Thank you for joining today's Capital Southwest Second Quarter Fiscal Year 2024 Earnings Call. Participating on today's call 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 the 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 second quarter fiscal 2024 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 in the Investor Relations section of our website at www.capitalsouthwest.com. You will also find our quarterly earnings press release issued last evening on our website. .

We'll begin on Slide 6 of the earnings presentation, where we have summarized some of the key performance highlights for the quarter. .

During the quarter, we generated pretax net investment income of $0.67 per share, which represented 24% growth over the $0.54 per share generated a year ago in the September quarter. With $0.67 per share, more than covered both our regular dividend and our supplemental dividend paid during the quarter, up $0.56 and $0.06 per share, respectively.

Portfolio earnings continue to be strong. And as of the end of the quarter, we estimate that our undistributed taxable income was $0.42 per share. .

We're also pleased to announce today that our Board of Directors has declared a $0.01 per share increase in our regular dividend to $0.57 per share for the quarter ending December 31, 2023.

This represents an increase of 1.8% compared to the $0.56 per share regular dividend paid during the September quarter and 9.6% over the 52% per share paid a year ago in the December quarter.

These increases in our regular dividends are a result of the increased fundamental earnings power of our portfolio given its growth and performance as well as further improvements in our operating leverage. .

In addition, due to the excess earnings being generated by our floating rate debt investment portfolio in this high interest rate environment, our Board has again declared a supplemental dividend of $0.06 per share from December '23 quarter, bringing total dividends declared for the December '23 quarter to $0.63 per share, which in total represent 11% growth over total dividends paid out a year ago quarter.

While future dividend declarations are at the discretion of our Board of Directors, it is our intent and expectation that Capital Southwest will continue to distribute quarterly supplemental dividends for the foreseeable future. .

While base rates are above historical averages, and we have a meaningful UTI, which is generated by earnings in excess of our dividend and realized gains from our equity investment portfolio. .

During the quarter, deal quality and activity in the lower middle market continued at a healthy pace, and we continue to be able to find attractive investment opportunities.

Deal flow continues to be weighted more towards acquisitions rather than refinancing and the environment continues to be a favorable one for nonbank first lien lenders like Capital Southwest. .

Private equity firms and business owners continue to transact while nonbank lenders continue to provide more certainty to closing than traditional bank financing structures. Loan pricing spreads remained attractive, but moderated somewhat.

We're attracting 25 to 50 basis points versus the most recent couple of quarters as competition in the lower middle market among nonbank lenders migrated slightly towards more normal levels. That said, we are still seeing very attractive loan pricing spreads on new portfolio loans that are 25 to 50 basis points higher than 12 to 18 months ago.

Leverage levels on the new portfolio company loans remain generally lower by half to a full turn of EBITDA. .

We also continue to see loan-to-value levels on new loans calculated as our first lien loan divided by the enterprise value being paid for an acquisition, down meaningfully from 12 to 18 months ago as private equity firms remain willing to pay relatively full multiples for quality companies. .

Portfolio growth during the quarter was driven by $110 million in new commitments, consisting of $81.7 million in commitments to 5 new portfolio companies and $28.3 million in commitments to 6 existing portfolio companies. .

On the capitalization front, we are pleased to announce that during the quarter, we successfully amended, extended and upsized our corporate revolving credit facility while also raising $22.8 million in gross equity proceeds at a weighted average price of $20.77 per share or 127% of the prevailing NAV per share.

We have remained diligent to ensuring we have strong balance sheet liquidity, while also funding a meaningful portion of our investment activity with accretive equity issuances. As we believe it is important to maintain a conservative mindset to both balance sheet liquidity and BDC leverage. .

We continue to manage our BDC with a full economic cycle mentality.

This starts with our underwriting of new opportunities, but it also applies to how we manage the BDC's capitalization, managing leverage to the lower end of our target range positions us to invest throughout a potential recession when risk-adjusted returns can be particularly attractive.

It also allows us to support our portfolio of companies, while also opportunistically repurchasing our stock if it were to trade meaningfully below NAV. .

