Capital Southwest Corp Q1 FY2021 Earnings Call

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.

Thank you, Chris, and thank you to everyone for joining us for our first quarter fiscal 2021 earnings call. Throughout our remarks, we will reference various slides in our earnings presentation, which are available on our website at www.capitalsouthwest.com. We are pleased to announce our results for the first fiscal quarter ended June 30, 2020. I hope everyone, their families, and their employees remain safe and well. At Capital Southwest, we have prioritized the health and safety of our employees and those of our portfolio companies. We have remained in regular communication with our financial sponsors and management teams and are pleased with their rapid responses to the pandemic along with the risk and cost-mitigation efforts across the portfolio. Despite the ongoing pandemic affecting the market, we feel positive about the quality and earnings potential of our assets. During the quarter, our portfolio performance stabilized, as shown by $2.1 million of net appreciation. We achieved two investment rating upgrades, no downgrades, and no new loans placed on non-accrual. As a well-capitalized first-lien lender with ample liquidity, Capital Southwest is well-positioned to pursue attractive financing opportunities and provide financial support to our portfolio companies, while also potentially receiving enhanced returns for doing so. Our investment strategy is aligned with our shareholder-friendly, internally-managed structure, which aligns the interests of our Board and management with those of our shareholders in generating sustainable long-term value through dividends, capital preservation, and operating cost efficiency. On slide 6 of the earnings presentation, we've highlighted key performance metrics for the quarter. We reported pretax net investment income of $0.40 per share and distributed a regular dividend of $0.41 per share, along with a supplemental dividend of $0.10 per share funded by our considerable undistributed taxable income balance. Total dividends for the quarter amounted to $0.51 per share, representing an annualized yield of 15.3% on last Friday's stock price and 13.6% on NAV per share. Our total portfolio grew by over 6% to $587 million as of June 30, 2020, driven by $30 million in commitments to two new portfolio companies and five existing ones. During the quarter, we invested $1.3 million in equity alongside two of our loans. Additionally, despite recent market volatility, we generated $5.7 million in gross proceeds through our equity ATM program, marking the seventh consecutive quarter we have prudently raised permanent capital for the BDC above NAV. Our strategy of selectively selling limited equity when our stock price is above NAV, combined with our ability to deploy that capital, is a key factor in our financial flexibility. At quarter-end, we had approximately $155 million in total liquidity available through our revolving credit facility and cash, with only $15 million in unfunded commitments to our portfolio companies meeting the criteria for draws. We are excited to announce that the U.S. Small Business Administration has invited Capital Southwest to apply for an SBIC license. Establishing an SBIC subsidiary is a strategic priority for us, and we look forward to collaborating with the SBA to provide capital to underserved markets, including businesses in low to moderate-income areas and those owned by minorities, women, or veterans. The final approval of an SBIC license would offer a 10-year commitment of up to $175 million in debt financing for investments in lower middle-market companies defined as small businesses by the SBA. Each loan from the SBIC would represent a new debt security with a 10-year maturity. If treasury rates remain near current levels, the cost of the SBIC debentures is expected to be between 2.5% and 3%. This program aligns well with our focus on the lower middle market, and we look forward to working with the SBA to complete the application process. On slides 7 and 8, we showcase our strong dividend yield, consistent dividend coverage, and value creation since initiating our credit strategy. We previously announced our Board's declaration of dividends of $0.51 per share for the upcoming quarter ending September 30, 2020, which includes a regular dividend of $0.41 and a supplemental dividend of $0.10. Turning to slide 9, our investment strategy remains unchanged since its inception in January 2015. We continue to focus on our core lower middle market while also being able to invest in the upper middle market when there are attractive risk-adjusted returns. In the lower middle market, we directly originate debt investments and equity co-investments, building a well-performing and granular portfolio of equity co-investments is essential for driving NAV per share growth and mitigating credit losses over time. We believe it's critical to maximize the