. of of a X% investment million this or was primarily with were quarter produced fair end $XX.X average $X.X on an due with million investments portfolio the income to loans million this yield an on credit nonaccrual average value of quarter. of investments as of X prepayment outstanding and aggregate the portfolio the

our weighted X.X% yield average was Our on portfolio quarter. the for credit

leverage as maintained Slide LTM the on of at seen As quarter. the X.X% of we operating end XX,

to leverage in the better operating X% targeting are or quarters. We coming approach

was The shareholders investment enhances share earnings on on the September of quarter share per dividend at of share. $X.XX power full Slide to this $XX.XX Turning net our approximately driver also forward. share was $X.XX was our maturity June as out compared premium The significantly a believe of these increase NAV company’s loss us $XX.X main our primary XXXX, and $XX.XX $X.XX in in annual to on as of XXXX, The losses XX. a well market consists X.XXX% the regular We a as issuance of we XX, of decrease per allows Slide XXXX. basis. write-off new pass by On pockets the significant increase of increased run per debt issuance realized our make-whole debt capital. unamortized the on by balance nearest catalyst X-year XX, savings form costs in sheet to a the transaction X.X%. This million flexibility a providing of out with the related NAV representing rate realized of share as basis the cost capitalization The to refinancing X.XXX% yield income for cost our increases million debt payment of going per of XX, this $XX.X extinguishment lay the dividend quarter-over-quarter risk-free to pushes capital of decision to per prepayment of from XXXX, dividends. million. October reduces $X.XX capital decrease our multiple our note $X.X of due our directly to and This notes considerable

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

Our today revolving leverage January in in XXXX; a $XXX bond million $XXX institutional syndicate with banks to debt line $XXX upon. XXXX; bond which million maturing left March a the million and credit of SBA, issued the XX in is million institutional maturing million commitment initial XXXX; $XX newly a capitalization $XXX sheet on-balance of be an August credit includes from maturing revolving million maturing line in I-XX $XX.X October drawn at XXXX;

the debt majority consistent extend past facilities our of look and is we to currently our will Although amend outstanding with maturity before in due opportunistically credit XXXX, practice. well

going within discussed have begun will we’ve on now we calls, prior see, forward, which SBIC you as as subsidiary, our Finally, denoted operations SBIC-X.

million is of tier initial our as we $XX fund of commitment equity for referred the leverage, to to and As fund a reminder, commitment from additional received have which is an million, also the SBA one $XX leverage.

X invest this of we We capital over at will expect $XX tier months, a to next which apply point fully million the second initial for of leverage.

million of million the $XXX plan the SBIC we Over $XX.X the fund, from life to draw capital alongside full Southwest. in debentures in Capital

with the are be to program of Overall, and it our fit as million believe with end of continues strategy. and that be in liquidity the balance investment excited We’re sheet to a commitments is our this to leverage we $XXX quarter. pleased part strong approximately natural undrawn report of cash

maturity our is were As debt earliest approximately of capital January and structure in of September liabilities XX, our XXXX, XX% unsecured XXXX.

on X.XX:X. XX, hand will at call of back for I ended the seen final as some leverage, to now a comments. debt-to-equity regulatory quarter ratio Bowen Our the Slide

Bowen Diehl

thank joining us perform well and journey. to everyone, original and and our communicated consistent strategy Southwest Capital Michael, to our when we Thanks, with you, shareholders today. for we began this vision continues

concludes shareholders’ long-term Operator, investment being our capital by our to to all about to of very continue demonstrate investment and the value for Our prepares capital deal the first strong open well sustainable prepared the team building creating as ready flexible Capital and Capital Southwest excellent feel secured strategy excited senior economic and cycle. team forward. at continuing for to structure execute believe that Southwest strategy. going of Q&A. robust origination to dedicated our here the stewards a environments we that us a are We deliver totally lines our lien continues is performance of good an capability This Everyone debt job our all as to the and We of base, performance has asset done portfolio, throughout stakeholders. our we health remarks. acumen at merits our are our company good for

