Capital Southwest Corp Q2 FY2025 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 Chief Executive Officer, Bowen Diehl.

Thanks, Chris. And thank you, everyone, for joining us for our second quarter fiscal year 2025 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 release issued last evening on our website. We'll now 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 pre-tax net investment income of $0.64 per share, which fully covered our regular dividend of $0.58 per share and our supplemental dividend of $0.06 per share paid during the quarter. Portfolio earnings continue to be strong, and as of the end of the quarter, we estimate that our undistributed taxable income was $0.64 per share. As we look forward to the December quarter, we are pleased to announce that our board of directors has declared a regular dividend of $0.58 per share for the quarter ended December 31, 2024. Our board has also declared a supplemental dividend of $0.05 per share, bringing total dividends declared for the December quarter to $0.63 per share. Deal flow in the lower middle market continues at a healthy pace this quarter, while competition in the market for both bank and non-bank lenders for quality deals continues to be fierce. This has resulted in tighter spreads on quality new deals, as well as slower net portfolio growth over the last two quarters for Capital Southwest as we have maintained our credit discipline. That said, our current backlog of deals in which we have either signed up or have received an indication that we are likely to win would indicate that net portfolio growth should be very strong in the December quarter. The deals we are currently underwriting continue to have loan-to-value levels ranging from 35% to 50%, resulting in significant equity capital cushions below our debt and reasonable leverage levels of around three times debt to EBITDA. Deal closings in the lower middle market have always been lumpy from quarter to quarter, and that is certainly the case these past few quarters. Over the past decade, our team has done an excellent job generating attractive returns for our shareholders in all competitive environments. And I am highly confident we will continue our track record in the current environment. Josh Weinstein will provide additional color on the market, our investment activity, and the performance of our portfolio later in our prepared remarks. Portfolio activity during the quarter consisted of $89.8 million in new commitments to four new portfolio companies and 11 existing portfolio companies, as add-on financing continued to be an important and highly attractive source of origination for us. Portfolio growth for the quarter was offset by $45.2 million in proceeds from four debt prepayments, which generated a weighted average realized IRR of 14.5%. On the capitalization front, during the quarter, we increased our ING-led corporate credit facility to $485 million from $460 million with the addition of one new bank lender. Additionally, we raised approximately $21 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $24.49 per share or 148% of the prevailing NAV per share. We remained diligent in ensuring that we have strong balance sheet liquidity while also funding a meaningful portion of our investment activity with accretive equity issuances. We continue to maintain a conservative mindset toward both BDC leverage and the balance sheet liquidity. Balance sheet liquidity at Capital Southwest remains robust, which Michael will provide additional commentary on in a moment. Managing leverage to the lower end of our target range while ensuring strong balance sheet liquidity affords us the ability to continue to invest in new platform companies as well as provide financing for both growth capital and add-on acquisitions for our existing portfolio companies. We believe this strategy allows us to continue to grow our balance sheet through any capital markets environment, while also maintaining the flexibility to opportunistically repurchase our stock if it were to trade meaningfully below NAV. On Slide 7 and 8, we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage, and solid value creation. Since the launch of our credit strategy almost 10 years ago, we have increased our quarterly regular dividend 29 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pre-tax net investment income. In addition, over the same period, we have paid or declared 26 special or supplemental dividends totaling $4.06 per share, all generated from excess earnings and realized gains from our investment portfolio. Dividend sustainability, strong credit performance, and continued access to capital from multiple capital sources are all core to our overall business strategy. Our track record in all these areas demonstrates the strength of our investment and capitalization management strategies as well as the absolute alignment of all our decisions with the interest of our fellow shareholders. As a reminder, Slide 9 lays out the core tenets of our investment strategy in lending and investing in the lower middle market. The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms. Currently, approximately 93% 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 junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies in tandem 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 consisted of 72 investments with a total fair value of $134 million, representing 9% of our total portfolio at fair value. Our equity portfolio was marked at 132% of our cost representing $32.5 million in embedded unrealized appreciation or $0.68 per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, often resulting from the institutionalization of the businesses by experienced private equity firms as well as the significant value accretion potential of strategic add-on acquisitions. Equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation as well as equity distributions to Capital Southwest over time. As illustrated on Slide 10, our on-balance-sheet credit portfolio ended the quarter at $1.4 billion, representing year-over-year growth of 17% from $1.2 billion as of September 2023. For the current quarter, 100% of the new portfolio company debt originations were first lien senior secured. As of the end of the quarter, 98% of the credit portfolio was first lien senior secured with weighted average exposure per company remaining at 1%. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. We expect this metric will continue to improve in our asset base growth. I want to now hand the call over to Josh to review more specifics of our investment activity, the market environment and the performance of our portfolio for the quarter.

