Thank you for joining today's Capital Southwest Fourth Fiscal Quarter 2019 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 thank you to everyone for joining us for our fourth quarter fiscal year 2019 earnings call. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com.

We are pleased to be with you this morning to announce our quarterly and annual results for our fiscal year ended March 31, 2019.

During the year, we continued to advance the credit strategy we laid out for our shareholders over four years ago of prudently building a well performing credit portfolio through conservative late-cycle underwriting principals.

We are pleased to report that our assets, income and shareholder dividends grew substantially throughout the year, producing a 37% total return to shareholders, driven by a 24% increase in stock price and $2.27 per share in dividends paid out to shareholders during the fiscal year.

We continue to be committed and excited about our core investment strategy of building a predominantly lower middle market portfolio consisting largely of Senior Secured 1st Lien Debt with equity co-investments across the loan portfolio, where we believe significant equity upside opportunity exists.

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

Now to summarize some highlights of the fiscal year as laid out on Slides 6 and 7. We grew our portfolio over 33% to $524 million as of March 31, 2019 from $393 million as of March 31, 2018.

This growth was driven primarily by originating $218 million in total commitments in 18 portfolio companies, including 20 million invested in equity alongside nine of our loans. During the fiscal year, we also exited seven companies for 64 million in proceeds generating a weighted average IRR of 21.8%.

Cumulatively, since the launch of our credit strategy four years ago, we have had 26 exits representing approximately 187 million in proceeds in generating a weighted average IRR on the exits of 18.2%.

This net portfolio growth drove a 48% increase in total investment revenue for the year to 51.9 million, up from 35.1 million in the prior fiscal year. While generally fixed nature of our internally managed BDC cost structure improved operating leverage to 2.8% by the end of the year.

These factors both contributed to the substantial year-over-year growth in dividends paid to our shareholders. Specific to the portfolio exits, we realized gains on two of the three remaining legacy portfolio equity positions, TitanLiner and Deepwater Corrosion Services.

Both were fantastic results for Capital Southwest as we were successful in managing the investments through a very tough period in the oilfield services industry in 2015 and 2016 and we’re able to sell the companies generating IRRs on a 49% and 26% in TitanLiner and Deepwater, respectively, measured since our spinoff and relaunch of Capital Southwest as the middle market lender back in 2015.

This now leaves Media Recovery, which as a reminder does business under the banner Spot C as the last remaining legacy equity investment in our portfolio. As we have mentioned on prior calls, the company is currently undergoing a sale process.

The process is going very well as there continues to be robust interest in the asset from a large number of potential buyers. The management team that we recruited back in 2015 continues to do a superb job managing and growing the business. Our expectations continue to be that this company will excel during the 2019 calendar year.

During the year, we also made significant progress towards diversifying our capital sources, while reducing the cost of our debt capital.

We increased commitments on our revolving line of credit to $270 million as of the end of the year from $180 million at the beginning of the year, while also meaningfully decreasing the cost of the credit facility and amending the terms to allow for the additional leverage now allowable under the Small Business Credit Availability Act.

During the year, we also issued 19.5 million in additional baby bonds through our debt ATM program. We raised 13.2 million through our first equity offering since our IPO in 1961 and we raised an additional 5.5 million in equity through the launch of our equity ATM program.

Subsequent to year-end, we further upsized our revolving line of credit by adding an additional commitment for 25 million from a new lender resulting in the current total of 295 million in commitments from 10 lenders in our facility.

Specific to the March 31, 2019 quarter as laid out on Slide 8, we generated $0.42 per share of pre-tax net investment income and paid a regular dividend of $0.38 per share.

Additionally, we distributed $0.10 per share through our supplemental dividend program funded by our sizable undistributed taxable income balance or UTI, which was generated by excess income and capital gains accumulated from our investment strategy today.

As of March 31, 2019, we had approximately $20 million or $1.14 per share in UTI, providing visibility to continuing the quarterly supplemental dividend program well into the future. For the quarter, the $0.48 per share paid out in total dividends generated a total annualized dividend yield of 9.1% based upon our March 31, 2019 share price.