Operator

comes Securities. [Operator first from Devin with line of our Instructions] And JMP the Ryan question

Kevin Fultz

This on for Devin. is Kevin

question. First

that looking at share can And in the nonaccrual? of to provide added the company then nonaccrual existing any developments name was you nonaccruals, you separately, Just the investments? can new X

Bowen Diehl

Yes.

of So which later announced a will I’d on company rather it’s will not a public it be say the queue, nonaccrual will call But the tonight. a name transcript, the it this that’s been be the just like because in sales result out, but up chain market but in cycle there’ll be wind about and that is extended. in temporary a the affected its market the has and which by of all in that out as real, we we’ve supply certainly hope heard company’s all --

So of this on recovers. so going in will restructuring it accrual and back come or we’ll it business equity X/X about We quarter. own think as the forward

Kevin Fultz

was What If you other the X can... that?

Bowen Diehl

Yes.

is them currently large of It’s its a syndicated restructuring. working on still deal. One

no so that. And on update really

Kevin Fultz

It’s definite?

Bowen Diehl

improve Yes. to to kind to one quarter, pretty services within the continues pharmaceutical encouragingly. report And pipeline the build, the of other last convert actually Same then continues -- space. as pipeline increased starting same actually

we fine. to that to going -- end one’s up be being so And going think

So...

Michael Sarner

-- Yes, was company. PEC we’ve accrued a bit there on bit PEC of that a accrued of

and -- on as the enterprise value, occurs accrual exceeds the value back the that recovery debt our as will So well. come

Kevin Fultz

give on also how Okay. well? and is sense That activity helpful. then originations a Can activity. as far quarter-to-date are information you investment then And so just us touching tracking repayment

Bowen Diehl

Yes.

to portfolio too. we’ll growth going are believe mean do prepayments with the have quarter. market strong. there, imagine, as be quarter, net heavy the activity -- for the Prepayments that’s I through of They’ll you originations quarter. We end the all can quarter -- out are this this So strong be

which that have get ours like job, churn, amount with would our going remarks, So our of funnel. a expanding fantastic portfolio of -- you in number top strong expect of a we’re I end my like But it’s as team the a guys a out refinanced fair the of done deal to deals. said

day, of And quarter. very in the this market. been end get have we’ve the we active to at So growth portfolio the we’ll again, net believe

Operator

line And Ladenburg. Mickey Schleien from with next the comes question our of

Mickey Schleien

is sector. this be we to all to seems more yield, for risk know, there’s as more Obviously, risk across fees, that’s you’re a those can to look prepayment your and defend capital which and as Bowen, maybe generate near-term about search we private bit which debt, in market the -- forward? payment organization doing attracting But help talk more what increasing you little great. can your share tremendous

Bowen Diehl

first that’s it’s we Yes. I good anyway, that that long start you good table stress way, being which over I And the mean sponsors really deal that and freedom yet really have the fair funds, with business of seen own deals we’ve every this across make that, a to business a reasonable pandemic, we market that of. that’s super at go stress. track is broaden a sources get you through number the from. on like number with funds being from been into interest have We to that candidly in interest things pandemic. defending sources, develop had encouraging. across portfolio off covering deal the market and the been PE balance capital your record by And of sit the partners had been And kind that partners the lot usually, of and market for or in and the time. has gives of when portfolio secondary and doing you we’ve this years. shareholders’ person. in function you PE of And company really make pandemic, own you -- sponsor of a type with really thing the decisions deal business as that we and that to mainly, that doing able have me pretty heard coverage junior primary, -- country the during a then interesting, in And lender, with The your your share the and of the spin sponsors their stress which, decisions you deals covered funds with their lien a to how

And extra Fortunately, we where supported everything necessary. it way, where recovered there extracted fair economics sponsors along the we here where -- companies company the and -- nicely. was and the

going And years credibility we really street something that that ago. X like through have might us had so necessarily not gives

also are and we’re with So actually that’s references more and a doing calling us, for we’ve of to sponsors big sponsors. new sponsors us other been those deal. ask seeing that business And then more that

you increasingly how other so how you market decisions sponsors and important act, in the sources. And how becoming the is and make operate amongst you deal

And encouraging. me, so for that’s hugely

to you a because way you the and -- way operate you in you that’s the from So that that’s want what the market. want, act get benefit

those so share ways are And market the end of at you all your defend the day.