top end of our deal origination funnel across both markets to ensure strong credit performance, allowing us to employ conservative underwriting standards and construct a portfolio that can endure various economic cycles. While we are currently taking a cautious and selective approach to deploying new capital, considering the new normal and potential risks, we are pleased that we have the capital to support acquisitions and growth in our markets. We are excited about the opportunities we have pursued and closed, particularly in the lower middle market where we can lend at lower leverage and loan-to-value levels while ensuring tighter covenants and terms in our loan documents. Slide 10 shows that our credit portfolio, excluding I-45, grew by 3% this quarter to $487 million compared to $474 million at the end of the previous quarter, with 85% of the portfolio currently weighted towards lower middle market loans. We emphasize first-lien senior secured debt lending, with 100% of this quarter's debt originations being first-lien senior secured. Consequently, by quarter's end, 90% of the credit portfolio was in first-lien senior secured debt. Slide 11 lays out the $30 million of capital committed and invested in portfolio companies this quarter, which included $20.8 million in first-lien senior secured debt for two new companies and $9.2 million in additional capital for five existing companies. Deal flow since the quarter end has remained strong. After the quarter, we originated an additional $34 million in commitments, including $27 million for two new portfolio companies and $7 million for add-on acquisitions for two existing companies, totaling $32.2 million in first-lien senior secured debt and $2.1 million in equity co-investments. Slide 12 breaks down our on-balance sheet portfolio as of the end of the quarter between lower middle market and upper middle market, excluding I-45. The total portfolio weighted approximately 85% towards the lower middle market and 15% to the upper middle market based on fair value. We had 36 lower middle market portfolio companies with an average hold size of $12.6 million, a weighted-average EBITDA of $8.2 million, a weighted-average yield of 10.8%, and a leverage ratio of 4.1 times. Two-thirds of our lower middle market portfolio companies included equity ownership. Our on-balance sheet upper middle market portfolio, excluding I-45, comprised 11 companies with an average hold size of $8.4 million, a weighted average EBITDA of $73.1 million, a weighted average yield of 6.8%, and a leverage ratio of 4.4 times. The leverage metrics for our upper middle market portfolio exclude our investments in American Addiction and Delphi Behavioral Health, which although improving, had levels at the end of the quarter that could skew the overall leverage ratios. Post quarter-end, Delphi was successfully restructured out of court, and Capital Southwest now holds a first-lien senior secured debt investment in the company, which should resume accruing this quarter, alongside an equity ownership position and Board representation. We remain pleased with the high-quality care Delphi provides and its improving financial performance, and we are optimistic about its future and our capital recovery. Unfortunately, American Addiction has filed for bankruptcy, which is a necessary step towards restructuring its balance sheet for future success. Despite this, we are also satisfied with the quality of care American Addiction provides and its improving financial situation. On slide 13, we detail the rating changes within our portfolio for the quarter. We recorded two upgrades for companies that significantly outperformed expectations and no further downgrades. Investments begin with an initial rating of two on a four-point scale, with one being the highest. The two upgrades shifted loans previously rated two to one based on strong performance and reduced leverage, with nearly 16% of the portfolio now holding our highest investment rating. At quarter-end, we had nine loans rated three and only two loans rated four, while the remaining 70% of investments stayed rated at two. Given the intense economic downturn caused by the pandemic, we are pleased that over 82% of our investment portfolio retains one of our top two ratings. As shown on slide 14, we have established a diversified portfolio across industries with a strong asset mix that provides security for our shareholders. The portfolio is predominantly invested in first-lien senior secured debt, with only 6% in second-lien secured debt and 2% in subordinated debt. On slide 15, we see that 96% of the I-45 portfolio is in first-lien senior secured debt, combined with industry diversity and an average hold size of 2.4% of the portfolio. The I-45 portfolio has also stabilized, with our investment appreciating by $4.2 million or 8% during the quarter. I will now turn the call over to Michael to discuss the specifics of our financial performance for the quarter.

