Capital Southwest (NASDAQ:CSWC) Q4 2020 Earnings Conference Call June 2, 2020 11:00 AM ET

Company Participants

Chris Rehberger – Vice President, Finance

Bowen Diehl – Chief Executive Officer

Michael Sarner – Chief Financial Officer

Conference Call Participants

Tim Hayes – B. Riley FBR

Mickey Schleien – Ladenburg Thalmann

Kyle Joseph – Jefferies

Casey Alexander – Compass Point

Bryce Rowe – National Securities

Robert Dodd – Raymond James


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

I will now turn the call over to Chris Rehberger.

Chris Rehberger

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

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

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

Bowen Diehl

Thanks, Chris, and thank you to everyone for joining us for our fourth quarter and fiscal year 2020 earnings call. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at

We are pleased to be with you this morning to announce our results for the fourth quarter and fiscal year ended March 31, 2020. I want to first say that, I hope everyone, their families and their employees are safe and well. Today, our prepared remarks will be a bit longer than is typical, given the unprecedented times our country has been going through, as we are going to try to provide you with a thorough understanding of the status of our company and portfolio and an appreciation for the level of confidence, we have in the future.

To that end, I will discuss the company, the portfolio and the market environment, Michael will then walk through some details around our quarterly performance in the BDC’s capitalization, followed by our opening up the lines for Q&A.

We are meeting with you today in a far difference environment any of us have ever lived through before. The COVID-19 pandemic and associated shelter in place directive across the country, it impacted the U.S. and global economies negatively at an order of magnitude, not seen in our lifetimes, and certainly in excess of the impact seen in the great recession of 2008 and 2009. While we are certainly pleased with the early indications that the economics is beginning is open back-up, by no means is COVID-10 gone away.

In response to the pandemic, we have first and foremost prioritized the health and safety of the employees of the Capital Southwest and – of our portfolio companies. I am pleased to say, that we have remained safe and productive as the team has done a fantastic job rallying to the occasion.

At Capital Southwest, we have been working remotely since early March. We immediately instituted daily calls with the entire team to monitor portfolio activity. We instituted a COVID tracker sheet, which complies silent performance data, all of the portfolio company, including actual and anticipated real-time revenue and EBITDA effects of the economic shutdown.

PPP funding eligibility and application status, liquidity status and any anticipated liquidity needs and covenant breaches. This central depository allows real-time access to the latest status of the each portfolio company in a format that can easily access by Michael and I and the team.

While the pandemic has clearly had a negative impact on the market and on our portfolio as evidence by the quarter-over-quarter 9.6% decline in net assets value per share in the addition of one portfolio company to our non-accrual list. We feel good about the quality of the assets and earnings power of the portfolio as a whole. Indeed, we ended the year producing a solid $0.40 per share in NII in the March quarter.

Further as a well capitalized first-lien vendor with ample liquidity, Capital Southwest is in a favorable position to provide financial support to our portfolio companies and were warranted received enhanced economics for doing so. While it is impossible to calculate the full and precise impact on our portfolio from the COVID-19 pandemic, it is important to note some key aspects of Capital Southwest and critical decisions that were made over the past two years that have positioned us well to weather this unprecedented time in our nation’s history.

We have laid out these points on slide 6. First, Capital Southwest balance sheet credit portfolio consist of 49 mods across 41 portfolio companies with 90% of Capital Southwest capital invested in first lien senior secured debt. Moreover, the percentage of our at-risk capital in first lien senior secured debt is even higher including I-45 given that 97% of I-45’s assets are in first lien senior secured debt.

Second, despite the sale process for Media Recovery being long and difficult in a choppy global economy, we opted to close on the sale in November 2019 reducing the equity exposure on our balance sheet from 19% down to 8% as of the end of the fiscal year. We were then able to distribute $0.75 per share in cash to our shareholders during the December quarter.

Next, over two years ago, we started negotiating for higher LIBOR floors on our loans many as high as 2%. As of March 31, 2020 the weighted average LIBOR floor across our credit portfolio was approximately 1.4% protecting our portfolio asset yield from decreases in LIBOR below 1.4%. And as a reminder, our balance sheet credit facility does not have a LIBOR floor allowing our cost of debt to float with LIBOR all the way down to a LIBOR rate of zero.

Next given that 84% of our balance sheet credit portfolio is invested in the lower middle market, many of our portfolio companies were eligible for the payment protection plan or PPP funding provided within the CARES Act. Across our $550 million balance sheet portfolio almost $90 million of PPP funding has been applied for and received by 24 of our portfolio companies.

On the capitalization front, during the fiscal year we grew our revolver commitments on our ING-led balance sheet credit facility from $270 million to $325 million. The most recent increase of $30 million included adding two new lenders, which closed during the March quarter subsequent to the COVID-19 outbreak.

Our bank lender group has shown us incredible support and now stands at 11 banks. As of 3/31/2020, we had approximately $170 million in availability on the credit facility. While on the asset side, we had only $15.2 million in unfunded commitments across our loan portfolio, approximately $7.5 million of which was in delayed draw term loans or other revolving loans in which drawing conditions had not been met.

Including cash and undrawn commitments on our balance sheet credit facility, we had dry powder of approximately $180 million allowing us ample liquidity to both support our portfolio companies and seek new financing opportunities. Unfunded commitments remain approximately the same today as we have had approximately equal draws and repayments since quarter end.

Finally the fiscal year — finally during the fiscal year, we completed a $75 million institutionally placed unsecured bond issuance allowing us to end the fiscal year 2020 with approximately 50% of our balance sheet debt capital provided by the unsecured bond market. We also made the difficult but appropriate decision to forgo a previously announced voluntary pay-down of our December 22 baby bonds. We originally announced the pay-down in February 2020 with the intent of proactively reducing our overall cost of debt but determined in March that based on the uncertainty in the market at the time the best course of action for our shareholders was to retain capital flexibility. Future voluntary pay-downs on the notes is certainly something we will revisit in the future.

Overall, during the fiscal year, we continued to advance our credit strategy achieving the final step in transitioning the BDC to solely a middle market lender with the successful sale of Media Recovery.

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

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

Slide 7 and 8 of the presentation summarizes some of the key performance highlights for the fiscal year and for the quarter. We grew our portfolio over 6% year-over-year to $553 million as of March 31, 2020 and increased our credit portfolio by $107 million or 29% to $474 million. This growth was driven primarily by $195 million in total commitments to 19 portfolio companies including $6 million invested in equity alongside six of our loans.

During the fiscal year, we also exited five companies for $100 million in proceeds generating a weighted average IRR of 11.6%. Included in the $100 million was $48 million in proceeds from the sale of Media Recovery which generated an IRR of 11.8% measured back to our original investment in 1997.

Since the of our credit strategy five years ago, we have had 31 exits representing approximately $287 million in proceeds and generating a weighted average IRR on the exits of 16.4%.

Our net credit portfolio growth drove a 20% increase in total investment revenue for the year to $62 million up from $52 million in the prior fiscal year, while the generally fixed nature of our internally managed BDC cost structure improved operating leverage to 2.4% by the end of the year achieving our previously stated goal of sub 2.5%.

We will endeavor to achieve continued improvement in operating leverage by growing our total operating expenses at a slower pace than the growth of our asset base. The ability to improve operating leverage over time is one of the fundamental advantages of the internally managed structure.