Michael Sarner

And we’ve Mickey, Yes. reduced thing, the few capital. X.X%. We is of cost last our years, were other the at over

X% we’re closer Operating down came to X.X%. down from X.X%. Now leverage to down

margin. in that look certain XXX, we deal on an And the where credit staying specialty it ability know net our refinanced years allows there XXX also are plus mean this doesn’t and chasing we at and at competitive. X, the for helped when defend, didn’t are ago. businesses, stay deal, deals alone. just that look those yield if XXX on -- say credits it whereas to the be and deals offering we have was we L are you at bother well riskier X to deal wouldn’t we’re interest us looking to It it L deals And yield the or to we historically, but considered in L get us have So able XXX, to down based deals -- less we’re more when today, came

Bowen Diehl

their companies the happens, down. And is that on is as cost clearly of to leverage comes that come spread reason know, or these most going of people course, the call grow, down capital

we perspective. stay in interest that from how net can long a the really margin So question is credit

right. And is so Michael

it And to our of businesses, allows new capital tighter operating drop increase us thing. spreads, lower kind we our then to leverage, companies on and tail the on to businesses. that at As value, extend lend loan then to growing of cost being able

Michael Sarner

less X.Xx have the where issuance the or would a X.Xx so years Also X.Xx, doing at dilutive obviously raising at done we than ATM that’s equity -- in or we’re ago. Xx lot X

Mickey Schleien

I meetings agree. travel Bowen, across -- in issue relationship end of agree mentioned you but just of the at origination now eye table to day, Or Zoom great, doing a for sitting with is are that sitting more you table, the new still is the team? important. you now? I eye an engaging a the Are

Bowen Diehl

I -- adds type we’re Well, You also Candidly, Zoom thing. interesting, again. industry But adds It as to -- calls. of dynamic we cadence functional to important a professional thing. become meetings has a see are professional just it -- in really a job have get superior a work, over from right? answer that your as yes, -- which your get to manufacturing myself, deal Zoom. person a management that’s a dynamic plants, definitely to operations, to of is deal the certainly the And believe your the travel, perspective, traveling former that’s

And so that. we’ve seen

happy that. yes, traveling thankfully, very be So to and we’re again doing

Mickey Schleien

other One Bowen. high-level question,

of economic and potential the tightening, to challenging probably How volatility growth default the are year sheet lower economic election. is had think you’re But with at very which wind terms about in low Fed sector, more your own be balance growth a starting very trend thinking repayments from new in strong around originations you apart across those risks will that BDCs next seeking leverage? of and and a terms this certainly lot I’m So a their of have environment. year, back

Bowen Diehl

Yes.

models So test always well, you of the of wrong a we will. Part swan doing go type is all, in Those deals new is events. we’re recession, are black could we stress things of like part before we’ve what if that the that pandemic, of kind saying, system, of in first is deals, do which done, okay, upfront.

of increase, in up basis. the side. majority we rate are that’s to best in hopefully things. the to believe can our interest loans. vast bond X.XXX% asset we liability Hence, -- obviously on to an certainly our able the different rates being So setting -- have weather that is able as the base very issue on capital floating do to be fixing unsecured issue Obviously, most the We we recent attuned rate

those things as And that say this look so forward hearing we the I really us beginning. think always you’ve we’ve do been are the we -- very -- to from