Thanks, Bowen. On Slide 11, we detailed $89.8 million of capital invested in and committed to portfolio companies during the quarter. Capital committed during the quarter included $72 million in first lien senior secured debt across four new portfolio companies, in which we also invested a total of $975,000 in equity. In addition, we closed add-on financing for 11 existing portfolio companies consisting of $16 million in first lien senior secured debt and $815,000 in equity. We are pleased with the strong market position that our team has established as a premier lender to the lower middle market. This is evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities. As a point of reference, currently, there are more than 70 different private equity firms represented across our investment portfolio. Additionally, in the last year, we closed 10 new platforms with financial sponsors, which we had not previously closed the deal, showing our continued penetration in the market. Since the launch of our credit strategy back in January 2015, we have completed transactions with over 100 different private equity firms across the country, including over 20%, which we have completed multiple transactions. As Bowen mentioned, competition in the lower middle market over the last six months has been quite strong. This has resulted in tight loan pricing for high-quality opportunities. We in the depth and strength of the relationships our team has cultivated over the years. We continue to source and gain opportunities with attractive risk-return profiles, and we are very pleased with the current backlog of transactions that should close between now and the end of the year. Turning to Slide 12. We continued our track record of strong returns on our exits for debt prepayments during the quarter. In total, these exits generated $45.2 million in total proceeds, generating a weighted average IRR of 14.5%. During the quarter, the prepayment activity was driven by the robust financing market as all four prepayments were refinancing transactions of portfolio companies with EBITDA in excess of $15 million. Two of the companies, ADS Tactical and WIS, were large syndicated credits formerly held at I-45, which were paid off at par. Over the past 10 years, we have realized 86 portfolio company exits, representing over $1.1 billion in proceeds that have generated a cumulative weighted average IRR of 13.9%. On Slide 13, we detail key statistics for our portfolio as of the end of the quarter. The total portfolio consisted of 118 unique companies with a fair value as of the end of the quarter, weighted 89.2% in first lien senior secured debt, 1.8% in second lien senior secured debt, 0.1% in subordinated debt, and 8.9% in equity co-investments. The credit portfolio had a weighted average yield of 12.9% and a weighted average leverage through our security of 3.8 times EBITDA. Overall, we are pleased with the operating performance across our loan portfolio. In fact, as shown on Slide 14, the portfolio upgrades were meaningfully more than the downgrades this quarter. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four-point scale, with one being the high rating and four being the lowest rating. We had five loans representing $80 million in fair value upgraded during the quarter, while having only one loan representing approximately $12 million in fair value downgraded during the quarter. The portfolio remains healthy with 93.5% of the portfolio at fair value weighted in one of the top two categories, one or two, and only 6.5% of the portfolio in the three or four categories. Cash flow coverage of debt service obligations across the portfolio remained at a healthy 3.4 times despite the higher base rate environment. With our loans across our portfolio averaging approximately 43% of the portfolio company enterprise value. Quarter-over-quarter revenue and EBITDA growth on a weighted average basis was 2% and 1%, respectively. As seen on Slide 15, our portfolio continues to be broadly diversified across industries, with an asset mix that provides strong security for our shareholders' capital. In addition to industry diversification, our average exposure per company is 1% of assets, which gives us great comfort in the overall risk profile of our portfolio. Our investment committee members utilized our cumulative experiences navigating through various economic cycles to continually assess risk, both on a company-by-company basis as well as on the portfolio. I will now hand the call to Michael to review the specifics of our financial performance for the quarter.

