Thank you for joining today’s Capital Southwest Fourth Fiscal Quarter 2018 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 Diehl..
Thanks, Chris, and thanks to everyone for joining us for our fourth quarter fiscal year 2018 earnings call. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our Web site at www.capitalsouthwest.com.
We are pleased to be here with you this morning to announce our quarterly and annual results for the fiscal year 2018. This year, our focus remain on building a lower a middle market portfolio, consisting largely of first lien senior debt with smaller equity co-investments across the loan portfolio where significant equity upside opportunity exist.
We continue to execute under our shareholder friendly internal managed structure, which at its foundation, closely aligns our interest with the interest of our fellow shareholders in generating sustainable long-term value through stable increasing dividends and NAV per share growth.
Laid out on Slide 5 are some important summary points on our performance for the fiscal year ending March 31, 2018. During the year, we paid $0.99 per share in quarterly dividends, a 25% increase in dividends over the $0.76 we paid out during our fiscal year 2017.
We were able to accomplish this while growing NAV per share to $19.08 from $17.80 per share as of the end of the fiscal year ’17. As a result, our total return on equity for the fiscal year '18 was 13.7%.
During the year, we significantly grew the right side of our balance sheet, increasing our total debt capitalization through increasing commitments on our revolving line of credit from 100 million to 180 million, and issuing 57.5 million in unsecured baby bonds, which today trade on the NASDAQ under the ticker CSWCL.
Subsequent to year-end, we added an additional $30 million in commitments to our credit facility from both new and existing lenders, bringing our total credit facility commitments to its current level of $210 million.
Our increased capital base has been utilized to grow our portfolio over 35% from $287 million in March 31, 2017 to $393 million at March 31, 2018.
During the year, we originated $169 million in total commitments in 17 portfolio companies, including $10 million invested in equity alongside eight of our loans, while exiting 11 companies for $61 million in proceeds, generating a weighted average IRR of 12.2%.
We are pleased to note that three years into our credit strategy, we have a portfolio with no loans on non-accrual, and only one investment on our internal watch list. In fact, Wastewater Specialties, the company we have mentioned on previous calls is being on our internal watch list, has now been sold.
The transaction closed last Friday, resulting in our first lien loan being prepaid in full with contractual prepayment fees. The exit generated an IRR of approximately 17%. Our current watch list credit recently added to the list is a distribution and logistics company, in which we have a first lien loan and no equity.
The company has underperformed and has breached our financial covenants. That said, the company has signed up a large number of new customers that are expected to ramp up in the coming months.
The financial sponsor and other equity investors are very bullish on the Company's prospects, and are preparing to invest significant equity dollars to fund the necessary growth CapEx to prepare the company to take on this new business.
We feel pretty good about the long-term prospects of this company and very good about the security of our shareholders’ capital in this deal. We’re also pleased with the support the sponsor is providing the company, and think the management team has done an excellent job signing up some interesting new customers.
Specific to the fourth quarter, as seen on Slide 6, we experienced strong portfolio performance, growing NAV per share by $0.64 during the quarter to $19.08 per share, while earning $0.28 per share in pretax net investment income.
During the quarter, we achieved net portfolio growth of 7%, increasing the investment portfolio to $393 million from $367 million at the end of the prior quarter. Our I-45 senior loan fund continued its solid performance, providing a 13% annualized cash yield on our capital in the fund for the quarter.
Finally this quarter, we repurchased 36,000 shares under our share repurchase program. As we have previously said, we are committed to building long-term shareholder value, while the number of shares we can purchase in any given day or week is significantly limited due to the low trading volume of our stock.
If the market price presents itself where it makes sense to repurchase shares then we will repurchase what we can.
As we have illustrated in the past quarterly updates, Slide 7 shows our continued progress and track record of increasing shareholder dividends and driving increases in NAV per share through thoughtfully building a portfolio of well performing assets.