Finally, subsequent to quarter end, we received shareholder approval to increase authorized shares of our common stock to 75 million shares, up from 40 million shares.

These new shares will allow us to continue our track record of growing our asset base while maintaining conservative balance sheet leverage by raising accretive equity primarily through our ATM program. .

On Slide 7 and 8, we illustrate our continued track record of producing strong dividend growth, consistent dividend coverage and solid value creation since the launch of our credit strategy back in January of 2015.

Since that time, we have increased our regular dividend paid to shareholders 28x and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pretax NII. .

Additionally, over the same time period, we have paid or declared 22 special or supplemental dividends totaling $3.83 per share including the $0.06 per share the Board has declared for the December 2023 quarter, all generated for excess earnings and realized gains from our investment portfolio. .

We believe our track record of thoughtfully growing our dividend, the solid performance of our portfolio as well as our company's sustained access to multiple capital sources has demonstrated the strength of our investment in capitalization management strategies as well as the absolute alignment of all our decisions with the interest of our shareholders.

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Turning to Slide 9, we lay out the core tenets of our investment strategy. Our core strategy is lending and investing in the lower middle market. The vast majority of which is in first lien senior secured loans, the company's backed by product equity firms.

In fact, approximately 91% of our credit portfolio is backed by private equity firms which provide important guidance and leadership to the portfolio companies as well as the potential for new junior capital support if needed. .

We have been pleased with the leadership and support that our private equity firm partners have provided our portfolio companies both in the few instances where capital has been required to maintain the operating and growth strategies of the portfolio companies and in realizing operational efficiencies in an environment where business input costs have been rising.

In the lower middle market, we often have the opportunity to invest on a minority basis in the equity pursuit with the private equity firm, when we believe the equity thesis is compelling. .

As of the end of the quarter, our equity co-investment portfolio consists of 59 investments with a total fair value of $121.1 million, which was marked at 147% of cost representing $38.9 million in embedded unrealized appreciation or $0.97 per share. .

Our equity portfolio, which represented approximately 9% of our total portfolio fair values at the end of the quarter, continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses which will come in the form of NAV per share growth and supplemental dividends over time. .

Our lower middle market strategy is complemented by club participation in first lien loans to larger companies led by like-minded lenders with whom we have relationships and have gained confidence in their post-closing loan management from working together across multiple deals.

Virtually all of these club deals are first lien senior secured and backed by private equity firms. .

As illustrated on Slide 10, our on-balance sheet credit portfolio as of the end of the quarter grew 6% quarter-over-quarter to $1.2 billion compared to $1.1 billion as of the end of the prior quarter. .

Year-over-year, the portfolio has grown 31% from $903 million end of the September '22 quarter end. For the current quarter, 100% of our new portfolio company debt originations were first lien senior secured. And as of the end of the quarter, 97% of the credit portfolio was first lien senior secured. .

The weighted average credit exposure per company in our portfolio was 1.1%. We believe our portfolio of granularity speaks to our continued investment discipline, of maintaining a conservative posture to overall risk management as we grow our balance sheet. .

On Slide 11, we detailed a $110 million of capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter included $79.7 million in first lien senior secured debt committed to the 5 new portfolio companies, including 2 in which we also invested a total of $2 million equity.

We also committed a total of $27.8 million in first lien senior secured debt and $550,000 in equity in 6 existing portfolio companies.

We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital provider, as evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities. .

Deal activity over the past quarter continued at a healthy pace, and we continue to expect solid net portfolio growth in the coming quarters. .

Slide 12, we detail key stats for our on-balance sheet balance sheet portfolio as of the end of the quarter, excluding our I-45 joint venture.

As of the end of the quarter, the total portfolio at fair value was weighted 87.8% of first lien senior secured debt, 2.8% to second lien senior secured debt, 0.1% of sub debt, and 9.3% to equity co-investments. The credit portfolio had a weighted average yield of 13.5% and weighted average leverage through our security of 3.6x EBITDA. .

As seen on Slide 13, our total investment portfolio, including our I-45 JV continues to be well diversified across industries with an asset mix, which provides strong security for our shareholders' capital.