We’re shareholders us like that’s always about that. the just recession That’s always we And But year feel have fantastic, we have what I next that’s a paranoid about in recession, do if or the institution X. -- for our upside. pay a then to to and to protect don’t be thinking that mentally.

that volatility. of can clearly. it’s that far going to end the the But economic be around volatility at the year, be there’s election as As -- day,

catalyst wrong, that, too. the things the the about of to answer, to can is election do the hopefully, it at all that could thinking the and the day, going economy so to And end the other atmospherically do. we’re what’s the we catalyst in -- underwriting go system, be it’s be and things but the which that, But things same could

Michael Sarner

in Right. And draw what essentially the taking off mean expect obviously, interest off broader nearly but out table, that’s our far as have will SBA, did. risk not I pushing some market. rate you’d by we that us allowing volatility, lot debt of additional as the the a which maturities that’s to

Mickey Schleien

you. I got

Michael. one Just any housekeeping previous new income you small for reverse Did question accruals NPL? for the

Michael Sarner

for quarter asset. didn’t that anything accrue No, we this

Mickey Schleien

previous reverse for didn’t anything And accruals? you

Michael Sarner

this No, for was reversed no. We quarter. just out reserved whatever

Operator

from comes with question next our And Rowe Hovde. of the line Bryce

Bryce Hovde

the last I debt commitments wanted couple about over to level investments. relative of of kind quarters ask to funded here of the

to kind within in You’ve new of seen the activity. speak, so unfunded, an uptick investment

could maybe here continue? the of whether converting commitments speak So any some the of structure those of to near to you unfunded and you to that Michael, expect in maybe Bowen then future? And pace level for funding kind feel

Bowen Diehl

mean first interesting are I commitments aren’t oftentimes clearly lot as that term Bryce. banks. aren’t mean well lender. you managing thanks, to loan revolvers sure. we’re Yes, -- revolvers Clearly, a Well, that providing unfunded lien whole revolvers as is a used -- the I

so And same revolver we higher which bank a than the as would is loan, on is revolver, rate charge. the rate ticking can offer fees, term get the the on the the

thought up lower we revolvers our it been. That’s the security have revolver a And such to nice on covenant manage of But being for compliance. being but have to would liquidity than function revolvers. example, not balance is with revolver we of I it maybe think -- obviously sheet that that. So us, ends had have balance capital have companies Those a pandemic, our I we the are -- XX% liquidity for which fund in drawn, obvious. sheet to would those obviously, fundings the a our have

On the delayed draw term loan.

are similar commitments loans higher means and on an other In funding number, strategy half hit they usually draw that quarter about half words, different. draw delayed earnings number. a partly based Those EBITDA earn-out acquisition Delayed unfunded buying are -- earn-out it’s purchase. on funding maybe specific our a this a term revolver, term a businesses, the loans. higher about So function are of a

definition, by the paying out well. companies then is are the so doing And earn-out when

sudden those really all or apart, -- they not sudden those But loan. the not term are how it’s that’s work. on And pandemic a is starts are so just to That’s a draw of originations. like are And not those commitments different. draw what mean future otherwise. of the unfunded all delayed world fall those I

hits funding that that if That’s realize a obviously those we’re there’s quality on business the good. add-on further we’d Or going origination. do an new companies That’s if company a there’s like target, acquisition. to that, to So the EBITDA if are be -- acquisition, that. grows, to allows which a again, business, higher diversifies synergies

have on So those acquisition. that it to refinances significantly it that, up outside do. And sets believe out like already the odds and are the I acquisition. And company the also prebaked us originations on another that to we’d out the a goes also with for that deal financing us decreases facility in

the position in into pole to you So a it attractive fund just kind very of situation. puts

So if fund draw. are -- of delayed to delayed of the affect we’d candidly, future would originations. We most draw all, term expect not that, loans

extension. usually Some are of XX in XX draws maybe months the months, delayed

when the they to period earn-out, would we in fund or would So -- fund. the not earned expect have to passes we to that financials, tend get haven’t our fade. to the closer months and to XX of the would that term intend going loans draw we it then you’re earn-out delayed most you and But