For the quarter ending March 31, 2018, we paid out $0.28 per share in quarterly dividend, generating a 6.6% annualized dividend yield to our shareholders, while increasing NAV significantly. NAV appreciation this quarter was driven largely by appreciation in our equity investment in TitanLiner and in MRI.
As we have mentioned on our last several quarterly calls, TitanLiner's financial performance has been quite robust. As the company has continued to benefit from significant increases in oil and gas drilling activity and from a management team that has done a great job managing the business and generating what we believe a market share gain.
TitanLiner has been an active sale process for the past several months, and is under letter of intent today for a sale transaction that we expect to close very soon.
Regarding MRI, the company continues to perform very well with growth being driven by increased profit margins on its core products, and increasing market penetration with several new products. We also recently announced a capitalization policy, following the passage of the small business credit availability act.
The act allows for business development companies to decrease the required minimum asset coverage ratio applicable to the company from 200% down to 150%. Stated differently, maximum allowable leverage at the BDC can be increased from the prior limit of 1:1 debt to equity, up to a maximum of 2:1 debt to equity.
BDCs can access this additional financing flexibility, either immediately through a vote of the shareholders or one year after a resolution of the BDCs Board of Directors that adopts the new leverage limitation.
After careful consideration of the company's long-term strategy, the Board announced two resolutions; first that it approve the adoption of the new regulatory limitations; and second, that it also adopt in a self-imposed more restrictive limitation on leverage of Capital Southwest of 1.5:1 or 166% asset coverage.
While the additional financial flexibility provided by the legislation is certainly a positive for the company, and that it provides Capital Southwest with the flexibility to manage balance sheet leverage above our previously stated target of 0.8:1, our philosophy on leverage of Capital Southwest has not changed.
We remain steadfast in our view that leverage should be prudently applied to an underlying portfolio of assets based on the security and quality of the assets.
Specifically, we consider factors, such as; the portion of the portfolio and first lien assets; the weighted average leverage at the portfolio companies themselves; and the underlying portfolio loan performance.
While we do not view balance sheet leverage at Capital Southwest near 2:1 as being appropriate, we do believe that targeting balance sheet leverage of Capital Southwest greater than 0.8:1 may be appropriate.
Frankly, 0.8:1 previously stated leverage target, while there is much a cushion that a 1:1 leverage limitation, from a regulatory perspective, as it was evaluating the optimal leverage level appropriate for a well performing portfolio of largely first lien assets.
We believe that the additional leverage will better enable us to increase the security and quality of our loan portfolio, while allowing for additional economics flowing from the any increase in leverage levels at Capital Southwest to flow to our shareholders.
The second resolution by our Board implementing a more restrictive leverage limitation specific to Capital Southwest was meant to communicate our intent to be measured and prudent in managing any changes in Capital Southwest leverage levels.
Since our growth plan does not currently contemplate meeting the additional leverage over the next 12 months, our Board of Directors elected to pass the resolution at this time, and then utilize the one-year waiting period to obtain feedback from our shareholders and our lenders to take into consideration in our capitalization decisions over the longer-term; as all of these decisions we made in the context of creating attractive risk-adjusted returns and long-term sustainable value for our shareholders.
Again, it is important to emphasize that our internally managed structure allows for virtually 100% of the economics earned from any incremental leverage to float our shareholders. This is in stark contrast to the externally managed structure where much of the incremental economics flow to the asset manager.
Our investment strategy is described on Slide 8, which focuses on a blend of both lower middle market and upper middle market assets, provides a strategic flexibility as we have built the robust capability to seek attractive risk-adjusted returns in both markets.
In our core market, the lower middle market, we directly originate opportunities consisting of debt investments as well as equity investments made alongside our debt, building out a high-performing and granular portfolio of equity co-investments is important to driving growth and NAV per share, while mitigating future credit losses.
On the other hand our capability and presence in the upper middle market provides us the ability to opportunistically invest in a more liquid market when attractive risk adjusted returns exit. This quarter, as seen on Slide 9, we committed $27 million to two new portfolio investments and two add-on investments to existing portfolio companies.