The portfolio remains predominantly weighted towards first lien senior secured debt with less than 3% of the total portfolio in second lien senior secured debt. .

Turning to Slide 14. We have laid out the rating migration within our portfolio during the quarter. As a reminder, all loans upon origination are initially assigned an investment rating of 2 on a 4-point scale, with 1% being the highest rating and 4% being the lowest rating. .

We feel very good about the performance of our portfolio with 96.9% of the portfolio at fair value rated in one of the top 2 categories, a 1 or 2. .

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 quarter, as summarized on Slide 16, we increased pretax net investment income by 6% quarter-over-quarter to $26.4 million or $0.67 per share compared to $25 million or $0.67 per share in the prior quarter. .

During the quarter, we paid out a $0.56 per share regular dividend and a $0.06 per share supplemental dividend. As mentioned earlier, our Board has approved a $0.01 per share increase to the regular dividend to $0.57 per share and maintained a $0.06 per share supplemental dividend for the December quarter. .

Maintaining a consistent track record of meaningfully covering our dividend with pretax net investment income is important to our investment strategy.

We continue our strong track record of regular dividend coverage with 120% coverage for the last 12 months ended September 30, 2023, and 109% cumulative coverage since the launch of our credit strategy in January 2015. .

Given the floating nature of our credit portfolio, elevated interest rates continued to be a tailwind to our net investment income.

The quarter-over-quarter increase in the base rate index used to calculate interest on a majority of our loans moderated from the pace of increase we have seen in the past several quarters, having reset in early October to approximately 5.39%. .

This represented an increase of 15 basis points from its early July base rate reset of approximately 5.24%. As a reminder, our intent is to continue to share a portion of the excess of our quarterly pretax NII over our regular dividend with our shareholders in a quarterly supplemental dividend.

We are confident in our ability to continue to distribute quarterly supplemental dividends for the foreseeable future based upon our current UTI balance of $0.42 per share, our ability to grow UTI each quarter organically by over-earning our total dividend and the expectation that we will harvest gains over time from our existing $0.97 per share in unrealized appreciation on the equity portfolio.

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For the quarter, we increased total investment income to $42.8 million, representing 6% growth quarter-over-quarter and [ 60%] growth from a year ago. Weighted average yield in the portfolio on all investments was 13%.

Total investment income was $2.4 million higher this quarter due to growth in our credit portfolio as well as an increase in our weighted average yield on investments. As of the end of the quarter, we had 4 portfolio companies with loans on nonaccrual, representing 2% of our investment portfolio at fair value. .

As seen on Slide 17, we further improved LTM operating leverage to 1.8% for the current quarter. Achieving 2% or better operating leverage as one of our initial long-term goals when we relaunched CSWC as a middle market lender back in 2015. To put this metric in perspective, our 1.8% operating leverage is second best in the entire BDC industry.

We believe this metric speaks to the benefits of an internally managed model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to invest in people and infrastructure to continue to build a best-in-class BDC.

As we look forward, we expect further improvements in operating leverage as we continue to grow the balance sheet over time. .

Turning to Slide 18. The company's NAV per share at the end of the quarter increased by $0.08 per share to $16.46.

The primary drivers of the NAV per share increase for the quarter were earnings in excess of our dividends for the quarter and accretion from the issuance of common stock at a premium to NAV per share, partially offset by net depreciation on our investment portfolio. .

Turning to Slide 19. We're pleased to report that our balance sheet liquidity remains strong with approximately $207 million in cash and undrawn leverage commitments on our revolving credit facility as of the end of the quarter.

We recently completed an amendment upsize and extension on our revolving credit facility as our bank syndicate continues to support our growth. In fact, 8 of our existing lenders in the facility upsized their commitments, which we believe demonstrates their confidence in our stewardship, especially in the current capital markets environment. .

The amendment increased total revolving facility commitments from $400 million to $435 million and extended the maturity of the facility from August 2026 to August 2028. Based on our current borrowing base, we have full access to the incremental revolver capacity.