Michael Sarner

but quarterly see see about XX% of we be we’ve a seen XX% also get the we of revolvers And them on basis, repaid. drawn, -- normal maybe

were then met. that all that then all So from They And earnings well. scheduled dates on -- repaid the hit. in out. those COVID And perspective, the quarterly XX% this are quarters, HAD funded To basis, after can all soon as the a be planning which DDTLs, on the those funded, and -- point, during revolvers. those funding their Bowen’s have you most a was X is a COVID, of really the on net was

monitoring that debt. raising planning that, for will we’re purposes equity ATM on our we impact So or additional raised how an obviously, much closely and

Bryce Hovde

helpful. That’s Okay.

like Does of had? the see outsized statement, December do that income that quarter. the in so feel here pace quarter that quarter? of obviously, And -- another side activity relative have of came sounds expect on level When that the How it of September -- kind kind the and income same of think in all repayment at we the activity you you good into about Or along of the lines kind terms you those some least repayment continued at of quarter, to look and we things. statement in you investment origination when here would this activity. current amount both on activity you prepayment to the of

Michael Sarner

Yes.

So above repayments have we and both would the net I I but the originations think anticipated, was growth think modest, what September, fine. the were but

growth, coming said but to well I to originations. as net be portfolio going -- earlier, significant as quarter, we on as think this think we’re it’s I repayments significant see Bowen expect

can I being deals speak the XX/XX that to quarter. we’re seeing, best pulled there’s lot what is, forward Bowen So a are think this of into just

much sort you to until quarter pulled again. deals in see how I when forward, how was will mark -- therefore, going to X/XX see be it’s an the we Or to the the think back so of have much have? left increase And and is question X/XX -- be come going the

Bowen Diehl

heavy I you I private is the attractive that thinking can stay thing, founder be your a business changes Yes. lot of year portion years doing would looking to earnings, of a type were couple and company, about over you of regime it. because year whatever, a monetize good and of with mean some equity your monetize that lifelong the have roll market a to transaction that do but you I theory. work. think that’s in the were mean in And next this more you sometime a you of involved or were people that tax if that, of a of also pretty a theory amount if a can with to

You the just through pandemic. live

not that not you’re younger. tax can learned happen, changing. by life are and things and regimes way, is the You And getting any forever oh,

selling, lot a would on also to seek things there’s sale a was their founder-owned sponsor And drive a docket sale mind. that’s the already too. So that business if a of in a

But see. I -- but is at that the lot described see. of the we’ll the a middle in activity just some we’ll believe dynamics I dynamics least lower of of some So market the market, theoretically,

Michael Sarner

we have quarter. across we’re in amount of to in more already and occurred I of see November your sort XX/XX question, the exits penalties exits would P&L, anticipating the on expect spread -- we’ve significant And inflated and are December. to prepayment had the already And -- mean

assets, but you’ll those see level interest of to those So penalties. going you’re some prepayment also get of off

Bryce Hovde

Got it.

maybe me. one Okay. And then last from one

in function You’ve of of activity NAV? trading terms stock where same liability net really to relative ATM continue? structure that all of "cleaned got up" the your pace is to Or expect and extending. do you is more you originations -- a Do the

Bowen Diehl

at stock the down to of mainly more It’s keeping track record, growth of stock Certainly, price developing the -- an manage our of business net a guys is organic leverage we’ve the -- respect and it’s our growth. of function a It’s story mean, about variables. and model of it’s backdrop So range day, access at too. portfolio look and lot growth know just less and permanent And of a what then the of one after the So our with portfolio actual to with function to of market leverage, a function price. talked target originations, the but excellent metrics mean just right? kind that’s head -- I slowly we leverage. portfolio trades is the end where then just it’s it’s have and growth. But net how prepayments, grow a BDC an in against of the portfolio equity net the to lockstep equity executing do to grow base the capital I

add, so And at, the with what in you’re BDC the lockstep Michael? equity your Anything but -- it’s to of day, you’re raising portfolio at end is again, leverage looking growth.