Three of the investments were in the lower middle market and two included equity co-investments. On a weighted average basis, the debt investments made during the quarter had a yield maturity of 11.2%.
During the quarter, as seen on Slide 10, we received $5 million in proceeds from the exit of one upper middle market second lien investment held since December 5, 2015 that generated an IRR over this time of 13%.
This continues our track record of generating strong risk adjusted returns on our shareholders’ capital expenditures as we have now had 19 exits since the launch of our credit strategy three years ago, representing over $122 million in proceeds and a weighted average IRR on exits of 16.9%.
On Slide 11, we break out our on balance sheet credit portfolio, excluding our I-45, between the lower middle market and the upper middle market. As of the end of the quarter, the portfolio was approximately 75% and 25% weighted on a cost basis between the lower middle market and upper middle market respectively.
We had 19 lower middle market investments comprised of first lien sub-debt and equity securities with an average hold size of $10.8 million, a weighted average EBITDA of $8.6 million, a weighted average yield of 11.9% and leverage, measured as net debt to EBITDA through our security, of 3.3 times.
Within our lower middle market portfolio, as of the end of the quarter, we held equity ownership at approximately 74% of our portfolio companies.
Our upper middle market portfolio consisted of 10 loans, including first lien and second lien debt with an average hold size of $6.6 million, a weighted average EBITDA of $86.2 million, a weighted average yield of 10.2% and leverage through our security of 4.3 times.
On our balance sheet credit portfolio, at Capital Southwest as shown on Slide 12, again, excluding I-45, this grew 6% to $239 million, driven by strong lower middle market first lien activity. As the portfolio has grown, the percentage of the credit portfolio represented by the lower middle market has increased, by design, to now 72%.
As we have stated on prior calls, we believe the lower middle market to be the market that has demonstrated the most attractive risk adjusted returns through the economic cycle as debt pricing terms and leverage are more attractive, and we often have the opportunity to invest in equity in companies with very interesting growth prospects.
While we have increased the percentage of the portfolio represented by the lower middle market, we have also continued to heavily emphasize first lien senior loans in our investment strategy. As of the end of the quarter, 82% of our on balance sheet credit portfolio was in first lien senior securities.
As illustrated on Slide 13, now including capital invested in I-45, our overall investment portfolio grew 7% quarter-over-quarter, increasing to $393 million from $367 million at the beginning of the quarter. We continue to believe we have positioned our investment and invested assets well for any economic environment we may face in the future.
We have a well diversified portfolio heavily biased towards first lien and secured debt investments preparing us for a recession, while at the same time, 95% of our credit exposure is invested in floating rate securities as can be seen on Slide 14. So that our shareholders also continue to benefit should interest rates continue to rise.
Specific to our I-45 senior loan fund, as seen on Slide 15, we saw a slight net portfolio growth with fund assets growing to $221 million from $218 million at the beginning of the quarter.
During the quarter, I-45 committed $24 million in four new and four add-on credit investments, while receiving $19 million in proceeds from the exit and sales of credits during the quarter, which generated a weighted average IRR of 8.9% at the fund level.
As of the end of the quarter, the I-45 portfolio was 94% first lien with diversity among industries and an average hold size of 2.3% of the portfolio. The portfolio had a weighted average EBITDA of $74 million and weighted average leverage through the I-45 security of 3.6 times. In our markets, the environment remains robust and highly competitive.
While the business and economic environment is highly favorable for our portfolio companies, the quantum of liquidity in both the private equity and leverage finance markets continues to give rise to valuation and leverage levels that make it more difficult to find and consistently generate attractive risk-adjusted returns.
As most of you know, the upper middle market, or syndicated market, continues to see tight spreads as the market has given back much of the increase in LIBOR and reduced spreads.
In addition, in the syndicated upper middle market, leverage levels are high and in many cases the portion of underwritten EBITDA represented by pro forma adjustments are at elevated levels. This clearly creates an environment that makes it difficult to generate attractive risk-adjusted returns.