Thanks, Josh. Specific to our performance for the quarter, as summarized on Slide 16, pretax net investment income was $30 million or $0.64 per share as compared to $31.3 million or $0.69 per share in the prior quarter. Net investment income after tax was $31.2 million or $0.66 per share for the quarter. The main driver of the tax benefit this quarter was $1.5 million in deferred taxes related to our taxable subsidiary, CSCI, which holds the majority of our equity investments. For the quarter, total investment income decreased to $48.7 million from $51.4 million in the prior quarter. The decrease was driven primarily by a $1.8 million reduction in one-time cash dividends from equity investments in the prior quarter, as well as a decrease of approximately $800,000 in fee revenue quarter-over-quarter. The decrease in cash dividend income was the result of three non-recurring dividend recap transactions which occurred in the prior quarter. As of the end of the quarter, our loans on non-accrual represented 3.5% of our investment portfolio at fair value, and the weighted average yield in the portfolio on all investments was 12.7%. During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend. As mentioned earlier, our board has declared a regular dividend of $0.58 per share in the supplemental dividend of $0.05 per share for the December quarter. Management and the board have spent significant time contemplating the impact of a lower interest rate environment on future earnings. We have consistently maintained the setting a regular dividend at a level that we believe will never be cut in any foreseeable interest rate environment is key to generating stable, attractive shareholder returns over the long term. We continued our strong track record of regular dividend coverage with 119% coverage for the 12 months ended September 30, 2024, and 111% cumulative coverage since the launch of our credit strategy in January 2015. As a reminder, our intent is to continue to distribute to our shareholders the excess of our quarterly pretax NII over our regular dividend 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 $0.64 per share and the expectation that we will harvest gains over time from our existing $0.68 per share in unrealized appreciation on the equity portfolio. As seen on Slide 17, LTM operating leverage ended the quarter at 1.7%, which improved slightly quarter-over-quarter. Our operating leverage of 1.7% continues to compare favorably to the BDC industry average of approximately 2.8%. We believe this metric speaks to the benefits of the internally managed BDC 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 be invested in people and infrastructure as we continue to build and manage a best-in-class BDC. Turning to Slide 18. The company's NAV per share at the end of the quarter decreased slightly by $0.01 per share to $16.59 per share. The primary drivers of the NAV per share decrease for the quarter are net realized and unrealized depreciation on our investment portfolio, offset by accretion from the issuance of common stock at a premium to NAV per share. Turning to Slide 19. We are pleased to report that our balance sheet liquidity is robust with approximately $475 million in cash and undrawn leverage commitments on our two credit facilities and our SDA dense debenture commitment, which altogether represents 3.6 times the $133 million of unfunded commitment we had across our portfolio as of the end of the quarter. During the September quarter, commitments to the ING-led corporate credit facility increased to $485 million, up from $460 million in the prior quarter, with the addition of one new bank lender. In addition, based on the current borrowing base, we have access to the full $485 million in total commitments. This facility has an accordion feature allowing for the further increase in 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. As a reminder, in March 2024, we submitted a MAC application to the FDA, which began the process towards a second SBIC license. We are actively working with the FDA, and we continue to be optimistic that we will complete this process by the end of this calendar year. Finally, as of the end of the September quarter, 46% of our capital structure liabilities were unsecured covenant-free bonds with our earliest debt maturity in January 2026. Our regulatory leverage, as seen on Slide 20, ended the quarter at a debt-to-equity ratio of 0.8 to 1, up from 0.75 to 1 as of the prior quarter. While optimal target leverage continues to be in the 0.8 to 0.95 range, we are weighing the impact of future base rate reductions and maintaining adequate cushion levels to allow us the flexibility to potentially increase leverage to support future earnings and dividend growth. We will continue to methodically and opportunistically raise secured and unsecured debt capital as well as equity capital through our ATM program, to ensure we maintain significant liquidity and conservative balance sheet leverage with adequate covenant cushions. From a capital markets perspective, BDCs have been very active in the unsecured debt market as investors remain constructive on new bond issuances. Despite not having any maturities within our debt structure until 2026, we are actively evaluating financing transactions to mitigate future capital market volatility while also being mindful of the current interest rate environment. I will now hand the call back to Bowen for some final comments.

Thank you, Michael, and thank you, Josh. And again, thank you, everyone, for joining us today. As always, we appreciate the opportunity to provide you with 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 is doing in building a robust asset base, deal origination, portfolio management capability, as well as a flexible capital structure. We believe we have prepared our company well for future growth and performance. The overall health and security of our portfolio is strong. Our credit portfolio is predominantly made up of first lien senior secured loans allocated across a broad array of companies and industries with a weighted average exposure per company of only 1%. The vast majority of our portfolio is backed by private equity firms. Interest coverage and the debt obligations across our portfolio was a strong 3.4 times with strong equity cushion and support below our debt investments. Additionally, our equity co-investment portfolio gives our shareholders participation in the equity upside of many of these growing lower middle market businesses, providing further enhancement to our long-term shareholder returns. Last but not least, we have a very well-capitalized balance sheet with multiple capital sources and significant balance sheet liquidity, all of which provides our company an exciting runway to continue to grow and generate strong shareholder returns for years to come. This concludes our prepared remarks. Operator, we are ready to open the lines for Q&A.

Certainly. Our first question will be coming from Brian McKenna of Citizens JMP. Your line is open.

Okay. Great. Thanks good morning, everyone. So I heard the commentary around some deals that got pushed into calendar 4Q. Is there any way to quantify this? And then it's great to hear that the pipeline is also robust. So how should we think about the magnitude of net portfolio growth into year-end and then also into calendar year 2025 as well?

We had deals delayed into the fourth quarter, and as I mentioned earlier, we have agreements in the pipeline that are undergoing significant due diligence, and we've received indications that we are likely to win these deals, so we anticipate they will close. These factors will contribute to substantial net portfolio growth in the quarter.

Our originations were primarily in the later stages compared to the quarter ending September 30. If we were to estimate, we anticipate around $150 million to $200 million of net portfolio growth for this quarter. We expect that about half of the originations have either been completed or are expected to close soon. Therefore, we expect strong portfolio growth as well as income and balance sheet improvements.

Yeah. Okay. Got it. That's helpful. And then maybe just a bigger picture question. What are you seeing just within kind of the lower middle markets and then really just the markets more broadly in terms of new deal activity? I think deal flows remain largely stable, the last several years and kind of the lower middle markets and broader sponsor M&A has been pretty muted. So I think we've seen some larger players moving down market. So thinking about sponsor M&A, specifically in the larger end of the market, that should be picking up here. So I guess, what does that mean for transactions and yields in your space? And then are you seeing any early signs of some of these larger firms moving back up market a bit?

It's a really interesting question that we get asked often. Over the past several years, we've seen a significant amount of capital raised first in the private equity market and then in the private credit market. The volume of capital raised tends to favor the larger market due to the sheer amount of capital involved. We've also noted that deal flow has been relatively muted over the past year and a half. There are two main factors at play here. It doesn’t take much change in the competitive balance between supply and demand for capital in the lower middle market to impact pricing. The deal flow in the lower middle market mainly consists of private equity firms acquiring controlling interests in family-owned businesses that are aging and looking to diversify. This deal flow has remained flat. With decreased activity in the upper market and flat deal flow in the lower middle market, private equity firms have experienced heightened competition from larger market players. This creates a cascading effect where larger private equity firms are starting to pursue slightly smaller deals, followed by mid-market firms doing the same and so on. As mentioned, once deal flow increases again, that trend should reverse. There is currently a large amount of liquidity in the market, but the speed of that reversal is uncertain. Additionally, we are seeing increased competition from banks, which can disrupt pricing dynamics. Although we haven’t observed significant deterioration in credit, there have been minor changes around the edges, but pricing has fluctuated more significantly. Overall, it doesn't take much to disturb the pricing landscape.

We say perspective. Probably three quarters ago, in fact, our spread over Silver was 750, two quarters ago, the June 30 quarter, it was 700, and this quarter, it was just a shade over 650. So we've seen obviously somewhere in the 50 to 100 basis points tightening on spread at the moment.

Yeah. All right, great. Thank you guys. I’ll leave it there.

Thank you. One moment for our next question. And our next question will be coming from Doug Harter of UBS. Your line is open.

Thanks. Can you talk about your appetite to continue to raise capital given the combination of the premium to book and the increased pipeline that you talked about?

Sure. So well, I'll start by saying we've done a lot of the hard work coming for today. We have close to $500 million of capital available either through cash or availability on our credit facilities. Now we're trading where we are 1.5 times book, and the ATM is constantly raising capital on a daily basis. I would say that we are always opportunistically looking to additional capital and certainly with an eye towards our funds in 2026, sort of refinance those in time. So I would tell you, yes, we're active there. You'll probably see us increase secured capacity a little bit. We certainly should expect over the next six to nine months to see some unsecured activity, and raising ATM money will probably look like something in the $20 million to $40 million a quarter.

Great. Appreciate that. Thank you.

Thank you. One moment for our next question. And our next question will be coming from Bryce Rowe of B. Riley. Your line is open.

Thanks. Good morning. Maybe wanted to start around the discussion topic of the portfolio, a robust portfolio and a couple more questions around that. So Bowen, and maybe touch on the mix of the backlog, whether it be kind of newer portfolio companies versus existing portfolio companies. And I'm kind of curious, have you seen incremental spread compression since the end of September with some of the new deal activity that's kind of bled over into the fourth calendar quarter?

The new deal activity remains consistent, with about two-thirds being new platform companies and the rest as add-ons, which has been the historical trend over the past few quarters. Spreads have tightened a bit since September, but this isn't our main concern; it seems to be slightly tighter for quality credits.

That's helpful. Can you discuss how the loan rate resets lag behind short-term rates? We noticed some yield compression in the portfolio during the September quarter. Michael or Bowen, could you clarify what portion of that was due to non-accrual inflows and how much was driven by SOFR compression? Additionally, what are your expectations for the portfolio yield, considering that lag?

Sure. The SOFR decreased from about 5.1% in the previous quarter to an effective rate of 12 basis points for the quarter ending on 9/30 compared to 6/30. We observed a yield compression of approximately 15 basis points, along with some compression due to higher non-accruals during the quarter. This led to a reduction in our yield on this debt from 13.3% to 12.9%. For the quarter ending on 12/31, based on the reset date of October 1, we expect the rate to be 4.6%, which is a decline from the previous quarter's pipeline. We are anticipating another 50 basis points of compression, which reflects our current situation.

Yeah. Okay. Helpful. And then maybe just touch on the non-accruals. I mean, obviously, you saw the portfolio's weighted average risk rating improved in the quarter, but you did have a couple of non-accruals flow into that non-accrual bucket. Can you give us a little commentary around that, kind of what the expectation is for those particular assets?

We've added two new non-accruals, which is understandably frustrating. It's just part of our business. Both of these companies were already on our watch list since last quarter. One is a closeout sale business that targets lower-end consumers, and I believe that the current economic pressures, such as rising costs for eggs, gas, and milk due to inflation, have impacted this segment. The other company focuses on video content editing for platforms like Hulu, Netflix, and Prime, and has faced challenges due to the recent strike. Although the strike has concluded, the industry is still recovering. The return of that business will depend on the volume of streaming content produced and how quickly that recovers. We expect to restructure both non-accruals by the end of December, and discussions are ongoing. I am confident that we'll have them restructured by then. They'll be off the non-accrual list, but we'll maintain equity in these companies and continue collaborating with their management teams to turn their businesses around, if possible.