Michael Sarner

this right it’s quarter, very agree. now, before lot mean variable. I I a at repayments. this mean point Yes, of know I there’s we --

lot expecting originations. We’re a of

will that dilution quarters. ATM of then if pull don’t cognizant And ATM the the We to are back so occur, originations the think some we of certainly following usage. on that if brings we

equity going sake. we’re raise equity’s So to not for

being in to agreement. whole ATM registration. week, available equity shelf that of equity in is market to as that. we’re a we we X shelf But raise going our raise it that the some that over next So years, as put point resolved our equity is well mention equity -- ATM as debt capital secondary only I offering, One primary public have distribution actually, and prudent. I’ll but on was source We -- And of just it’s thing not also about not there to if equity. that know opportunity in to -- confusion a refreshed raise the to take last the the still forward. ATM our source, level of

Bowen Diehl

credit metric look mentioned I’d we thing that availability say, too. portfolio I facility. also as earlier, manage, the i.e., That’s we balance Bryce, look, sheet another watch and liquidity, other at on leverage, the important besides

Operator

Raymond line the of comes next And question Robert with James. Dodd from our

Robert Dodd

Congratulations on quarter. the

for else. into read but co-invest. with not a is market give of you is right it was Just it now But a color to high more co-invest that, environment is the equity activity the read only co-invest very want portfolio, quarter, trend. appealing that I guess you Is of have Or $XXX Any mean or quarter, X% I making that on reported, a that harder of couple of about give in opportunity? your this but just I kind there? the right over -- us you the there for quarter now? elevated now quarter a for valuations to in than within take, market questions equity anything just level on to equity get can great less right maybe is million, a but anything X% valuations? just

Bowen Diehl

small, have -- equity of may in But the and co-investment over be mean -- should, the it much check on small. come and and too not read about this it’s or a question. still sheet. if and I’d equity to quarter number worth be equity sponsor the we’re participate. opportunity of and situation bit co-investments -- amount. want can I time. to percentage putting to There just probably the be It’s the to but the say, the into are be where might excess I’m overpaying and mean sponsor I do past balance exercise relationship vast we trying exaggeration. valuing mean time, everybody’s a the mean it. I is equity of love we’re most we play with deals, majority a kinds we’ll that just to story, time, -- an choosing things of way a would got so of you, And all, not they some Yes. it little could they invest books it’s think liquidity good the like have overequitize times wouldn’t the there’s the the it we be if our I would definitely I precise there first the tell of that to where an has we think I of quarters. so they of -- have

read I -- particular. wouldn’t into in I much yes, this too quarter So don’t

Robert Dodd

Okay. Fair enough. This of related one’s sort follow-up.

Or while -- kind market IRR not -- said, So is the XX%. capital gains, the think debt of or IRR parts? about a come of maybe that XX% was of the et cetera. that’s I couple total mean and XX% you a equity of coupons is bit business other you is going forward, that were math that’s if as just mean do because down did right, cost word benefit conducive it. a going moving My the Do reasonable recoup be I right credit might mean has the are target I a forward? other smaller and wins kind fees is comes to sustainable? that you forward? on big But think down strategy, of going that XX% you maintaining says coming little that from Roughly, the since for about your down wrong number -- coupon.

Michael Sarner

XXXs based that started the a and were I this the comes have come down. fact looking bit that deals a on that weighty, are business, When we at little we yields little the again, our down more think X%. probably

that now see deals we’re down, has at are to looking L come L yield where our You XXX. XXX

likelihood perhaps, don’t XX.X the come XX up you’d down, IRR the from NIM will themselves, a individual ends down were few think that points, come basis being an but -- so maybe I relative XX. overall deals might is we yield that that or say And where the on to before.