We believe being highly selective in our credits in which we invest, taking small position so that our portfolio is highly granular, diverse and relatively easy to sell out of, all while investing through an efficiently levered vehicle, like a senior loan fund, is the best strategy for generating attractive risk-adjusted returns in this market right now.
In the lower middle market, it is also very competitive and it has been for a while, so we don't believe the environment has changed all that much over the past several quarters.
Over the past year, LIBOR spreads on senior loans have generally tightened by approximately 100 basis points, but increases in leverage levels have been much less pronounced than we have seen in the upper middle market. Importantly, loan terms such as covenants and LIBOR floors have remained firmly intact.
We continue to focus on maximizing our investment pipeline, while maintaining the investment discipline we have consistently described to you, since the launch of our credit strategy three years ago.
We continue to model each and every investment we underwrite, for stress test purposes, assuming the great recession repeats itself during our hold period, and anticipating that a financial model demonstrate that our loan remains well within enterprise value with our interest being paid through such a cycle.
This methodology will, by definition, bias the portfolio towards first lien senior debt. While appropriately matching capital structures at our portfolio companies to the potential volatility specific to the portfolio of company's businesses and industries in which they operate.
We continue to be pleased with the flow of quality lower market deals being generated by our investment team. Our close rate has remained less than 3% over the last 12 months. So a robust pipeline of opportunities is key to maintaining our conservative underwriting approach in a competitive market.
I will now hand the call over to Michael to review the specifics of our financial performance for the quarter..
Thanks, Bowen. As seen on Slide 16, our investment portfolio produced $9.9 million in investment income this quarter with the weighted average yield on all investments of 10.5%. This represents an increase of $855,000 versus $9 million from the previous quarter, mostly attributable to net portfolio growth.
We incurred $3.4 million in operating expenses this quarter, excluding interest expense, which was flat from $3.4 million in the previous quarter. For the quarter, we earned pretax net investment income of $4.5 million or $0.28 per share compared to $0.27 per share during the prior quarter.
As a result, we paid out $0.28 per share in regular dividends for the quarter, an increase of $0.02 per share over the $0.26 per share paid out in the prior quarter. We continue to focus on growing our quarterly dividends in a sustainable manner demonstrated by our last 12 months’ dividend coverage of 103%.
As seen on Slide 17, during the quarter, our NAV increased by $9.8 million to $308.3 million or $19.08 per share. The increase in NAV is primarily due to an increase in net realized and unrealized gains during the current quarter generated primarily from, as Bowen mentioned, appreciation in our equity investments and TitanLiner and MRI.
We’ve produced total annualized return on equity of 20.1% during the quarter. During fiscal year 2018, we produced 13.7% total return on equity and increased NAV approximately $23.2 million. This compares to a total return on equity of 8.5% during fiscal year 2017.
As illustrated on Slide 18, our on balance sheet investment portfolio mix, excluding capital invested in I-45, was 73% debt and 27% equity at quarter end and 92% of our total portfolio produced income in the form of either interest or dividend.
The weighted average yield on our debt portfolio was 11.5% for the quarter, up from 11% the previous quarter. And as of the end of the quarter, there were no assets on non-accrual.
During the March quarter, the equity markets experienced significant volatility, which presented an excellent opportunity to repurchase shares at an attractive discount to our net asset value.
As Bowen mentioned, despite being limited by trading volume in the quantity of shares we can accumulate on any trading day, we were able to repurchase 36,000 shares at a blended price of $16.37 per share, representing approximately $600,000. We believe these purchases provide both immediate and long-term accretion that will benefit all shareholders.
The repurchases also further highlight the advantages of our internally managed structure, which incentivizes us to grow shareholder value while maintaining sufficient capital flexibility, rather than solely focusing on growing our assets under management.
After these purchases, we have approximately $9.4 million remaining on our $10 million Board approved share repurchase program. We will continue to assess opportunities in the market to purchase shares when we believe our stock is undervalued.