The portfolio as a whole continued to perform well this quarter generating 3.6 million in net appreciation, which was the primary driver of our NAV per share growth to $18.62 per share – per $18.43 per share in the prior quarter.

Our senior loan fund, I-45 also continued its solid performance producing a 15% annualized yield on our capital in the fund for the quarter.

During the quarter, we grew our portfolio on a net basis to 524 million from 497 million as of December 31, 2018, originating 29 million in total commitments listed on Slide 9 consisting of one new portfolio company, one refinancing, and one add-on transaction.

The new portfolio investment was in the lower middle market and included an equity co-investment of our debt, while the refinancing and add-on transactions were in the upper middle market.

Our originations this quarter consisted of 28 million in Senior Secured 1st Lien Debt with a weighted average yield of – weighted average yield to maturity of 12.5%, and 1 million in equity.

Subsequent to the quarter-end as shown on Slide 10, we have completed three new transactions totaling 23 million in Senior Secured 1st Lien Debt and exited one portfolio company for the total proceeds of 20 million.

Our pipeline remains strong and we can currently have several lower middle market deals signed up with expected closings in late June and July. Again, this quarter, the majority of capital deployed by Capital Southwest was directly originated and led by our investment teams as they continue to demonstrate our traction in the market.

Turning to Slide 11, we illustrate our continued track record of growing shareholder dividends as we continue to migrate the balance sheet towards target leverage levels through thoughtfully building a portfolio of well performing income generating assets.

The regular dividend of $0.39 per share for the current quarter ending June 13 announced in last night's press release marks our fourteenth consecutive quarterly regular dividend increase.

Slide 12 illustrates our history of value creation from September 2015 to the date of our spin-off of CSW Industrials making Capital Southwest purely of middle market lender.

Total value, which we show here as net asset value plus cumulative dividends paid has increased $5.03 per share to a value of $22.71 per share as of March 31, 2019 from $17.68 per share as of the spin-off.

Our increasing regular dividend coupled with the supplemental dividend program and a well-performing investment portfolio should continue to create attractive long-term returns for our shareholders. Turning to Slide 13, as a reminder, our investment strategy has remained consistent since its launch in January 2015.

We continue to focus on a blend of both lower middle market and upper middle market assets, providing us strategic flexibility as we have built the robust capability to seek attractive risk-adjusted returns in both markets. In our core lower middle market, we directly originate opportunities consisting of debt investments and equity co-investments.

Building out a highly performing and granular portfolio of equity co-investments is important to driving growth in NAV per share and aids in mitigating future credit losses.

At the same time, 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 exist. In the upper middle market, over the past year or so we have been in an environment where it has been difficult to find value in syndicated loans.

For the syndicated deals we have found acceptable from a risk return perspective, we have often chosen to pick small positions of approximately $5 million, which fit well into the I-45 portfolio.

To the extent that syndicated spread widened, terms improve and we identify our especially attractive opportunities to invest in the upper middle market syndicated loans. We have the ability through our loan relationships with syndicate banks to capitalize on such opportunities either through additional exposure on our balance sheet or through I-45.

That said, we do occasionally have the opportunity to invest in larger club deals in the upper middle market, with lenders that we respect and see as like-minded to Capital Southwest. Recent examples listed on our origination slides are RJO'Brien and iEnergizer led by WhiteHorse Finance and Main Street Capital, respectively.

In the lower middle market, our robust origination platform continues to generate solid deal flow allowing us to close on some highly attractive opportunities from a risk return perspective.

We believe that maximizing the top of our origination funnel is critical to generating strong credit investment performance over time as it ensures that we consider a wider array of deals allowing us to employ our conservative underwriting standards in a competitive market, and thoughtfully build a portfolio that will perform through the economic cycle.

Our on-balance sheet credit portfolio, excluding I-45 as shown on Slide 14, grew to 368 million as of March 31, 2019 from 351 million as of December 31, 2018. As the portfolio has grown, the percentage of the credit portfolio represented by the lower middle market has increased by design to now 78%.

While we have increased the percentage of the portfolio represented by the lower middle market, we have also continued to heavily emphasize Senior Secured 1st Lien Debt in our investment strategy. As of the end of the quarter, we had 86% of our on-balance sheet credit portfolio in 1st Lien Senior Secured Debt.