Thank you, Bowen. Regarding our performance for the June quarter, as summarized on slide 16, we achieved pretax net investment income of $7.2 million, which translates to $0.40 per share. This is consistent with the $0.40 per share earned in the previous quarter. We distributed $0.41 per share in regular dividends for this quarter, unchanged from the prior quarter’s $0.41 regular dividend. Additionally, our Board has declared another regular dividend of $0.41 per share for the current September quarter. Over the near and long term, we have consistently covered our regular dividend with pretax net investment income, as shown by our 102% regular dividend coverage over the past 12 months and 106% cumulative regular dividend coverage since we initiated our credit strategy. This quarter, we maintained our supplemental dividend at $0.10 per share, and our Board has also declared another supplemental dividend of $0.10 per share for the September quarter. The supplemental dividend program allows shareholders to benefit from successful exits in our investment portfolio through distributions from our UTI balance over time. Following the successful sale of Media Recovery in late 2019, we replenished our UTI balance to the maximum allowable level by the end of the 2019 tax year, ensuring the program's sustainability moving forward. The program will continue to be funded from UTI earned from realized gains on both debt and equity, as well as any undistributed net investment income that exceeds our regular dividends. As of June 30, 2020, our estimated UTI balance stood at $1.27 per share. Our investment portfolio generated $15.2 million in investment income this quarter, with a weighted average yield of 10.4%, reflecting an increase of about $130,000 from the previous quarter. Additionally, we had no new non-accruals at the end of the quarter. Currently, there are three assets on non-accrual with a fair value of $11.3 million, which is 1.9% of our total investment portfolio at fair value. The weighted-average yield on our credit portfolio was 10.1% for the quarter. Excluding interest expense, we incurred $3.7 million in operating expenses, approximately $150,000 higher than the previous quarter. As shown on slide 17, we reported an operating leverage of 2.4% for the quarter, slightly below our initial target of 2.5%. We remain committed to managing our operating costs alongside portfolio growth with a longer-term goal of achieving a target operating leverage of 2% or better. We expect our operating leverage to improve as our investment portfolio expands due to the relatively fixed nature of our operating costs within our internally-managed structure. Moving to slide 19, the company's NAV per share as of June 30, 2020, was $14.95, compared to $15.13 at the end of March 2020. The slight decrease in NAV per share was primarily due to the annual RSU grant to employees, with $0.11 per share of net appreciation on the portfolio offset by the $0.10 per share supplemental dividend paid. On slide 20, we outline our various capital sources. As discussed in previous calls, a strategic priority for our company is to continually assess methods to reduce the risks associated with our liability structure while ensuring adequate investable capital through economic cycles. Accordingly, as Bowen highlighted earlier, we are pleased to announce that we received a green light letter from the SBA. This is a significant development for Capital Southwest in the long term, as we believe this program provides access to efficiently priced long-term capital, enhancing our competitiveness in deal origination and improving total returns for shareholders. We have consistently expressed our long-term goal of achieving an investment-grade rating, and we believe that participating in the SBA program further strengthens our position toward that objective by diversifying our funding sources. In addition to the potential access to up to $175 million from the SBIC license, our current debt structure includes a $325 million revolving credit facility with 11 banks, a $77 million publicly traded baby bond maturing in 2.5 years, a $75 million institutional bond with 21 investors maturing in four years, and a $150 million revolving credit facility at I-45 with four banks. We are also pleased to report robust liquidity, with around $155 million in cash and undrawn commitments at the end of the quarter, along with sufficient borrowing capacity and covenant protections on our senior secured revolving credit facility. Furthermore, approximately 46% of our current liabilities are unsecured, with the earliest debt maturing in December 2022. Our balance sheet leverage, as depicted on slide 18, concluded the quarter with a debt-to-equity ratio of 1.19:1. Lastly, despite increased market volatility this quarter, we successfully sold 373,177 shares of Capital Southwest common stock under the equity ATM program at a weighted average price of $15.38 per share, generating $5.7 million in gross proceeds. Over the past seven quarters, we have raised $51 million in equity capital through our ATM program, aligning our fundraising with our investment activities. I will now turn the call back to Bowen for final comments.