At quarter end, we had significant liquidity consisting of $140 million of available capacity on our ING led balance sheet credit facility, $22 million in additional capacity on the Deutsche Bank led I-45 credit facility, and $8 million in balance sheet cash.
In April, we increased the ING credit facility commitments to $200 million with the addition of the lender. In May, we further increased the ING credit facility commitments to $210 million with a commitment increase from a current lender.
As seen on Slide 19, we have significant unused debt capacity and no payment obligations until late 2021, which will enable us to significantly grow our portfolio. I will now hand the call back to Bowen for some final comments..
Thanks, Michael, and thank you everyone for joining us today. I'm extremely proud of what our team has accomplished so far. Capital Southwest has grown and the business and portfolio has developed consistent with the vision and strategy we communicated to our shareholders over three years ago.
We continue to work tirelessly to execute our investment strategy and to be good stewards of our shareholders’ capital. Everyone here at Capital Southwest is totally dedicated to our number one goal, the creation of long-term sustainable shareholder value. This concludes our prepared remarks.
Operator, we are ready to open the lines up for questions?.
Thank you [Operator Instructions]. And our first question comes from Mickey Schleien from Ladenburg. Your line is open..
Bowen, I wanted to ask you about dynamics in the lower middle market. I think the market appreciates that it's partially insulated from the volatility in the more liquid markets, and that it's harder to do -- harder to originates deals there, so you get better terms.
But on the other hand, can you give us some insight into how the LMM companies that you target performed during downturns in the economy, especially EBITDA declines and default rates?.
I would say to your question on how they performed, and if you think about across our portfolio, we have companies that EBITDA and the great recession went down maybe 30% and others that EBITDA were flat or even up during the great recession based on the nuances of their business models.
And so it's a fairly big range that what we try to do is we try to match the capital structure, which may or may not work for the borrower, which is why we lose a deal. But we try to match the capital structure with that potential volatility.
So as you would imagine, the lower middle market companies that have the higher potential volatility are going to have lower leverage in our portfolio..
And on the two LMM deals, Prism and ITA, how did you source those two deals? And are they small companies where you did all the financing or did you lead a club of some sort?.
So on Prism, we led a club with another lower middle market lender. We lead it. It's a small deal initially but it's going to grow as they do acquisitions. And so we brought on a co-lender to join us in that deal. And so when we source that just do networking with sponsors. And then on the ITA, we actually sourced that to founder owned business.
We sourced it through a small intermediary actually that I had done business with, or a couple of us have done business within our former firm. We’ve had relationship in the market with them and we were the -- we lead that. We’re the only financing party there..
And my last question, do you -- I haven't seen the proxy yet for the shareholder meeting.
Do you expect to potentially add a proposal there for higher leverage to accelerate the clock for that process?.
We haven’t gone that route. The Board decided -- as I said in my remarks. The Board decided to approve the leveraged change also though message prudent and approving a self-imposed limitation. And then takes next year, because as we said, we don’t need the leverage above our target for the next year.
And so we've got a lot of time to talk to our shareholders, talk to our lenders and watch the portfolio, watch the market and make that decision over that time period in the context of the feedback we've gained over that year.
And so rather than going in through the additional expense of terms of the proxy, preliminary things like preliminary proxy issuances and comments from the SEC, which generate legal expenses, which is a smaller BDC like us that matters, we decided to take this route..
Thank you [Operator Instructions]. And our next question comes from Christopher Testa from National Securities Port. Your line is open..
I appreciate all the thoughtfulness that you guys put into describing how you’re going to handle the leverage increase. I have just a couple of more questions about that.
You guys mentioned that you see the SLF as one of the better risk-adjusted returns in the market given where spreads are, but at the same time, you guys have, predominantly on the balance sheet more lower middle market loans. Going forward, as you guys are able to move towards 1:1 given that you now have a much higher cushion at 1.5 times.