Probably of course, just to be clarified, so a portion of the asset will be debt and the portion will be equity. But some of it will come back on accrual. I can't give you those percentages now, but that's anticipated.

Yeah. Okay. Last one for me, just a modeling question. You saw the comp line kind of come in let's call it, 40% or so quarter-over-quarter. Michael, can you help us think about what that comp line might look like for the balance of the fiscal year?

I would say that the cash compensation run rate is expected to be around $3 million, with stock compensation figures likely between $1.5 million and $4.5 million on a normal basis. Additionally, SG&A is projected to be another $2.5 million, which would set the total SG&A run rate at approximately $7 million.

Okay, thank you all. Nice quarter.

One moment for our next question. Our next question will be coming from Matthew Hurwit of Jefferies. Your line is open.

Hi, there. This is Matt Hurwit from Jefferies. Congrats on the quarter. Just to follow up on the non-accrual list. Are you able to provide any detail on some of the NPAs from last quarter like Gauge, American Nuts Research Now or Stat Meds?

Research Now has been restructured and sold, resulting in a net realized loss this quarter. American Nuts is performing at a stable or slightly improved level, while Stat Meds is struggling.

And one moment for our next question. And our next question will be coming from Robert Dodd of Raymond James. Your line is open.

Hi, everyone. Regarding the net deployments, I want to clarify that this is not the factor influencing bonus accrual. However, considering the figures projected for the December quarter, along with the run rate comparison numbers and stock compensation, should we anticipate anything out of the ordinary in the fourth quarter given the strong level of deployments?

I would say that we evaluate the bonus accrual each quarter as we approach year-end. We have already accrued for the first three quarters based on our expectations for the end-of-year run rate. The fourth quarter will involve a true-up for the final bonus payment, which is made only once at the end of our fiscal year. We don’t base compensation on originations, so the bonus will depend on the company's performance, our credit situation, and our ability to provide dividends to shareholders for the rest of the year. We also need to consider the potential for supplemental dividends and building up the UTI bucket. Therefore, I wouldn't anticipate any significant changes, as that’s not how we compensate our employees.

Got it. Thank you. Regarding credit in general, I understand you mentioned having a low-end consumer business that has entered non-accruals this quarter. While these sectors are not directly related, could you share if there are other areas showing signs of weakness? You noted that EBITDA was up 1% quarter-over-quarter, which suggests that not all segments are performing equally; some must be experiencing declines. Are there any particular themes or additional concerns related to the lower EBITDA growth in some areas?

Thanks, Robert. There are unique situations within any portfolio. If I think about the broader economic trends, one significant observation is the lower-end consumer market. While we don’t have many businesses in that area, we’ve noticed some pressure there, particularly with discretionary purchases slowing down. This hasn’t necessarily translated into credit issues yet, but it is visible in the portfolio. Another point is that businesses serving other businesses are taking longer to make purchasing decisions, likely due to a cautious outlook on the future. This isn’t major when you look at our overall portfolio, but it’s a noteworthy narrative. Regarding rating migration, as you and Bryce mentioned, we’ve seen a good number of upgrades and few downgrades, with strong interest coverage this quarter. Our cash income is a larger portion of our overall income, which is more recurring. This gives us confidence in the sustainability of our dividends and benefits to shareholders. However, there are some negative stories, mainly due to individual management issues and easily solvable problems that can appear in any loan portfolio. Generally, the key themes seem to revolve around the low-end consumer and the slower investment decisions in B2B sectors.

Got it. Thank you.

And I would now like to turn the conference back to Bowen Diehl for closing remarks.

Thanks, operator, and thanks, everybody, for joining us today. We appreciate the opportunity to give you an update on our company and portfolio. And we look forward to keeping you updated on events in the future.

And this concludes today's conference call. Thank you for participating. You may now disconnect.