Bowen Diehl

exits distributed mean options I exits, we made of that I companies. to the lumpy. and give of -- mean, I do referenced, the so. -- don’t And I breaches outstanding you million way XX not a that remember, -- think at the of track and exits to record time or I I log mean have is, if guy as being whatever pretty over that evenly over you first I’m I look its covenants, market over that That’s -- lien -- a guys -- proceeds, do mean little a track first our as to it’s and it the it’s pretty a we Yes, list company mean mean $XXX lender, the lien going that’s things And understand, of here you economics credit. always all there record. and a and lender, extract the bit when kinds comment

So it’s small to in the not like companies you’re night. breaking bump relationship glass economics extract when

that first lender that’s lien lower is it so one not And this that middle an want And of lender is strategy we’ve the to be to know, years, a that and works. XX flexibility. a you first of some don’t way to element reasons for, market that done of I be a sub-debt the lien have able

in I attractive a think it the do think little pretty business I term. is model the long comes mean yes, so we -- but bit, down maybe And

Michael Sarner

portfolio Robert, we a somewhat the the also deals and for over exiting glide months. we depreciation path the would those unrealized of us next have in probably some of in have million $XX XX

as sizable well. some So gains those have of

Robert Dodd

those back winner I I nice mean record guess. got Understood. going not big appreciate more did Yes. was obviously lumpiness you years And you I have particularly on X a But handful. IRRs No, -- than -- track it. delivering the of have a

So I appreciate...

Bowen Diehl

completely Yes, it’s a fair question.

like something like I think that gain that is referred you IRR lumpy on that to XX%.

But XX% a and the people question an the broad. is It’s just performance So average it asset that lumpiness IRR. actually down fair if basis, about -- that’s you’re should ask. on pretty talking brought

Michael Sarner

Titan within years and and were portfolio years. the for of Liner MRI, And for that’s them both true

in the So the IRRs were teens.

Bowen Diehl

Right.

So...

Operator

question line of Sherbetchyan next from with comes Sarkis our B. the And Securities. Riley

Sarkis Sherbetchyan

Congrats on the quarter.

compete of rate to tailwinds you any kind kind It on spreads can regime guys interest looks an if pricing give or interest lower your the you of current given in touch capital relative quickly wanted nice real very have of the considering of are of going debt. cost update wondering on shifts Just to rate forward. carrying like I backdrop ideologies kind you some cost just to potential environment. here time, maybe or was the

Michael Sarner

or liability the Are on asset you side the looking side?

Sarkis Sherbetchyan

Well, the right? perspective, of in from things. and I liability asset totality mean an

Michael Sarner

Bowen, through you I can and liabilities. can mean, go I the asset Yes. to side, speak

Bowen Diehl

-- I mean, market, I of it’s on relatively in universe COVID in clearly asking, that I market. spreads -- wouldn’t the mean, been I terribly flat. are deals the It’s I kind long the quarter. the and last Yes. any clearly, competition come what mean chasing, working there’s speaking, in have of think spreads generally say But mean down that that’s we’re premiums if I gone. the you

able think our just deals price is to situation really mainly in is being tighter. that compete I

of been on end because need margin. And so main And at the interest I capital live to day, the mean, get cost down that’s of you competitive. your net the market’s definitely you thing.

anybody lot pretty got I leave -- wrong end now, also see that of the -- mean to respect. lenders mean of want are don’t what full the deals happens They’re I on. we’ll in throughout right year, bars but going So lenders’ right? I they a

that’s might shows So year, by that got the the little end as -- when bit on X but interesting of I theory, the December what a and deal a market that’s not quite it’d up get aggressive said, be be deal. pricing more done to just that lender see in mean supply-demand someone to incremental happens.

the So asset that’s -- side. but

capital and so. believe, of -- it’s I a I mainly story, think cost it’s

Michael Sarner

Yes.