Thanks, Michael. And thank you, everyone for joining us today. Capital Southwest has grown, and the business and portfolio have developed consistent with the vision and strategy we communicated to our shareholders over five years ago. Our team has done an excellent job building both a robust asset base, as well as a flexible capital structure that prepares us for tough environments like the one we have experienced over the past few months. While we are not immune to the challenges the economy faces today, we feel good about the health of our company and the opportunities that the environment will present to us as we consider places to invest capital in what should prove to be a less competitive environment. Everyone here at Capital Southwest is totally dedicated to being good stewards of our shareholders' capital by continuing to deliver strong performance and creating long-term sustainable value in troubled times such as these. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

Our first question comes from Kyle Joseph of Jefferies. Your line is open.

Hey, good morning, guys. Congrats on a good quarter and thanks for taking my question. First question just about deal flow and actually more specifically on repayments. I didn't see the repayment level in the quarter. And can you just give us a sense for your expectations for repayment trends in the portfolio given the current environment we're in?

Yeah. So repayments were other than amortization and revolvers draws back and forth virtually zero.

Yeah. I think it's $2.5 million maybe the amortization result.

And the last part of your question was what?

Would you anticipate repayment levels being fairly muted given the overall deal environment?

It's interesting. Yes and no. We've observed strong deal activity at the moment, as I mentioned in our remarks, but now we have our portfolios. Sixteen percent of the portfolio is rated one, which indicates those companies are performing very well. We don't see any specific companies that we believe will be refinanced quickly, but they are strong and definitely refinanceable. So that answers the question positively. However, I think prepayments are likely to be relatively slow going forward, except for that significant portion of our portfolio that is outperforming.

Got it. And then in terms of the outlook for yields, obviously, there is portfolio mix shift. And it looks like you had some very attractive yields on the new deals in the quarter. So can you give us a sense of weighing mix shift yields on new deals, the rate environment just your outlook for the consolidated yield?

Yeah. You want to take that one?

Sure. Our yield decreased from 10.5% to 10.1%, primarily due to LIBOR fluctuations during the period. We've seen volatility from the previous quarter, but it appears to have stabilized now. We're currently around 30 to 35 basis points. I expect to see a slight recovery, as some of the assets we acquired during the quarter had higher yields. Additionally, the yield was slightly lower because we had investments in late-stage assets from the prior quarter, which didn't contribute to income despite being part of the weighted average balance. You’ll notice this in the next quarter. Overall, I believe 10.5% is a reasonable target moving forward.

Yeah. And as far as the market environment, I would say right now as we sit here spreads while earlier in the COVID pandemic time period, you'd say maybe 100 to 150 basis points higher than pre-COVID. I would say now it's probably 50 to 100 basis points higher in the market than pre-COVID. You still have some market participants that are essentially out of the market, but there are quite a few in the market. People are being more disciplined as far as spreads that they're offering in the market. So I'd say it kind of feels like it's kind of a 50 to 100 basis point spread difference to the positive now versus pre-COVID. I assume that was part of your question too.

Yes. Absolutely. Thanks very much for answering my questions, guys.

Take care. Thank you.

Our next question comes from Tim Hayes of F.B. Riley. Your line is open.

Good morning, Bowen and Michael. I have a few questions about credit to begin with. I noticed there was one less non-accrual this quarter. Did you exit that? As you mentioned, there were no significant repayments this quarter. Was one credit removed from non-accrual status? I assume that you didn't exit that. I’m curious if that is what led to the realized loss; if not, then what was the cause?

Thank you for the question. Regarding Delphi, I mentioned in my remarks that it was on non-accrual. We restructured that outside of court, and it's now back on accrual. A restructured transaction like this can often trigger a taxable event. This means you would recognize a loss, but we maintain significant equity ownership. Additionally, we have representation on the Board. Therefore, we are optimistic about recouping our principal on that loan over time.

Okay. Got it. Thanks for clarifying that. And then how many credits in the portfolio would you say have been extended some type of forbearance or modification? I'm just wondering if you've seen those requests decline?

We have definitely noticed a decline in requests as the situation from the COVID pandemic initially caught everyone off guard in March and then unfolded by June. To give you some context, we agreed to pick up a portion of the interest on three loans for a limited time in exchange for equity support of the company. Additionally, we amended the covenants on six loans in return for some economic benefits, and all of them are current with their interest payments. The issue wasn't a lack of cash interest but rather related to covenant adjustments, which allowed us to secure some economic benefits by providing them a little more flexibility.