These factors both contributed to a 17% year-over-year growth in quarterly regular dividends paid to our shareholders in total for the year. In total for the year, we paid out $2.75 per share in regular, special, and supplemental dividends representing a 21% increase over the $2.27 per share paid out in fiscal 2019.

Additionally, on the equity capitalization front, we raised $26.7 million in gross proceeds during the year through our equity ATM program selling over 1.2 million shares at a weighted average price of $21.71 per share representing an average premium of 17% to net asset value as measured at the time of sale.

Our diligence in selling limited amounts of equity each quarter when our stock is trading meaningfully above NAV in lockstep with our ability to deploy that capital was one of the key contributors to our financial flexibility in today’s market.

Further, our financial flexibility during the March quarter allowed us the ability to opportunistically execute on our share buyback program. Amidst the extreme market volatility instigated by the COVID-19 pandemic, we were able to repurchase approximately 800,000 shares at a weighted average price of $11.57.

Total accretion from the share buybacks to net asset value was $0.23 per share. Additionally, the management team and Board members were also active buyers in the market during the March quarter collectively purchasing approximately 107,000 shares during the quarter. The total shares owned by employees and Board members now represents approximately 10% of our — of the total shares outstanding, illustrating further our commitment and total alignment with shareholders.

Turning to slides 9 and 10, we illustrate our continued track record of producing a strong dividend yield, consistent dividend coverage and the value creation since the launch of our credit strategy. We previously announced that our Board declared total dividends of $0.51 per share for the quarter ended June 30, 2020. Today, we are pleased to announce that our Board has also declared dividends of $0.51 per share for the quarter ended September 30, 2020 consisting of a regular dividend of $0.41 per share and a supplemental dividend of $0.10 per share. In an effort to create some level of certainty in an otherwise uncertain world, we believe this announcement demonstrates our continued confidence in our portfolio and the ability to earn our dividend at the current level over time through net investment income.

Turning to slide 11, as a reminder, our investment strategy has remained consistent since its launch in January 2015. We continue to focus on our core lower middle market, while also maintaining the ability to invest in the upper middle market, when attractive risk-adjusted returns exist. In the lower middle market, we directly originate opportunities consisting of debt investments and equity co-investments. Building out a well-performing and granular portfolio of equity co-investments is important to aiding the migrate — mitigation of credit losses over time.

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

Though we are currently taking a cautious and extremely selective approach towards deploying new capital, taking into account the new normal of potential pandemics among other risks, we continue to find superior risk-adjusted return opportunities in the lower middle market, where we can lend at lower leverage and lower loan-to-value levels, while maintaining tighter covenants and other terms in the loan documents. Over the past several quarters, this has been especially true as the upper middle market has been the primary source of NAV volatility in our portfolio.

Turning to slide 12. Our on-balance sheet credit portfolio, excluding I-45 grew 4% during the quarter to $474 million, as compared to $456 million as of the end of the prior quarter. We continue to heavily emphasize first lien senior secured debt lending, and again this quarter the vast majority of our originations were in the lower middle market.

At the end of the quarter, we had 84% of our on-balance sheet credit portfolio invested in the lower middle market companies, while not having 90% of the credit portfolio in first lien senior secured debt.

On slide 13, we lay out the $38 million of capital invested in and committed to new portfolio companies during the quarter all closed prior to COVID-19. This included $32 million in first lien senior secured debt provided to three new portfolio companies and $6.1 million of additional capital to three existing portfolio companies, which included $4 million of first lien senior secured debt and $2 million of second lien senior secured debt.

Included in the $38 million was $8.5 million in capital to two upper middle market investments, one existing and one new. Our net exposure to the upper middle market actually went down slightly quarter-over-quarter, as we were able to sell one upper middle market syndicated credit, realizing $12.6 million in proceeds. The weighted average yield to maturity on debt originations this quarter was 9.6%.

On slide 14, we break out our on-balance sheet portfolio, excluding I-45 between the lower middle market and the upper middle market. At the end of the quarter, the total portfolio including equity co-investments was weighted approximately 85% to the lower middle market and 15% to the upper middle market on a fair value basis.

We had 34 lower middle market portfolio companies with an average hold size of $12.8 million, a weighted average EBITDA of $8.3 million, a weighted average yield of 11.2% and a leverage ratio measured as debt-to-EBITDA through our security of 3.7 times.

Within our lower middle market portfolio, as of the end of the quarter, we held equity ownership in approximately two-thirds of our portfolio companies. Our on-balance sheet upper middle market portfolio consisted of 11 companies with an average hold size of $8.7 million and weighted average EBITDA of $74.1 million, a weighted average yield of 6.6% and a leverage ratio through our security of 4.2 times.

We should also note that our on-balance sheet, upper middle market leverage metrics are shown excluding our investments in American Addiction and Delphi Behavioral Health, as the EBITDA, while improving in both cases on a run rate basis remains at levels that would skew the aggregate portfolio leverage ratios to a degree that would obscure the ratios of the remainder of the upper middle market portfolio.

Turning to slide 15. We want to illustrate the COVID-19 impact on the portfolio as of the end of the quarter by providing commentary on the migration of portfolio risk ratings quarter-over-quarter. While the full LTM EBITDA effect of COVID-19 on the portfolio will be more fully represented in the June 30, 2020 quarterly numbers, we believe that the risk ratings represented on this slide largely hold as of today based on our communications to date with our portfolio companies.

As a reminder, all investments upon origination are initially assigned an investment rating of two on a four point scale with a one being the highest rating and a four being the lowest rating. During the quarter, mainly as a result of the COVID-19 pandemic and associated shelter in place orders, we had nine of our 49 balance sheet loans downgraded and one upgraded. The downgrades included a one rated loan, downgraded to a two, representing 2.4% of our portfolio at fair value.

This is a company that has been a consistently strong performer since origination and we believe the company will continue its very strong performance once COVID-19 is under control and the economy opens back up. We had six loans downgraded from a two to a three, representing 11.4% of our portfolio at fair value. Of these six loans, five are sponsored and two are past due on their principal and interest as of today.

In one of these past due situations, the sponsor has proposed a meaningful equity infusion into the company, the terms of which are currently being negotiated. In both cases, the company performance is improving and we believe we will collect our interest and ultimately recover par for the loans.

Finally, we had two loans, representing 1.9% of the portfolio at fair value, downgraded from a three to a four. These two loans are our two investments in the addiction treatment space, American Addiction or AAC Holdings and Delphi Behavioral, both of which were put on non-accrual in past quarters. Both companies saw their patient admissions fall meaningfully, due to the pandemic. And both received PPP funding.

Subsequent to quarter end, Delphi’s capital structure issues were successfully resolved, as the balance sheet was restructured out of court, resulting in the first lien lenders reinstating a portion of their first lien debt and owning the equity of the company. Capital Southwest now owns 10.8% of the common equity. And has a board seat on the company’s Board.

The new ownership group and board are working closely with the management team, to streamline the cost structure, protect their employees, and maintain the company’s track record of providing the highest level of patient care. We believe that the performance of Delphi can and will improve significantly in the future. And our equity position in the company should provide a mechanism for meaningful NAV upside going forward.