Should we expect maybe more -- higher composition of upper middle market loans on the balance sheet, are you still seeing that as a better risk-adjusted return on balance sheet as well as the SLF?.
So let me correct part of what you said, Chris, and thanks for the question by the way. You said that we said that one of the more attractive returns in the market is in the upper middle market. That’s actually not correct.
What I meant to convey is that every market is very competitive; like I said spreads tight, leverage level high, lots of add backs. And so the way to play in that market is to take small pieces of a lot of loans within the universe of loans that we find attractive and basically good fundamental businesses.
Take small pieces so that you have a very granular portfolio, so if any one of them doesn't do well, it doesn't move the needle. So that's the granularity the key. Then efficiently levering it in a senior loan fund, which as you know, a very low leverage CLO entity, it’s not tend to one leverage its 2:1 leverage or less.
And so just take a little bite from a bunch of loans, and so that reflects -- that looks like a senior loan fund. So we think the senior loan fund -- we still we think that's a nice vehicle for us.
But as you can see, the assets really aren’t growing all that much, because we’re not driving growth in that fund, because we’re not really seeing the value to drive growth in the upper middle market in our portfolio; so if the environment stays like it is today and the levers were to increase, we would look at our portfolio, and say okay, we see more value in the lower middle market now, that’s assumption, that’s fact one; fact two then is what is the optimal leverage on a portfolio that is in fact largely lower middle market and of course, largely first lien.
And so we think that leverage could be above the 0.8, we don't think that's 2:1 leverage. Some BDCs are effectively getting 2:1 leverage to FDIC's. We do think the lower middle market first lien asset class, certainly a performing asset class, could handle more leverage than the 0.8:1.
But I wouldn’t assume that in our leverage calculation that we’re going to turbo-charge our positions in the upper middle market. Because if you think about the number of deals we see that we like and the size holds that we want to take in those deals in the upper middle market, they fit nicely in the senior loan fund.
So we’re putting new deals with senior loan funds, at the same time, we get recapped out of deals in the senior loan funds with senior loan funds hanging out at the 220 to 225 asset size, maybe it grows a little bit from there.
But I wouldn’t assume that because we’re adjusting leverage that we're going all the sudden put a whole lot more money to work in the upper middle market at least in the environment we're in right now..
And also, Chris, the I-45 credit facility has a lower cost of capital surplus 240 and slightly higher advance rates. So we’re able to get decent returns even with lower yields in the upper middle market….
But again small bites very granular it's how I would see play in this market..
And just you had mentioned media recovery continues to perform well and obviously, that's been a really great investment for you guys. I'm just curious, I mean as you look in your crystal ball.
What do you think the timeline on monetization of this is? Is the thinking behind that somewhat that you actually want to take on more leverage on the revolver before you actually monetize this, so you don’t have to deploy so much capital and risk creating a drag on earnings? Or is that just totally out of the question and you guys were simply looking to wait until things are going to get the best value for this?.
Well, first and foremost, we’re looking at the investment the Company strategy, the Company's growth and working with the management team that we put in place three years ago who’s doing an excellent job managing that business. But trying to think, okay, when is the right time to sell against the backdrop of a couple of things.
We’re in a very wide hot M&A market. We need not lose context to that. We are -- ultimately if it continues to grow and it continues to depreciate, it's just going to become a larger and larger asset on our books. And I don’t -- the strategy that we laid out three years ago was not to becoming MRI strategy.
So we want -- at some point, it gets large and it probably needs to be sold and we're in a nice market. So you put all those variables together, you can't really turn the dial up and down by days or weeks of course.
But if you think about general timing of all of those variables, I think it’s fair to say that this is an asset that will be sold in the next 12 months..
And Chris to your question, I think, also I would tell you with the dry powder we have. We anticipate putting that capital to work and levering up, over the next 12 to 15 months. So it actually might be around the same timing of when we lever up and when we see this exit occur..
And cov light obviously has been a problem in the upper middle market with over three quarters of the loans being cov light there. Just wondering how much of that gets down into the sub-40 million to 50 million EBITDA market.