The facility also has an accordion feature, allowing for the further increase of total commitments up to an aggregate of $750 million, allowing us to continue to grow our revolver capacity in lockstep with the growth of our overall balance sheet. .

In addition, we have a $45 million uncommitted SBA debentures capacity to draw from in the future. As of the end of the September quarter, 49% of our capital structure liabilities were in unsecured covenant-free bonds and our earliest debt maturity is in January 2026. .

As Bowen mentioned earlier, subsequent to quarter end, we have received shareholder approval to increase the number of authorized shares from 40 million to 75 million.

These incremental shares provide Capital Southwest with the flexibility to continue our track record of raising accretive equity to maintain conservative balance sheet leverage as we continue to grow our asset base. .

Our regulatory leverage, as seen on Slide 20, ended the quarter at a debt-to-equity ratio of 0.92:1. down meaningfully from 1.11:1 as of the year ago September quarter. .

We will continue to methodically and opportunistically raise both secured and unsecured debt capital as well as equity capital through both our ATM program and secondary offerings to ensure we continue to maintain significant liquidity, conservative leverage and adequate covenant cushions throughout all economic cycles. .

I will now hand the call back to Bowen for some final comments. .

Thanks, Michael. And again, thank you, everyone, for joining us today. We appreciate the opportunity to provide you an update on our business, our portfolio and the market environment.

Our company and portfolio continue to demonstrate strong performance, and we continue to be impressed by the job our team has done in building a robust asset base, deal origination and portfolio management capability as well as the flexible capital structure. .

As to the uncertainty in the economy, we have been underwriting new deals and managing the overall BDC with a full economic cycle mentality since day 1, which we believe has positioned us well for the potential economic volatility in the coming months and years. .

In summary, we have a credit portfolio heavily weighted to first lien senior secured debt allocated across a broad array of companies and industries, over 90% of which is backed by private equity firms.

We had a well-capitalized balance sheet with multiple capital sources, strong liquidity and a flexible capital structure, much of which is fixed rate and covenant light. .

We believe our first lien senior secured investment focus and our capitalization strategy provide us complete confidence in the health and positioning of our company and our portfolio as we look ahead. .

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 Ladenburg. .

Bowen, one of your larger investments this quarter was in Swensons restaurants. And obviously, that can be a difficult sector to invest in. And eating out is one of those things that people cut back on during a recession, which may be coming. I do see that its menu seems to be focused on value, which is appealing.

But is there anything else in that deal in particular that attracted you to this investment?.

Yes. It's an interesting question because we don't do a lot of restaurant deals, obviously. That one is kind of unique.

You referenced the value menu, but it's also, it's founded back in 1934, and it's in a certain couple of markets that has been there for a long time, and it's kind of nostalgic drive-in where literally the waiters and waitresses jog to your car and back, and it's very nostalgic and it's been -- it's kind of a very loved by the community, let's put it that way.

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And so a lot of people go there because they went there right there, their parents and grandparents went there, that type of thing. So it's very -- that's why I included the word nostalgic in the press release, that's literally what it is. And then obviously, the leverage, profitability and all those other things were very attractive to us.

But those are the reasons that it's different than your typical restaurant deal. .

Appreciate that. Wanted to ask you also a couple of questions about the operating leverage ratio. Can you give us a sense of the number of portfolio companies you're now managing per investment professional.

And do you see that -- how do you see that ratio trending?.

So we've got 94 portfolio companies, and we have 15... .

15... .

15 investment professionals. So that's the average of 6.3 per investment professional. I mean it's -- plus we've got a bunch of employees that have been here for a while, too, so it underwrote those portfolio companies. So we feel pretty good about the coverage ratio that you're asking about. And certainly, we watch obviously.

And as we grow, we'll certainly be increasing people as well as internally, promoting people and then hiring more junior people underneath them to leverage our time. .

And I might want to just touch about the scale. We've added significant employees in middle levels, we promoted employees from within. We're probably as deep today than we've ever been. And as Bowen said, a lot of these people are seasoned professionals that can handle -- certainly can handle 6 deals at a time. .

