Capital Southwest Corporation

Southwest First 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.

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 Deal.

Thanks, Chris. And thank you, everyone, for joining us for our earnings call for the quarter ended June 30, 2021, which is the first quarter of our 2022 fiscal year. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio, and our progress on executing our investment strategy as stewards of your capital. Throughout our prepared remarks, we will refer to various slides in the earnings presentation, which can be found on our website at www.capitalsouthwest.com. We'll begin on slide six of the earnings presentation, where we have summarized some of the key performance highlights for the quarter. During the quarter, we've generated pre-tax net investment income of 45 cents per share which more than earned our regular dividend paid for the quarter of 43 cents per share. Total dividends for the quarter were 53 cents per share, which included a 10 cent per share supplemental dividend. Total dividends paid during the quarter represented an annualized dividend yield on our stock prices of the last day of the quarter of 9.1 percent and an annualized yield on net asset value per share of 12.8 percent. I am pleased to announce that our Board of Directors has increased our total dividends per share to 54 cents for the coming quarter ending September 30, 2021, consisting of a regular dividend increase from 43 cents per share to 44 cents per share and a quarterly supplemental dividend of 10 cents per share. Our decision to increase the dividend emanates from our continued confidence in the current earnings power of our portfolio as a result of portfolio growth, continued reductions in our cost of capital, and our ability to improve our operating leverage efficiency by actively managing operating costs while growing the asset base. During the quarter, we grew our investment portfolio on a net basis by 16% to $799 million. Portfolio growth during the quarter was driven primarily by a total of $138.9 million in new commitments to eight new portfolio companies, of which $102.6 million was funded at close. offset by $1.6 million in proceeds from the exit of one equity co-investment. The portfolio generated net realized and unrealized gains of $6.1 million during the quarter, driven primarily by unrealized appreciation in our equity co-investment portfolio. On the capitalization front, we successfully raised $28.1 million of equity through our ATM program at an average price of $26.10 per share, representing an average of 163 percent of the prevailing net asset value per share. In addition, during the quarter, our SBIC fund received its initial leverage commitment from the SBA in the amount of $40 million. Turning to slide seven and eight, we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage, and value creation since the launch of our credit strategy. We believe the solid performance of our portfolio and our company's sustained access to the capital markets has demonstrated the strength of our investment and capitalization management strategies. Maintenance and growth of both NAV per share and shareholder dividends remain as core tenets of our long-term investment objective of creating long-term value for our shareholders. Turning to slide nine, as a refresher, our investment strategy has remained consistent since its launch in January of 2015. We continue to focus on our core lower middle market lending strategy while also maintaining the ability to opportunistically invest in the upper middle market when attractive risk-adjusted returns exist. In the lower middle market, We directly originate and lead opportunities consisting primarily of first lien senior secured loans with smaller equity co-investments made alongside our loans. We believe that this combination is powerful for a BDC as it provides strong security for the vast majority of our invested capital while also providing NAV upside from equity investments in many of these growing businesses. Building out a well-performing and granular portfolio of equity co-investments is important to driving growth in NAV per share, while aiding in the mitigation of any credit losses over time. As of the end of the quarter, our equity co-investment portfolio consisted of 31 equity investments totaling $66.1 million, representing 8% of our portfolio fair value. Within our lower middle market portfolio, as of the end of the quarter, we held equity ownership in approximately 57 percent of our portfolio companies. Though the equity portfolio has performed extremely well with 14.3 million in cumulative embedded net unrealized appreciation, some lingering effects of the pandemic aftermath still do persist, leaving us very excited about the potential upside of this equity portfolio moving forward. As illustrated on slide 10, our on-balance sheet credit portfolio as of the end of the quarter, excluding our I-45 Senior Loan Fund, grew 17% to $671 million as compared to $573 million as of the end of the prior quarter. Our credit portfolio is currently weighted 87% to lower middle market loans consistent with prior quarters. For the quarter, seven out of the eight new debt originations were first lien seniors secured. And as of the quarter end, 90% of the credit portfolio was first lien senior secured. On slide 11, we lay out the $138.9 million of capital invested in and committed to portfolio companies during the quarter. This included $119.4 million in first lien senior secured debt committed to seven new portfolio companies, $15.8 million