Sentiment Analysis of the earnings transcript to help figure out if there are any bullish or bearish sentiments that could be gathered from it. We're doing ML and AI based analysis on the earnings call to get some more insights.
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| Statement |
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| Our equity portfolio, which represented approximately 9% of our total portfolio fair values at the end of the quarter, continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses which will come in the form of NAV per share growth and supplemental dividends over time |
| We believe our track record of thoughtfully growing our dividend, the solid performance of our portfolio as well as our company's sustained access to multiple capital sources has demonstrated the strength of our investment in capitalization management strategies as well as the absolute alignment of all our decisions with the interest of our shareholders |
| In fact, eight of our existing lenders in the facility upsized their commitments, which we believe demonstrates their confidence in our stewardship, especially in the current capital markets environment |
| Our company and portfolio continue to demonstrate strong performance, and we continue to be impressed by the job our team has done in building a robust asset base, dealer origination and portfolio management capability as well as the flexible capital structure |
| Portfolio earnings continue to be strong |
| As we look forward, we expect further improvements in operating leverage as we continue to grow the balance sheet over time |
| The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to invest in people and infrastructure to continue to build a best-in-class BDC |
| These increases in our regular dividends are a result of the increased fundamental earnings power of our portfolio given its growth and performance as well as further improvements in our operating leverage |
| As to the uncertainty in the economy, we have been underwriting new deals and managing the overall BDC with a full economic cycle mentality since day one, which we believe has positioned us well for the potential economic volatility in the coming months and years |
| We had a well-capitalized balance sheet with multiple capital sources, strong liquidity and a flexible capital structure, much of which is fixed rate and covenant light |
| During the quarter, deal quality and activity in our lower middle market continued at a healthy pace, and we continue to be able to find attractive investment opportunities |
| Deal flow continues to be weighted more towards acquisitions rather than refinancing the environment continues to be a favorable one for non-bank first lien lenders like Capital Southwest |
| We are confident in our ability to continue to distribute quarterly set mental dividends for the foreseeable future based upon our current UTI balance of $0.42 per share, our ability to grow UTI each quarter organically by over-earning our total dividend and the expectation that we will harvest gains over time from our existing $0.97 per share in unrealized appreciation on the equity portfolio |
| That said, we are still seeing very attractive loan pricing spreads on new portfolio loans that are 25 to 50 basis points higher than 12 to 18 months ago |
| We believe our first lien senior security investment focus and our capitalization strategy provide us complete confidence in the health and positioning of our company and our portfolio as we look ahead |
| We continue our strong track record of regular dividend coverage with 120% coverage for the last 12 months ended September 30, 2023, and 109% cumulative coverage since the launch of our credit strategy in January 2015 |
| Deal activity over the past quarter continued at a healthy pace, and we continue to expect solid net portfolio growth in the coming quarters |
| And so seeing things migrate up from struggling to performing is obviously encouraging |
| We have been pleased with the leadership and support that our private equity firm partners have provided our portfolio companies both in the few instances where capital has been required to maintain the operating and growth strategy of the portfolio companies and in realizing operational efficiencies in an environment where business input costs have been rising |
| We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital provider, as evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities |
| On Slide 7 and 8, we illustrate our continued track record of producing strong dividend growth, consistent dividend coverage and solid value creation since the launch of our credit strategy back in January of 2015 |
| So we feel pretty good about the coverage ratio that you're asking about |
| And so I'd say, quality of deals has been strong |
| Our lower middle market strategy is complemented by club [ph] participation in first lien loans to larger companies led by like-minded lenders with whom we have relationships and have gained confidence in their post-closing loan management from working together across multiple deals |
| These new shares will allow us to continue our track record of growing our asset base while maintaining conservative balance sheet leverage by raising accretive equity primarily through our ATM program |
| As seen on Slide 13, our total investment portfolio, including our I-45 JV continues to be well diversified across industries with an asset mix, which provides strong security for our shareholders' capital |
| We feel very good about the performance of our portfolio with 96.9% of the portfolio at fair value rated in one of the top two categories or 1 or 2 |
| And then obviously, the leverage profitability and all those other things were very attractive to us |
| Turning to Slide 19, we're pleased to report that our balance sheet liquidity remains strong with approximately $207 million in cash and undrawn leverage commitments on our revolving credit facility as of the end of the quarter |
| Since that time, we have increased our regular dividend paid to shareholders 28 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pretax NII |
| Statement |
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| We also continue to see loan-to-value levels on new loans calculated as our first lien loan divided by the enterprise value being paid for an acquisition, down meaningfully from 12 to 18 months ago as private equity firms remain willing to pay relatively full multiples for quality companies |
| And so that kind of affected that business |
| And then I know you addressed prepayment fees a little bit already, but just looking at that prepayment fees and other income line, down a little bit in the 9/30 quarter |
| I mean I think it might improve a little bit |
| And obviously, that can be a difficult sector to invest in |
| And so it's come down precipitously over the last two |
| It's been down kind of over the last three or four quarters anyway |
| I mean -- over time, we've seen less attractive opportunities in that market, and I think Mainstreet and Capital Southwest both believe that's the case |
| And eating out is one of those things that people cut back on during a recession, which may be coming |
| Obviously, the financing market is choppier than it was 12-18 months ago |
| Michael Sarner Well, I'd say that run rate is about 1.7% and we probably see over the next -- I would actually say, for the next 6 to 12 months, we'd see us dropping to that 1.7% on an LTM and probably down to 1.6% |
| I was on mute |
| And the other thing that's been going up is their interest burden |
| And then prepayment fees and amendment fees, that's obviously a lot harder to judge |
| And last one, just looking at the Slide 14 and the three credits that were downgraded in the quarter |
| Our regulatory leverage, as seen on Slide 20, ended the quarter at a debt-to-equity ratio of 0.92 to 1, down meaningfully from 1.11 to 1 as of the year ago September quarter |
| So we have to compensate them accordingly |
| On the downgrades, it's pretty idiosyncratic to those certain companies one services, utilities and vegetation management and that industry has moved a bit ones in farm services and the farms are kind of delaying some of their budgeting |
| And so one would think inflation should start moderating next year |
| Wondering if you could add a little color there in terms of the industries that those companies operate in? And maybe what developments in the quarter led to the downgrades |
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