Yes, we're certainly very biased towards internal professional development and then letting people grow and learn how we do things, how the business model has actually worked through. It's worked quite well over the last [ 8 ] years. .

Yes, I agree. .

Our people underneath them. So the staffing ratio looks pretty good right now. .

So my last question, sort of segue from that, your operating leverage ratio is now very close to the peer you mentioned in your prepared remarks. And they've obviously been around a long time, and they're quite a bit larger than you.

So do you see more upside in this ratio? Or is this about as good as this -- as it can get?.

Yes. I mean I think we might have improved a little bit. But I mean it's, I mean obviously, we need to have the best professionals in the industry. So we have to compensate them accordingly. And so there's only asset management business or something like that.

The operating leverage will grow and probably improve a little bit, but it's not going to drop by half. .

Well, I'd say, right now, run rate is about 1.7% and we probably see over the next -- I would actually say, for the next 6 to 12 months, we'd see us dropping to that 1.7% on an LTM and probably down to 1.6%. .

Yes. So a little bit of improvement. .

Yes. .

For sure. .

Our next question comes from Vilas Abraham with UBS. .

You mentioned on the last call that there was some potential M&A percolating and potentially $35 million to $75 million in prepaid through the end of the year.

Can you just talk a little bit about what transpired over the quarter that -- it may and delay that? Is it just broader public market volatility or idiosyncratic dynamics that may have changed things?.

Yes. No, I think I wouldn't say that -- I'm just thinking of the processes we're referring to, I wouldn't say they were significantly delayed. And a lot of the sale processes kind of take a while. Obviously, the financing market is choppier than it was 12, 18 months ago.

So raising financing is, I'd say probably a larger -- a more of a handholding type exercise for a private equity firm that it might have been into 1.5 years ago. So maybe things take a little bit longer, but... .

And 2 of them actually, one of them is going through an HSR process that was not identified before the need for it. So that actually puts that out 8 to 10 weeks still expected to close. The other one that we were probably alluding to is actually not happening. I think they're probably more likely to do a dividend recap and stay in the deal.

So those were the 2 largest deals. .

Okay. That's helpful. And then yes, just as you think about just line of sight into pre-pays over the next couple of quarters and just balancing that with managing leverage. Just any thoughts there on the look forward. .

Yes. So I think you're talking about really leverage. And we obviously ended the quarter at 0.92. And we want to note, we just received approval to increase our share base for the share from 40 million to 75 million. So we had essentially had a partial quarter of a run rate at ATM raises.

We'd probably tell you in this [ fourth quarter ], we'll be more than the $22 million that was raised in this quarter. .

Prepayments. .

Okay. So actually, in the prepayment side, I think we have around maybe $25 million to $30 million in prepayments that we're expecting, but those could also slip past the end of the year. So we'll see that is. We do plan to bring leverage down this quarter, probably closer to the 0.85% to 0.9% range if that's our expectation, without that exit. .

Our next question comes from Bryce Rowe with B. Riley. .

Maybe wanted to touch on that last point, Michael and Bowen it sounds like the shareholder vote to increase the authorized shares is really the reason for maybe less usage on the ATM this past quarter?.

That's correct. Yes. .

That's correct. Yes. .

Okay. That's helpful. And then maybe I wanted to hit on I-45, leverage within that JV kind of continues to go down in terms of debt outstanding on that particular facility.

What's the outlook there? Do you expect to continue to see debt outstanding within that -- for that facility going down or kind of steady state from this point forward?.

Yes. I mean -- over time, we've seen less attractive opportunities in that market, and I think Main Street and Capital Southwest both believe that's the case. So we haven't originated in quite some time, but we have seen significant amounts of capital coming back which we've utilized to pay down that facility.

We would tell you probably over the next 1 to 2 quarters, we will look to continue to pay down that facility and with -- the notion that there's always -- we've talked to the market in times about consolidation being a possibility. That is something that in order to do so we probably be delevering ahead of time. .

So by delevering that obviously give us a little bit of flexibility of what we want to do. .

Okay. That's helpful. And then maybe one follow-up just on expenses.

Compensation, Michael, do you expect kind of an uptick here in the fourth quarter in that comp line as maybe you get some catch-up bonus accruals?.

