Capital Southwest Corporation (NASDAQ:CSWC) Q2 2025 Earnings Call Transcript

Capital Southwest Corporation (NASDAQ:CSWC) Q2 2025 Earnings Call Transcript October 29, 2024

Operator: Thank you for joining today’s Capital Southwest Second Quarter Fiscal Year 2025 Earnings Call. Participating on the call today are Bowen Diehl, Chief Executive Officer; Michael Sarner, Chief Financial Officer; Josh Weinstein, Chief Investment Officer, and Chris Rehberger, Executive Vice President of Finance. I will now turn the call over to Chris Rehberger.

Chris Rehberger: Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information, and management’s expectations, assumptions, and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties, and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest’s publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances, or any other reason after the date of this press release, except as required by law. I will now hand the call off to our Chief Executive Officer, Bowen Diehl.

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 NIV 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 to 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 grow 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 dividend — regular dividend 29 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pretax 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 a core tenants of our investment strategy in lending and investing in the Royal 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 [indiscernible] 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 the $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.

Josh Weinstein : 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 of companies consisting of $16 million in first lien senior secured debt in $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 countries 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 loss 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 back auto 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, is 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% to second lien senior secured debt, 0.1% to subordinated debt and 8.9% to equity co-investments. The credit portfolio had a weighted average yield of 12.9% and 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 4-point scale, with one being the high rating and for 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 which 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.

Michael Sarner : 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 onetime 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 nonaccrual 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 has 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 on 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 or 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% our capital structure liabilities were an 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 and while also being mindful of the current interest rate environment. I will now hand the call back to Bowen for some final comments.

Bowen Diehl: 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 and 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 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.

Operator: Certainly. [Operator Instructions]. Our first question will be coming from Brian McKenna of Citizens JMP. Your line is open.

Q&A Session

Brian Mckenna : 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?

Bowen Diehl : Yeah. So I mean, generally speaking, I mean, we had deals pushed into the fourth quarter and we — as I said in the commentary, if you look at the deals that we’ve either signed up, so they’re in heavy diligence or we’ve been told that we’re going to win likely so the deal has to close, right? But those two things, I mean, it will be very significant net portfolio growth in the quarter.

Michael Sarner : Yeah. So it’s also relative to the 9/30 quarter, our originations were mostly late stage. This quarter, if we were going to quantify, we’d probably see — I mean, on the services side, we probably expect to see $150 million to $200 million of net portfolio growth for the quarter. And so say half of the originations are — either have closed or will close shortly. So we expected a pretty strong portfolio growth, ultra-income as well as the balance sheet.

Brian Mckenna : 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?

Bowen Diehl : Yeah. So it’s a really interesting question. And when we think about and ask other firms about quite often. I think — over the last several years, we’ve seen an enormous amount of capital being raised initially in the private equity market and then in the private credit market. When you read about the quantity of capital raised, obviously, just that’s tends to lean more towards the large market, probably for no other reason to me just a lot more capital. I think we’ve also heard and you’ve read in the papers, et cetera, that deal flow, as you just referenced, has been muted in the last year and half years say. And so what we’ve heard is there’s two things going on. And it doesn’t take a whole lot of change in the competitive balance, if you will, between supply and demand and capital in the lower middle market to disrupt pricing.

So the deal flow in the lower or middle market, as we’ve — as you know, is not private equity firms selling businesses to each other, but it’s private equity firms buying controlling interest in founder family-owned businesses that are aging and want to diversify their holdings. And so the deal flow has been relatively flat. And so when you have decreased deal flow in the upper market and relatively flat deal flow in the lower middle market, we have seen certainly the private equity parties that I’ve talked to have seen some of the increased competition from larger market, private equity firms. It’s a cascading effect, right? So large market private equity firms starting to justify deals a little bit smaller and then mid-market justifying deals a little bit smaller and kind of cascades down.