I mean, I would assume it’s in the 8 million to 10 million EBITDA market where you have a lot of your lower middle market loans at that level. But if you could just give us a sense of how much you've seen covenants and deterioration in terms kind of dip down from the upper middle market that would be appreciated..
Given we’re in the upper middle market, which is large and you just described it and we’ve been talking about the competitiveness and the term deterioration and stuff in the upper middle market. In the lower middle market where we play actively, as you also said, it's certainly -- as we said, we certainly are getting robust terms in those deals.
In the middle zone of larger not quite upper middle market, larger not quite lower middle market world. We don’t do a lot of deals in that area but we do a handful year of -- handful or half of handful of club deals where we’re partnering with maybe two other lenders or so that they lead and that were taken $10 million-ish position in.
And on those deals, we’ve had covenants, and I think the covenants are a little bit -- certainly higher cushions than the lower middle market and terms are a little bit looser. But it hasn’t been near as much -- it’s not near as looses in the upper middle market. So it’s somewhere in between, Chris, I guess is the best way to say..
And last one from me just, what caused the increase in income from your affiliate investments this quarter?.
There’s actually a few factors there. We re-class two portfolio companies from non-accrual to affiliate -- non-control to affiliate, to the voting securities percentage being greater than 5%, that was that $35 million. We had two originations during the quarter that were in the affiliate category, and that was about $15 million.
And then we had one prepayment during the quarter that was a non-control category about $5 million..
So the current quarterly run rate we should for modeling purposes use that going forward as a base?.
That’s correct..
Yes, the affiliate hurdle, as you know, is a 5% ownership, so it’s pretty low. So as you move forward, you'll see a lot of our investments when we make a co-investment, often times we’re in the 5% to 10% ownership, which would be affiliate..
Thank you. And our next question comes from Troy Ward from Ares. Your line is open..
Actually a question on the current liability stack, so on Slide 19, you show the facility and the 2022 senior notes, baby bonds. Can you just talk about, if any of these liabilities have covenants tied to the 200% asset coverage? And I know you did some -- you had conversations with your lenders post quarter end, some changes, some increases.
Can you just talk about how the lenders are thinking about lower asset coverage or higher debt to equity, going forward?.
So the revolver, as other BDCs have, has a 1:1 covenant. The notes do not they’re just require you to stay complaint within BDC. But obviously the governor being the revolver, we had that conversation. I think for our lender, particularly, I think, there are still putting together whitepapers and considering how they’re going to handle it.
Generally, what they discuss is they’re looking at companies that had performed well over the last six, 12, 18 months, to see what levels they’re going to allow in terms of overall leverage. I think body language has been positive. But for us, we have 12 months before we’re going to be up against to 1:1# leverage.
So we have some time to work with them on an amendment and we’re going to obviously see how they interact with other BDCs and where they reset those levels. We’re hopeful that it’s going to be consistent with our policy that we’ve set, if not better..
Thank you. And our next question comes from Chris McCampbell from Hilltop Securities. Your line is open..
In regards to dividend policy, you rated change and dividend growth is slowing.
Should our expectations be that we've gotten to a point where increases are going to be less frequent?.
No, I don’t think that’s the case. I think what you saw this quarter was that we did raise a significant amount of capital, the baby bonds that were raised at the very end of December. And therefore -- so there’s a bit of an overhang in this quarter. We also have unused fees on our revolver.
So therefore, when you use those proceeds to pay it down, we’re going to incur additional cost there, and also say we had some late stage originations. So I think there’ll be a bit of a J-curve as we move forward, and we still expect to see dividend growth over the next really six to 12 months..
Thank you. And I am showing no further questions at this time. I would now like to turn the conference back over to Bowen Diehl for any closing remarks..
Thanks operator. And thanks, everybody, for joining us today. We really appreciate it and we look forward to keeping you appraised of our progress on future calls. Have a great week..
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day..