in split lien senior secured debt in one new portfolio company, along with $3.8 million invested in equity co-investments alongside three of the new portfolio loans. A brief description of the split lien structure is explained in the footnote to the table. Turning to slide 12, we continued our track record of successful exits with one this quarter. We exited our equity investment in tax advisors group, generating a realized gain of $1.1 million and an IRR of 34%. To date, we have generated a cumulative weighted average IRR of 15.2% on 39 portfolio exits, representing approximately $385.1 million in proceeds. From a macro perspective, the market for acquisition and refinancing capital was robust this quarter and has continued its momentum into the September quarter. Our investment pipeline, as we have mentioned on previous calls, has also been robust and continues to be in both volume and quality of deals. The deal team continues to do an excellent job broadening the top end of our deal funnel, which maximizes the number of deals in the market for which we have the opportunity to review and consider. As we have always said, this is a critical component of building and maintaining a quality investment portfolio in a competitive market. This activity has presented Capital Southwest with what we believe to be some very interesting investment opportunities. Based on dialogue with our portfolio companies, we also believe that the active market will result in elevated prepayments for Capital Southwest over the remainder of this year. On slide 13, we break out our on-balance sheet portfolio as of the end of the quarter between the lower middle market and the upper middle market, again, excluding our I-45 Senior Loan Fund. As of the end of the quarter, the total portfolio, including equity co-investments, was weighted approximately 87% to the lower middle market, and 13% to the upper middle market on a fair value basis. Our portfolio of 49 lower middle market companies had a weighted average EBITDA of $10.6 million and a weighted average leverage ratio measured as debt to EBITDA through our security of 4.2 times. Our average hold size in our lower middle market portfolio was approximately $13 million. Our on-balance sheet upper middle market portfolio, excluding our I-45 senior loan fund, consisted of 12 companies with a weighted average EBITDA of $61.8 million and an average leverage ratio through our security of four times. Our average whole size in our on-balance sheet upper middle market portfolio was approximately $8 million. Turning to slide 14, we have laid out the rating migration within our portfolios. During the quarter, we had three loans upgraded from a two to a one and one loan upgraded from a three to a two. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four-point scale, with one being the highest rating and four being the lowest rating. As of the end of the quarter, we had 64 loans representing 92.2% of our investment portfolio at fair value rated in one of the top two categories, a one or a two. We had six loans representing 7.8% of the portfolio at fair value rated a three and no loans rated a four. During the quarter, we placed two first lien senior secured loans on non-accrual with a cumulative fair value of $14.5 million or 1.8% of the total investment portfolio. Both businesses remain rated a 3 with one loan being in the upper middle market and one loan being in the lower middle market. With respect to the upper middle market loan, this company has experienced softness in their post-COVID performance and is currently engaged in active restructuring conversations. We have decided to place this loan on non-accrual pending more clarity on the loan terms and company performance post-restructuring. The lower middle market loan placed on non-accrual this quarter is a company which has previously experienced operational challenges resulting in poor performance. Recently, the company's senior management team has made significant operational and personnel changes to upgrade the organization. While we believe the company's outlook is improving, illustrated by a significant growth in the company's project pipeline, we have decided to put this loan on non-accrual as we monitor their ability to convert this growing pipeline into revenue. Capital Southwest has representation on this company's board of directors and is attending monthly operating meetings with the company's management team, giving us enhanced access to real-time company performance dynamics. As illustrated on slide 15, our total investment portfolio continues to be well diversified across industries with an asset mix which provides strong security for our shareholders' capital. The portfolio includes remains heavily weighted towards first lien senior secured debt with only 7% of the portfolio in second lien senior secured debt and only 1% of the portfolio in one subordinated debt investment. Turning to slide 16, the I-45 senior loan fund showed solid performance for the quarter with asset growth and unrealized appreciation. Leverage at the I-45 fund level is now 1.4 times debt-to-equity. As of the end of the quarter, 96% of the I-45 portfolio was invested in first lien senior secured debt. Weighted average EBITDA and leverage across the companies in the I-45 portfolio was 77.9 million and 4.8 times, respectively. The portfolio continues to have diversity among industries and an average hold size of 2.6% of the portfolio. I will now hand the call over to Michael to review more specifics. of our financial performance for the quarter. Thanks, Bowen.