And then as you just referenced, Brian, I mean that when deal flow picks back up, that should cascade back. Now there’s an enormous amount of liquidity in the market. So the speed at which that cascades back is the question mark, but I think it would tend to cascade back up. The other effect is in our market is we’re seeing more competition recently from banks. As we all know, banks come and go. They’re here now, and they were here year and half ago in many — and it’s a certain handful of regional banks. So that’s somewhat disrupts the market from a pricing perspective. We haven’t seen a lot of deterioration in credit, like leverage up covenants worse, a little bit around the edges, but not as much as pricing has changed. And so I think those two factors, again, it doesn’t take a lot to disrupt the pond, if you will from a pricing perspective.

Michael Sarner : 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.

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

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

Doug Harter : 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?

Michael Sarner : 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, we — the ATM is constantly rating 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 secure 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.

Doug Harter : Great. Appreciate that. Thank you.

Operator: 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.

Bryce Rowe : 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?

Bowen Diehl : Yeah. So I mean the new deal activity is you say two thirds new platform companies in third add-ons, which has kind of been the mix historically in the last several quarters. So it’s about the same. I’d say spreads have tightened slightly since September, but not — that’s not the biggest item of our concern, that change. It’s kind of the same, but it’s probably slightly tighter for quality credits.

Bryce Rowe : Okay. That’s helpful. And then maybe speak to — I think you guys have talked in the past about how the loan rate resets kind of lag what we see from a short-term rate perspective, we saw a little bit of yield compression for the portfolio here in the September quarter. Maybe Michael or Bowen, can you kind of speak to what percentage of that was non-accrual inflows? What percentage of that was SOFR compression driven? And then what your expectation is for the portfolio yield given that lag?

Michael Sarner : Sure. So saw SOFR come in from essentially 5.1% in the previous quarter from to effective, I guess, 12 basis points, it came in effectively for the 9/30 quarter versus the 6/30 quarter, compression on yield came in about 15 basis points and then there was some compression due to elevated non-accruals during the quarter. So it brought our yield on this debt from 13.3% down to 12.9%. For the 12/31 quarter, we’re expecting, based on the reset date, which was October 1, was 4.6%, so down from the pipeline in the previous quarter. So another 50 basis points anticipation — so that’s kind of good items to where we are on the compression today.

Bryce Rowe : 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?

Bowen Diehl : Yeah. I mean, it’s two new non-accruals, obviously, that’s frustrating. It’s part of our business. It’s frustrating to see — both of those names were three last quarter. So they were already on our watch list. One is a closeout sale company to lower end consumers, and I think that’s my view of that. I think our view of that is that the lower-end consumer that’s affected more acutely by the cost of eggs and gas and milk with inflation. And so that’s hurt that business. And then the other one is it serves the — it’s the video content that streamed through Hulu, Netflix, Prime, those types of things, they’re a video digital editor company. And so that’s been affected by the strike. That’s over, but the businesses — the industry is still down.

And then it’s just — the comeback of that business will be a function of the quantum of streaming content volume and how fast that recovers. Both non-accruals will most likely be restructured by the end of December. Both are in discussions right now. And I’m pretty confident that they’ll be restructured by the end of December. So they’ll be off that list anyway, but there’ll be companies where we’ll own equity in, and we’ll continue to work with the management teams and turn around those businesses, hopefully.

Michael Sarner : Probably of course, just to be clarified, so a portion of the asset will be to get 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.

Bryce Rowe : 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?

Michael Sarner : Yeah. I would tell you that the run rate for compensation — for cash compensation of $3 million, stock comp number should be about $1.5 million to $4.5 million for compensation on a normal basis, run-rate basis and then SG&A is another $2.5 million on run rates of total set SG&A at $7 million is the run rate you should be working off of.

Bryce Rowe : Okay, thank you all. Nice quarter.

Operator: One moment for our next question. Our next question will be coming from Matthew Hurwit of VP [ph]. Your line is open.

