Capital Southwest Corp (CSWC) 2022 Q4 法說會逐字稿

Thank you for joining today's Capital Southwest Fourth Quarter and 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 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 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.

Thanks, Chris, and thank you, everyone, for joining us for our fourth quarter and fiscal year 2020 earnings call. 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 as we continue to diligently execute our investment strategy as stewards of your capital.

Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.southwest.com.

I'll start by saying that during tumultuous times like we have seen recently in the public markets, it's covering to have a portfolio heavily weighted to first lien senior secured debt built with the full cycle underwriting we have deployed over the past 7 years since the launch of our credit strategy, (inaudible) that 89% of our credit book is in sponsor-backed companies, which provided these companies with potential capital and operating support if needed.

On the capitalization front, we have been diligent about maintaining over half of our liabilities and unsecured debt while consistently raising our cost-efficient equity ATM program. Finally, we are well positioned for a rising interest rate environment with 98% of our debt assets in floating rate securities and only 38% of our liabilities and floating rate securities.

Now turning to Slide 6 of the earnings presentation. We will begin with a summary of the key performance highlights for the fiscal year. Total return to shareholders for the fiscal year was 18%, which consisted of share price appreciation of 7%, and total dividends paid during the year of $2.52. Our NAV per share grew 5% to $16.86 from $16.01 in the prior year, driven primarily by over $17 million in net realized and unrealized gains in the portfolio.

During the fiscal year, we grew our total portfolio at fair value by 36% year-over-year to $937 million from $688 million in the prior year. While increasing our pretax net investment income by 6% to $1.90 per share from $1.79 per share in the prior year.

Furthermore, we strengthened our balance sheet capitalization during the year. Through the opportunistic issuance of $150 million of 3 and 3/8 (sic) [3.375%] unsecured notes, approximately $100 million in equity proceeds raised through our equity ATM program, and $80 million in SBA debentures on which we are currently drawing.

Moreover, in May, we received $45 million in additional commitments on our ING-led revolving credit facility. This now brings the credit facility commitment to $380 million. Michael will provide further detail on this later in our prepared remarks.

On Slide 7 of the earnings presentation, we have summarized some of the key performance highlights for the fourth quarter of fiscal year. During the quarter, we generated pretax net investment income of $0.50 per share, which more than covered our regular dividend paid during the quarter of $0.48 per share. As previously announced, our Board has declared a special dividend of $0.15 per share for the June quarter, which will be in addition to the $0.48 per share regular dividend also declared for the June quarter. This special dividend of $0.15 per share is a result of another successful equity exit and demonstrates our continued track record of distributing realized gains to our shareholders through special dividend.

During the quarter, acquisition and financing activity in the lower middle market continues to be strong, albeit slightly below the record activity we saw in the December 2021 quarter. On a net basis, we were able to grow our investment portfolio by approximately $60 million or 6.8% to $937 million. Portfolio growth during the quarter was driven by $103 million in new commitments, consisting of investments in 3 new portfolio companies totaling $50 million, 2 refinancing transactions totaled $41 million and add-on commitments in 8 existing portfolio companies totaling $12 million. This was offset by $49 million in proceeds from forward debt prepayments during the quarter.

On the capitalization front, we raised $25.2 million of equity through our ATM program at an average price of $24.27 per share, representing an average of 150% of the prevailing net asset value per share. Additionally, we received approval for an additional $40 million of leverage from the SBA and total average commitment from the SBA to $80 million. As a reminder, the total leverage expected from our current SBIC license is $175 million.

On Slide 8 and 9, 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 who've demonstrated the strength of our investment and capitalization management strategy.

Maintenance and growth of both NAV per share and shareholder dividends remain a core tenet of our long-term investment objective of creating long-term value for our shareholders. Turning to Slide 10, annual pressure. Our investment strategy has remained consistent since its launch in January 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. In the overall market, we directly originate and lead opportunities consisting priority of first lien senior secured loans with smaller equity co-investments by many of our loans. We remain in the quarter, our equity co-investment portfolio consisted of 41 investments with a fair value of $85.2 million which included $25.1 million in embedded unrealized appreciation or approximately $1.01 per share.

Our equity portfolio, which represents approximately 9% of our total portfolio at fair value at the end of the quarter continues shareholders' attractive upside from growing the lower middle market businesses.