Got it. Got it. Okay. And on the follow-ons you funded this quarter, were those all sponsored credits? And did you require sponsors or inject more equity in order for you to participate as well, and then just curious, if you denied any follow-on requests this quarter?

Well, in both add-ons, we financed part of the acquisition and sponsors provided equity to fund it. We focus on determining the appropriate leverage level in this market, industry, and for this specific company. Then we finance a leverage amount to reach what we consider the right level without exceeding it. This usually means the equity will contribute more to the acquisition. Regarding follow-on requests, we do regularly decline deals, but I can't recall any instance this quarter where a sponsor approached us for financing an acquisition and we said no. That would require significant reasons, and we didn't have any companies that fell into that category.

Okay. Got it. And then can you just help reconcile the unrealized depreciation in the upper middle market portfolio? You saw $25 million of depreciation last quarter. I think only $5 million of appreciation this quarter despite spreads coming in and asset values recovering more than just 20% I believe in most cases. So was there some company-specific depreciation that offset the mark-to-market gains this quarter?

I’m trying to understand your question regarding the differences from that reconciliation. Two things have occurred: we experienced depreciation last quarter and we invested capital alongside Main Street to reduce the credit facility from then to now. Additionally, we saw $5 million in appreciation. I’m not clear on what the missing piece is.

I would have anticipated a greater markup on the upper middle market portfolio, considering what we've observed in the market. That is the essence of my question.

Certainly. We experienced some fluctuations in the portfolio. Specifically, we saw depreciation in the upper middle market portfolio, along with the spread. As you're aware, while there is a secondary market for the upper middle market, it tends to lack liquidity. Consequently, quotes often decrease faster than they increase, reflecting a negative trend in the market which we have mentioned before. This could have influenced our results.

And I think the other piece probably actually now that you're missing CPK is the one name that I would tell you that is idiosyncratic or obviously related to COVID. It had significant depreciation for the quarter that sort of muted what otherwise would have been higher appreciation. That might be what you're looking at.

Got it. Yes. I think that makes sense.

Yes. That's actually a big part of it. That's a big part of it. That's a good point.

Thank you, Michael. That seems to be the key element we were missing. It makes sense. I will return to the queue now as I have a couple more questions, but I appreciate you addressing mine.

Our next question comes from Bryce Rowe of National Securities. Your line is open.

Thanks. Good morning, Bowen and Michael.

Good morning.

Yes. To follow up on Tim's question regarding depreciation within the lower middle market portfolio, I am curious about what specifically drove that this quarter.

Yes. When considering the lower middle market, it's important to note that while the loan indices are part of the valuation, the analysis is more comprehensive regarding yield. Last quarter, many correctly pointed out that the majority of the EBITDA impacts from the pandemic were evident in the June quarter rather than in March. This means the challenges we faced had to be processed over time. On a last twelve months basis, EBITDA in our portfolio generally decreased, leading to our leverage in the lower middle market rising to 4.1x, reflecting that ongoing adjustment. The positive aspect is that we've observed stabilization and even improvement in real-time. So while leverage increased, this has had a greater impact on loan values than the index effect, if that makes sense.

I wanted to ask about the internal ratings. The 4-rated credits moved from 3 to 2, and I understand that Delphi was restructured, so I assume that could be one of the changes. Is that correct? Additionally, I noticed there was an add-on to AG King this quarter, so could you provide an update on that as well?

Sure. So what was the first part of the question?

The loan from going from 4?

Yes. Yes 4 and 3. So that was Delphi you're correct.

4 to 2.

I'm sorry it went from a 4 to a 2 because that reflects the rating of the debt security. As for AG Kings, I don't want to comment on specific companies. It's a grocery business, and you can imagine it's performing well during the pandemic. I'm still pleased with the management team. The restructuring process is lengthy, and I prefer to keep my comments limited since it's a private company. However, you could reasonably speculate that, being a grocery business, it's likely doing better in that context.

Yes. That's helpful. One last question from me regarding the potential capitalization of the SBIC license or subsidiary. Michael, could you explain how you see that developing? Additionally, could you discuss how you might access that initial tranche of debt and when that could occur in relation to capitalizing that subsidiary?