Specific to our performance for the June quarter, as summarized on slide 17, we earned pre-tax net investment income of $9.4 million, or 45 cents per share. We paid out 43 cents per share in regular dividends for the quarter, an increase from the 42-cent regular dividend per share paid out in the March quarter. As mentioned earlier, our Board has again this quarter increased the regular dividend declaring a quarterly dividend of 44 cents per share to be paid out during the September quarter, up from 43 cents per share paid out in the June quarter. Maintaining a consistent track record of meaningfully covering our regular dividend with pre-tax NII is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with 110% for the last 12 months ended June 30, 2021, and 107% cumulative since the launch of our credit strategy in January 2015. During the quarter, we maintained our supplemental dividend at 10 cents per share, and again, our Board has declared a further 10 cents per share supplemental dividend to be paid out during the September 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. As of June 30, 2021, our estimated UTI balance was 83 cents per share. Our investment portfolio produced $18.6 million of investment income this quarter with a weighted average yield on all investments of 10.1 percent. Investment income was $1.4 million higher this quarter due primarily to an increase in average credit investments outstanding as well as an increase in cash dividends paid from our equity portfolio. There were two non-accruals with an aggregate fair value of $14.5 million, or 1.8% of the investment portfolio as of the end of the quarter. Our weighted average yield on our credit portfolio was 10.7% for the quarter. As seen on slide 18, our LTM operating leverage continued to improve, decreasing to 2.3% as of the end of the quarter. For fiscal year 2022, we expect operating leverage to be between 2% and 2.2%. Turning to slide 19, the company's NAV per share as of June 30, 2021 was $16.58 as compared to $16.01 at March 31, 2021, representing a quarter-over-quarter increase of 3.6 percent. The main drivers of the NAV per share increase were $6.1 million of net appreciation in investment portfolio and the accretion generated by the issuance of equity at a premium to NAV per share during the quarter. On slide 20, 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 de-risk our liability structure while ensuring that we have adequate investable capital throughout the economic cycle. Our debt capitalization today includes a $340 million on-balance sheet revolving line of credit with 11 syndicate banks maturing in December 2023, a $125 million institutional bond with 25 institutional investors maturing in 2024, a $140 million institutional bond maturing in 2026, a $150 million revolving line of credit at I-45 also maturing in 2026, and an initial $40 million leverage commitment from the SBA, which is yet to be drawn upon. With regard to our revolving line of credit, We are currently in discussions with our bank syndicate on an amendment and extension. While we do not have anything formal to announce today, we can say that we are very pleased with the terms of the amendment and the tremendous support we continue to receive from our bank syndicate. The closing of the amendment is imminent, and we plan to announce the details in the coming days. Finally, as we've discussed on prior calls, We have now begun operations with our SBIC subsidiary, which we'll see going forward denoted as CSWC SBIC 1. As a reminder, our initial equity commitment to the fund is $40 million, and we have received an initial commitment from the SBA for $40 million of fund leverage, which is also referred to as one tier of leverage. We would expect to invest this initial $80 million of capital over the next six to nine months, at which point we will apply for a second tier of leverage. Over the life of the fund, we plan to draw the full $175 million in SBIC debentures alongside $87.5 million in capital from Capital Southwest. We are excited to be part of this program and believe it will be a natural fit with our investment strategy. Overall, we are pleased to report that our liquidity continues to be strong with approximately $203 million in cash and undrawn leverage commitments as of the end of the quarter. As of June 30, 2021, approximately 58 percent of our capital structure liabilities were unsecured. Our earliest debt maturity is in December 2023, which we would expect to extend upon the closing of the credit facility amendment. Our regulatory leverage, as seen on slide 21, ended the quarter at a debt-to-equity ratio of 1.23 to 1. our Board announced a further share repurchase program authorizing the company to repurchase up to $20 million of stock below NAV. As you recall, we maxed out our prior $10 million program during the extreme market volatility seen in 2020. While we don't wish for future Black Swan events, we do endeavor to manage our balance sheet in a manner to provide our shareholders the benefit of repurchasing shares if such extreme volatility is experienced in the future. I will now hand the call back to Bowen for some final comments.

