Capital Southwest Corp (CSWC) Q2 2021 Earnings Call Transcript

Thank you for joining today's 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'd 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're 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 everyone for joining us for our second quarter of fiscal year 2021 earnings call. Throughout our prepared remarks we will refer to various slides in our earnings presentation, which can be found on our website. We are pleased to be with you this morning to announce our results for our second fiscal quarter ended September 30, 2020. I want to first say that I hope everyone, their families and their employees continue to be safe and well. Here at Capital Southwest, we have continued to prioritize the health and safety of our employees and the employees of our portfolio companies. We remain in regular dialogue with our portfolio company financial sponsors and management teams and have been pleased with the overall performance of the portfolio. We have been most impressed with the management teams and financial sponsors' ability to manage all aspects of company performance, including protecting our employees, while increasing operating efficiencies during these unprecedented times. While the pandemic is not yet behind us, as we look back to where we were in March 2020 with so much uncertainty and market volatility, we are very grateful for all the work done by the team here at Capital Southwest and the teams at both our portfolio companies and financial sponsor clients. We're also extremely pleased with the performance of our portfolio and we remain highly confident in the quality of the assets and its earnings power. During the quarter, our portfolio performance continued to improve as evidenced by $8.4 million of net appreciation across the portfolio. For the quarter we had two loans which had investment rating upgrades. We had no investment rating downgrades and we had no new loans placed on non-accrual. As a well-capitalized first lien lender with ample liquidity, Capital Southwest continues to be in a favorable position to seek attractive financing opportunities and to provide financial support to help our companies grow. Executing our investment strategy under our shareholder-friendly internally managed structure closely aligns the interests of our board and management team with that of our fellow shareholders in generating sustainable long-term value through recurring dividends, capital preservation, and operating cost efficiency. On Slide 6 of the earnings presentation, we have summarized some of the key performance highlights for the quarter. During the quarter we generated pre-tax net investment income of $0.44 per share, which more than earned our regular dividend paid for the quarter of $0.41 per share. We also continued our supplemental dividend program paying out an additional $0.10 per share, funded by our sizable undistributed taxable income balance. Total dividends for the quarter of $0.51 per share represented an annualized dividend yield on the quarter stock price per share of 14.5% and an annualized yield on net asset value per share of 13.3%. I'm also pleased to announce that our board has declared total dividends of $0.51 per share again for the quarter ended December 31, 2020, consisting of a regular dividend of $0.41 per share and a supplemental dividend of $0.10 per share. During the quarter we grew our investment portfolio by over 7% to $631 million as of September 30, 2020. Portfolio growth during the quarter was driven primarily by $66.3 million in total new commitments to 4 new portfolio companies and 6 existing portfolio companies offset by $21 million in prepayments from two loans which I will review in a bit more detail in a moment. Additionally, on the capitalization front, we successfully raised $15 million in proceeds at par on our existing institutional unsecured bonds bringing the total principal outstanding of this bond issuance to $125 million. Finally, as we mentioned last quarter, we continue to work with the U.S. Small Business Administration towards becoming officially licensed. We are pleased to report that we completed our final license submittal during the quarter, and look forward to reporting developments on the status of our pending license application to our shareholders as warranted. As a reminder, final approval and issuance to Capital Southwest of an FDIC license would provide a 10-year commitment to provide Capital Southwest with up to $175 million in debt financing to be drawn to fund investment in our lower middle market strategy. We estimate that the vast majority of the deals we have reviewed over the past five years would qualify for FDIC financing, giving us a high level of confidence that we will be able to invest this capital in our existing strategy and continue to support growth and employment in small businesses across the country. As a reminder, each draw from the FDIC debenture program separately represents a new debt security in our capital structure with a 10-year maturity from the date of draw, making this capital truly long term in nature. From a cost perspective, if treasury rates remain close to today's level, the all-in cost of the FDIC debentures would be less than 3%. This program is clearly a perfect fit for our lower middle market focus and we look forward to continuing to work with the SBA in completing the application process and in successfully executing the SBA's mission of supporting growth and employment in U.S. Small businesses. Turning to Slide 7 and 8, we illustrate our track record of producing a strong dividend yield, consistent dividend coverage and value creation since the launch of our credit strategy. We strongly believe that the maintenance and growth of both NAV per share and dividends paid per share are paramount to creating long-term value for our shareholders. Turning to Slide 9, as a reminder, our investment strategy has remained consistent since its launch in January of 2015. We continue to focus on our core lower middle market, while also maintaining the ability to invest in the upper middle market when attractive risk-adjusted returns exist. In the lower middle market, we directly originate opportunities consisting of debt investments and equity co-investments. Building out a well-performing and granular portfolio of equity co-investments is important to driving NAV per share growth as well as aiding in the mitigation of any credit losses over time. Overall, we believe that maximizing the top end of our deal origination funnel in both markets is critical to generating strong credit performance over time, as it ensures that we consider a wide array of deals, allowing us to employ our conservative underwriting standards and thoughtfully build a portfolio that will perform through any economic cycle. Though we continue to take a cautious and extremely selective approach towards deploying new capital, taking into account the new normal of potential pandemics among other risks, we are pleased to have the capital to invest to support acquisitions and growth across our markets. That said, we continue to find superior risk-adjusted return opportunities in the lower middle market, where we can lend at lower leverage and loan to value levels while maintaining tighter covenants and other terms in the loan documents. As illustrated on Slide 10, our own balance sheet credit portfolio, excluding I-45, grew 7% during the quarter to $521 million, as compared to $487 million as of the end of the prior quarter. Our credit portfolio is currently weighted 82% to the lower middle market, down slightly from 85% last quarter as a result of two loan prepayments in the lower middle market and two originations in the upper middle market during the quarter. We continued to heavily emphasize first lien senior secured debt lending with 100% of the debt originations this quarter being first lien senior secured. As a result, as of the end of the quarter, 91% of the credit portfolio was in first lien senior secured debt. On Slide 11 we lay out the $56.3 million of capital invested in and committed to portfolio companies during the quarter. This included $42.2 million in first lien senior secured debt committed to four new portfolio companies and $20.9 million in additional first lien senior secured debt committed to six existing portfolio companies. Turning to Slide 12, as I previously alluded to, we had two lower than expected market exits this quarter, Danforth Advisors and Trinity 3. Our debt at Danforth was refinanced by a traditional bank, repaying our loan in full, generating proceeds of $6.7 million and an IRR of 12.4%. We continue to hold equity in Danforth alongside the sponsor, and we are excited to watch this management team and sponsor continue its stellar performance. In the case of Trinity 3, which also appears on the new deal funding for the quarter, we were able to participate in a much larger club deal which refinanced our original loan and finance a large strategic acquisition for Trinity 3. We also hold an equity interest in this company and are very excited about its continued growth prospects going forward. This continues our track record of successful exits. To date, we have generated a cumulative weighted average IRR of 14.7% on 33 portfolio exits, generating approximately $308 million in proceeds. On Slide 13, we break out our on-balance sheet portfolio as of the end of the quarter between the lower middle market and the upper middle market, excluding I-45. As of the end of the quarter, the total portfolio, including equity co-investments, was weighted approximately 84% to the lower middle market, and 16% to the upper middle market on a fair value basis. We had 39 lower middle market portfolio companies with a weighted average leverage ratio measured as debt to EBITDA through our security of 3.9x, down from 4.1x weighted average leverage in the prior quarter. This reduction in leverage was primarily driven by EBITDA performance across the lower middle market portfolio during the quarter. Within our lower middle market portfolio, as of the end of the quarter, we held equity ownership in approximately two-thirds of our portfolio companies. Our own balance sheet upper middle market portfolio excluding I-45 consisted of 12 companies with an average leverage ratio through our security of 3.7x, down meaningfully from the 4.4x weighted average leverage for the prior quarter. This decrease was also driven primarily by EBITDA improvement quarter-over-quarter across the portfolio. Turning to Slide 14, we have laid out the rating migration within our portfolio for the quarter. During the quarter we had two loans upgraded while having no loans downgraded. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four-point scale, with 1 being the highest rating and 4 being the lowest rating. The upgrades consisted of two loans to one portfolio company previously rated at 3, which were upgraded to a 2 rating based on improved performance. As of the end of the quarter, 80% of our investment portfolio at fair value was rated in one of the top two categories, one or two. We had seven loans representing 10% of the portfolio at fair value rated three and only two loans representing 2% of the portfolio at fair value rated four. As illustrated on Slide 15, we have established a portfolio well-diversified across industries with an asset mix that provides strong security for our shareholders' capital. The portfolio remains heavily weighted towards first lien senior secured debt, with only 6% of the portfolio in second lien senior secured debt and only 2% of the portfolio and one remaining subordinated debt investment. Turning to Slide 16, the I-45 portfolio shows meaningful improvement during the quarter as our investment in I-45 appreciated by $4.7 million or 8%. Leverage at the I-45 fund level is now 1.39x debt to equity at fair value, which is substantially improved from the March 31 quarter average of 2.51x. As of the end of the quarter, 96% of the I-45 portfolio was invested in first lien senior secured debt, with diversity among industries and an average haul size of 2.4% of the portfolio.

Thanks, Bowen. Specific to our performance for the September quarter as summarized on Slide 17, we are in pre-tax net investment income of $8.1 million or $0.44 per share. This was a 13% increase from the $7.2 million or $0.40 per share earned during the prior quarter. We paid out $0.41 per share regular dividends for the quarter flat from the $0.41 regular dividend per share paid out in the prior quarter. As mentioned earlier, our board has also declared a further $0.41 regular dividend per share to be paid out during the December quarter. In the near and long term, we have built a consistent track record of meaningfully covering our regular dividend with pre-tax net investment income, as demonstrated by our 103% regular dividend coverage over the last 12 months and 106% cumulative regular dividend coverage since the launch of our credit strategy. During the quarter, we maintained our supplemental dividend at $0.10 per share and again, our board has also declared a further $0.10 per share supplemental dividend to be paid out during the December quarter. As a reminder, the supplemental dividend program allows our shareholders to meaningfully participate in the successful exits of our investment portfolio through distributions from our undistributed taxable income balance. As of September 30, 2020, our estimated undistributed taxable income balance was $1.19 per share. Our investment portfolio produced $16.7 million of investment income this quarter, with a weighted average yield on all investments of 10.4%. This represents an increase of approximately $1.5 million from the previous quarter. As Bowen mentioned, we had no new non-accruals as of the end of the quarter. Currently, three assets remain on non-accrual with a fair value of $10.9 million, representing 1.7% of our total investment portfolio at fair value. The weighted average yield on our credit portfolio was 10.3% for the quarter. On Slide 18, we lay out our operating leverage for the quarter, which was up slightly quarter-over-quarter. Operating expenses were slightly elevated this quarter, due mainly to a true-up to our annual bonus accrual based on improvement in our overall portfolio performance as well as an increase in share-based compensation expense relating to the annual grant to employees. On a run-rate basis, we expect operating leverage will be well within our sub 2.5% target going forward. Turning to Slide 20, the company's NAV per share as of September 30, 2020, was $15.36 as compared to $14.95 at June 30, 2020. The main driver of the NAV per share increase was $8.4 million of appreciation in the investment portfolio, much of which was in the upper-middle market portfolio. On Slide 21, we lay out our multiple pockets of capital. As we have mentioned on prior calls, a strategic priority for our company is to continually evaluate approaches to de-risk the liability structure of the company, while ensuring that we have adequate investable capital throughout the economic cycle. During the quarter, we raised an additional $50 million on our 5.375% unsecured notes due 2024 and subsequently paid down $20 million on our 5.95% baby bond due 2022. We will continue to be opportunistic in paying down higher-priced debt to optimize net investment income while also being mindful of maintaining appropriate flexibility in our liability structure. Our debt capitalization today includes a $325 million on-balance sheet revolving line of credit with 11 syndicate banks maturing in 2023, a $57 million publicly-traded baby bond maturing in 2020, a $125 million institutional bond with over 25 institutional investors maturing in 2024, as well as a $150 million revolving credit facility at I-45 with four syndicate banks maturing in 2024. We're pleased to report that our liquidity is strong, with approximately $151 million in cash and undrawn commitments as of the end of this quarter with ample borrowing base capacity and covenant cushions on our senior secured revolving credit facility. Approximately 49% of our current capital structure liabilities are unsecured, with the earliest debt maturity at December 2022. Our balance sheet leverage as seen on Slide 19 ended the quarter at a debt to equity ratio of 1.28 to 1. Finally, as Bowen mentioned, we continue to work actively with the SBA toward an FDIC license, which would allow us in time to access up to $175 million at attractively priced debt at our FDIC. We believe we're in the final stages of the licensing process and are hopeful of receiving our license by the end of the calendar year. We are excited to integrate the FDIC license into our capitalization strategy as the flexibility and low cost of FDIC debentures should be highly accretive to our net investment income per share, while also allowing us to continue to provide important growth and acquisition capital to U.S. Small businesses. 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 have developed consistent with the vision and strategy we communicated to our shareholders almost six 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 difficult environments, like the one we have experienced over the past several months. In fact, difficult environments like this demonstrate the investment acumen of our team at Capital Southwest and the merits of our first lien senior secured debt strategy. 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. 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, even in challenging times such as these. This concludes our prepared remarks. Operator, we are ready to open the lines for Q&A.

Our first question or comment comes from Michael Smith from B. Riley. Your line is open.

Hey, congrats on a very strong quarter. So my first question would be, you had a very good quarter of origination activity despite some of the COVID headwinds, so I was wondering if you can maybe size the pipeline, and just talk a little bit about the quality of deals you're seeing now, just in terms of pricing covenants, attachment points, etcetera?

Sure, thanks for the question. We found the quarter's origination to be very strong, including both new portfolio companies and four add-on acquisitions at our existing companies. Currently, I would say the pipeline is about average. It remains solid but is at an average level. Regarding market conditions, we believe that most, if not all, of the pre-COVID premium in terms of yield or spread has diminished. There may be minor variations in some deals, but generally, the pre-COVID or COVID premium has reduced significantly. With respect to leverage attach points, I think we're still seeing leverage attachment points slightly below pre-COVID levels. And covenants are still strong, and the EBITDA adjustments, and those types of things that you see in credit docs are still really strong in the lender's favor, I should say. And as far as quality deals, we definitely are seeing quality deals, certainly seeing low-quality deals too, low quality being defined as companies that we still can't underwrite COVID performance. But we're seeing a fair amount of quality deals. And if you look across the business descriptions of the companies we originated this quarter, I mean, software, government services, cybersecurity, and internet marketing-type companies, there's really interesting business models, especially in this environment. So, our team has done an excellent job. They've got a very wide array of relationships, and they've done a fantastic job monetizing those relationships through the form of originating quality deal flow.

That's very helpful color. So another question would be on leverage. You're currently sitting at 1.28 times and, if I'm not mistaken, I think the previous target was one to two. So I'm just wondering, how are you thinking about leverage moving forward here? And are you comfortable with it being slightly above your target?

Sure. I'll make a macro comment just with respect to leverage as it relates to economic cycles. In a recessionary challenging environment, you might be willing to go to one leverage level and in a peak, everything's wonderful, marching forward like we were a year ago, you want to be in another leverage level. And so you don't want to maximize leverage at the high end of the cycle. And you might be willing to have leverage increase at the low end of the cycle. And you want to go into the cycle with leverage low, so that you can manage leverage down in the cycle. So what all that means, if you think about leverage up to 1.28, the answer is, yes, we're comfortable with where we are. It is higher than our 1.1 to 1.2 target range we gave pre-COVID. If you just take a high-level look at the depreciation in the portfolio during COVID, retracing that COVID effect on the portfolio, we're basically back to the top end of our leverage range, and so, you have to keep in mind that as the portfolio re-appreciates that leverage, all else equal will come down. So that's one point and why I can say we're comfortable with where we are. We have visibility on $30 million to $35 million in prepayments coming from our well-performing portfolio companies that are being sold or refinanced. This gives us confidence in our cash inflows, which we will reinvest in new originations. Additionally, for nearly two years before COVID, our stock traded above book value. I believe this demonstrates that our business model and strategy should be valued above NAV in a more typical market. With the stock trading above NAV, we have an at-the-market program that we can access at low spreads. Currently, our yield on NAV is around 13.5%, while our stock price exceeds 14%. Ultimately, the market will determine the risk premium on our stock, and we are content to let it unfold.

Yes, I was just going to say, just from a company profile perspective, our asset mix is a little different now than it was a year ago. We were probably in the mid-80s on first lien and our 91% first lien. We probably had two to three sub debt investments, and today we have one sub debt investment. And our equity percentage of the portfolio was probably in the low 20% and now it's sub 10%. So our overall profile is a lot stronger than it was then. So you could probably take on a little more leverage based on that profile.

Yes, that's all very helpful. And then one more high-level question for me. If I'm not mistaken, I think $631 million is a record portfolio size. So just given your outlook for the origination environment, and the potential for an SBA license, I'm wondering what kind of portfolio size can you support with your current infrastructure?

Yes, so we've managed costs, we look at operating leverage, and so we think as the portfolio grows, we're looking at the operating leverage number. So as our portfolio grows, we can invest in staff and resources. So our dollar costs will go up over time, but that's what we look at as a percentage of our assets. And so, as we layer in the FDIC, as we continue to grow the portfolio, we will add people, but we manage it to that operating leverage number because that's really what the shareholders should care about, is that percentage drag, if you will, on the income and the portfolio from overhead that we're spending. So we look at that metric and we absolutely add resources as we grow the assets.

Got it. Well, thanks for taking my questions. I'll let somebody else ask a few. Thanks.

Thank you. Our next question or comment comes from the line of Mickey Schleien from Ladenburg. Your line is open.

Good morning, Bowen and Michael, nice to hear from you. I wanted to follow up on the prepayment risk. I think we're living in a world of haves and have-nots in terms of the portfolio companies. And there's a lot of private debt capital out there chasing, what I would say, still a limited deal pipeline when you consider the constraints everyone has on underwriting. Meanwhile, there are potential changes in tax rates, and that could catalyze some business orders to sell now this quarter. So, with those trends in mind, how high do you feel prepayment risk is in your portfolio, given the strength of some of your investments, besides the two that you've already mentioned in the prepared remarks?

Thanks for the question. I mean, to quantify the number, it's $30 million to $35 million of prepayment, so we have some visibility on. With respect to the environment and tax regime changes, theoretically as we move into the end of the year, because of potential pending capital gains treatment changes that could definitely influence deal flow. I would say that I’m not as certain that people are going to make, especially with the aging entrepreneurial population that are monetizing their retirement in these businesses generating a lot of sales across the lower middle market. I don't know that a founder of a business makes a rash lifetime decision, 30 days here or there based on a tax change. If they were already thinking about selling their business, it could absolutely accelerate it and push it into this year. I would also say that we won't know until tomorrow or hopefully soon after the election change, and you would have more visibility on a theory on tax change. It'd be hard to launch a sale process right now and get it sold by the end of the year. So, long way of saying, I don't know that the tax changes necessarily are going to dramatically change. There certainly are prepayment risks. But look, as a lender, the strongest performers get pre-paid refinance, especially in the lower middle market, where traditional banks maybe aren't willing to lend to some of these companies we are. And then, the traditional banks in the case of Danforth refinanced out. I mean, that's a process. And so, there's a vast majority of portfolio companies that are just going along, growing, and we end up holding loans for a couple of years, then you have the star performers, and of course, you have a small universe of guys that underperform.

Yes. And also to say, some of the deals that are set to repay were on our list of deals that could occur. So that's being taken off the register. So what we're left with is a lot of companies that we've refinanced over the last two years. So we actually feel like we have a good sense that there's not going to be another $30 million to $50 million in the next quarter after that. So I feel like a lot of the stuff that's happening right now.

That's helpful. I appreciate that. And Bowen, I wanted to touch on the non-performing loans, if I'm not mistaken, they're all in certain stages of bankruptcy. And I think there's been some movements since our last call. So starting with American Addiction, from what I've read, the information is a little sparse, it looks like you're going to be repaid in cash on that from asset sales. Is that correct? And when will that be?

So based on what's public, it's going to emerge from bankruptcy relatively soon. It'll be restructured. So the lender group, personally, lender group which we are a part of will end up holding a debt security, first lien debt security in the new restructured company, and then ownership of the equity in the company. So it'll be restructured, it will emerge from bankruptcy and Capital Southwest actually will have a board seat. And so, that's that; it will all be resolved relatively soon. I mean, it's not in our control, but it's basically got to work through taxes and various things structuring the recap, the restructuring, so that's AC. Anyway, you want to talk about Kings and CPK as well?

Well, before we go into those, you will end up with a performing piece of debt in AAC at some point, maybe next quarter?

That's correct; that's the expectation.

So CPK, it looks like similarly you're going to get equity and debt. Is that correct? And when is that going to happen?

The situation is similar to AC regarding what will occur from the bankruptcy perspective. We will have a performing first lien note and equity in the company, but we won’t have a board seat in that case. We believe this will happen, and it may be announced fairly soon.

Right. And what's the game plan for CPK? I mean, I've been reading headlines where lenders, surprisingly, are taking over some of these restaurant businesses despite everything that's going on in the world, obviously thinking that in the long term there must be value there. I think you've mentioned in the past that CPK was doing pretty well prior to the pandemic, but looking ahead, are there any major changes you expect to implement with the other owners at CPK? Or you're just going to wait for COVID to run its course and hope for things to improve?

I appreciate the question. I'll share my thoughts, but I want to be cautious about the confidentiality concerning that company. It's clear that the management team is doing a commendable job with the business. One observation is that the new restaurants are attracting customers, which indicates that the brand is relevant and in demand in the market. That is encouraging. Of course, COVID has created a lot of challenges for restaurants, and the management team is implementing some creative strategies to address these issues at CPK. Additionally, any political unrest in an area impacts all retailers, including restaurants. Although there is a lot of noise out there, I believe the management team is doing an excellent job, we have weekly calls, and people are eager to dine at the open restaurants. And so, based on those two things, that gives me a lot of encouragement as to the future of that concept once all the market noise, COVID pandemic noise sort of fades away, which will, this too shall pass. And so, still challenges, but good team, and there's definitely some signs of relevance of that concept and brand.

I understand that. That's great. Thanks for that. And on AG Kings, obviously there was a stalking-horse bid. I haven't seen another bid come through unless I'm mistaken. Is that correct? Or are there other folks snooping around and potentially going to offer?

Yes, so that's actually been announced, and they signed a purchase agreement to sell to Albertsons. That's in a process of closing/documentation. And it's pretty much all I should really say about it, but our evaluation is the best guess on waterfall analysis around the proceeds on a sale.

Okay, I didn't see that Albertsons announcement. Thanks for that. And finally, just a balance sheet question. Is there any restriction on using the remaining borrowing base in the credit facility to help fund the SBIC once you get the license? And at the same time, can you contribute at least part of your positions in your existing lower middle market portfolio to capitalize it?

Yes. We're able to draw on the revolver to fund the equity. And in the plan going forward, we expect to get the license, as we said earlier, by the end of the year, and then we'll start originating assets, and the collateral will get allocated between the revolver and the FDIC. And we think that's important from a capital flexibility standpoint, I think you've seen other BDCs that are solely focused on FDIC, and when things go bad, they don't have enough collateral in a revolver to be able to draw. And that's obviously a cash flow issue. So we will be ramping up our revolver, in fact, to both pay down some of the 5.95% bonds, as well as to accommodate originations that are not in the FDIC going forward.

I understand, and Michael, can you sort of warehouse lower middle market deals now and contribute to the SBIC once you get the license to move things along?

The answer is you can, but the answer is there's a process you go through. We're not going to do that. We actually expect that we're weeks away from actually having that application. We don't want to be presumptive, but that's the guidance we've been given. So we're going to just wait until probably December and likely start allocating those assets to the FDIC, probably in January.

And just directionally, how will leverage in the SBIC subsidiary progress since you're not going to start out at two to one leverage on day one?

Sure. So you essentially get one term of leverage out of the gate, and it's based on the tech notes related to the FDIC. So essentially, the first $40 million of capital will be funded by us as equity, and then we'll be drawing from the FDIC thereafter.

You have access immediately to $40 million of debentures then?

Yes. Okay. That's it for me this morning. I appreciate your patience and your time. Thank you.

Thank you. I'm showing no additional questions in the queue. At this time, I would like to turn the conference back over to Mr. Bowen Diehl for any closing remarks.

Great. Thanks, operator. Again, thanks, everybody for the call. Thanks for all the robust questions. We appreciate it and we look forward to keeping you guys posted on our progress and will not before we'll be talking next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.