We demonstrate on Slide 11, our on-balance sheet credit portfolio at the end of the quarter, excluding our I-45 senior on fund grew 7% to $794 million as compared to $745 million as of the end of prior quarter. For the quarter, 100% of the new portfolio debt originations were first lien senior secured debt.

Finally, as of quarter end, 93% of the credit portfolio was first lien senior secured.

On Slide 12, we lay out the $130 million of capital investigator and committed to portfolio companies during the quarter. Capital committed this quarter included $49 million in first lien senior secured debt committed to 30 new portfolio companies, including 1 which we also invested $1 million in equity.

Finally during the quarter, we also committed $51 million in first lien senior secured debt to 9 existing portfolio companies.

Turning to Slide 13. We continue our track record of the successful exits with 4 debt investment prepayments. 2 of these loan prepayments were refinancings related to acquisitions in which Capital Southwest was able to participate in the new credit facility. In total, these debt exits generated over $49 million in total proceeds realizing gain of $512,000 and generating a weighted average IRR of 12.9%. Since the launch of our credit strategy over 7 years ago, we have generated a cumulative weighted average IRR of 14.4% on 60 portfolio exits, representing approximately $695 million in proceeds.

As previously mentioned, the market for acquisition and refinancing capital continues to be strong. Our investment pipeline, as we have mentioned on previous calls, remain robust throughout fiscal year 2022 on both volume and quality deals, and that trend has continued into the June quarter. Given the current activity we are seeing in the market, we expect the June quarter to again be a strong quarter for originations. 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 partner.

On Slide 14, we illustrate some key stats for our on-balance sheet portfolio over end of the quarter, again, excluding our I-45 senior loan funds. As of the end of the quarter, the total portfolio fair value was weighted 84.2% to first lien investments, 6% to second lien and 0.1% to subordinated debt, and 99.7% to equity co-investments.

Turning to Slide 15. We have laid out the rating migration within our portfolio. During the quarter, we had no loans upgraded and 1 small loan position downgrade from a 2 to 3. As a reminder, all loans upon origination are initially defined an investment rating of 2 on 4 point scale, with 1 being the highest rate and 4 being the lowest rate. As of the end of the quarter, we had 71 loans representing 95.3% of our investment portfolio at fair value rated in 1 of the top 2 categories, a 1 or a 2. We had 6 loans representing 4.6% of the portfolio at fair value rated at 3, and 1 loan representing less than 1% of the portfolio rated at 4. During the quarter, we had no new loans placed on nonaccrual.

As illustrated on Slide 16, 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 remains heavily weighted towards first lien senior secured debt, with only 6% of the total portfolio in second lien senior secured debt and only 0.1% exposure to subordinated debt.

Turning to Slide 17. Our I-45 figure on fund continued to generate solid performance. As of end of the quarter, 97% of I-45 portfolio was invested in first lien senior secured debt. Weighted average EBITDA and leverage across of the companies in the I-45 portfolio was $72 million and 4.2x, respectively. The material decrease in leverage this quarter was due to the exclusion of a loan position in 1 portfolio company that had negligible fair value in EBITDA. As the stats for each of the December and March quarters excluded this portfolio company, pro forma leverage across the I-45 portfolio would have been 4.3x and 4.2x and in each of the December and March quarters, respectively. The portfolio has had diversity among industries at an average hold size of 2.4% of the portfolio. Leverage at the I-45 fund level is currently 5x, 9x debt to equity.

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 March quarter, as summarized on Slide 18, we earned pretax net investment income of $12 million or $0.50 per share. We paid out $0.48 per share in regular dividends for the quarter, an increase from the $0.47 per share paid out in regular dividends in the December quarter.

As mentioned earlier, our Board has declared a special dividend of $0.15 per share for the June quarter, while maintaining the regular dividend for the June quarter at $0.48 per share. Maintaining a consistent track record of meaningfully covering our dividend with pretax net investment income is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with 105% for the last 12 months ended March 31, 2022 and 107% cumulative since the launch of our credit strategy in January 15.

Our investment portfolio continues to perform well generating $7.7 million in net realized and unrealized gains this quarter, bringing the net realized, nonrealized gains on the investment portfolio over the past 4 quarters to $17.3 million. As Bowen mentioned, going forward, we intend to periodically distribute special dividends to our shareholders as we monetize the unrealized appreciation in the portfolio. As of March 31, 2022, our estimated UTI balance was $0.47 per share.