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

Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Devin Ryan with the JMP Securities. Your line is open.

Hi, good morning. This is Kevin Fulton for Devin. First question, dividend income was elevated in the quarter due to dividends received from portfolio companies of roughly 1.1 million. Can you provide some color on the source of that dividend and then also confirm whether that should be considered recurring or non-recurring?

Yeah, so a portion of that is recurring or received from our shareholder, from our portfolio companies held in our blocker. On a quarterly basis, I think the level is around, call it $3,000 to $350,000 is what we're receiving. And then some of those tend to be one time in nature from dividend income coming from portfolio companies distributions.

Okay, that's helpful. And then looking at the expense side, G&A tracked a bit higher this quarter than last quarter. Is that increase driven by one-time expenses, or is that reflective of higher G&A due to increased scale of the business?

Sure. So some of this related just to the seasonality. This is our annual meeting is in July, so we incur some audit costs and 10K. So that's about $200,000, and you'll see that every year in the 630 quarter. We also noted we had $100,000 one-time costs for a headhunter for a new principal that we hired, which obviously is one-time in nature. And then we did increase. We had one new board member, and that's increased professional expenses by $100,000. And so that will be recurring going forward.

Okay, I got it. That makes sense. And thanks for taking my questions. Thanks.

Thank you. Our next question comes from Kyle Joseph with Jefferies. Your line is open.

Hey, good morning, guys. Thanks a lot for taking my questions. In terms of other income, it was light in the quarter. I would guess that has to do with the lower prepayment activity in the quarter. And I think from your comments, it sounds like you expect prepayment activity to pick up as the year goes on, and therefore, should we expect a pickup in other income?

So, I mean, we're looking probably at maybe somewhere in the $30 million to $60 million in potential prepayments between now and the end of the year. Now, some of those have make holes. So the newer companies that maybe have been with us a year or two, they'll have either, you know, 102 or 101. But there's others that potentially come back and don't have a make hole. So I'm not sure that it's going to be elevated beyond, you know, somewhere in the 500,000 range.

Yep. Okay. Got it. And then I just want to get your high-level thoughts on credit. Obviously, you know, the ratings were positive. There was some unrealized appreciation, but we did see – two investments go on non-accrual. You know, just broadly talk about the, whether it's revenue or EBITDA growth trends you're seeing across your portfolio.

Yeah, I'd say across the portfolio, you know, EBITDA is, you know, from an LTM perspective is growing slightly. You know, as we move forward, you know, each quarter we're progressively further across the calendar, so we start losing some of those COVID months of last year. So, I'd say generally EBITDA is kind of flat to slightly up across the portfolio.

Okay, got it. And then last one for me, obviously a good quarter on the origination side. Can you give a sense for the cadence of originations throughout the quarter, whether that was front-weighted or back-weighted, just to help us figure out modeling yields going forward?

You know, I'd probably say it's in the middle. I think we had some very early and then probably like 40% very early and 60% very late. So it sounds like it's fairly evenly weighted. Yeah, I think that's right.

Okay, great.

Well, thanks so much for answering my questions.

Thank you.

Thank you. Our next question comes from Bryce Rowe with Hovde Group. Your line is open.

Thank you. Good morning, Bowen and Michael. I wanted to ask, you make note of, I guess, the additional employees there at Capital Southwest, so maybe you could speak to the principal that was hired and how that might impact kind of deal flow going forward in the investment funnel.

Yeah, we're very excited about it. You'll see Laura Zingalowski on our website. Very excited. She joined us from Alliance Bernstein, obviously another competing credit shop down in Austin. We're very excited for her addition, and she comes with, you know, very robust underwriting track record, and she gives us some more horsepower to originate deals, so to put out in the market. So pretty excited about her joining.

Great. Okay. And then, Bowen, you guys made mention of the impact of appreciation within the equity portfolio on NAV for the quarter. Can you speak to kind of how broad-based that was? Was it, again, driven across multiple investments or really just concentrated in a couple?

No, it's pretty, I mean, I'd say if you looked at the list of investments, it's probably, you know, almost, you know, maybe 40% of them had appreciation and just thinking of the list, I don't have the list in front of me, probably, you know, 20% of them had some kind of depreciation with the appreciation being higher than that small, you know, the 20% of the companies that were depreciated and a bunch of them that were basically flat. So I'd say, you know, you know, Slightly less than half of the companies had appreciation. And then what – do you have the – I was going to say, on the equity side, we had four companies. That's pretty material.

That had material appreciation that are just, you know, performing tremendously. And on the debt side, you know, like the half a million of appreciation, though it's small, it was very granular, and it's – you know, these are some – On the debt side.

On the debt side.

So to some degree, it's just like the, you know, companies that were struggling during COVID are starting to come out from that, and you're starting to see some granular appreciation there. on those assets that they re-appreciate.