On Slide 15, we break-out our on-balance sheet portfolio, again excluding I-45 between the lower middle market and the upper middle market. As of the end of the quarter, the on-balance sheet portfolio was weighted approximately 79% to the lower middle market, and 21% of the upper middle market on a cost basis.

We had 26 lower middle market investments with an average hold size of 12.5 million, the weighted average EBITDA of 9.2 million, weighted average yield of 12.2%, and a leverage ratio measured as 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 in 73% of our portfolio companies.

Our other middle market portfolio consisted of 10 companies with an average hold size of 8.5 million, a weighted average EBITDA of 66.5 million, a weighted average yield of 9.7%, and a leverage ratio through our security of 4.8 times, which was up from 3.8 times in the prior quarter, driven almost solely by the underperformance in the American Addiction, which increased its debt-to-EBITDA leverage ratio significantly quarter-over-quarter.

Excluding this company’s underperformance, the leverage ratio through our security for the upper middle market portfolio would have been flat to last quarter at 3.8 times.

Despite its underperformance, we continue to feel reasonably confident about our 1st Lien position in the company, due to the value of its national substance abuse treatment franchise, managements operational efficiency initiatives, the tremendous demand for drug addiction treatment in the U.S., and the company’s large real estate portfolio associated with its street facilities.

Within our internal investment rating process, the changes for the quarter included an upgrade from 2 to 1 for the 1st Lien secured loan to Environmental Pest Service, due to the company's strong performance and a downgrade from a 2 to 3 from a 1st Lien Senior Secured loan to American Addiction due to its underperformance.

As a reminder, all investments upon origination are initially signed in an investment rating of 2 on a 4-point scale with 1 being the highest rating, and 4 being the lowest rating. Overall, we are pleased with the performance of the investment portfolio.

As of the end of the quarter, of the 36 loans in the portfolio, we had 4 with the highest rating of 1, representing 17% of invested capital. We had 29 loans rated at 2, representing 77% of the invested capital. And we had 3 loans rated at 3, representing 6% of the invested capital.

As of the end of the quarter, we had no loans rated at 4 in the portfolio. As illustrated on Slide 16, we have established a portfolio that is well diversified across industries, which we believe is well-positioned for late in the economic cycle.

Further, our portfolio remains heavily weighted towards senior secured 1st Lien investments providing strong capital preservation security for our shareholders capital. Shown on Slide 17, as of the end of the quarter, the I-45 portfolio was 94% 1st Lien with diversity among industries at an average hold size of 2.1% of the portfolio.

The I-45 portfolio had a weighted average EBITDA of approximately 68 million, and a weighted average leverage through the I-45 security of 3.9 times, which was up from 3.7 times at the end of the prior quarter. Here as well, the increase in the portfolio weighted average leverage was influenced by the underperformance of American Addiction.

Without this underperformance, weighted average leverage of the portfolio would have been 3.6 times, which was down from 3.7 times at the end of the prior quarter. Overall, we have been pleased with the solid performance of I-45 over the past 3.5 years.

We and our partner in I-45, Main Street Capital, have invested approximately 500 million through the fund and have harvested 50 exits generating 196 million in proceeds at a weighted average IRR our on the exit for the 11.4%. 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 18, our investment portfolio produced $14.3 million of investment income this quarter with a weighted average yield on all investments of 11%. This represents an increase of $437,000 from the previous quarter, mostly attributable to net portfolio growth.

The weighted average yield on our credit portfolio was 11.6% for the quarter, flat from the previous quarter. As of the end of the quarter, there was one asset on non-accrual with a fair value of $8.3 million, representing 1.6% of our total investment portfolio.

Excluding interest expense, we incurred $3.8 million in operating expenses this quarter, which was relatively flat from the previous quarter.

Looking ahead to the June 30, 2019 quarter, we do expect to incur certain seasonal operating expenses such as payroll taxes associated with our annual bonus payment and annual shareholder meeting expenses that are incurred in the first quarter of each fiscal year.

For the quarter, we earned pre-tax net investment income of $7.2 million or $0.42 per share compared to $0.40 per share during the prior quarter. We paid out $0.38 per share in regular dividends for the quarter, an increase of $0.02 per share over the $0.36 regular dividend or share paid out in the prior quarter.

We continue to focus on growing our regular dividends in a sustainable manner demonstrated by our cumulative regular dividend coverage of 105% over the last 12 months, and 104% since the launch of our credit strategy four years ago.

As Bowen mentioned earlier, we also paid out a supplemental dividend of $0.10 per share this quarter as part of our supplemental dividend program. This program allows our shareholders to meaningfully participate in the successful exits of our investment portfolio.

The program will continue to be funded from our UTI earned from both realized gains on debt and equity, as well as undistributed net investment income earned each quarter in excess of our regular dividends. On Slide 19, we illustrate our operating leverage, which continues to improve and look toward our target of sub 2.5%.

As of the end of the quarter, operating leverage was 2.8% down from 2.9% at the end of the prior quarter, and 4.9% as of the end of fiscal year 2016. We continue to actively manage operating costs in lockstep with portfolio growth and expect to achieve our target operating leverage over the next several quarters.

With all senior professionals and corporate infrastructure largely in place, portfolio growth from here should continue to improve our operating leverage, due to our internally managed structure. As Bowen mentioned earlier, our NAV per share during the quarter increased by $0.19 per share to $18.62 per share as seen on Slide 20.

Our total annualized return on equity for the quarter was 13.2%. If you focus on the last three fiscal years, on average, our total annual return on equity was 10.9%, demonstrating our growing track record of generating attractive risk-adjusted returns. On Slide 21, we lay out our multiple pockets of capital.

As of the end of the quarter, we had approximately $141 million in cash and undrawn commitments available between our balance sheet and I-45 with the earliest debt maturity at December 2022.

I should also note that subsequent to quarter-end, we added an additional $25 million commitment from a new lender to our credit facility, increasing total commitments to $295 million and our total cash and undrawn commitments between our balance sheet and I-45 to over $160 million.

We feel good about our liquidity and capital structure flexibility and believe that it will allow us to thoughtfully grow our investment portfolio. Our balance sheet leverage ended the quarter at a debt-to-equity ratio of [0.67 to 1].

As Bowen mentioned earlier, during the quarter, Capital Southwest launched its initial equity ATM program and raised $5.5 million.

We believe our equity ATM program is a prudent and cost-effective way to issue equity over time at tight spreads to the latest trade, while selling equity on a just-in-time basis so it can be thoughtfully invested in income generating assets. 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 has grown and the business and portfolio developed consistent with the vision and strategy we communicated to our shareholders four years ago. Our team has done an excellent job generating significant return to our shareholders.

Everyone here at Capital Southwest is totally dedicated to being good stewards of our shareholders capital by continuing to deliver strong performance in creating long-term sustainable value for our shareholders. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A..

Thank you, sir. [Operator Instructions] And our first question will come from the line of Tim Hayes with B. Riley FBR. Your line is now open..

Hi, good morning guys. Thanks for taking my questions. My first few just kind of revolve around meeting the K in front of me.

So, I apologize, but how much of the NAV increase this quarter was due to a reversal in the mark taken on the JV last quarter?.

There wasn’t any reversal from last quarter..

No reversal. Okay, got it. So, I guess, that – and we saw control investments up a little bit the fair value mark there.

So, would that be MRI potentially, was there a mark on MRI? And if there was – was that reflective of the operating performance of the company or a rebound in public comps following the sell off, or does it reflect any potential sale becoming more of a possibility or more forthcoming?.

Well, should I say, first of all on I-45 back on that, there was a rebound in the portfolio, but the portfolio was negatively affected by American Addiction and premier global as well. So, if you were to take those two out, there was a rebound across the portfolio to basically end up flat quarter-over-quarter.

So, it’s a little bit isolated to a couple of names. With respect to MRI, it’s a kind of a combination of all those things and the company has perform – its performance continues to improve. Management team has done a great job and obviously had some multiple increase quarter-over-quarter as well. So, it’s kind of all of those things together..

Okay.

And then would you be able to just – should we look for the K to see the mark or would you able to just mention how the mark was?.