Sure. We plan to go through the application process over the next two to three weeks to get it submitted. Based on feedback from the SBA, we hope to successfully complete this process by November or December. This will allow us to begin investing in the SBIC. We need to put our first tier of $40 million of capital to work before we can start drawing. We anticipate being able to leverage this by March or April of 2021. If interest rates remain the same as they are now, we see this as a substantial increase to net investment income. Without the SBA debt, we would typically rely on baby bonds, which can be less predictable depending on market conditions. Interest rates have fluctuated between 5% and 7%. Currently, our average return on equity on an asset is around 15%, but we expect it to rise above 20% with the SBIC on an asset-by-asset basis. Once fully implemented, with the entire $175 million invested, we believe this could significantly increase net investment income by around $0.20 to $0.25 per year. We estimate that full ramp-up will occur sometime between the end of 2022 and 2023.

Yes. It's just a function of putting the money to work. Yes.

Yes. That's helpful. And in terms of kind of targeted leverage on a statutory basis, does that kind of change here if you're adding that level of debt?

I think we're likely going to see a total economic leverage in the range of 1.1% to 1.5%. From a regulatory standpoint, it will probably be between 1.0% and 1.2%.

Okay. All right. Thank you so much.

You bet.

Our next question comes from Robert Dodd of Raymond James. Your line is open.

Hi, everyone. Congratulations on the quarter. Regarding the SBIC, could you provide data on the deals you've seen and exited over the last 12 months since the pandemic? What percentage of those deals were SBIC-eligible? Is there a need to adjust your targeting to secure SBIC-eligible deals, or is the current pipeline sufficient?

Yes, it's a good question. The vast majority of them fit the SBIC definition by our estimation, so it's over 90%. We don't need to change our strategy at all. That's why the program is so interesting to us. It's efficient and flexible financing that allows us to invest in the exact market we currently operate in.

Thank you. We don't have the complete schedule of investments and all the details yet. If I assume the realized loss related to Delphi for the debt equitization was a reversal, it indicates that you had approximately $2.5 million of unrealized appreciation excluding Delphi. It appears that $4.5 million of that was from the I-45. There seems to be some deterioration or depreciation in the rest of the portfolio. Could you provide any insights on the factors contributing to this, particularly since spreads have narrowed somewhat? Last quarter, you mentioned that trailing 12 EBITDA trends could potentially outpace market rebounds in valuation multiples. Can you share any dynamics regarding how this affected your NAV this quarter?

Certainly. As I mentioned earlier, the lower middle market credit valuation is influenced by the loan indices within the debt portfolio, which have a positive impact. However, the more significant factor is leverage in relation to the last twelve months EBITDA. Throughout the pandemic, most of the effects on the portfolio and the economy occurred more in the June quarter than in March. This situation resembles a pig passing through a python. Consequently, the EBITDA across the portfolio on a last twelve months basis decreased from March to June. This resulted in our leverage in the lower middle market increasing to 4.1 times. Currently, we are observing a fairly encouraging stabilization and even improvement in performance. Nevertheless, by the end of the June quarter, our last twelve months EBITDA had dropped, as the pandemic months constituted a larger portion of the last twelve months EBITDA used for valuations. As anticipated, the lower middle market saw a slight decline, but given a $415 million debt portfolio, the decrease was only $1.5 million, which is not significant. Overall, I believe this was a pretty good outcome considering expectations in March, although the portfolio did decline primarily for that reason.

I understand, thank you. I want to go back to the SBIC because I forgot to ask another question. After receiving the final license and mentioning the capital commitments of $40 million, is the plan to initially invest $40 million? If so, what would be the funding approach for that? You have sufficient liquidity, but do you have specific plans in place at this moment?

Sure. The way it works with that $40 million is that you invest by originating assets using the available capital and placing those assets into the fund. We currently have $155 million available from the revolver and cash. We will look for opportunities in the bond market as they arise, and we will continue with the ATM equity program as long as we are trading above book value. Overall, we have significant liquidity at the moment and will continue to raise additional capital to ensure we are prepared to fund that equity check.