With respect to AAC, the capital structure solution is taking longer to achieve, due to its additional complexity. AAC is a public company and a much larger enterprise in Delphi. And the facility in which Capital Southwest participates is broadly syndicated, thus involving numerous other lenders. AAC’s challenges are similar to that of Delphi.

And AAC’s management team seems to be doing a good job, managing its cost structure and protecting its employees, while also continuing to maintain the highest level of patient care. Both of these companies perform critical life-saving work each and every day. They clearly have many important reasons to exist. And in both cases there is significant upside in financial performance from where they are today.

The remaining company rated at four is AG Kings, which was put on non-accrual back in December 2018. AG Kings, a grocery business in the Northeast United States, has seen a significant uptick in its performance, given the extraordinarily strong demand for groceries, during the pandemic.

Offsetting these downgrades, we had one balance sheet loan representing 2.5% of our portfolio at fair value, upgraded from a two to a one, based on superior performance and deleveraging throughout the pandemic. In summary, as of the end of the quarter, we had nine loans rated at three. In all cases, we think the underperformance is temporary.

We did place California Pizza Kitchen on non-accrual this quarter, as its short-term performance deteriorated significantly during the COVID-19 pandemic related shutdowns of its dining room.

Now, that the economy in many parts of the country appears to be opening back up, most or all of its restaurants are now either reopened or in the process of reopening. So we feel confident about management’s ability to turn the financial performance of the company around and the ultimate recovery, of our first lien senior secured debt position.

As illustrated on slide 16, we have established a portfolio, well diversified across industries. Further our portfolio asset mix should provide strong security for our shareholders’ capital. The portfolio remains heavily weighted towards first lien senior secured debt, with only 7% of the portfolio in second lien senior secured debt and only 2% of the portfolio in one subordinated debt investment.

Shown on slide 17, as of the end of the quarter, the I-45 portfolio was 97% first lien with diversity among industries and an average hold size of 2.3% of the portfolio. The I-45 portfolio had weighted average EBITDA of approximately $65 million, a weighted average coupon of LIBOR plus 6.3% and weighted average leverage through the I-45 security of 4.6 times.

We also excluded American Addiction from these ratios for the aforementioned reasons. Of the 43 portfolio companies in I-45, we would estimate that 11 of them, representing 23% of the assets at fair value have been meaningfully impacted, albeit temporarily by the COVID-19 disruptions to the U.S. economy. Four of the portfolio companies representing 7.5% of the assets at fair value are not current as of today on interest on principal, which includes AAC.

Three out of four of these past due situations are companies that are owned by financial sponsors. Overall, we would estimate that approximately two-thirds of the depreciation for the quarter was due to mark-to-market quote volatility and approximately one-third was specific to company performance. We would also estimate that the company performance component of the overall estimate for the quarter was virtually all COVID-19 related.

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

Michael Sarner

Thanks, Bowen. Specific to our performance for the March quarter, as seen on slide 18 and we earned pre-tax net investment income of $7.4 million or $0.40 per share. This compared to $0.44 per share during the prior quarter. The reduction in net investment income per share for the quarter was mainly attributable to the one-time dividend and transaction fee received in connection with the sale of Media Recovery in the prior quarter.

We paid out $0.41 per share in regular dividends for the quarter, an increase from the $0.40 regular dividend per share paid out in the prior quarter. In the near and long term, we have built a consistent track record of meaningfully covering our regular dividend with pre-tax NII, as demonstrated by our 105% regular dividend coverage over the last 12 months and 107% cumulative regular dividend coverage since the launch of our credit strategy.

As Bowen mentioned earlier, we also paid out a supplemental dividend of $0.10 per share during the quarter. As a reminder, the supplemental dividend program allows our shareholders to meaningfully participate in the successful exits of our investment portfolio through distributions from our UTI balance over time.

Due to the successful sale of Media Recovery, we were able to replenish our UTI balance to the maximum allowable level, providing visibility on the longevity of the program well into the future. The program will continue to be funded from UTI earned from realized gains on both debt and equity, as well as undistributed net investment income earned each quarter in excess of our regular dividends.

As of March 31, 2020, our estimated UTI balance was $1.44 per share. Our investment portfolio produced $15 million of investment income this quarter, with a weighted average yield on all investments of 10.6%. This represents a decrease of approximately $950,000 from the previous quarter.

As I mentioned earlier, the decrease in total investment income during the quarter was primarily attributable to the dividend and transaction fee received from media recovery in the prior quarter and a decrease in LIBOR, offset by an increase in weighted average debt investments outstanding.

As Bowen mentioned, we did place California Pizza Kitchen on non-accrual as of the end of the quarter. There are now four assets on non-accrual, with a fair value of $18.2 million, representing 3.3% of our total investment portfolio at fair value. The weighted average yield on our credit portfolio was 10.5% for the quarter.

Excluding interest expense, we incurred $3.5 million in operating expenses for the quarter, which was $455,000 less than the previous quarter. The main driver of the operating expense decrease was a reduction in cash compensation for the year. The management team and Board of Directors determined that it was appropriate and in the best interest of the shareholders, given the current environment, to reduce the cash portion of the bonus paid to officers in order to prioritize strong dividend coverage for the quarter.

On slide 19, we illustrate our operating leverage, which as of the end of the quarter was 2.4%, which puts us below our initial target operating leverage of sub 2.5%. As referenced earlier, we are fully committed to actively managing our operating costs in lockstep with portfolio growth and have our long-term site set on achieving target operating leverage of 2% or better. Our operating leverage should continue to improve as the investment portfolio grows due to our internally managed structure.

Flipping to slide 20, the company’s NAV per share as of March 31, 2020 was $15.13 per share as compared to $16.74 per share at December 31, 2019, representing a quarter-over-quarter decrease of approximately 9.6%. The main driver of the NAV per share decrease was depreciation in the upper middle market portfolio including our investment in I-45.

Total upper middle market portfolio depreciation during the quarter resulted in a decrease in NAV of $1.37 per share. And as Bowen mentioned earlier, we estimate that roughly two-thirds of that decline was mark-to-market related with the remainder being performance-related due to COVID-19.

We also experienced $0.29 per share of lower middle market equity depreciation, which was mainly the result of decreased market multiples and increased cash flow model discount rates applied in our internal valuation model.

On slide 21, we lay out our multiple pockets of capital. As we have mentioned on prior calls, a strategic priority for our company is to continually evaluate approaches to derisk the liability structure of the company, while ensuring that we have adequate investable capital throughout the economic cycle.

We are pleased to report that our liquidity is strong with approximately $180 million in cash and undrawn commitments, and as of the end of the quarter, ample borrowing base capacity and covenant cushions on our senior secured revolving credit facility. In addition, approximately 50% of our current capital structure liabilities are unsecured with the earliest debt maturity at December 2022.

Our balance sheet leverage, as seen on slide 22, ended the quarter at a debt-to-equity ratio of 1.11:1. During the quarter, we were able to utilize our capital flexibility by opportunistically repurchasing shares through our share buyback program during the extreme market volatility we saw in March.

During the quarter we repurchased 794,180 shares of Capital Southwest stock at a weighted average price of $11.57 per share, resulting in total NAV per share accretion of $0.23. Cumulative to date, we have purchased 840,543 shares of Capital Southwest common stock and have reached the Board approved $10 million share repurchase limit.