We had about 3.5 million increase quarter-over-quarter [in mark]..

Okay. Understood.

And then the investment on nonaccrual, I assume it's still AG Kings?.

That’s correct..

And can you just give us an update there? It seemed like it was marked down a little bit this quarter, what exactly does that reflect?.

Well, I mean it just kind of flows through our evaluation process. I mean, generally the company is kind of performing generally the same. The management team is doing a great job, managing a tough business, and the lender group is supportive of the business and kind of working through the situation.

So, that’s really all I can say about the company itself, but we bought the valuation down slightly this quarter, which you will see in the K..

Okay. And then one more from me, and then I'll hop back in the queue. Leverage modestly increased, but still well below your target range, you're tapping your new ATM program a bit this quarter.

So, how do you think about using the ATM as a source of capital versus all the capacity you have in your credit facility or other tools you have to fund growth with leverage still kind of where it is?.

Yes. So, it’s good question. So, we're certainly committed to getting to target leverage. The first question is, do you have an ATM program or not? It seems like a no-brainer for us to have one set up so we did that. We are kind of gauging how much we raised in the ATM program vis-a-vis pipeline activity.

Certainly, we have a lot of liquidity on the balance sheet, which is a good thing, we want to maintain our capitalization, but the amount to be based on the ATM program, I mean really affects the slope of [$0.01] to which we approach target leverage.

And so, we’re willing to flatten that slope slightly to maintain our equity capitalization if we can do it in a just-in-time basis and an accretive manner to our shareholders and certainly it is cost effective to do that through the ATM program, but I wouldn't interpret as that’s not wanting to get to target leverage.

We certainly intend to do that by growing the portfolio, but we want to be, and we use the word prudent, we want to be prudent and diligent of raising kind of on a just-in-time basis and certain amount of equity, again, allowing us to get to target leverage in a reasonable timeframe, but being diligent about being in on a just-in-time basis some level of equity into the capital structure..

And it also dovetails with us having increased the size of the credit facility and we believe they are going to bank capital with a very reliable source of capital. I mean, having a granular syndicate of 10 lenders, we feel pretty secure in that.

So, bringing our total commitments up to 300 million allows us to be able to be fully levered in our 1 to 1 and 1.2 target for [indiscernible]..

Just to re-emphasize what you said, that’s important. So, where we brought the credit facility now if you just do the math, if we were [in there] let’s say, you utilize 90% of the credit facility, you are basically within our target leverage ZIP Code of 1-to-1 to 1.2-to-1.

So, having that capital deals, okay, we’ve raised the capital irrespective of what happens in the market, the capital markets to approach target leverage is important to us strategically..

And then it also allows us going forward since we have the debt capacity to be flexible in a low rate environment, if there are opportunities exist to raise other forms of capital that are cheaper than our low-cost credit facility..

Got it. Makes sense. Appreciate all the comments. I will hop back in the queue..

Thank you. And our next question will come from the line of Mickey Schleien with Ladenburg Thalmann. Your line is now open..

Good morning, everyone. I just wanted to follow of on that capital allocation question.

Bowen, did you say you were interested in issuing common shares to improve the float, is that – did I hear you correctly?.

No. I didn’t say that. We're not raising equity to improve the float. I mean, obviously over time as you raise equity it has had an effect, but that’s not why we’re doing it. What I was trying to say was, first of all to us to make – it is kind of a no-brainer to set up and ATM program.

It is a very cost-effective mechanism to raise some amount of equity. The next question is, how much equity did you raise on that program. And I think Tim was asking about, well how do you think about that in – vis-a-vis your large credit facility of availability.

And so the point I was trying to make was, the amount we raised on the ATM program in a quarter does is a function of kind of our view to pipeline et cetera, but raising small amounts of equities in the ATM program does tend to flatten the slope of ascent, if you will of us approaching and getting to target leverage.

We’re willing to flatten that ever so slightly to be able to kind of diligently raise in an accretive cost-effective manner, a small amount of equity as we go along, but it doesn't change our view. Yes, we want to get the BDC to target leverage bringing our cost to capital down, which obviously of effective increasing earnings..

Mickey, because we’re really trying to avoid, hitting our target leverage overnight and having to rely on the equity markets to be open to raise a large secondary offering and diluting our shareholders through NII, while we redeploy that capital. So, doing as exactly as Bowen just described, kind of a slower path and allows us more flexibility..

I understand Michael.

So, that implies the pipeline must be pretty healthy, correct?.

Yes, the pipeline – the deal close started out the calendar year relatively slow. We saw a lot of deals coming in, but just kind of, I think of slow versus robust is really – what percentage of the deals that we really like are pursuing actively or have signed up. That’s improved significantly.

As I said in my remarks, we have several deals that are signed up and kind of working through the diligence process that we would expect to close in kind of late June and July timeframe. So, we think the pipeline, yes, I feel pretty good about the pipeline right now..

Very good..

And also the lumpiness Mickey as well, because you saw we had 29 million of originations that were late stage in the 331 quarter and we announced 22 million that we’ve already closed in the early part of June, and then Bowen’s also indicating we still have some deals that are looking to close in June and July. So, obviously kind of lumpy..

Understand. That’s helpful. Couple more questions if I can. Based on the last Q, I’ve seen that most of the flow is and your floating rate investments are around 1%, but you do have a few that are at 2, I think there is even some above 2.

I would like to understand how receptive you view the marketplace to be in terms of accepting higher LIBOR floors, particularly given the current shape of the forward curve?.

Yes, so, I mean there is a period of time here where everybody was extremely bullish or the view of interest rates going up significantly and so we've asked for 2% LIBOR floors, which really frankly has been relatively straightforward and easy to get.

We haven’t seen a lot of pushbacks yet on those level of floors, but again kind of consistent with our late cycle mindset, you know if rates come down in a recession, we think that’s a cash flow maintenance type term to have in the credit facility. And so, so far, we haven't seen a lot of pushback on that.

Now that may change with rates staying low, but that’s what we’re coming down, but that has not been the case as of today..

I understand. That’s helpful. And just one housekeeping question.

When do you expect to file the 10-K?.

That will go out later this afternoon..

Alright. That’s it from me this morning. Thank you..

Thanks Mickey..

Thank you. [Operator Instructions] And our next question will come from the line of Christopher Testa with National Securities. Your line is now open..

Hi. Good morning guys. Thank you for taking my questions.

Just curious, I know you guys said, MRI is still on track to be sold for calendar 2019, just wondering, given obviously the uncertainty and some volatility in equity markets whether you’ve seen any change in the number of enquiries that have come in as of the recent quarter?.

No. We really haven’t. I mean it’s a sale process. It’s an option type situation. We have interested – we have a large number of interested bidders. We're kind of working through the process and so we have not seen or heard any real effective in that process from the equity market volatility..

Got it. Okay.

And you had mentioned Bowen, I know, American Addiction what was written down and Premier, I didn’t get the name, what was the second one?.

Premium Global..

Okay..

We discontinued our policy of keeping things marked at the quarter levels. Other BDCs in that have much higher mark, some of them then we do, but we just follow the quote..

Got it.

And those are both lower middle market companies?.

No. They are both upper middle markets..

Okay. Got it..

They are both syndicated loans..

Got it.

So, have you observed what those to the extent you are able to disclose any meaningful declines in EBITDA there or is this more technical in nature?.

No. American Addiction to EBITDA came down. So, Google changes to algorithm and they are a public company.

So, I'm just reiterating what you can go to their website and what you could hear them say is terrible market, but Google changed their algorithm, which affected their senses flow, patient flow or missions I should say in the fourth calendar quarter of last year.

So, that brought on EBITDA pretty substantially kind of fourth quarter and into the first calendar quarter of this year. So, they are rebuilding from there. They have cut a bunch of cost, which we think is smart and they are rebuilding the admissions across their national franchise and so LTM EBITDA has come down, so leverage has gone up.

They have got a very large real estate portfolio that I believe the market use and the management team says is worth in excess of the 1st Lien Debt, which is why that debt I think remains in the low-to-mid 90s kind of quoted level..

Got it. Now that’s helpful Bowen. And with the upper middle market, I mean, obviously, cov-lite is cov-lite in the syndicated market, but we’ve seen things creep down into kind of that 68 million even towards 40 million EBITDA with more poor docs and collateral dilution and things of that nature.

I'm just wondering spreads aside and pricing aside, is it getting more and more difficult just to source things that you are comfortable putting on the books in the upper middle market?.

Yes. I’ve said in my last few quarters that’s what I’ve been alluding to. So, in the upper middle market, and I would say the syndicated markets, so they are differentiating that from like the large club at the middle market, you know, the syndicated market absolutely, and so we’ve done very little in this syndicated upper middle market.

And so – and I-45 has actually done in this last quarter and originations on I-45 is very light. The prepayments were light too.

So, the assets stayed fairly consistent, but – so we have – there is lot of cov-lite, lot of high add back deals, and when I say it’s hard to find value, from a credit perspective value obviously is spread and leverage and add backs and all those kinds of things and so it’s hard to find value.

In the large market club deals that we’ve invested in this last quarter absolutely have covenants, and robust documents there, really almost as good as what we see in the lower middle market..

Got it.

And I guess to obviously compensate for those risks, obviously there is a significant amount of volatility, although it was very short lived and, you know the [12/31 quarter], I mean is that the sort of volatility you need to be sustained to see syndicated loans be attractive again or have the terms basically gotten so bad that you really need to be compensated and the average bid has to go basically maybe to under 88 or 85 something like that? I'm just curious when you think there is a good risk-adjusted return in that sort of market?.

So, there's a couple of things. First of all, I mean the volatility in the fourth quarter was a quote volatility. It really wasn’t a paper for sale at those lower level, price level higher yield spread levels, and so you really need a sustained, you mentioned the word sustained, that’s correct. You need a sustained period of widened spread.

So that you actually see paper for sale or even better new deals coming out at wider spreads entitled documents.

So, you need a sustained level, you either are going to have sustained level of asset stress where you actually have funds having to shed assets, which we did not see in the first quarter or you are going to see, you need to see new deals coming out meaning private equity firms. Okay, I'm buying the company. I’m buying the company in June 2019.

I’m not buying it in March of 2020. So, I got to close the deal now, and so they’re willing to take a higher, maybe more tighter documents in wider spreads to get to it. So, that would be – so you need a period of sustained weakness if you will in the upper middle market to start seeing those opportunities..

Got it. Okay now that’s appreciated. And Michael, you had mentioned the seasonally higher expenses in the first fiscal quarter from bonus payments and shareholder meetings.

Should last year's numbers serve as good proxy for that, is that a good run rate for us to you just for modelling purposes?.

Generally. I think there might be slightly higher just because we have some amendments to the bylaws that work through the proxy. So, we do have a proxy solicitation agent and to cost – I mean, it's slightly higher..

Got it. And last one from me, and I’ll hop back in the queue.

We’ve seen a continued escalation in the trade war, seemingly now and not just with China, but with other trading partners, just wondering I know not of the middle market is just based in the U.S., but obviously there could be a great variance in input cost, just wondering how much you are hearing this from your portfolio company management teams if at all if they see business as a threat or potential threat to any business?.

Yes, it’s definitely something that the management teams in our portfolio that have inputs there [indiscernible] and shipping in the country are paying attention to. We’ve looked at our portfolio and the general comment I would make is, you know the companies in the portfolio that it could is or could affect the cost structure.

They’ve really all been situations where the price increase that they would need to pass on to the customer is small enough and they are in markets where we think that they could pass it on. So, as you hear that you hear that obviously in the Reuters account in news cycle of consumer prices and producer prices going up as a result of the tariffs.

With respect to our portfolio, we feel pretty good that our companies that are effective can pass us on to their customers..

Got it. Okay. Those are all my questions. Appreciate your time today..

Thanks Chris..

Thanks Chris..

Thank you. And that concludes today's question-and-answer session for today. So now, it is my pleasure to hand the conference back over to Mr. Bowen Diehl, Chief Executive Officer for any closing comments or remarks..

Thank you, operator, and thanks everybody for joining us. We appreciate your time and we look forward to keeping you apprised of our progress going forward. Have a great rest of the week..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we will all disconnect. Everybody, have a wonderful day..