Our investment portfolio produced $21 million of investment income this quarter with a weighted average yield on all investments of 9%. Total investment income was $1.3 million lower this quarter due primarily to a decrease in onetime fees paid on debt repayments in the December quarter. There continue to be 3 loans on nonaccrual with an aggregate fair value of $14 million or 1.5% of the investment portfolio as of the end of the quarter. We did not place any new loans on that accrual during the quarter. The weighted average yield on our credit portfolio was 9.3% for the quarter.

As seen on Slide 19, we further improved LTM operating leverage to 2.2% as of the end of the quarter, we are targeting operating leverage to approach 2% or better in the coming quarters.

Turning to Slide 20. The company's NAV per share as of March 31, 2022, increased 4.1% for the quarter, to $16.86 per share compared to $16.19 per share as of the end of the December quarter. The driver of the NAV per share increase was due to the strong performance of the investment portfolio coupled with the accretion from our equity ATM program.

Turning to Slide 21. We are pleased to report that our balance sheet liquidity continues to be strong with approximately $178 million in cash and undrawn leverage commitments as of the end of the quarter. As Bowen mentioned earlier, in early May, we've received broad support from our lender group, which increased commitments on our ING-led senior secured credit facility by $45 million, bringing total commitments to $380 million.

Our bank syndicate continues to support our growth, and we are pleased with the flexibility the increase regarding credit facility provides to our capital structure. In addition, we continue to draw debentures in our SBIC subsidiary as we originate SBIC-eligible assets. As of the end of the quarter, we had drawn $40 million in debentures, with an average capital cost of 2.6%. Our current commitment from the SBA is $80 million, which we fully expect will increase over time to the maximum underwrite license of the $175 million as we continue our participation in the SBIC program.

As of March 31, 2022, approximately 54% of our capital structure liabilities were unsecured, and our earliest debt maturity is in January of 2026. Our regulatory leverage, as seen on Slide 22, ended the quarter at a debt-to-equity ratio of 1.6:1.

Turning to Slide 26. Our balance sheet is well positioned to benefit from rising interest rates. Short-term interest rates have increased significantly with LIBOR increasing from 21 basis points at the end of December to 96 basis points at the end of March. And as of yesterday, LIBOR is approximately 150 basis points. The weighted average flow on our investments is approximately 1%, with the short-term rates exceeding the floor on our investments, this will have a positive impact on net investment income. Based on quarter end rates, we estimate 50 basis point and a 150 basis point increase in reference rates would result in an annual incremental earnings of approximately $0.10 and $0.33 per share.

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 original vision and strategy we communicated to our shareholders when we began this journey. Within underwriting with a full economic cycle mentality since day 1, which we believe has prepared us well for any environment presented to us in the coming months and years. I continue to be impressed by the job our team has done in building a robust asset base deal origination capability as well as a flexible capital structure.

We believe that our performance continues to demonstrate the investment acumen of our team at Capital Southwest and the merits our first lien senior secured debt strategy. We feel very good about the health and positioning 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 strong performance and creating long-term sustainable value for all our stakeholders.

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

(Operator Instructions) Our first question comes from Mickey Schleien with Ladenberg.

Yes. We're experiencing macro headwinds that we have been seeing for a long time. And obviously, you have a lot of experience in the credit market, so I'd like to ask you where you think you will see defaults and non-accruals head over the next couple of years?

Yes. It's hard to predict, Mickey. We have been doing this for a while. Honestly, when we took over the BDC 7 years ago, we were paranoid by a recession, and we've underwritten to the -- great recession for 7 years now. And -- so we've kind of always expected or had to plan for increased defaults in the portfolio. And so we've underwritten a debt portfolio that will perform well in a greater recession type economic environment. So while it's hard to predict the actual numbers, if we look at our underwriting deal by deal and it will -- our portfolio performed very well in kind of a full cycle. When you have -- we underwrite 30% to 50% LTV on a typical deal, and 89% of our portfolio are sponsors are sponsored by deals. And as you all know, that the sponsor community is pretty flashy with liquidity. So when I think about a portfolio, it's going to generate a dividend for the shareholders, which includes us, and I feel pretty good about that.

Not a specific answer to your question on a prediction. But we've again been worried about recession or making sure we have a portfolio that would withstand a recession since the beginning.

On the dividend side, the other way that we plan for this is obviously to maintain that dividend coverage that's conservative as we've done. I think we keep noting each period that we're 107% in coverage since we began this and 105%, I believe, in the last year. So I think it will be important for us to continue to lead enough cushion as we move through this and see how severe recession could be to make certain that our dividend is conservative, respective of what the environment might look like.

I understand, Michael. When we look at the forward LIBOR and so far curves, they're obviously very steep, and that implies a nominal rates on debt -- on the debt investments you've made could go up very sharply over the next year or so. So how do you see that trend affecting your borrowers in terms of their appetite for capital and their ability to service their existing debt?

Yes. So it's a good question. So we look at that at least every quarter. It does start with the underwriting leverage that you're putting on companies, and the leverage needs to be appropriate for the potential volatility of those particular industries. So it starts with that. But we look at our portfolio and our weighted average fix charge coverage across the book is a little over 3x. So EBITDA to fix earnings for fixed charge, so a little over 3x. And you kind of synthesize it if you were to increase. So for LIBOR by 200 basis points from where it is today, that 3x would go to about a little over 2.4x. And if you were to increase that by 300 basis points, that coverage would be about 2.2x. So those number -- so that gives me confidence that pretty substantial increase in interest rates, you still got 2.2x kind of coverage of your fixed charges across your portfolio.

That's interesting, Bowen. And that's obviously assuming everything else remains equal, right?

No, that's right. I mean obviously, if the economy starts to slow down, you're going to have increased default -- covenant default to first lien lender doesn't necessarily mean it a disaster. It means that we charge additional economics on those loans, fees or otherwise. But certainly, in a slowing economy, you start to have a little bit more noise in the portfolio for sure.

Of course. Bowen, when we think about those rising interest rates, that could provide a big tailwind to you and to other BDCs since most portfolios are floating rates. How much of that increase in short-term rates do you think the lenders will keep versus perhaps passing some of that through to the borrowers as spread compression to help support them?

Yes, that's a good question. I've been doing this for a while. And I would tell you that rates start to increase -- lenders do have a tendency to -- or the market generally has a tendency to give some of the increase in the index back in spread. I do -- the vast majority of the increase in index will be kept by the lenders, but there's -- our job is to make sure we minimize how much we get back, but that is a dynamic that does happen. If you think about our capital structure, we've got over 50% of our liabilities into fixed rate notes. And so -- and then our assets were all floating rate. So we're pretty level upside on interest rates.

As for margin, you're right. I mean that's something that the lending industry does to an extent as the index goes up, they get a little bit of the spread back. At the end of the day, we're net interest margin. We eat net interest margin at the end of the day. So we have to minimize the amount of that dynamic, but it does -- it has in past cycles has been that way at the margin.

Yes, I agree with that. My last question, sort of housekeeping maybe for Michael. Could you just give us what the main drivers were of the realized and unrealized gains this quarter.

The $6.3 million of the depreciation was related to the equity portfolio. And I think we had, I want to say, at least 3 portfolio companies on the equity side that are loan grade 1s that had sizable increases. And then across the board, really the, I would say, debt was up as well, I think, about $1.4 million, I believe, for the quarter, which was fairly granular. I mean even kind of a macro perspective, our companies saw revenue growth. We saw EBITDA growth as well despite increased labor and transportation costs. So overall -- and we saw EBITDA margins probably come down slightly. But overall, the portfolio performed individually quite strong.

One of the things, Mickey, I thought was encouraging this quarter was that across our equity portfolio, the equity co-investment portfolio, market multiples were down slightly, but our portfolio appreciated. And so that was a really fundamental performance across that equity book as opposed to just market multiples expanding. So that was a healthy group of companies.

Our next question comes from Kevin Fultz with JMP Securities.

I'd like to start with a question on leverage. Regulatory leverage was 1.16x at quarter end. Can you just remind us what your target leverage range is? And then also, could you talk about if your target leverage range has shifted at all recently, given the current market backdrop?

Sure. So what we've said in the past is our economic leverage target is 1.2x to 1.4x and our regulatory would be between 1.0x and 1.2x. So we're obviously in the middle of those ranges. But we are mindful of what's going on in the economic environment. And from that perspective, the notion is that we would like to be in the middle to the low end of those ranges entering into what a possible recessionary period. So how will we do that? We're likely -- as we want to use the ATM fully as we've done before. We've certainly -- we don't want to be behind the curve and force to raise equity to bring leverage back down. So you can kind of imagine it will probably be conservative on that front and try to stay really around 1.2x to 1.5x -- 1.2x to 1.25x and probably 1.1x to 1.15x on regulatory.

Okay. That makes sense, Michael. And then just in regards to portfolio positioning, just curious if there are any pockets or industries that you find particularly attractive in the current climate?

Well, certainly, I mean importantly, everybody heard me beat this drum for years on the whole recession, full-cycle underwriting mentality we use. Look at some of the deals we've done in the last quarter, you'll see American Nuts as a food deal you see American Thrift store, which is a thrift retailer. [Jack Sparrow] is a manager of supply chain parts, little screws and bulks and things in manfacturing plants of supply chain things that they have to manage is complex. Air conditioning specialists, which is HVAC service company that people that come by your house and service your AC. So these are all kind of non -- very low cyclicality of any cyclicality associated with those industries. And so that's kind of how we're thinking about the world. I mean, we like industries that are stable high cash flow margin aren't particularly discretionary-type purchases and the ones that shouldn't be as affected by the economy -- economy kind of affects everything to some extent. But typically less -- much less cyclical or even counter cycle, you'll see a National Credit Care, for example, certainly a countercyclical-type industry. So you look on our deals, you'll see that theme. So I think that's how I'd answer that question.

Okay. That's helpful. And then just 1 more follow-up on Mickey's question. You had some pretty nice unrealized gains on equity and debt investments in the quarter. That's kind of the opposite of what we saw in the public markets and other BDC portfolios in the March quarter. Just curious that's in the equity portfolio, were -- was the unrealized gain primarily in a handful of equity securities? Or was that kind of broad across the portfolio?

Yes. So I would say there's certainly a handful and half of companies that were shiny stars for sure. But we saw a pretty broad performance, I guess, across the portfolio, but they certainly have a handful and a half of shining stars. So I think that's -- can typically what happens in an equity portfolio. But that's -- I got to be pretty encouraged by the fact, again, that if you looked across our portfolio, yes, market multiples come down -- index. Market multiples come down, as we all know, we saw that in the public market. But the equity portfolio, EBITDA grew and kind of increase the appreciation overall.

Our next question comes from Kyle Joseph with Jefferies.

Most have been answered. But we talked about kind of the rising rate environment impact on demand for middle market credit. Can you go to the kind of maybe the other side of the spectrum and talk about how you see rising rates impacting competition in the overall supply of credit to the middle market?

That's a good question. The supply as far as our competitors and capital -- availability of capital, I would say, I don't expect it changing all that much. I mean the market is competitive now, it was competitive yesterday, it will continue to be competitive. And so -- and I think, again, the private equity community is pretty flashy liquidity. So I think people are all talking about recessions. And so I'd say that the sensitivity around recessions is certainly heightened.

We've had that sensitivity for a while, but that's -- the market is certainly sensitive to that. So I think that could -- as the lender community is thinking more about recessions and trying to court underwrite through recessions, that does typically and it should increase the conservatism across the industry. But I think the quality of -- the quantum of capital out there, I don't see it changing, but I do see the mentality of the lender community and sponsor community as well becoming more recession-sensitive as they're thinking about investing capital.

Yes. I guess also from a competitor's perspective, it's going to depend on their overall health of their portfolio and the leverage they have going into could be a cycle whether they're going to be able to be aggressive in finding unique opportunities, which is what you tend to see in the down market.

Our next question comes from Bryce with Hovde.

I wanted to maybe start on your commentary around the pipeline feels like you got another healthy quarter coming up here. For the June quarter, we're 2/3 of the way through, maybe you could speak to what you're seeing kind of from the terms or pricing perspective with some of the shifting market dynamics that we've seen here over the last few months.

Yes. Pricing and terms, I would say, really from the -- everything is down from a volume perspective from the December quarter of last year because it was a feverish pace then. But the June quarter is similar to the March quarter as far as general activity. And so as far as pricing and terms, it's been kind of the same. It hasn't really been the general statement. It hasn't been that much different between the quarters. There's differences between deals and things feel specific, but I think generally speaking, it's not -- we haven't seen a material change in pricing in terms, I mean, we have -- in the oral middle market, we get strong covenants, first lien, lower LTV cash flow businesses. And so that's kind of the same in the June quarter as it was in the March quarter.

That's helpful, Bowen. And you've obviously had some monetizations exits, are you still seeing some opportunity for that here? Or do you expect that activity to slow down here?

Well, I mean, it was -- again, kind of follows the market activity. So the market activity in the December quarter was obviously really high. Prepayments were high. Kind of into this year, they kind of a little bit of a steady home don't know if you could comment on. I can take -- I mean, I don't...

It definitely slowed down. But what I would say, just looking down for the next 6 to 12 months, some of the loan grade ones that are performing extremely well. Those are always possibilities for repayment sort of exits. And I think if you look to our history, since 2016, we've had a large exit that we were able to provide a supplemental dividend or special dividend in every year since. And so looking at that list, we would think that's a high likelihood that there could be an exit before the end of the year.

I think that's a fair comment. I mean, if you look at those names, if I was an owner of some of those businesses, I'd certainly be considering a sale. I mean, given the extreme outperformance of some of these names. So no line of sight on any particular 1 at the moment but certainly not unreasonable. I think we would see something by the end of the year.

Okay. Maybe a couple of housekeeping question from me. From an access to future SBA draws is that something Michael that you guys can access here now? Or I've seen or remember there being a review by the SBA now that you hit that first year.

Yes. No, correct. We already received that review when we got to our first half here, which was the $40 million. And so we're past that. So we have access right now to $80 million. As of the end of this quarter, we had drawn the $40 million. And we tell you that activity seeming robust this quarter and several of the deals we're looking at are SBIC eligible. We see ourselves being in the -- not quite at $80 million, but pushing it by the end of the June quarter or into July. So we'll probably be back to the SBA in the summer, looking for additional leverage commitment.

Okay. Okay. That's helpful. And then maybe 1 more around I-45. It looks like the dividend that came into the BDC from I-45 was up. Is this a good run rate, anything kind of driving that, that might cause that to fall back down?

Honestly, it was a strong quarter. We did see, I would tell you, towards the end of the quarter some exits in I-45. And then we're ramping that back up right now, more late stage. So I would say that number comes down a bit, but it's not going to be too far off.

Our next question comes from Robert Dodd, Raymond James.

Congratulations on the quarter. If I can on the -- going back to the special dividends. Spillover is now $0.47. I mean you've paid over the last 12 months, a lot of special dividends to shareholders who've done quite well. Is it the intent to kind of like better to level off spillover here and basically pay out over earning if you have a realized gain or if you continue to overearn the dividend dollar just a more NII basis? Or if rates come up, obviously, there's earnings power there as well? Or is there -- is it just going to be more -- is there a potential that there's a plan basically pay out the over-earning each quarter or something like that to manage the spillover down so you don't have the excise tax? Or can you give us any thoughts on that front?

Sure. Sure. So honestly, that is what we have been doing. Our balance was quite high and obviously, you go back to the MRI days, we had over $1 in UTI, they were paying significant excise tax. We paid that down through the supplemental dividend program. And this $0.15 was related to an exit of one of our equity portfolio companies that produced this $0.15 distribution that we're paying off. It brings us down to approximately $0.30, $0.32 on a UTI balance, which we would tell you that we think that we should be somewhere between $0.20 and $0.30. And so we're really where we want to be from this point going forward, I think normal activities will maintain that balance. And then as we see exit with -- I think we noted we have, again, $25 million of unrealized appreciation. So we do expect to see exits that will generate gains and that would be included in special distributions going forward, but while maintaining this $0.20 to $0.30 UTI balance.

Got it. I appreciate that. And then 1 more, if I can, on the color you gave that revenues and EBITDA both grew margins came down slightly. I don't think that's a great suppose. Were there any areas of the portfolio, not necessarily specific business, but any areas where you saw margin compression that maybe you didn't anticipate? I mean, obviously, labor costs are up, raw materials are up, but with other kind of drivers that came out of left field, so to speak.

Yes. So I mean, obviously, labor inputs are up, material inputs are up. Fortunately, for the vast majority the companies, when you have an inflationary environment, "inflationary environment" narrative out in the public square, easier to call your customers and raise prices, right, who is not extensive when you do so. So that helps.