As we move forward, we will continually re-evaluate an upsize of our share repurchase program. Our conservative management of the balance sheet, over time, in terms of both capitalization structure and liquidity is key to our maintaining the ability to take advantage of extreme market volatility and repurchase shares when they are trading below book.

With respect to I-45, subsequent to quarter end, the JV partners of the fund made a voluntary equity contribution of $16 million to reduce the outstanding amount on the I-45 credit facility.

Capital Southwest’s portion of the capital contribution was $12.8 million. This contribution and paydown was done proactively as part of a credit facility amendment, allowing to fund more flexibility to manage its loan portfolio during the COVID-19 aftermath.

Finally, early in the quarter, we sold 181,500 shares of Capital Southwest common stock under the equity ATM program at a weighted average price of $20.61 per share, raising $3.7 million of gross proceeds.

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

Bowen Diehl

Thanks, Michael, and thank you everyone for joining us today. Capital Southwest has grown and the business and portfolio have developed consistent with the vision and strategy we communicated to our shareholders five years ago. Our team has done an excellent job building both a robust asset base, as well as a flexible capital structure that prepares us for tough environments like the one we have experienced over the past couple of months.

As we have attempted to portray to you today, while we are not immune to the challenges the economy faces, we feel good about the health of our company and the opportunities that the environment will present to us as we consider places to invest capital in what should prove to be a much less competitive environment than it was only a few short months ago.

Everyone here at Capital Southwest is totally dedicated to being good stewards of our shareholders’ capital by continuing to deliver strong performance and creating long-term sustainable value even in troubled times such as these.

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

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question comes from Tim Hayes with B. Riley FBR. Please go ahead.

Tim Hayes

Hey, good morning Bowen and Michael. I hope you’re both doing well. And I appreciate the extra color on credit performance this quarter. Just a couple of follow-ups there, I know you mentioned that 4.7% of the portfolio is past due. Does that exclude companies that have been offered forbearance and have some form of interest or principal deferral at this point?

Bowen Diehl

I think that — yeah, I think we have a couple of portfolio companies that the lenders have agreed to push interest payments. So it doesn’t include those.

Tim Hayes

Okay. And can you maybe give us an update on how many companies or like what that would bring that percentage to? And if there are any other, I guess forms of forbearance that you’ve been providing aside from potential P&I deferrals whether that’s eliminating covenants or anything else?

Bowen Diehl

Yeah. I would say — yeah, it would probably remove the forbearance. It would include companies in forbearance. It’s really just companies where we’ve agreed to forgo or defer an interest payment, and in those cases frankly the sponsors are supporting the company equally. So — and the way we view it is if we’re going to push an interest payment to a later date that’s our contribution to the kitty if you will. And so we look for the sponsors to also put some money in the kitty to support the business. And so it’s — I think firstly always coupled with that so.

Tim Hayes


Bowen Diehl

As far as the percentage, I don’t have that in front of me. I mean. I would say it goes — I don’t want to speculate. I can follow-up with you off-line as far as what that percentage might be. I just don’t have in front of me.

Tim Hayes

Okay. No, that’s fine. And then how much cash runway to operate their businesses do you believe your portfolio companies have on average?

Bowen Diehl

I think pretty much across the portfolio, certainly when you consider the PPP funding that’s been injected across the portfolio, the runway is pretty healthy in most all the cases. And so it’s well into August, in the August, September if you were to look at the run rate during the pandemic and project that forward.

The good news is as we see the economy opening up and we do see run rate performance across some of these companies that were hit with a pandemic. We see, kind of, the run rate weekly performance if you will improving pretty meaningfully. And so that’s obviously encouraging and I think people are seeing that across the economy. So just cross our fingers and hope that continues.

But that’s — so I think that would extend obviously the runway in theory liquidity runway. But we think across the portfolio, the companies that are current with their interest, which is the majority of them are pretty healthy from a liquidity perspective. Frankly, noted across our portfolio, if you look at the unfunded revolvers, fortunately for us, it was relatively low going into the pandemic. But we had a couple — a few revolvers draw. And then we’ve had — like we’ve had a basically equal draws and repayments since the depth of the pandemic.

Tim Hayes


Bowen Diehl

It’s indicative of kind of what’s going on across the portfolio.

Michael Sarner

I think we were similar to a lot of other companies that saw early draws in March and early April and then it slowed down and then there were some paydowns and then the PPV money has come in behind it. So sort of stable.

Tim Hayes

Right. That make sense.

Bowen Diehl

We’ve got a couple of companies that are considering paying the PPV money back. We have — the majority of the companies that threw it down needed it. But we’ve got a couple that are actually considering paying it back. So we really didn’t need it.

Tim Hayes

Okay. That’s helpful. And then you grew the portfolio a bit this quarter, the credit portfolio this quarter, but the borrowing base capacity was pretty much flat quarter-over-quarter. Just curious, if you had some assets fall out of eligibility this quarter, and what the primary driver behind that is whether it’s any — it doesn’t sound like there’s too many loan mods occurring right now. So I’m just curious, if it is more a function of operating performance and leverage multiples or anything like that.

Michael Sarner

I don’t think we did see a reduction. I mean our ING credit facility, that’s predicated on fair value. So our advanced ability on the credit facility will be an advanced rate times whatever the fair value is. We did see some level of fair value depreciation this quarter, but it really wasn’t meaningful quite frankly.

Bowen Diehl


Michael Sarner

Absolutely, yes. It was actually repayments offset against originations here made us relatively flat this quarter I think within $5 million.

Tim Hayes

Okay. Got it. Okay. And then, just if you could maybe provide a little bit more detail on your, I guess your thoughts or your appetite to invest right now versus preserve liquidity for your existing portfolio companies at this point? I know you have based on your unfunded commitment balances and the capacity you have on the credit facility, it seems like you have some good liquidity to support portfolio companies, but still clearly a lot of uncertainty ahead. So just wondering what your appetite to invest in new companies looks like at this point. And if you could maybe just provide either a little bit more color on kind of the pipeline you’re seeing and how leverage multiples are trending, or where you’re seeing the best opportunities that would be appreciated?

Bowen Diehl

Yes, sure. So as far as investing capital preserving liquidity, I mean we’ve always from the beginning wanted to maintain the flexibility in the capital structure, now I didn’t expect a pandemic of course. But just anything — any kind of black swan event disruption in the market, we wanted to always maintain liquidity and flexibility, so that we could do several things. Obviously, support our portfolio of companies, which is not particularly fun, when the portfolio companies need that, but that’s something you need to be able to do to preserve value. That’s one thing you want to be able to do. You also want to be able to look at new deals, because a lot — and I’ll come back to that in a second, but a lot of competitors move out of the market. So it’s less competitive and so spreads widen as a result and so that you want to be able to do that. And then you also want to have the — I don’t want to ever have to tell our deal guys when they find an interesting deal that we can’t do that deal because we also want to buy back stock because there’s a Black Swan Event in the market like we saw with COVID-19.

So we want to be able to do all of those things. And we’ve been thinking about that type of flexibility since January of 15. It’s kind of core the way we think. So here we are, Black Swan Event don’t love it you know hate it as a matter of fact in a lot of respects it’s not fun. But we feel basically good about our asset base as a whole. We’re very happy that we’re first lien lenders.

And here we are that the market is less competitive than it was a few months ago. And so, now the reality is so we’re continuing to seek new deals. We’re not traveling. You don’t actually have to work as hard honestly to find new deals because they find you because people know that we have liquidity, they now were open the business and so our phone rings.

And so, we see the vast majority of the deals out there that would be relevant for our capital. However and the deals the market — the spreads have widened 100 to 200 basis points. And so — but we have to underwrite those deals in light of now what we know and that is that there is a very real pandemic out there that hasn’t gone away A; and B, there may be future pandemics, right? I mean it’s something that we weren’t thinking of 6, 12 months ago right?

And so, it changes how you view everything right? And so we’re not only looking at hey what is the performance in the Great Recession, we’re actually now looking at well, what’s the performance in a pandemic. That changes the fundamental paradigm on how you look at investing dollars.

And so naturally — so we’ll see a lot of business models that you can’t underwrite yet because you don’t really know. There’s too much uncertainty right? For those — you don’t pursue those. And so the number of business models that you can underwrite in the new paradigm decreases significantly.

But — so the deal flow or the deals that we would be pursuing naturally comes down. However the returns that we have the opportunity to make on the deals we do, do go up. So your return on your equity, if you will, goes up. And so that’s good. And so we are out there looking at deals. In fact we closed the transaction last week, you’ll likely see in the press release in the next couple of business days that we closed. It’s a company that performed right through the pandemic and it’s in the medical space, but it performed right through the pandemic.

We’ve got another deal, we’re working on pre-documentation right now that should close in the next five to seven business days something like that. And so we’re not — we are looking at deals and we are closing deals. Now these are $8 million to $10 million hold sizes kind of first lien loans kind of situation, but very interesting business models and ones that we can underwrite the current pandemic.

To give you an idea on deal flow because I think it’s kind of interesting because the number is relatively significant. So when the COVID-19 hit, I went back and looked. We had five transactions that were signed up. They were — total capital was about $60 million that we basically put on hold. Unfortunately in all those cases that had sponsors involved as sponsors also put them on hold.

So it wasn’t like we had to break any glass to put them on hold. But those you — wouldn’t have wanted to do. And so those — and that $60 million of originations for us in March, I mean that moves the needle on earnings that affected the March quarter.

But you know what, I’m glad we didn’t do them. I’m looking at every one of those deals and I wouldn’t have wanted to do it at least not yet. One of them is one that’s in the healthcare space that you probably will eventually do, when it opens back up. But the other ones are — the other ones, you probably don’t do in the current environment. So, a lot of deal flow goes away. But we — our guys are doing a great job. Their relationships are calling them. They’ve got great flow of ideas.

But like I said, a lot of our business models that we just we can’t underwrite in this situation. But we definitely are seeing less competition on the deals that we want to pursue based on what we’re hearing right now. And so — and the result of that is, we’re kind of seeing spreads widening from where they were pre-COVID somewhere in 100 to 200 basis point range.

Tim Hayes

That’s good color. Appreciate that Bowen. Yes, I think all — I guess yes, I mean, just a quick follow-up on that. Is it safe to assume then that you highlighted that you closed one transaction last week and you’re working on another one. Is that really the only update to give for the quarter so far? And just curious if you’ve seen any repayments so far this quarter?

Michael Sarner

No repayments this quarter. Just normal amortization.

Bowen Diehl

Revolvers and stuff…

Michael Sarner

Yes. Yes, I mean, we’ve probably seen $2 million to $3 million in amortization.

Tim Hayes

Got it. Okay. Great. Well, appreciate the color guys.


Thank you. Our next question comes from Mickey Schleien with Ladenburg Thalmann. Please go ahead.

Mickey Schleien

Good morning guys. Can you hear me, okay?

Bowen Diehl

Yes, Mickey, good morning.

Michael Sarner

Good morning.

Mickey Schleien

Bowen, I realize that the portfolio was valued as of March 31 when the pandemic impact was just beginning to be felt. And strictly speaking the Board’s estimated value as of that date, but more information became available as time went by. So, I’d like to understand, how much of a forward-looking approach the Board took since there was so much uncertainty in the ensuing weeks.

Bowen Diehl

Yes. I would say, obviously, you’re right. The valuations were done as of the end of March. The forward-looking component of a valuation at that point in time is done — is looked at through — if it’s equity a DCF analysis in the intermediate term that’s going to affect intermediate term, it may not affect your five-year projection on EBITDA, but it would affect your one year projection on EBITDA or two year. So there is some element of that that goes into the valuations.

On the debt side, you’ve got market indices that flow through the valuation equation. So — and those are basically market perception of the future. So that’s — that flows through. On an EBITDA basis, as I referenced in my prepared remarks, I mean EBITDA, the LTM EBITDA across the portfolio will more fully reflect COVID-19 in the aftermath than it did at the end of March. And so, I think I would expect or we would certainly look across the portfolio and the BDC industry for that matter and just see LTM EBITDA coming down to reflect the full effect of COVID-19.

So — but the market is getting better. So you’ll have some EBITDA effect, you’ll have market indices effect. And so, we won’t know where valuations come out, but the fund — until we do the June 30 valuations. But there’s different variables kind of going in different directions if you will right now. So, our equity portfolio multiples and markets, we’ll see what the market continues to do. And the market has been rallying multiples have been coming up. The view of risk right or wrong pandemic is mitigated from where it was a month ago.

So, there’s different things that will go into that calculation. Net-net, longer term, I mean the opening up economy is really, really good for our portfolio. So, we’ll see what valuations do. But hopefully that helps you appreciate, there’s different variables that go into it.

Mickey Schleien

No, I certainly understand and you actually sort of preempted my follow-up question I was going to ask you. Between spreads stabilizing or even tightening, depending on the credit and equity markets rebounding with all of the Fed stimulus, but as you mentioned, borrower EBITDA. I’m trying to get a handle on which is going to have the most impact on NAV.

Is the EBITDA decline, which I agree with you, we can expect some meaningful declines in certain credits, will that overpower the movements in the markets and we could see some more attrition in NAV, or do you think the movements in the credit and equity markets are strong enough to mitigate the decline in EBITDA?

Bowen Diehl

Yes. It’s hard to tell, honestly. I mean, the spreads have certainly come back in. You can see it in the quotes. We’ve seen that across our I-45 quotes. EBITDA will come down certainly, I would expect, across the portfolio. Although, we have some companies that are performing really well. Certainly, or at least flat EBITDA, maybe EBITDA is down 5% or 10%, which doesn’t really matter a huge amount from a creditor’s perspective.

And we’ve got EBITDA. We’ve got companies that EBITDA is going up. And so, it’s hard to tell. I mean, EBITDA and leverage, I mean, I’m not going to — I mean, I’m not going to mislead you. I mean that is a negative. Leverage goes up, that’s all else equal a negative effect on valuations, clearly. But we have kind of — we have portfolio companies that are doing well or better than they were. We have a bunch of them that are doing slightly worse, that kind of thing.

Michael Sarner

And also the relativity from the 331 to 630 a quarter. I’ll get back to you on that Micky, I apologize.

Bowen Diehl

Yes. So, let me answer that — yes, hopefully that’s helpful. I mean it’s hard to tell, but I do think the market metrics are improving. And the EBITDA levels are probably coming down to more fully affect the COVID-19, because it was only through March. So maybe valuations, maybe the EBITDA overweighs the market metrics, I mean, that wouldn’t surprise me.

Michael Sarner

I apologize. What I was going to say is the upper middle market has really stabilized the list through the quotes. Majority of our depreciation that you’ve seen over the last two quarters has really been the upper middle market and a lot of it’s been in I-45. And so, we’re seeing the mark-to-markets on a daily weekly basis and that’s really stabilized. So I think, from a relativity perspective, you wouldn’t expect to see so much movement one way or the other this quarter, even though you perhaps would expect some level of depreciation due to the EBITDA drop.

Mickey Schleien

I understand. Michael you and I have talked I think about the credit facility at I-45 in the past. Did the banks actually ask you to inject more equity into that fund, because it was close to breaching some sort of covenant, or did you do that to just from a risk management perspective?

Michael Sarner

It was the latter Mickey. We proactively came to DB. There was tightening in the facility and there is interest for us to be able to defend our portfolio and to make originations in I-45 going forward. So us and Main Street came together and we thought it was a good time to put capital into work to pay down that facility.

And by proactively doing so, we were able to get some things in return. We were able to get — by making it a permanent reduction we actually got the prepayment penalty waived. So thinking that we’re not going to be levering up significantly in the next 12 months, having that cost come down made a lot of sense.

We also dropped the utilization rate from 75% down to 60% or threshold for the unused fee. So that allows us flexibility to delever without incurring additional costs. So we felt like these were — it was a good time to do it and certainly coming to them, rather than waiting for them to come to us and have less leverage in the negotiation made a lot of sense.

Bowen Diehl

If you take a step back, Mickey, I mean, both us and our partner Main Street are very — in very strong liquidity positions. And so by getting some cushion in the I-45 facility, you create flexibility so that you can make decisions more you’ll have like — I don’t want to make a decision on whether a company needs to defer an interest payment for a quarter, which isn’t a big deal, but then that creates an issue with the borrowing base, and so we just wanted to get the cushion.

We actually got — we actually were able to lower the cost on unused fee thresholds and that type of thing as a result as well, because we were able to offer up — we were able to offer up some cash and lenders in a scary market love that, right? So, that we use that to our advantage to reduce some of the cost of the facility.

Mickey Schleien

So, Bowen, you actually injected cash, or did you contribute some investment assets?

Bowen Diehl

No, no. We actually — yes, we — I mean, at the end of the day in part it’s a financing vehicle, right? So we took some of our availability off of the ING credit facility and we invested it in the I-45 entity and paid down the Deutsche Bank credit facility. So, it’s really just moving availability from one facility to the other, I mean, essentially.

Mickey Schleien

I understand. Just a couple of housekeeping questions. Did you reverse any previous interest income accrued on CPK during the quarter?

Michael Sarner

Yes. It had a February payment that it may, so we actually reversed the month of March only for the quarter.

Bowen Diehl

By the requirements.

Mickey Schleien

Reverse one month. And lastly, Michael, what’s the required timing of the distribution of the $1.44 in UTI?

Michael Sarner

So that would be by October 15. So just to be clear, it was $1.48 was our balance as of 12/31/2019. We made a payment of $0.51 at the end of March and we’ve declared $0.51 for June. So we had a $0.46 requirement for spillover by the October 15 and we’ve just cleared $0.51 dividend for the September quarter.

Mickey Schleien

Understood. That’s all my questions for today. I appreciate your time. I hope everyone there stay safe and healthy. Thanks.

Bowen Diehl

Thanks, Mickey.


Thank you. Our next question will come from Kyle Joseph with Jefferies. Please go ahead.

Kyle Joseph

Hey, good morning guys. Thanks very much for taking my questions. A lot have been asked and answered, but I just have a few follow-ups for you. I wanted to get a sense for your outlook for the portfolio yield going forward. Obviously, you guys have the LIBOR floors, which have kicked in and it sounds like spreads on new issues maybe widening, but can you — so can you just give us a sense for your near-term and more intermediate term outlook for the overall portfolio yield?

Bowen Diehl

Yes. I mean, I would, expect as we go forward assuming the exact same set of companies that we would invest in that yields — the average portfolio yield, I should say, spread should go up, but then there’s kind of different things that go into that, right?

So for the same company the spread might be 100 to 200 basis points higher, but then the spread for a larger slightly larger lower loan-to-value company that might have priced at, I don’t know, LIBOR 500 might price at LIBOR 650 or 700 now, and so that would be closer to kind of our average yield. And so you’ve got — I guess, what I’m trying to say is for the same risk level companies spreads have widened, and then also for lower risk categories, the spreads have also widened into an area where we think it makes sense for us to invest. And so you can either get the same yield on a lower risk subset or the higher yield on the same risk subset if you know what I mean.

So what does that mean for the overall portfolio? It’s not really — it’s hard to estimate. But I would guess that our yield — average yield on the portfolio on — as we add new deals to the portfolio then, of course, absent — or negative being any kind of future nonaccruals or what have you. But the average deals that we’re adding to the portfolio yields should definitely go up in this department.

Michael Sarner

Yeah. I’d also just add just from the yield migration, our yield was about 11% in September 30. Our December was 11.25%, but that really included a little bit of default interest, which was nonrecurring. So 11% has been really where we’ve been at. It dropped to 10.50% this quarter partially to nonaccrual for CPK, but mostly due to the LIBOR drop during the quarter.

Kyle Joseph

Got it.

Michael Sarner

So, we should see it stabilize. It should stabilize at 10.50% except for originations as Bowen said that may actually be above where our other marks have been in terms of 100 to 200 basis wider.

Kyle Joseph

Okay. That’s very helpful. Thanks. And then you’ve talked about originations. Can you give us a sense for repayments in this type of environment? And do we ultimately start to see repayments pick up as the economy reopens?

Bowen Diehl

So there’s a couple of things going into that right? The financing market has backed up, still backed up less — when I talk about less competition for us that’s because there’s less lenders that are active out there at least based on what we can see. And so that means less at the margin, less opportunities to refinance us out. And so there’s — the factor that tends to lower decrease prepayments even on strong companies as the dynamics in the financing market, same dynamics that allow us to charge wider spreads, right?

And so as the economy opens up, some of our stronger companies if the financing market opens wide-up in a very robust fashion and that company — the Fed company could actually refinance us out at a lower rate, right? So the 200 basis points or 100 basis points expansion in yields tends to insulate prepayments as well right? And so it’s not obvious. I think if the economy opens up robustly, the financing opens up robustly and risk premiums come in significantly then I think we would have some of our companies get prepaid. Does that make sense?

Kyle Joseph

Yes absolutely. That’s helpful. One last one for me, obviously, your debt-to-equity increase given some of the unrealized depreciation. Can you just step back and give us a sense for where you envision your leverage going in this environment and what you think is appropriate?

Bowen Diehl

Yeah. So we’ve always said our target leverage was 1:1.21. And so I think I would tell you that in the lower end of the cycle, right? And when you don’t want to lever up is at the high side of the cycle where you might be willing to lever up more is at the — towards the lower end of the cycle, right? And so we are always in this robust environment where everything — everybody just says, oh it’s going up into the right and we’re in a perfect — there’s no risk. It’s kind of the market sentiment out there and it’s like — we’re always like, well, look that’s not realistic. We don’t know what the future holds. And so we looked at leverage in that context.

When you’re in more of a recessionary environment or you’re going to kind of theoretically towards the bottom end of the cycle, you might be willing to lever up a little bit more in that side of the cycle. And so what all that means is if our leverage goes above 1.2, we’re not going to stop doing deals.

I would tell you, we’re comfortable with leverage. We don’t really anticipate it getting here, but we’re comfortable with it up to where our Board policy is 1.5:1. And so clearly, we would be — opportunities willing, deals that we see et cetera, if we — it caused us to go up above 1.2, there’s — we have some cushion above that. And I would tell you that Michael and I and the Board are comfortable with that leverage going up, in that environment.

Michael Sarner

Yeah. We said earlier, we have capital flexibility to originate in a normal year, probably for a full year. Based on Bowen’s comments earlier, it’s likely we’re going t be originating less than a full throttle for the year.

So we’ll assess how much our deal flow is, the overall health of the portfolio in terms of figuring out what that target leverage is, as well as the access to capital markets. So obviously the capital markets aren’t open today. But as we assess where we are and our ability to access the ATM that will obviously dictate that answer as well.

Kyle Joseph

Appreciate. That’s great color. Thanks very much for answering my questions.


Thank you. Our next question will come from Casey Alexander with Compass Point. Please go ahead.

Casey Alexander

Yeah. Hi. Good morning. And thanks for taking my questions. You made an allusion to this, but I’m not quite sure I heard the answer, that you had a number of portfolio companies that were able to access the PPP. How did they get past the affiliation rules?

Bowen Diehl

So every one of them has got their own — the boards that those companies have to make that determination. But, certain things like numbers of employees, EBITDA size, qualifying as a small business. And then, they’re subject to those affiliation rules. However, there’s a number of companies in the portfolio where our lender partners are SBIC, which was an entry ticket into the PPP funding.

So each one qualified, everyone is different. We had, we did have companies that were sponsor-owned. And it looks up to the sponsor. And they didn’t otherwise have an SBIC if you will, in the capital structure. And so they didn’t qualify. And therefore they didn’t apply.

Casey Alexander

Okay. Great, thank you for that. Secondly, you gave some encouraging comments around the California Pizza Kitchen. But I think we’re all kind of wondering, like California Pizza Kitchen is not a big takeout. It’s more of a dine-in location. That is at least for the foreseeable future going to be asked to be operating at a different capacity, than it has been in the past in its dine-in operations.

To what extent do they need to recover towards their prior business level in order to be able to sustain themselves given the capital structure that existed prior to the COVID-19 crisis?

Bowen Diehl

Yeah. So, look, I mean, I’m going to give you an answer, you’re not going to love. And that is — these are private companies. And so I really can’t. And I shouldn’t talk. I always try to walk the line as close as I can, to help the shareholders understand what’s going on in our portfolio, without crossing a line.

And frankly I’ve been a couple of times over the last couple of years, where I’ve gotten calls from management teams because I said too much and so — and so we’re all trying to find that line. So this is one of those situations. I will tell you that, after listening to a bunch of calls with the CPK management team, they are very impressive. And their resume is very relevant.

And CPK has elements in our business that are there you don’t realize, like a licensing business. You see CPK’s product in the freezer aisle of the grocery store. I mean, you have some things a lot of their stores in malls are actually outward facing as opposed to inward facing, meaning the CPK restaurant can open up prior to the mall opening up. They do have a takeout business and the takeout business has increased a lot but I’ll just leave it at that.

I mean, look, every restaurant out there is challenged. But this management team is very impressive and they’re doing some pretty impressive things to get the business going. And so that’s why I wanted to say some things encouraging because I’ve been actually pretty impressed by some of the things that they’re doing in a tough environment.

Michael Sarner

I mean, the other thing to note is obviously, we put it on non-accrual as well. So we – there are other BDCs I think did not take that stance. So we are taking a cautious approach to it. But based on the comments that Bowen has said and the management team’s words, we do find that there’s still – there’s a ray of light for that credit.

Bowen Diehl

We’ll see. We’ll see.

Casey Alexander

All right. Thank you for that answer and my apologies, if it sounded like I was trying to get you to cross the line. That was certainly not my intention. Lastly, and this is a small investment, but I’m just curious, what the thought process was around Blaschak? I don’t think, I’ve seen a BDC make a coal investment in probably the last five to 10 years. So I was just kind of wondering, what was opportunistic about that and what you guys were thinking there?

Bowen Diehl

Yes. I mean, look, you can look at their website, you see what they do. They’re an emphasize coal miner and supplier to the Pennsylvania market, a lot of it to the Amish community that burns the anthracite coal in their stoves. So it’s not like – it’s different than maybe a typical coal business. And so, it’s sponsor-owned. It’s a very well respected sponsor-owns it.

It’s not – it’s relatively low leverage. It’s actually – we have a first lien on the coal reserves themselves. I mean, there are some things about it that are interesting from a creditor perspective and it’s a very well-run company and a very strong sponsor that owns it. So it’s not that – we’re not out looking for necessarily more coal deals to your point. But it’s a pretty interesting company from that perspective.

It’s a relatively unique situation. And then you know, they had some working capital needs as the company kind of ramps. And so we provided some liquidity there. And we got, as you can see on our deal sheet some pretty attractive economics for what typical deals we do. And so it’s a relatively unique situation.

I mean, you shouldn’t expect us to do a bunch of coal deals going forward. We’re not out looking for that. This was more based on a unique situation and a very strong private equity firm and a very experienced, a private equity firm that owns it.

Casey Alexander

All right. Great. Thank you for taking my questions. I really appreciate it.

Bowen Diehl

Take care.


Thank you. Our next question will come from Bryce Rowe with National Securities. Please go ahead.

Bryce Rowe

Thanks. I guess good afternoon now for me. I’m on the East Coast. Bowen and Michael, I just wanted to ask about the dividend. And I’m sure the market appreciates the dividend being unchanged here for the September quarter. I understand that you had the distribution requirement $1.48 here. And it sounds like you’ve met that.

How do you think about at least a supplemental dividend going over the next couple of quarters, given the level of uncertainty here with respect to COVID-19. I mean, do you think about adjusting that temporarily, or do you feel pretty comfortable with that $0.10 level for the supplemental?

Bowen Diehl

Yes. So thanks, Bryce. A couple of things I would tell you. First of all, our shareholders, that dividend is very important to our shareholders, you would certainly agree with that. We take it very seriously. So any kind of adjustments to our dividends is a very debated subject and something we take very seriously, and frankly, don’t want to do unless we absolutely have to.

The supplemental dividend program we set up. We said, okay, well at the end of last year, it’s $1.48. We’ll pay out $0.10 a quarter. That’s 14 quarters or so. Just do the math. It’s easy for the shareholders to look at that. 14 quarters in a long time into the future.

And so the UTI, that’s the UTI bucket. Clearly that UPI bucket, we think is primarily there to pay its supplemental dividend program, because we think over time we’ll earn our regular dividend through NII. But the reality is we have some pennies to use there to cover our — any particular dividend or any particular quarter as it matches to NII.

So, if we were to pull out a couple or a few pennies over the next couple of quarters, we don’t necessarily expect that. But, let’s say it happens then that would shorten slightly the duration on the supplemental dividend program from $1.44 to $1.40 or I mean pick a number. I mean that’s kind of who cares.

So you look at that, and then it comes down to, well, do we have the liquidity on the balance sheet to pay the dividends, and we’ve managed the capital structure to be able to do that. And so we look at that, and we’re like okay, as long as we feel like we have the liquidity and we have enough visibility on the supplemental dividend program then we tend to be heavily biased towards keeping that dividend where it is.

And so again, I mean, that’s what we — so if we look at the September quarter, for example, we didn’t have to pay out a full $0.51 to hit our RIC requirements, as you pointed out. We could have cut it by $0.05 or $0.06, I guess in the September quarter.

But when you look at our liquidity, you look at our situation overall health, it’s like you know what there’s no reason to. Therefore, we’re not going to do it. So why don’t we throw out some certainty in an otherwise uncertain world and go ahead and declare the dividend for the September quarter.

So, as we move forward again, I guess what I would say is, it’s a liquidity question and then ultimately what kind of visibility does the UTI that’s left provide the certainty or the term if you will, or the future confidence of that supplemental dividend program going well into the future.

Michael Sarner

Yes. And I’d also add that we’ll probably keep the dividend relatively flat as we continue to grow NII. As Bowen mentioned earlier, we’re still originating and we feel good about the overall health of the portfolio. We ended essentially the March quarter with a run rate of around $0.40 of NII as a run rate going forward. So we feel good about where our dividend is relative to our earnings power, but we’ll probably hold that dividend constant relative to ever making a dividend cut.

Bryce Rowe

Got it, okay. That’s helpful. And then, I wanted to shift gears here a little bit and talk about the, I guess the weekly performance tracker and really just the daily meetings that you’ve talked about. But, was curious what you’ve seen from a run rate perspective as the economies have in fact opened up.

And maybe you can talk, if you can, to differences in businesses as you’ve seen the economy reopen, and then maybe seeing what kind of differences do you see in certain geographies versus others? I mean I don’t know if you have any insight to that, but it could be helpful if you do.

Bowen Diehl

Yes. So it’s interesting question on the geographies. Generally speaking, the economy is starting to open up. We definitely are seeing green shoots to use the cilio or a kind of a hokey term, across the portfolio on kind of weekly performance improving. I mentioned CPK starting to open up dining rooms, those types of things across the portfolio; orders, customer orders coming in, certainly stabilizing, if not improving. So, that’s obviously very encouraging. I mean honestly it’s early. So, we’ll see right? But I mean it’s encouraging.

With respect to regions of the country, I’m thinking about that because certainly we have regions of the country we all see on the news. Certain regions of the company are opening up faster than other regions of the country. It seems like — personally, it kind of seems like it’s more urban versus rural areas difference as far as speed of the economy opening up.

But I don’t really — Bryce I have to think about it more and I can give you some color offline and you can provide it in your reports. But as far as kind of what we see across the portfolio regionally nothing has really strikes me as dramatically different like the Southwest is dramatically different those portfolio companies improvement versus the Northeast.

I don’t really have a stat like that in my mind. And I’m actually sitting here thinking through the trackers as far as what I’ve seen and as we’ve talked about I don’t really have anything have a real sense to tell you that.

Michael Sarner

I think we’ve more focused it on an industry like for our portfolio obviously the energy and travel lodging restaurants and non-essential medical providers. That’s been certainly been a headwind. But on the other side and we’ve seen some things do better obviously grocery stores, the behavioral health is starting to see some uptick stock trading platforms and communication technology and PON is another business that we’re in. That’s obviously unfortunately doing better. So, I think we look at it more on an industry than we do in a geographic location.

Bryce Rowe

Okay. And then one last question. You kind of called out AG Kings as a longer standing non-accrual uptick in performance because of the industry that it is in. What gets that company from a four rated to a three rated and have you seen that company’s performance really improved throughout the COVID period?

Bowen Diehl

I would tell you the performance approved a lot through throughout the pandemic and so it’s pretty dramatic given its grocery stores. As far as changing the grade, look, we’re probably going to be — we want to be just as a general matter conservative when we start upgrading things. So, we’ll see but the company right now is cash flowing well and doing much, much better. So, we’ll see as we go forward how — what happens. It’s hard to say what it actually happens to upgrade to three.

Bryce Rowe

Okay. Thank you, guys. Appreciate it.

Michael Sarner

Take care, Bryce.

Bowen Diehl

Thanks Bryce.


Thank you. Our next question comes from Rob Dodd with Raymond James. Please go ahead.

Robert Dodd

Hi guys. And thanks for taking the questions. Just a couple more liquidity questions if you haven’t ran out of words to speak to those. On I-45 I mean you said you’re injecting more cash down kind of changed the on the facility.

And then also that there are now four loans including AAC that are not covered within the I-45. Is — I mean basically do you expect there are going to be any more needs to inject more cash within that vehicle given the performance of that portfolio and obviously 11 other — was it 23% of the portfolio significantly impacted?

Michael Sarner

Yes, I would tell you that right now we don’t think so. When we’ve created enough space that we can invest as we see necessary, I don’t think that that’s going to be something we need to do. Mark-to-market doesn’t impact our borrowing base at that facility. It’s a par facility. So, it’s revaluation events. So, that have to do with companies that either make a payment default defer payments or have a material change in leverage.

And I would tell you a lot of the companies that we’ve discussed that are problem children there, have already had those events. And so the borrowing base feels like it is, where it is. It’s obviously this potential with COVID for there to be the next round of issues. But we feel like, we’re pretty thoughtful about the dollars we put in to get us to a place where we’re not in the near future requiring any additional capital.

Robert Dodd

Got it. I appreciate it. And then another one that you haven’t talked about in a long time, an SBIC license, obviously the PPP program kind of made it clear that having one can be advantageous because borrowers from an SBIC were exempt from the affiliation rules, right? So if there are more issues, more pandemic issues, more PPP programs in future not necessarily even related to this one. There could be advantages to having such a license.

And I mean you talked about it years ago about potentially pursuing one. Could you tell us what the plans are on, if there are any plans on that front right now? Because obviously also doesn’t get exemptive relief doesn’t apply the regulatory leverage 10-year fixed rate — I mean all the good things about it you already know. So can you give us any update on what you’re thinking on that front?

Bowen Diehl

Yes. So first thing I would say is, agree with everything you said. And I would say let’s just leave it. I’ll tell you we’re ahead of you on that and so more to come.

Robert Dodd

Okay, I appreciate it. Okay.


I’m showing no further questions in the queue at this time. I would like to turn the call back over to Mr. Bowen Diehl for any further remarks.

Bowen Diehl

Thanks everybody for joining us today. We really appreciate it. We appreciate the support and we thank you for all the guys that had questions. Those are great questions. And as always, we’re always trying to walk as close to the line as we can to help you all understand what’s going on in the portfolio without crossing into private company matters that may affect these companies operationally. And so hopefully everybody appreciates that and we look forward to giving you guys updates as we go forward. Thank you much.


Ladies and gentlemen this concludes today’s conference call. Thank you for your participation. You may now disconnect.

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