From my perspective, the SBIC has a 10-year commitment to provide $175 million of capital, regardless of economic conditions. We need to refine our assets and maintain our performance, which is necessary in any case. This is a debt commitment that doesn't require us to depend on the capital markets. Additionally, it is very cost-effective. I don't anticipate any changes in our future strategy; we will continue to operate within the same framework. Now we have committed capital from a provider with a long-term cost-effective commitment. Each draw creates a new 10-year bond, which is also beneficial. Therefore, I see no need to change our approach. We will keep executing our current strategy while benefiting from this new and attractive capital source.

Yes, over the next few years, we will raise bonds and pay down our revolver. We will also gradually address the existing bonds. Our focus is on maintaining sufficient liquidity on the revolver and ensuring there is no significant gap in maturities on the bonds as we approach those dates.

Got it. I appreciate all that. One last one. Obviously, you could, in principle, long term get more than one license and they are 10-year licenses. I mean, I presume that this is intended to be that the first SBIC might not be the only one and this is not just in it for a decade. I mean, this is going to be a perpetual part of the capital structure of the business going forward and maybe even grow with the second license? Would that be fair?

Yes, that's absolutely the case. We are lower middle market first-lien lenders, and our team has been engaged in this for over fifteen years. As long as the SBIC program supports lower middle market lending and investing, we will be involved. One key aspect for us is the performance of the first license. While we want the license to deliver results for our shareholders, it's crucial for the first license to perform since it's the main factor in obtaining the second license. Therefore, we are already considering the pathway to the second license. So, to answer your question, yes, it is a permanent and fundamental part of our strategy.

And to reiterate, when we established the entity in 2015, this was intended to be part of our process. They were keen to see us develop our credentials in the early stages following the spin-off. Feedback we've received during this process indicates that they are pleased with our progress, and we are also quite impressed with the credentials we have assembled today. This has definitely been and will continue to be a key component of our strategy moving forward.

Got it. I appreciate it. Thank you, guys.

Our next question comes from Chris York of JMP Securities. Your line is open.

Hi, this is Kevin Fultz on for Chris. My first question the dividend from the SLF dropped again for the second consecutive quarter. The Q isn't out yet but what drove the decline? And do you expect any further pressure on that sort of income to CSWC?

Yes. So for I-45 the biggest impact there was LIBOR. So the weighted average floor on our – on loans in that facility is 80 basis points. And where the quarter started to where it end, it crossed over the LIBOR floors but we took a pretty big hit in terms of – if you think about the lower middle market companies the floors tend to be somewhere in the 1% to 2% and you'll see a lot lower floor on the syndicated credits. So you saw about a $275,000 hit. That's almost all due to LIBOR.

Okay. That makes sense. And then my next question is a two-part question. How much did you receive in amendment fees in the quarter? And then secondly, when you made amendments to portfolio companies, what was the most common form of amendment? And did the borrower sponsor provide an equity injection or concession along with your amendment?

So the first part was approximately $300,000 of one-time amendment fees. I think Bowen can speak to the description.

Yes. So most often the COVID effect on the few companies that affected pretty materially that I referenced earlier there's a concern about the future and uncertainty about the future but confidence that the COVID will pass eventually. And so it's usually a request of okay, well we'd like to kind of store up liquidity at the Fed portfolio company. And so lender would you pick your interest for a period of time that's usually one or two quarters? And we, owner, will contribute X to the company in exchange for that. And then maybe there's slight covenant really for a couple of few quarters. And there's economic fees paid. I mean, that's kind of just a base case conversation. And then you had other companies where there wasn't a liquidity issue but it was like well covenants a little bit tight. We'd like a little bit of covenant relief in the next – for the next couple few quarters. We'll pay you all fee to do that. And in those cases we're getting enhanced economics for the increased leverage. A lot of times we'll put in a rate grid. So LIBOR, let's say let's make up a scenario LIBOR 700 loan. Now it's going to get close or even break through the previously negotiated covenant. So the sponsor comes to us and wants some covenant relief, meaning that they want covenants widened. And then we'll put in a rate grid where as the leverage travels up to the new allowed range, our yield goes up, our spread goes up. So that may be a certain leverage level it goes to LIBOR 750 and then LIBOR 800, LIBOR 850 what have you. And then it allows them also as the COVID passes and the company continues to perform they can earn their way back into a lower spread maybe something closer to where it was in the original deal if that makes sense. And so that's typically how the conversation goes.

Okay. That makes sense. And I appreciate the insight. And then next question, we weren't expecting you to be active in the ATM this quarter. Now we think investors appreciate your historical approach to capital management and allocation but how should we think about your future desire for primary equity at these prices?

Yes. We've said before, the ATM program is going to be something that we plan to turn on and stay on whether above NAV because we don't – what we don't want to see happen is us to basically create a cliff, where we need to go out and go to the market with a large equity raise and be subject to whatever discounts that would – the negotiated discount we'd have to take on. An average deal on a primary deal would be 7% to 10%. So we're raising it at a 2% fee. So we think that's quite frankly a better use of a – to better process for our shareholders. And so we're going to continue to use – I think we're going to turn it on and leave it on and continually build up an equity base over time.

Yes. However, we don't view the stock price as being limited to NAV. It's not just about selling every share we can above NAV or slightly more. We take a long-term and full cycle perspective on everything. Our goal is to consistently raise small amounts of equity each quarter while simultaneously investing that capital. As Michael mentioned, we're aiming for a 2% spread instead of the 7% to 10% spread typical of larger marketed deals. If you look at it over the long term, we've mentioned raising $51 million, and we achieved that at a much lower spread than if we had launched a deal of that size in a traditional way. Additionally, we can't count on the capital markets being available precisely when we need it, so we believe it's in the best interest of our shareholders to take smaller amounts each quarter.

I want to highlight that we raised $5.7 million and had the capacity to raise more, but we chose to stop a week before the window closed because our analysis showed we didn't require additional funds. Therefore, we are not aiming to maximize every dollar available.

Okay. That makes sense. And then my last question, we think most investors see your core dividend to be safe, but the shortfall of coverage could worry some investors. So looking at your coverage a different way, under what conditions do you think you would need to adjust your dividend?

Well, we tell you that where we are right now, the $0.41 is stable relative to what our earnings power is. With LIBOR having dropped down to where it is and with everything you read, the notion that LIBOR is going to be stable for the next 12 to 18 months, and barring non-accruals, we would expect to see our NII jump up over the next few quarters. And so, we'll probably likely retain the dividend level at $0.41 and build up additional dividend coverage. But we would tell you, we feel very comfortable where the dividend is. There would be no plans to have to cut it at any point in time.

Okay. That's very reassuring, and that's it for me. Thank you for taking my questions, and congrats on the quarter.

Thanks.

Our next question comes from Greg Mason of Ares Management. Your line is open.

Hi. Good morning, guys. Thanks for taking my question. I really just had one left and that was the impact of the realized losses on the undistributed taxable income. How will that impact the UTI spillover and from a tax characteristic? And if there are further losses that ultimately are realized kind of through this pandemic as you continue to restructure things, how will that impact the UTI going forward?

Thanks for the question. The good news is that your UTI balance is not impacted by the realized losses. However, it does mean you need to achieve a certain amount in realized gains before you can add more to the UTI. Specifically, we will need to generate a gain of $5.5 million over time or retain UTI by holding back on our dividend to continue to contribute capital.

No. But what's important is that as a first-lien lender, when the capital structure collapses, the first-lien lenders take ownership and the equity is erased, along with junior capital. In the case of Delphi, our equity ownership in that business means that if the business turns around, which we are clearly seeing, and then succeeds in recovering the valuations lost in the next couple of years, that could be a way to recover the realized loss. If we manage to recoup that realized loss, then everything else can start contributing to additional UTI, if that makes sense. So, it's crucial to be involved in those situations to potentially own a part of that company.

Yeah. I think the good news on that is, I mean with the $1.27 balance, we feel like we've got two to three years of runway to create those gains to apply against those losses to continue this program without any interruption.

Great, thanks guys. Appreciate it.

You bet.

There are no further questions. I'd like to turn the call back over to Bowen Diehl for any closing remarks.

Well, thanks everybody for joining us. We appreciate your support, and we'll continue to work hard for you all. And we look forward to keeping you posted next quarter on updating us on our business.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.