Yes, for sure. I think so what you saw during the [ 9/30 ] quarter was, I'd tell you, the run rate of SG&A was probably about $200,000 high actually based on the fact that we have a special meeting but the cash comp was right on in terms of our run rate.

So we would expect potentially, probably, I would almost say $1 million to $2 million in addition to the current quarter's cash cost in the following quarter. .

Our next question comes from Erik Zwick with Hovde Group. .

I wanted to first just start thinking about the outlook for the weighted average yield in the portfolio and kind of what that implies for interest income. Just curious how much of the SOFR continued to kind of move higher in 3Q, it looks like it may have stabilized here for a little bit, if we assume.

The Fed doesn't move tomorrow, and we're kind of in this current environment now.

Is there still a little bit more of the our [ 9/30 ] quarter increase in SOFR to trickle through the portfolio? Or has most of that been realized at this point?.

Yes. There's probably, I think, 15 basis points based on the most recent reset in October for the coming quarter. .

Okay. Great. And then I know you addressed prepayment fees a little bit already, but just looking at that prepayment fees and other income line, down a little bit in the [ 9/30 ] quarter.

Just curious what percentage of that line item is driven by prepayment fees versus other? And just curious about kind of the outlook going forward from your perspective?.

Yes. So the prepayments were about $330,000, which we've considered onetime. On top of that, there's another $400,000 that's really the base. Those are really admin fees and management fees that we have received on a recurring basis from our portfolio companies.

So going forward, you should expect that $400,000 has grown at about $25,000 a quarter based on originations, historically. And then prepayment fees and amendment fees, that's obviously a lot harder to judge. .

We would tell you that we saw amendment fees, labor fees sort of peak 2 quarters ago. And so it's come down precipitously over the last 2. So right, looking at the 12/31 quarter right now, there's not a whole lot of activity that way. So I wouldn't expect a significant amount there. .

That's helpful. And last one, just looking at the Slide 14 and the 3 credits that were downgraded in the quarter. Wondering if you could add a little color there in terms of the industries, that those companies operate in? And maybe what developments in the quarter led to the downgrades. .

Yes, especially, so there are 3 companies downgraded and 3 companies upgraded. On the downgrades, it's pretty idiosyncratic to those certain companies, one services, utilities and [ legislation ] management and that industry has moved a bit once in farm services and the farmers kind of delayed some of their budgeting.

And so that kind of affected that business. The other recent credit run from industrial type things, but around that particular company. .

So nothing really economic per se. It was encouraging this quarter of the 3 upgrades to the 2 companies that were upgraded to 2 were formerly 3. And so the credit risk improved meaningfully in both those cases. And so seeing things migrate up from struggling to performing is obviously encouraging. .

And just nice to see that the overall total rating went up even with the downgrades as you've noted, some upgrades as well. So excellent. That's all for me today. .

next question comes from Sean-Paul Adams with Raymond James. .

Just a few questions.

Have you guys seen any change in types of businesses that are coming to market now versus 3 to 6 months ago, whether it be industry sectors or credit quality?.

That's interesting question. Because I think -- not really on the tight companies. And the credit quality, any time you have an environment where yield in a healthy loan value multiples are about the same and leverage levels down for your loan to value on your new loans, it's come down. It's been down kind of over the last 3 or 4 -- 3 quarters anyway.

That's obviously a good thing for a first lien lender. And so I'd say, quality of deals has been strong. We slightly changed this quarter, as I referenced in our remarks with the competitive landscape in the overall markets. .

Increased a bit, but still not back to normal levels, I would say, but it's definitely like I said in the remarks, slightly moved towards normal loans. But loan to value is still very attractive. Yields are still obviously very strong for folks like us. So I feel like it's the flow of -- deal flow has been attractive. .

Yes, I'm not sure if Bowen earlier, but our loan-to-value probably a year ago before was 40%. Over the last 2, 3 quarters, it was really in the 25% to 30%. Now it's ticked up between maybe 30% to 40% so still so attractive. But... .

Yes. Low 30s. Yes. Yes. .