Okay. Okay. And then maybe following up on Kyle's question there around yields and pricing, it looked like spreads have kind of been relatively stable, you know, quarter to quarter. Are you seeing that within the pipeline that, you know, that you described as robust and just trying to get a feel for, you know, how you think about portfolio yield as we, as we move forward here?

Yeah, I mean, the portfolio pipeline or the deal pipeline has been strong. We're pleased by that. You know, the yields, you know, I mean, clearly they've retraced the COVID moves and the market is obviously very competitive. You know, we just have people out in the market and we're widening that top end of our deal funnel so we can have a greater percentage of the deals that we're looking at in the markets. We think that's pretty critical to maintaining our track record. But, you know, I think over time, you know, yields, our average yield in our portfolio, you know, maybe comes down a bit, but not a ton, but a bit. Yields right now in the market seem to be, as you noted, seem to be pretty stable from what they've been in the last, you know, quarter or so. Yeah, so, you know, obviously this quarter it dropped significantly.

you know, due to our non-accruals, but we also saw probably like 20 basis points of reduction through lower-yielding assets. We think that's probably going to come back up a bit in the coming quarters, and then On the hopeful side, I think we think that the two credits that are on non-accrual have a very high likelihood of coming back on accrual, and those are higher-yielding assets that would bring the yield back up.

Yeah, we had a pretty long dialogue back and forth with one of the questions last quarter about my analogy of the deep end of the pool and shallow end of the pool. So as we've gotten our cost of capital down and we've increased our operating efficiency, meaning that our assets are growing faster than our operating costs are growing – Our cost of doing business is dropping from that perspective, obviously offset by non-accruals, and I'd love to tell you all that this is a zero-defect business. As much as I want it to be, it's not. But as our cost of delivering the investment strategy to the shareholders comes down, we can compete in a safer end of the low-orbital market that tends to price at slightly lower spreads. And whereas like three years ago, two years ago, you know, that was really – those were deals that we really couldn't compete for. We could, but we just – our net interest margin wasn't attractive. And so now you'll see deals that, you know, LIBOR 650, LIBOR 625, you know, those are – our net interest margin on those deals are, you know, as we've gotten, as our business has evolved, is very attractive, and so we can compete for those deals. And so some of the rating, some of the yield migration is not necessarily the same deal that was higher yield two years ago. It's a different safety, lower LTVs type deal flow. And so you'll see that, and we've talked about that for the last couple of quarters, being a dynamic in our business. which I think is a very attractive piece of our story going forward.

I mean, so I think Bowen makes a good point because on the net interest margin perspective, so yields may come down, maybe from the 10.7 down to 10.25, you know, over the next 6 and 12 months. But our SG&A or operating leverage is going to go to 2% and probably hold around 2%. You know, you didn't ask the question, but we are in the process of amending our credit facility, which we think is going to have a significant reduction in cost as well. So you couple that with us starting to draw. We've already drawn $7.5 million on our SBIC, and that should be up to $25 million by the end of the quarter. So as those get drawn, so we're borrowing at sub-3%, and our SGA at 2%. I think you'll see an expansion of our NII, even with a reduction in the yield.

Great. That's good detail and really nice to see the dividend increase in you all continuing to execute. Appreciate it.

Thanks, Bryce.

Appreciate it.

Thank you. Our next question comes from Sarkis Sherbetian with V Riley Securities. Your line is open.

Hey, good morning, and thank you for taking my question here. I just wanted to see if I can get some more color on the pipeline here, quarter to date, as well as the activity that you're seeing. and then just if you can kind of pair that up with your expectation for the repayments to come in as the balance of the year progresses.

Yeah, so if I look at our pipeline right now and I add up the deals that are either, we've either closed quarter to date or are signed up and working through diligence, you know, it's $60 to $70 million in that range, and six new companies. And so, You know, the quarter is far from over, so, you know, currently we probably expect additional deals to close before September 30th. But that gives you an idea. So, you know, $138 million in a quarter is obviously a heavy quarter. I'm not sure that replicates in the next quarter or two, but their originations continue to be very strong. And if we think about repayments, You know, looking down, you know, our portfolio names and the dialogue we're having with the companies, you add up kind of the names, the capital that we would put a pin on saying, okay, that's something that very likely we'll prepay before the end of the calendar year, and that number is about $50 million. And from a timing perspective, we control that obviously less, but, you know, generally speaking, it wouldn't surprise me that that's pretty evenly distributed between the next two quarters, September, December. So... If you're modeling, you might say $50 million at $25 million a quarter in prepayments.