Matthew Hurwit : 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?

Bowen Diehl : Yeah. Research Now, I’ll start with that because that’s easy. That’s gone. That was restructured and sold. And so that’s actually the net realized loss this quarter. And then American Nuts, kind of flat to better business. And then what was the other one? — Stat Meds, that’s our one name that’s a four, and that company continues to kind of struggle.

Matthew Hurwit : Okay, that’s very helpful. Thank you all.

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

Robert Dodd : Hi, guys. On the net deployments, obviously, that is not what drives bonus accrual just the [Indiscernible] miss the point. But I mean with the number that you’re looking at for the December quarter, I mean — and you gave kind of some run rate comp numbers and stock comp I mean. Should we expect anything unusual in the fourth quarter given the level of deployments, which is healthy to say the least?

Michael Sarner : I mean I would say so, Robert. I think that from quarter-to-quarter, we assess what the bonus accrual will look like at year-end and then making — just to provide everybody we accrued for the first three quarters based on what we think the run rate will look like at the end of the year and then the fourth quarter will be the true up as the final bonus payment, a payment that supposed only paid at one time at the end of our fiscal year. So I mean, certainly, as — we definitely don’t pay people based on originations. So the answer to that question is it will depend on what’s going on with the company, how is our credit looking what we think we’re able to pay out, first and foremost, to our shareholders for dividends for the remainder of the year, but also with the eye of being able to continue to pay out supplemental dividends and build up the UTI bucket. So I wouldn’t expect anything dramatic because that is not how we compensate employees.

Robert Dodd : Got it. Thank you. And then on — so just credit in general, I mean — to your point, Bowen, I think you said you’ve got a low-end consumer business that’s a new non-accruals business this quarter. Digital — I mean these are not related industries, obviously. But I mean, is there any — I mean, I would expect the low-end consumer and any other exposure that will be under pressure. But any other areas where there’s any kind of emerging sign of weakness? I mean, to your point on the revenue and EBITDA, I mean EBITDA, I think, you said was up 1% quarter-over-quarter. So there’s got to be a — not everybody is up 1%. There’s got to be a proportion that are now declining sequentially. And I mean — any themes on where those pressures are and any incremental concerns given lower levels of EBITDA growth between some portion declining?

Bowen Diehl : Yeah. Thanks, Robert. I would say, look, I mean, there are idiosyncratic stories all throughout any portfolio, right? So I would say if I were to zone out and think about what are the economic related or trends or things that show up that would be on an economic general list. I mean one is the lower end consumer. No question about it. We don’t have a lot of businesses in that area, but like that’s something that we’ve seen not necessarily, yeah, to our non-accrual. But if you look across the portfolio, another one or two discretionary low-end consumer type purchases that slowed, not necessarily becoming a credit problem, but you see that in the portfolio. And then the other I would say is just businesses that are serving other businesses, business-to-business that decisions are slower to make purchase decisions, candidly, probably as much business is cautious about the future in some ways.

And so that — I don’t know that that’s like material if you zone out, look at our overall portfolio, but you definitely — there’s definitely a narrative about that in that respect. And then I’ll take a step back and like, all right, well, our rating migration, as you and Bryce both referenced, our rating migration, we have significant amount of upgrades, not a lot of downgrades, strong interest coverage in the portfolio on PIK interest this quarter as a percentage of income is down. So our cash — our income is a higher percentage of cash and it’s a higher percentage recurring. So you look at that and you feel pretty good about the engine that’s paying the dividend and that’s benefiting our shareholders. But at the margins, as you referenced, if you look at negative stories, other than just idiosyncratic, very fixable problems, bad management decisions, all those types of things that show up in any loan portfolio that are very fixable.

If you think about what general themes are, those would be the two kind of the low-end consumer and B2B slower investment decision or purchase slower purchase decisions.

Robert Dodd : Got it. Thank you.

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

Bowen Diehl : 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.

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