I think the 1 area that you haven't mentioned we all know about the supply chain and just not only cost of inflation, but the difficulty to get input. And we have seen a couple of companies utilize working capital to prebuy and bulk up their working capital base, their inventories. And so -- and the cost of doing that is essentially a cash flow margin hit, right? So that's been something.

I wouldn't say we didn't expect it, I mean it kind of make sense, right, with the supply chain being what it's been for several months. But that is definitely a dynamic that affects companies across the economy, and we've seen people utilize capital to increase their inventory to defend against just availability of inputs.

Has that been one of the drivers of the strength of the pipeline in terms of -- or is that just at the margin, some are using working capital? Or is that pretty, I want to say pervasive, but pretty common across the portfolio?

No. I mean, our pipeline is not really working capital deals, obviously, we have revolvers across the portfolio. I'd say at the margin some of the revolvers may be gone in part without those reasons. The pipeline really is still basically -- it's founder-owned businesses that are selling or diversifying their holdings as they get later in their life, right? So they're a private equity transactions in interesting alternative because it allows the founder to roll over a portion of their proceeds into the new -- into the company -- stay involved in the company, but diversify their holdings.

And with having the pandemic in the rearview mirror, economy being a concern. I mean, it's people that might not have not quite ready to sell, might say you know what, there's maybe a deal where I take a few of my chips off the table might make some sense, and it's given private equity guides a chance to invest in companies. So I think general dynamic still is there. So it's not necessarily working capital, looking for working capital as much as it's M&A kind of transactions.

Got it. And that makes sense. I mean you only had $12 million add-ons this quarter. Last one, if I can, how -- when underwriting and to your point, you always underwrite for a recession to occur during the life of the loan. How -- what increment -- what do you think of the quality of your incremental knowledge about borrowers if you will, given the COVID and those that the new portfolio, a new leading portfolio, obviously survived COVID and managed supply chain disruptions there and economic issues there. Do you think that financial information you have about borrowers that so relatively compared to the financial crisis, which was more than a decade ago at this point. Does that give you more confidence in the ability of borrowers to withstand any economic hiccups over the next couple of years? Or do you think COVID was just so odd that it doesn't tell us much about survivability or success during air quotes around normal, let's say, that comes to pass.

Yes, there's like several parts to that answer. I mean the COVID stress created a slowdown in business. And so whether the slowdown in business in a recession or COVID or otherwise, you get to see how all these companies handle or the business models handle kind of a stress in the economy. COVID is a little different because it was a flash crash and of course, then didn't thankfully, didn't end up being a lasting thing from an economy perspective. But you know the COVID dynamic is interesting. We have probably have certainly a bunch of business models that we've seen out there in new deal flow and to some extent, in our portfolio that actually from a pure EBITDA perspective, benefited from COVID that meaning that their product or service was needed more in COVID, in that COVID environment from before. And so we're underwriting deals now, we're underwriting the downside, but we're also thinking a lot about what -- in certain businesses we're looking at in underwriting is any of the EBITDA that we're underwriting COVID bump and kind of a lasting affect of COVID. So when that kind of stays, all else EBITDA will come down. So it's a little bit of a -- there's doubt there that, like I said, EBITDA increased guarantee for various specific reasons. And of course, there's a lot of businesses that decreased substantially in COVID.

So I would say just general -- seeing the portfolio stress in an environment like that it's helpful, sure, to some extent, as you said, it's comforting to see our borrowers that withstand it, you have PPP backing up and the like, but a lot of these companies didn't use the funds particularly to pay them back. So Yes. So it was good. I mean it was good. The Great Recession is a long time ago, but having something more recent that stressed the portfolio and portfolio performed, it's certainly a company.

And on the liquidity side, Robert, we did see -- even though there was seamless money out there, we saw probably 1/3 of our portfolio companies draw on the revolver and then pay it back down actually almost, essentially all of them paid it back down within 1 month or 1.5 months, but you kind of give a sense of just how they operate in a recession environment and strict environment.

I'm not showing any further questions at this time. I'd like to turn the call back to Bowen for any closing remarks.

All right. Well, thanks, everybody. Thanks for joining us, and we appreciate your time, and we look forward to giving you further updates as we go forward.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.