Understood. Thanks for that. And I think another one is a little bit more, I suppose, of a hypothetical question, but just want to kind of understand, you know, with your cost of debt capital and just kind of the overall cost of doing business coming down for you, you know, if there's, let's say, a change in interest rate, it seems like maybe the first 125 basis points might be a little bit of an NII headwind. I guess how do we think about that? Is there a way to kind of parse through that in the event that happens, or do you think, you know, you're kind of insulated from any of the potential changes that may come about there?

Yeah, I mean, I think the way we think about it is, you know, we've looked into hedging, you know, but that's a really difficult concept because you're spending a lot of dollars to predict the timing for when how quickly you're going to, that first 100 basis points is going to go up. So we didn't think that that's really an option for us. So, you know, quite frankly, the way we're looking at it is with our originations and our cost of debt and cost of, you know, operating leverage coming down, if and when the rates start rising for the first 75 basis points, you'll see our growth on NII slow. But you'll want – essentially, once you get past that 75, then you're going to see an acceleration. So you won't see a reduction in NII or a dividend. You'll just see – slower growth, and then an acceleration once it's done. Obviously, on that, I mean, the cost of debt, you know, with the SBIC, just to be clear on, you know, I think you guys probably have other BDCs you look at. Cost of debt right now on the pooled debt is 2%, or, you know, really about 165. But on the debt that you draw before pooling, and pooling happens twice a year, the actual cost is about 60 basis points. So just giving you a sense, as rates go up, I think that gets offset by extremely cheap capital that we're going to be drawing from. So that's why we feel pretty confident we'll continue to grow the dividend while interest rates rise.

Yeah, you also have to keep in mind that interest analysis on that last slide is a static analysis, so it seems like nothing else happens like new portfolio originations, portfolio growth, and that kind of thing. So the $120,000 The slide illustrates a headwind, but it's not a one-to-one. It's not one-to-one math as we continue to evolve and grow the portfolio.

Yep, no, I understand it's dynamic. Just wanted to get a sense for the changing dynamics there, and obviously you'll be originating and you'd probably get some repayments and what have you back. But I just wanted to get a sense for it. you know, the NII and dividend and how insulated the business is. That's all. Very helpful comments. Thank you, guys.

Great. Thanks. Good questions.

Thank you. Our next question comes from Matt Jaden with Raymond James. Your line is open.

Hey, all. Good morning, and I appreciate you taking my questions. First one for me, following up on the equity book, can you give us a sense of how much of the appreciation was a function of improved performance or kind of expanded market multiples? And if it was some combination of the two, kind of what proportion was which?

Yeah, the vast majority of it is – I'm just looking down the names. The vast majority of it is company performance. I mean, pretty robust performance.

Got it. And I guess as a follow-up – apologies if I missed this. With the receipt of the first SBIC license, can you remind us whether or not you have a target leverage range, both in an economic sense and on a regulatory level –

Yeah, we've kind of said this before. Our economic leverage is going to be somewhere in the 1.2 to 1.3 range, and our regulatory leverage will be around between, you know, 0.9 and 1.1. We actually think that, you know, with the pace of originations and the draws off SBIC, we should be near one times in the next six months.

Got it. That's helpful. Last one for me on PIC income. So it looks like over the last four quarters, PIC income both nominally and as a percentage of total investment income has fallen pretty materially. Any color you can give on how much of that is purposeful? Is that a kind of a concentrated effort to steer away from PIC income? Is that just how the docs are being signed? Any high-level color there?

Well, I would tell you it's actually kind of concentrated. The company, one of the lower middle market company we put on not accrual, it had essentially converted from cash to PIC. and then we, you know, obviously inevitably put it in non-accrual this quarter. So there was sort of a write-up of PIC for that company over the last two quarters, and then it was, you know, reserved against this quarter. So, therefore, what you're seeing now is actually the normal run rate of PIC income. Got it.

That's it for me. I appreciate the time. Thank you.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Bowen Deal for closing remarks.

Great. Thanks, Operator. Thanks, everybody, for joining today. We appreciate your time, and we certainly love talking about our business and giving you all updates on the business. So appreciate it. Have a great week. I look forward to talking to you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.