our and XXX. credit obviously, with So L we extended I side, with right facility mean on to amended the -- ING the

pretty twice of in mid-to And road believe it’s at deal competitive rates the the those so now. there between the we’re was prudent debentures it’s the X%, back thing in side, In right and And and see for do. between We that of X.XXX% look be they do a for to a reason. locked is you SBA pool down not a and We locking about the then on cost going for opportunistically if, small poolings, did to when, cap so years. up, start bond year. that’s very that think in We coming did number BDC. an that’s the capital

the we X% be million and SBA next that of around of going maybe that. a X.X%, the -- we’re higher will at we kind little would to X gets drawing off earlier. maybe $XX to But that’s anticipate be into pooled months, be where it alluded over So drawing than

SBA trending capital fully XX the is ramped is X% towards to start X.X%, as in seeing of cost you’ll the really the next to and all-in months. XX that Our down

Sarkis Sherbetchyan

of I guess about of XX lot it. take next I be months, flush advantage X, liability to any and term, here if going suppose there’s do liquidity, dislocations, think a And at equation you of bit? obviously, a think understood. pretty side given an the little things there potentially if that your of if the the look But NIM Yes, expanding is with we’re opportunity X attractive, near everyone’s to you in would kind

Bowen Diehl

Well, happens? a if our assets I locking manage if, if kind mean right? a in potentially What there’s world, right? What if, dislocation obviously, so in What liquidity adequate that of or market? liquidity flushing your if, maintaining by and world what happens because sheet. -- what-if the expand. what extending And balance are our your is in if and on then on in our out liability maturities dislocations, side the Then moves yields variable there we only asset our

liquidity interest would the what the expand. then to like that’s we And that, would so dislocation invest if here exactly in have happen net a and margin

advantage And of so storms business an of up the things from on set yield to the asset we’ve potentially kind we upside the downside on and take weather like perspective. feel

Michael Sarner

volume raise also to additional debt on certainly, expand that and rates, those opportunistic, issuance it’s right -- the be think X.XXX% opportunistically would would potentially I would it mean, on at look as immediately. we And there. I -- think I NIM the we it side, see that’s

Sarkis Sherbetchyan

good. sounds more me. No, from Yes. One

getting describe impacting understand quality to you’re some real-time, maybe if factors want out maybe is covenants this If if if so. you’re I can just of you some the seeing the are way key deal and looser on underwriting, there

Bowen Diehl

lot same would deal, Yes. macro lower I -- other deals. middle be the we But broad relationships, general the the to EBITDA middle lower for, deterioration the a multiple -- would covenant of not the terms. thing. haven’t they the Situations EBITDA value things and margin, are We get very competitive safer I a market where of have definition they and better way market. support in of really kind would generally the lower getting adjustments, financing that add-backs but things loans kind ones cushions they is loan that comment that better looser mean just those terms. to the our market, seen lower lender I seen -- covenant bunch just you I covenants in is -- covenants our lower, are and just that. a market, terms. really No, It’s that lot watch I do. we lower -- haven’t in -- imagine the at syndicated market, haven’t I really lenders of watch with margin covenant prove seen and the earnings looser, that. loan mean for terms, middle when different think a of of the better very on to you it’s is risk that’s carefully. EBITDA are And loan, But bump don’t companies and in smart financing deserve of on you get We deterioration have haven’t obvious, cushions are just here. loan will better higher well market, say least should those speaking, seen the clearly, the in just and sponsors we a financed night But than which

Operator

for I concludes to would turn the like to back question-and-answer over any This Diehl remarks. further conference Bowen our session, and

Bowen Diehl

We the for the for like Thank and questions, you, thanks questions. everybody. asking about Thanks that not questions. shareholders our I to more the answering all are for the business. get joining And hear us,

look to I forward. forward further updates giving and go that, for we thanks so everyone And as

Operator

concludes participating. you today’s Thank This for call. conference

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

Capital Southwest (CSWC) 2 Nov 212022 Q2 Earnings call transcript