Certainly, this last 12 to 18 months has definitely been strong in terms of tighter LTV. .

I appreciate the color.

And my last question was, last quarter, you briefly touched on the 2 nonaccruals in the portfolio, I think, bringing to a total of 3 as well as your expectations for restructuring event for both by the year-end? Has there been any update on those plans? And was there any surprises on the nonaccrual performance for the quarter?.

No. I mean the restructuring, I think one of them will happen before the other one, the company that we moved to -- will be restructured probably the next couple of weeks, actually improved slightly since the end of the quarter, but it will be restructured. .

The other one is a little bit unclear as far as the timing and other one because anyways, the question really is this sponsor, the quantum of dollars coming in, et cetera, some things like that, specific to that company. But one of them will be done in the next couple of weeks and the other ones 4 or 6 weeks away, maybe. .

Yes. And we also say one of the other portfolio companies that it wasn't upgraded or downgraded, but it's performing -- it's pretty well over the 3 quarters, we've been conservative to maintain it on nonaccrual, but there's a high chance that one of those actually is removed and probably upgraded to a 2. .

Our next question comes from Vilas Abraham with UBS. .

Sorry about that. I was on mute. UTI is up to $0.42 per share this quarter. Can you just discuss that trend and whether there's a range that you'd like to be on an ongoing basis? Would that... .

Absolutely. So I think you noted we have $0.42 at the end of the quarter. If you look at where our run rate NII is, which is around $0.67 a good run rate. But I think a question earlier in terms of the increase by 15 basis points will drive that higher over the next few quarters.

Assuming rates continue to be maintained in this range, we'd expect to share half of this under distributed income to grow our UTI bucket by $0.05 a quarter. .

So if you look ahead, that's probably, it's another $0.20 we're targeting probably having a minimum of $0.60 or more -- going forward. And we think that, that type of level will help support the $0.06 supplemental dividend that we're paying today as a minimum. There's always a possibility we would grow it.

This certainly allows us to maintain that success long term into the future. .

Okay. That's very helpful. And maybe if I could sneak just one more in here. Can you give some color on how your portfolio companies are thinking about 2024 budgeting in terms of EBITDA expectations.

Is it preparing for the worst and hoping for the best kind of situation? Or is there a more sanguine way to characterize how they're thinking about things looking at it. .

Yes. I mean so just to be clear, I mean, with 91% of them being portfolio or private equity firm banks are going through the budgeting process right now. So I don't have any specific views of the actual budgets in front of us or internally necessarily yet. .

But that said, I mean, these PE firms have been working -- we all hear about all the business input costs going up across the whole economy. And the other thing going up is their interest burden. And so they've been working very diligently on streamlining every -- everywhere, all levels of the cost structure to counterbalance that.

And so one would think inflation should start moderating next year. I mean, the companies have really positioned themselves well on automating where it's automating, digitizing where you can digitize and that type of thing. .

So we've got companies very efficient in my view. And so I would expect -- I don't really know what the budgets will be as a general matter. I mean the portfolio companies now are growing on an EBITDA level, kind of low single digits year-over-year and high single digits on a revenue basis year-over-year. And so they're kind of plugging along. .

So it will be interesting to see what the budgets look like for '24. But we haven't seen them yet, given it's obviously end of October, and they're working through right now. And I guess as we will see them, see the budget by -- certainly by the next time we talk to our shareholders. That will be early February, I guess, late January.

So we will have better knowledge of that. So I would say, ask that question again next quarter, and we'll have a better view of really actually seeing budgets. .

And Vilas one thing I just want to step back on is on the UTI, the other part of our UTI balance on top of just the undistributed earnings is realized gains that will harvest in the future, when I notice the $0.60, that's probably a minimum number because we do anticipate being able to harvest gains in 2024. .

That concludes the question-and-answer session. At this time, I would like to turn it back to Bowen Diehl for closing remarks. .

Great. Thank you, operator, and thanks, everyone, for joining us. As always, we enjoy giving updates on the company and things are going well, and we appreciate all of y'all support. We will talk to you next quarter. .

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect..