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<p type = "text" content = "Capital Southwest Corp& nbsp; (NASDAQ: CSWC)
Q3 2019 Earnings Conference Call
February 5, 2019, 11:00 am ET"data-reactid =" 23 ">Capital Southwest Corp (NASDAQ: CSWC)
Q3 2019 Earnings Conference Call
February 5, 2019, 11:00 am ET

Thank you for your participation in Capital Southwest's third quarter 2019 results conference. Bowen Diehl, CEO; Michael Sarner, Chief Financial Officer; and Chris Rehberger, Vice President of Finance.

I will now give the floor to Chris Rehberger.

Thank you. I would like to remind everyone that during this call, we will make 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 many risks, uncertainties and assumptions that could cause actual results to differ materially from these statements.

For information regarding these risks and uncertainties, see the Capital Southwest documents available to the public from the SEC. The Company assumes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances, or for any other reason subsequent to the date of this press release. unless required by law.

I will now give the call to our President and CEO, Bowen Diehl.

<p type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director"data-reactid =" 37 ">Bowen S. DiehlPresident, Chief Executive Officer and Director

Thank you Chris. And thank you all for joining us for our call for financial results for the third quarter of fiscal year 2019. Throughout the remarks we have prepared, we will refer to various slides of our presentation of results, available on our website at www.capitalsouthwest.com. We are pleased to be with you this morning to announce our quarterly results. In summary, we had a strong quarter in terms of net investment income growth and a strong quarter as our trading teams continued to do a great job generating a significant flow of transactions that allowed us to exercise our investment discipline. prudent to determine the transactions we want to pursue. at closing.

As we have always said, our objective remains to build a portfolio consisting primarily of senior secured senior debt with a co-investment in equities across the entire loan portfolio, where we believe it is there is an important opportunity for higher shares. In addition, we continue to implement our shareholder-friendly, in-house, owner-managed structure that closely aligns our interests with those of our other shareholders, which is to generate long-term, sustainable value through constant growth dividends, operating profitability, capital preservation and NAV. share the growth.

In general, we added a different quarter. We sold one of our last two assets in equities with a modest gain. We completed the company's first equity investment, raising $ 13.2 million from two of BDC's leading investors. We finalized the increase and refinancing of our ING Capital-led balance sheet credit facility and we opportunistically redeemed Capital Southwest shares through our 10b5-1 program during the period of excessive market volatility. observed in December.

Slide 6 presents some important summary points on our performance for the quarter. During the quarter, we realized net pre-tax investment income of $ 0.40 per share and paid a regular dividend of $ 0.36 per share. In addition, our additional dividend program paid $ 0.10 per share, funded by the balance of our undistributed and non-negligible taxable income, generated by the excess income and capital gains accumulated through our strategy. to date. For the quarter, the total dividend per share of $ 0.46 per share generated a total annualized dividend yield of 9.6%. During the quarter, we increased our portfolio on a net basis from $ 492 million as at September 30, 2018 to $ 497 million as at December 31, 2018.

Creating a total of $ 26 million in commitments to two new portfolio companies and a complementary investment in an existing holding company, offset by $ 18 million of outflows from the quarter. Once again this quarter, all of Capital Southwest's capital was generated by directly initiated and managed transactions by our investment teams, which continue to demonstrate our presence in the market. Our I-45 Senior Loan Fund also continued its strong performance, generating an annualized return of 15.5% on our capital of the Fund for the quarter. During the quarter, we continued to grow the right side of our balance sheet by increasing the size of our on-balance sheet credit facility. As part of our overall change to the credit facility, we were able to achieve a significant increase in the liabilities of our bank lenders while reducing the prices and overall cost of the facility.

It is important to note that we have also been able to incorporate the opportunity to access the increased leverage allowed by the law on the availability of small business credit adopted in 2018. As a reminder, the law and our Modified credit facility allows us to increase leverage at BDC to Our board has also approved a policy to limit regulatory leverage at Capital Southwest to a maximum of 1.5 to 1. Mike will deal with details of the change in a moment. While cautiously increasing leverage at BDC, we will improve our ability to improve the quality of our loan portfolio, while generating higher returns for our shareholders. Throughout an internally managed Internet structure in which almost 100% of the economy from the increased leverage of the asset base will go to our shareholders.

Turning to slide 7, we illustrate our continued shareholder dividend growth as we continue to migrate BDC to target debt levels through the smooth build-up of a high-performing asset-backed portfolio. On the slide, we also illustrate both the net asset value per share over time and the adjusted net asset value per share, adjusted for additional dividends paid to shareholders. For the quarter, the net asset value per share decreased by $ 18.43 as at December 30, 2018 compared to $ 18.43 as at December 31, 2018. The decrease in net assets of 41% (approximately $ 0.41) 2%) during this quarter is explained by three factors.

First, we recorded a net depreciation portion of our net investment portfolio of $ 2.4 million, or $ 0.14 per day, which I will come back to in a moment. Second, we paid an additional quarterly dividend of $ 0.10 per share on the balance of our UTI plan. And third, the board has granted restricted shares each year to Capital Southwest employees. Although restricted stock awards vest over four years, all of the granted shares are added to our total outstanding shares immediately upon their grant. For your reference, if you isolate the effect on the NAV per share from the sole valuation of the portfolio assets, adding both the effect of the additional dividend paid and the effect of the restricted annual stock grant to the employees , our NAV per share would have decreased by approximately $ 0.14 per share, representing a decrease of 0.75% or 75 basis points.

Not surprisingly, the extreme market volatility observed in December had a negative impact on the valuations of all BDC portfolios, including ours, as quarterly valuations are generally measured on the last day of the quarter. , while were almost at the lowest for the year. Specifically, the levels of the various relevant market indices, which are key inputs in our quarterly valuation process, decreased significantly at the end of the quarter compared to the end of the September quarter. On the equity side, we have seen the multiples of public markets fall, while on the debt side, corporate credit is spreading and union syndication loan quotes are declining. Although subscribed markets fell sharply at the end of the year in almost all cases, the discounted market prices were not accompanied by paper for sale at lower price levels.

As a result, in our opinion, most of the amortization of Capital Sud-Ouest's portfolio during this quarter was related to the volatility of this market rather than the fundamental performance of our overall portfolio. In fact, on a weighted average basis in Capital Southwest's portfolio, revenues and EBITDA increased quarter-over-quarter and the weighted average leverage of our mid-market portfolio in the lower half of the portfolio. Capital Southwest Security decreased from the end of the previous quarter. As part of our internal process – as part of our internal investment rating process, three portfolio companies benefited from upgrading their ratings, while two portfolio companies were downgraded.

As a reminder, all creative investments are initially signed with a rating of 2 out of 4, with one being the highest and four the lowest. Overall, we are satisfied with the performance of the investment portfolio, with 96% of the portfolio rated "investment grade" 1 or 2, 4% of the portfolio rated "investment grade" 3 and none of the portfolio companies ranked Investment grade 4..

This quarter, we placed our first senior secured secured loan with AG Kings, which is not recorded, which was one of two demotions. As a club member, we invested $ 9.2 million in the cost of this loan along with a few other leading mid-market lenders. Although I want to be careful not to provide too much detail on this public call for a private company, I will say that the company has defaulted on some of its financial covenants; the sponsor has also decided to withhold payments from the December monthly interest payment. to be incorporated in a wider discussion of the amendments.

As a result, the company remains in default today with a group of lenders aggressively pursuing its income. Based on the current debt level of the company about 4 times the ratio debt / EBITDA, our estimate of the value of the company as well as the experience and the Aggressive posture of the group of lenders, we are optimistic: this defect will be solved favorably for Capital Southwest and its lender. the partners.

Moving on to slide 8. Our investment strategy has remained the same since it was launched in January 2015. As a reminder, we continue to focus on a mix of mid-market and mid-market assets, which gives us strategic flexibility. ability to seek attractive risk-adjusted returns in both markets. In our main market, the lower middle market, we directly generate opportunities to invest in debt securities and equity co-investments in conjunction with our debt securities. It is important to build a highly performing and granular equity co-investment portfolio to stimulate growth in NAV per share, while mitigating future credit losses. At the same time, our ability and presence in the mid-upper market provides us with the opportunity to opportunistically invest in a more liquid market where attractive risk-adjusted returns exist.

In the last year or so, in the upper middle market, we have been very difficult to find value for syndicated loans. For transactions and structures, we found it acceptable in terms of risk return, we often chose to take small positions of about $ 5 million, which fit perfectly into I-45. As market generations continue and we see opportunities to invest in syndicated credits from the Upper Middle Market at particularly attractive spreads, we have the ability and the liquidity to take advantage of these opportunities either through exposure additional to our balance sheet, either by a possible increase in size. from I-45.

On the other hand, in the lower middle market, our robust origination platform continues to generate a large flow of transactions allowing us to close some very attractive opportunities from the point of view of risk return. We believe that it is essential to maximize the top of our original funnel to generate strong credit investment performance over time, as this allows us to consider a wide range of transactions that allow us to apply our conservative underwriting standards in a competitive market. And thinkfully build a portfolio that will work throughout the business cycle.

Capital Southwest's balance sheet loan portfolio, presented on slide 9, excluding I-45, increased from $ 337 million as at September 30, 2018 to $ 351 million as at December 31, 2018, under from the pursuit of low-key origination activity. As the portfolio grew, the percentage of the credit portfolio represented by the lower middle market increased in design to 77%. While we increased the percentage of the portfolio represented by the lower middle market, we also continued to place a strong focus on senior secured debt ranking first in our investment strategy. At the end of the quarter, we had 86% of our balance sheet credit portfolio in senior secured debt.

On slide 10, we committed $ 26 million during the quarter in two new portfolio investments and one additional investment in an existing holding company. All investments were made in the lower middle market and all were directly created and managed by Capital Southwest. On a weighted average basis, investments in debt securities during the quarter returned 11.1%. Our borrowings in the current quarter included $ 24.7 million of senior secured debt consisting of $ 12.5 million of first lien debt, a divisional secured debt $ 2.2 million first lien secured – for a $ 2.2 million deferred term loan secured. for a portfolio of existing companies. We also invested $ 1 million in a co-investment in equities funded alongside one of our new trading portfolios.

As indicated on slide 11, we received $ 18 million in proceeds from the release of three investments; Upper Middle Market investment and two Lower Middle Market investments. One of our exits resulted from the sale of Deepwater Corrosion Services to a strategic buyer, which generated a realized gain of $ 1.7 million, or $ 0.10 per share. Deepwater, a preferred share investment born in 2013, was one of our last two positions in traditional stocks. After a difficult period in the energy services sector in 2015 and 2016, Deepwater was able to recover and position itself for a strategic sale, producing an attractive result for its shareholders.

This quarter's outflows continue to generate strong risk-adjusted returns for our shareholder capital, which we now have 25 since the launch of our credit strategy four years ago, representing a product of approximately $ 180 million. dollars generating a weighted average IRR on exit. 16.3%. Media Recovery is now the last capital investment inherited from our portfolio. Media Recovery does business under the Spotsee banner. The Spotsee management team continues to do a great job in developing and increasing the profitability of the company. As we have mentioned in previous earnings appeals, the acquisition of this company continues to arouse strong interest. We have now hired an investment banker and are working closely with them to launch a sales process. Consistent with our previous comments, we plan to exit this investment during the 2019 calendar year.

On slide 12, we separate our balance sheet credit portfolio, excluding I-45, from the lower middle market to the higher middle market. At the end of the quarter, the total portfolio was weighted at about 79% for the lower middle market and 21% for the upper middle market, on a cost basis. We had 25 lower middle market investments with average holdings of $ 12.3 million, weighted average EBITDA of $ 9.3 million, weighted average return of 11.9% and leverage measured as Debt to EBITDA 3.2 times.

I should also note that the average weighted average portfolio leverage of our mid-market portfolio is 3.2 times lower than the 3.4-fold average at the end of the previous quarter. At the end of the quarter, in our portfolio of lower middle markets, we held stocks in approximately 72% of the companies in our portfolio. Our portfolio of Upper Middle Market consisted of 10 loans of an average size of $ 8.3 million, a weighted average EBITDA of $ 71.1 million, a weighted average return 10.4% and a leverage by our title of 3.8 times, which was unchanged from the previous quarter.

As illustrated on slide 13, we have a well-diversified portfolio with a strong focus on first lien secured debt, providing strong security for capital preservation for our shareholders. In addition, 97% of our credit risk is invested in floating rate securities, as shown on slide 14, so our shareholders should continue to benefit if interest rates continue to rise.

As shown in slide 15, at the end of the quarter, the I-45 portfolio was 95% 1st lien, with a variety of business sectors and an average holding size of 2 , 1% of the portfolio. The I-45 portfolio had a weighted average EBITDA of approximately $ 70 million and a weighted average leverage on I-45 stock of 3.7 times versus 3.8 times at the end of the previous quarter. We are pleased with the strong performance of the I-45 over the past 3.5 years. We and our partner in I-45, Main Street Capital, have invested approximately $ 500 million in the fund and made 50 outflows, generating proceeds of $ 196 million with a weighted average IRR of 11.4%.

I will now give Michael the floor to review the details of our financial performance for the quarter.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerFinancial director"data-reactid =" 67 ">Michael S. SarnerFinancial director

Thanks Bowen. As shown in slide 16, our investment portfolio generated investment income of $ 13.9 million this quarter, with a weighted average return on all investments of 11.1%. This represents an increase of $ 1.3 million over the previous quarter mainly due to net portfolio growth. The weighted average return on our credit portfolio was 11.6% for the quarter, stable compared to the previous quarter. At the end of the quarter, there was an unrecognized asset with a fair value of $ 8.6 million, representing 1.7% of our total investment portfolio.

Excluding interest expense, we incurred operating expenses of $ 3.7 million this quarter, unchanged from the prior quarter. We achieved $ 6.8 million or $ 0.40 per share of pre-tax net investment income during the quarter, compared to $ 0.36 per share in the prior quarter. We distributed regular dividends of $ 0.36 per share for the quarter, an increase of $ 0.02 per share from $ 0.34 per share paid in the prior quarter. We continue to focus on the sustainable growth of our regular dividends, as evidenced by our 103% regular cumulative dividend hedge since the launch of our credit strategy four years ago.

As Bowen mentioned earlier, we also paid an additional dividend of $ 0.10 per share this quarter as part of our additional dividend program. This program allows our shareholders to participate significantly in the successful outflows of our investment portfolio. The program will continue to be funded from our undistributed taxable income from realized gains on debt and equity, as well as net undistributed investment income earned each quarter in addition to our ordinary dividends. This quarter, the gain on Deepwater, coupled with our significant regular dividend hedge, provided an IU supplement to strengthen the program. At the end of the year of December 31, 2018, our UTI balance was $ 1.20 per share, which allowed us to better fund the supplement program at its current level for calendar year 2021.

In the future, realized gains and net investment income realized in addition to our regular dividend will replenish the UTI balance, extending the additional program beyond 2021. For example, if we were to assume a SpotSee's sale in calendar year 2019 to our current valuation with no further realized gains or additional income from UTI from net investment income, we expected the additional dividend program to expand to calendar year 2023. Beyond 2023, we hope that our many co-investments in equities realized in the framework of our lower middle market This strategy would make it possible to continue to reconstitute the UTI in view of the extension of the dividend program additional.

On slide 17, we illustrate our operating leverage, which has improved significantly from 4.9% in 2016 to 2.9% as at December 31, 2018. We continue to actively manage operating costs in phases with the growth of the portfolio to achieve our goal. a longer-term operational leverage of less than 2.5% that we expect to achieve in the coming quarters. With all senior professionals and largely in place business infrastructure, the growth of the portfolio here should continue to enhance our operational leverage through our internally managed structure. As Bowen mentioned earlier, during the quarter, our net asset value per share decreased by $ 0.41, or 2%, to $ 18.43 per share, as shown on slide 18.

As shown in slide 19, on the right side of the balance sheet, we have created multiple pockets of capital with extended maturities to provide us with maximum flexibility for a thoughtful increase in our investment portfolio. In fact, due to the recent modification of the ING credit facility, we currently have in the balance sheet approximately $ 155 million in cash and unused commitments, with no obligation of payment up to the date of the transfer. the end of the 2022 calendar year, with an additional unused capacity of $ 11 million within our portfolio. Credit facility I-45. The leverage effect of our balance sheet at the end of the quarter was 0.62 for 1 debt / share.

As Bowen indicated earlier, we increased, expanded and amended our credit facilities with ING Capital in December. Total commitments under the credit facility increased by $ 60 million from $ 210 million to $ 270 million for flows generated by the diversified group of nine lenders. The amendment provides for an extension of the $ 350 million accordion feature to reflect the future growth of the company. The renewal period of the credit facilities was extended from November 2020 to December 2022 and the final maturity was extended from November 2021 to December 2023. Credit facility pricing was reduced from LIBOR plus 3% to LIBOR plus 2.5%.

Amendment to the Credit Facility – the amendment to the Credit Facility reduces the Minimum Asset Coverage Clause from 200% to 150% from the anniversary date of the approval of our Board of Directors on April 25, 2019 We believe that this amendment significantly improves the flexibility of our financing and our competitive position in the market in the future. In addition, in October 2018, we issued 700,000 common shares at a net price of $ 18.90 per share by two institutional investors of BDC. The price of the offering was greater than the net asset value and less than 2% of the market price, generating proceeds of $ 13.2 million.

During the quarter, we also executed our share repurchase program, which was initially approved by our board of directors in 2016. Market volatility in December temporarily drove the share price of Capital Southwest under the net asset value, which triggered our share repurchase program and resulted in the repurchase of approximately 10,500 shares. at an average price of $ 17.72, which is a discount of 6% on the NAV at the time of redemptions. We continue to be pleased to accept Capital Southwest's equities taking into account the time volatility of the market, but the shares being sold at a significant discount to the net asset value.

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

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director"data-reactid =" 78 ">Bowen S. DiehlPresident, Chief Executive Officer and Director

Thank you Michael and thank you all for your presence today. Southwest Capital grew and the business and portfolio grew in line with the vision and strategy we communicated to our shareholders more than four years ago. Our team has done a great job, generating strong returns for our shareholders. Everyone here Capital Southwest is fully committed to being a good capital manager of our shareholders by continuing to generate strong performance and creating long-term sustainable value for our shareholders.

This concludes our prepared remarks. Operator, we are ready to open the lines for questions / answers.

Questions and answers:

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator"data-reactid =" 82 ">Operator

Ladies and Gentlemen, (Operator Instruction) Our first question comes from Mickey Schleien with Ladenburg. Your line is open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mickey Max SchleienLadenburg Thalmann & amp; Co. Inc. – Analyst"data-reactid =" 84 ">Mickey Max SchleienLadenburg Thalmann & Co. Inc. – Analyste

Yes. Bonjour tout le monde. Je voulais juste clarifier certains termes, si je peux. Je pense que vous avez indiqué que vos offres pour le Lower Middle Market de ce trimestre étaient directement à l’origine. Mais si je ne me trompe pas, il s’agit également d’affaires sponsorisées. Cela signifie-t-il que vous avez trouvé les transactions puis sorti et trouvé des sponsors, ou que cela signifie-t-il exactement quand vous dites directement avoir été à l’origine?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPrésident, chef de la direction et administrateur"data-reactid =" 86 ">Bowen S. DiehlPrésident, chef de la direction et administrateur

Yeah. Salut mickey C&#39;est Bowen. Merci pour la question. Donc, lorsque nous pensons que cela revient en grande partie à sortir et à nouer des réseaux, nous trouvons des offres et une grande partie des personnes avec lesquelles nous établissons des réseaux et que nous vendons à notre sponsor de private equity. Donc, au lieu d’avoir une autre société de prêt, trouvez le parrainé ou ayez la relation avec le sponsor, dans laquelle nous discutons avec lui, ce que nous avons fait un peu. Mais surtout, ce que nous faisons, ce sont nos relations de réponse que nous avons initiées – les sponsors trouvent en réalité l’opportunité réelle de la société dans ces situations, puis ils nous appellent et nous travaillons avec eux en raison de nos relations avec eux pour établir un partenariat avec eux. Et donc, quand je dis directement à l&#39;origine, je veux dire que c&#39;est une relation de sponsor que nous avons, que nous avons exploitée et que nous avons trouvé une opportunité de partenaire prêt à acheter une entreprise.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mickey Max SchleienLadenburg Thalmann & amp; Co. Inc. – Analyste"data-reactid =" 88 ">Mickey Max SchleienLadenburg Thalmann & Co. Inc. – Analyste

Et Bowen, dans ce processus ou les sponsors, fixent le prix de cette chose ou est-ce une sorte de négociation exclusive avec vous?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPrésident, chef de la direction et administrateur"data-reactid =" 90 ">Bowen S. DiehlPrésident, chef de la direction et administrateur

Ainsi, généralement les sponsors – la grande majorité des partenaires ont des relations avec plusieurs prêteurs, non? Je dirais donc que nous sommes pratiquement toujours en concurrence avec d&#39;autres prêteurs pour une situation et l&#39;une de celles qui – l&#39;un des indicateurs de notre décision selon laquelle le sponsor détermine le prix, mais les autres indicateurs sont la réputation de l&#39;entreprise, l&#39;historique des individus et ce genre de choses. Donc, dans notre connaissance de cet espace ou de ce que vous avez …

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerDirecteur financier"data-reactid =" 92 ">Michael S. SarnerDirecteur financier

La liquidité aussi.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPrésident, chef de la direction et administrateur"data-reactid =" 94 ">Bowen S. DiehlPrésident, chef de la direction et administrateur

Oui, la liquidité aussi. Je veux dire à quel point notre entité a-t-elle le pouvoir de rester à long terme et ce type de choses? Donc, mais dans tous les cas, au cours du trimestre, nous avons également eu recours à d’autres prêteurs.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mickey Max SchleienLadenburg Thalmann & amp; Co. Inc. – Analyste"data-reactid =" 96 ">Mickey Max SchleienLadenburg Thalmann & Co. Inc. – Analyste

Ok, je comprends. Si je peux me contenter de poser des questions sur l&#39;évaluation, en particulier avec la volatilité qui prévalait à la fin de l&#39;année dernière, l&#39;indice de crédit à effet de levier S & P s&#39;est élargi d&#39;environ 150 points de base, ce qui, je suppose, a probablement eu une incidence sur la valeur de vos investissements dans les fonds de prêt de rang supérieur et supérieur. . Cet élargissement a-t-il donc une incidence directe sur le calcul du taux d&#39;actualisation utilisé, du moins en ce qui concerne l&#39;investissement basé sur le revenu, ou utilisez-vous une autre méthode?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPrésident, chef de la direction et administrateur"data-reactid =" 98 ">Bowen S. DiehlPrésident, chef de la direction et administrateur

Tout d’abord, je dirais tout d’abord, Michael, que vous commentez bien cette question, mais la métrique est un élément si elle est incluse dans celle-ci – donc la métrique elle-même, l’indice réel, que nous utilisons comme prêt absolument. 1 à 1 base va dans le prêt. Et puis, tout comme votre entreprise privée (en difficulté technique) sur une base de capital, vous pouvez utiliser des annonces de sociétés ouvertes, mais vous devez ensuite actualiser le multiple de conclusion sur une grande société ouverte. Si une réduction est appliquée, cette multiplication permet d’obtenir la définition d’un multiple privé équivalent. Le même concept s’applique à la dette tout en envisageant l’élargissement de l’écart par rapport à un prêt important. Il y a donc des ajustements apportés aux indices boursiers, ainsi qu&#39;aux indices de dette. Mais l’indice de base, si vous voulez entrer dans le calcul, est une base avec laquelle vous commencez.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerDirecteur financier"data-reactid =" 100 ">Michael S. SarnerDirecteur financier

Du côté des courtiers, le courtier cite vraiment où nous avons terminé le trimestre à 12/31 (ph), le marché étant plutôt à la baisse. C’est le mot qui suit – dicte beaucoup de choses où, comme I-45, aurait pris fin.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPrésident, chef de la direction et administrateur"data-reactid =" 102 ">Bowen S. DiehlPrésident, chef de la direction et administrateur

Yeah. Nous prenons la croissance du marché indépendamment du point de savoir s&#39;il existe réellement du papier à vendre de ce cours de marché. Si la cote du marché bouge et est souvent le cas, pas de papiers ou de vente au prix réduit, notre valorisation baisse.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mickey Max SchleienLadenburg Thalmann & amp; Co. Inc. – Analyste"data-reactid =" 104 ">Mickey Max SchleienLadenburg Thalmann & Co. Inc. – Analyste

Je comprends. Une dernière question, puis je reviendrai dans la file d&#39;attente. La fermeture du gouvernement at-elle eu un impact sur vos emprunteurs?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPrésident, chef de la direction et administrateur"data-reactid =" 106 ">Bowen S. DiehlPrésident, chef de la direction et administrateur

Je veux dire, je dirais presque vraiment aucun. Nous voudrons peut-être savoir, à la fin du mois de mars, en regardant en arrière sur la performance trimestrielle et en réfléchissant aux réunions de notre conseil qu’il serait peut-être théorisé d’avoir comme effet un effet des affaires ici et là, mais rien ne ressemblerait à un appel téléphonique à nous sur une situation qui était matérielle.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mickey Max SchleienLadenburg Thalmann & amp; Co. Inc. – Analyste"data-reactid =" 108 ">Mickey Max SchleienLadenburg Thalmann & Co. Inc. – Analyste

D & # 39; agreement. C&#39;est suffisant. C&#39;est ça de moi. Merci pour votre temps.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Opérateur"data-reactid =" 110 ">Opérateur

Thank you. And our next question comes from the line of Chris York with JMP Securities. Your line is open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher John YorkJMP Securities — Analyst" data-reactid="112">Christopher John YorkJMP Securities — Analyst

Hi. Good morning, guys. Thanks for taking my question. Maybe Michael or Bowen, dividend income from the quarterly record on the dollar basis and also yield basis and the acute not out to, having to kind of dig a little bit further so a couple of questions. One was there any non-recurring income in the quarter embedded in the distribution? And then two, is that level of dividend income and therefore yield sustainable?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="114">Michael S. SarnerChief Financial Officer

Yes. So this quarter, we had about $0.01 from prepayment penalties, from exits in our company — from portfolio companies. So embedded in interest — in prepayment penalties and I-45, we had an increase in leverage at the fund. We increased it from 1.75 to about 1.87, which increased about 100,000 of additional income from I-45. The rest of the income pick up for the quarter was really — related to seasoning from originations in the 9/30 quarter (ph) and originations from the 12/31 (ph) quarter. So we&#39;d say, that if you&#39;re looking at the $0.40 run rate, the net investment income that is sustainable.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher John YorkJMP Securities — Analyst" data-reactid="116">Christopher John YorkJMP Securities — Analyst

Got it. I&#39;m looking specifically at the dividend income, the $2.5 million provided to Capital Southwest, as opposed the $0.40 there?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="118">Michael S. SarnerChief Financial Officer

Yeah. So that would be sustainable, that is — we&#39;re saying earlier, the I-45 pickup in leverage, increased debt plus repayments at the I-45 fund as well. So I would tell you that&#39;s $2.5 million should be sustainable into the following quarters.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher John YorkJMP Securities — Analyst" data-reactid="120">Christopher John YorkJMP Securities — Analyst

Got it. D & # 39; agreement. Great. And then, Bowen, maybe a little bit on investment strategy. So with the approval of additional leverage could that the shareholders and then an increase in committed capital under the revolver. How are you thinking about the trade-offs today of investing or holding in price of deal sizes with other partner versus the risks that could manifest in the concentration risk in the portfolio?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="122">Bowen S. DiehlPresident, Chief Executive Officer and Director

Yes. I think as we&#39;ve talked about before, I mean concentration risk is something that we are very cognizant of. So one of the things that excites us over time is, as we grow the asset base, we can hold larger and larger pieces of the loans. And so if you look across our portfolio, I think 40% of our lower middle market portfolio are deals that we have led and originated, but that we have brought in a co-lender alongside us. And so over time, as we can hold larger loans, given a certain level of granularity, and frankly, I&#39;d like to improve the granularity from where we are today. So, and so I look at it as — that&#39;s a nice upside for us as we grow, we can improve granularity and hold more of the loans and have to rely less on partners that we bring in.

And so, so the actual increase in the credit facility is part of that funding the asset growth. And so, our opportunistically when we raise bonds or even equity, I mean it&#39;s all part of growing scale and it&#39;s not growing scale, we just say, hey, we&#39;re larger — hey, we can do larger deals, it&#39;s actually the scale growth is going to allow us to do all of more of our existing deals. And so, there is no scope creep into larger — a larger deal sandbox where competition is greater and leverage is higher et cetera. It&#39;s all about growing scale to be able to hold more — 100% of more of our loans in our existing sandbox. And so the credit facility is a step in that process. Does that makes sense?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher John YorkJMP Securities — Analyst" data-reactid="125">Christopher John YorkJMP Securities — Analyst

It does, its helpful.

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And Chris on the granularity was helpful in our ING negotiation. In fact that we&#39;ve moved down on granularity overtime, plus the drop 50 basis points. We see the same sort of dynamic hopefully at I-45 with us dropping down to 2.1% in granularity in the I-45 fund and that should hopefully translate to a lower cost of capital there as well.

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Yeah. That would be great. D & # 39; agreement. That&#39;s helpful. Thanks a lot. And then, in reference to AG Kings, there are (inaudible) that 94% versus your September (inaudible) mark of 98% — 100% (inaudible) in this quarter, but maybe just I don&#39;t think BDC have recorded yet, but (inaudible) explain the previous quarter residual in valuation?

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I don&#39;t really know. I can&#39;t speak for WhiteHorse financed as the other one in there that you&#39;re probably referring to because they&#39;re a public BDC like us. And I can&#39;t explain the difference between the two. I mean, we&#39;ve got our valuation process actually I&#39;ll tell you, our valuations are — have always been within the range of our third-party valuation consultants range. And frankly, vast majority of the time, it&#39;s been at the lower end of the range from our third-party consultant, so we try to be conservative — on the conservative end of correct.

And frankly, there&#39;s a debate probably interesting to see across the BDC space as why we put this on non-accrual. We think it was the right thing to do based on the criteria we look at. We think maybe in the hindsight we view it as conservative, who knows, but that&#39;s what we decided to do. So, last quarter, I don&#39;t really know. I would tell you that it&#39;s the — our valuations within our third-party tell us and so we tend to be conservative in that range. But I can&#39;t really speak to white horses view on that.

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher John YorkJMP Securities — Analyst" data-reactid="134">Christopher John YorkJMP Securities — Analyst

Understood. (inaudible) BDC you have forward observation analysis another qualitative input that can move the difference valuation about risk. I was just wondering if that was the case for you guys.

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Yeah. There&#39;s only three of us in this deal, I should say four. There&#39;s three BDCs and there&#39;s one private loan group. It&#39;s a relatively speaking a tight club. We all communicate pretty often and frequently, so.

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D & # 39; agreement. And then last one I&#39;ll jump back in the queue, easy one here. How many employees were at the firm at quarter end?

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21.

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D & # 39; agreement. And then, is the other I think we had 19 at year end so quarter-over-quarter was there any increases?

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Here, we added associate and then I think an analyst.

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D & # 39; agreement. So, up to from the September quarter? Is that right?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Chris RehbergerVice President Finance" data-reactid="148">Chris RehbergerVice President Finance

No. Maybe 19 I think there was…

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="150">Michael S. SarnerChief Financial Officer

I don&#39;t know who joined.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Chris RehbergerVice President Finance" data-reactid="152">Chris RehbergerVice President Finance

I think don&#39;t there were 19.

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We haven&#39;t — what&#39;s that? They were 19 at the end of March.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="156">Michael S. SarnerChief Financial Officer

Yes.

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And then since then we have added an analyst and an associate.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="160">Michael S. SarnerChief Financial Officer

And we have one more analyst on the way.

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We have one more analyst that is scheduled to start this summer.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher John YorkJMP Securities — Analyst" data-reactid="164">Christopher John YorkJMP Securities — Analyst

Got it. That&#39;s it from me. Thanks guys.

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Thanks, Chris.

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Thank you. And our next question comes from the line of Christopher Testa with National Securities. Your line is open.

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Hi. Good morning, guys. Thank you for taking my questions. Just given the volatility we&#39;ve seen obviously in the broadly syndicated market during the quarter just curious, why there wasn&#39;t this more Upper Middle Market originations done during the quarter. Are you guys still concerned what the obvious the lack of documentation and EBITDA add-backs? Is that kind of outweighing the back of the yields that you&#39;re seeing? Just curious kind of what the thinking was on that?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="172">Bowen S. DiehlPresident, Chief Executive Officer and Director

Yes. So thanks — hi, Chris. Thank you. Couple of things I would say, first of all, as I said in my remarks that probably didn&#39;t hear out clear. But the vast majority of it, when these at least in our book, as we saw the markdown in quotes. And I think this is probably fair across the market. Certainly, when a quote comes down on a syndication debt, they mark coming down from 98% to 94% for that. That does not as you know that does not necessarily mean there is paper available at 94. So we didn&#39;t see a lot of opportunities to buy paper at significant discounts to what we thought value would be, we just didn&#39;t see the paper for sale.

That said, I would also tell you — and frankly, there would need to be probably gyrations in the market that last in a little bit longer, so that you actually had assets (inaudible) at funds. So that funds would start selling paper at a discounted price. That&#39;s a different. You&#39;ve got to have something more than just the last two weeks of December to cause that. And so — and we may see that in the future, we didn&#39;t see that in December and I&#39;d also tell you that from the caution perspective, we absolutely are cautious on from the add backs and all the other things that we&#39;re cautious about six months ago, we were still cautious about now.

And I would tell you that the first time we see gyrations in the market, we&#39;re not going to be diving in and buying in, catching a falling knife. We&#39;re pretty cognizant of that. And so net-net it&#39;s all kind of happened really quickly at the end of December, frankly a lot of its bounce back now, so when we just didn&#39;t see a lot of opportunities out there to really buy paper at the discounted price. And against the backdrop of being cautious the first time you see market gyrations just start going and buying things. We were going to be cautious in that respect.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher Robert TestaNational Securities Corporation — Analyst" data-reactid="176">Christopher Robert TestaNational Securities Corporation — Analyst

D & # 39; agreement. No that makes sense. And staying on this topic, given the volatility if this does indeed now it&#39;s, obviously, snap back but if it does indeed be sustained over a longer period of time, is this something that could potentially get you guys thinking about upsizing the I-45 to more so take advantage of some gyrations that last for longer period of time?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="178">Bowen S. DiehlPresident, Chief Executive Officer and Director

Yeah. So as we think about it — look, the first question is, is there value in the asset class, do we see value, do we want to buy in and do we want to increase our exposure to the asset class? That&#39;s the first question, so setting that question aside. The answer to that question at some point in the future very well could be, yes, and so then the question is how do we fund it? And so we would be able to fund it. We&#39;ve increased the liquidity on our credit facility substantially and will continue managing that up, we&#39;ll continue to drive to stay half a step ahead on capitalization through bond offering and potentially equity that type of thing.

But we also have the opportunity — we also possibly, I don&#39;t want to speak for our partner at Main Street, but we do have the option potentially to increase I-45. I would tell you that we&#39;re very happy with the relationship with Main Street, we&#39;re like-minded firms. The fund management it&#39;s been very smooth and so — and its in a very efficient funding vehicle. Thanks to the capitalization, credit facility that Michael and his team have put together around that fund. So from an ROE perspective, it&#39;s definitely an option for a place that we could either put the capital on our I-45, levered up through our credit facility there, or we could put the investments on our balance sheet and lever it with ING&#39;s credit facility. And that&#39;s more of an ROE question and a relationship question.

So I would definitely tell you that there is a possibility on the table. Nothing imminent, nothing — frankly the initial question of — is there value in the asset class, we&#39;re still very cautious in that as a general matter in that asset class, so we&#39;re not itching to greatly increase the exposure to asset class at the moment. But like I said, we would capitalize on our balance sheet to increase exposure if we change our mind on that. And I do think that, that increasing I-45 over time could be an option.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="182">Michael S. SarnerChief Financial Officer

And there&#39;s significant interest from our bank as well as other banks in that asset class should we choose to put in more equity and want to lever back up.

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Yeah. There is definitely interest from the lender community on both our balance sheet as well as I-45 to continue to provide increased leverage dollar on the deal.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher Robert TestaNational Securities Corporation — Analyst" data-reactid="186">Christopher Robert TestaNational Securities Corporation — Analyst

Got it. Yeah. D & # 39; agreement. That&#39;s helpful Thank you. And just again congrats on exiting Deepwater, so that&#39;s one down, one to go for the remaining legacy investments. Given that this was a real small realized gain, should we expect this to just solely be used to pad the UTI going forward, or is there a plan to maybe declare some of this to be a special dividend upfront or is this just too small to really kind of make a difference for that?

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No, this one will go into our UTI bucket, as well as the additional UTI from our dividend coverage this quarter, which was $0.03 as well. So that will continue to bed that program.

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Okay, got it. And just to the extent you are able to talk about the current non-accrual, you guys had mentioned it&#39;s 4 times levered, is that through the last dollar of leverage?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="192">Michael S. SarnerChief Financial Officer

Yeah. That&#39;s correct.

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And is this — I know you had said that the sponsor is withholding payment and you guys and the other lenders are obviously pursuing it. Is the sponsor of this one that you have other investments with or have one, two in the past?

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No, it&#39;s not. It&#39;s actually a family office in the Middle East. It&#39;s got a US office in New York and representative in New York. So, no, it&#39;s not somebody that we&#39;ve done other business with.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher Robert TestaNational Securities Corporation — Analyst" data-reactid="198">Christopher Robert TestaNational Securities Corporation — Analyst

Got it. D & # 39; agreement. And just one last one, if I may, and then I&#39;ll hop back in the queue. Looking at the originations during the quarter, you guys did a split lien on an energy company, midstream one, just wondering if you could provide some color on the leverage of that and just any other detail would be helpful.

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Yeah. So leverage low, it&#39;s in the 1.5 to 2 kind of fair way, multiple EBITDA, very low LTV. Let&#39;s say, basically it&#39;s a gathering company and what they do is, you&#39;ve got — there&#39;s just a gazillion stripper wells, which are basically wells that produce less than 10 barrels a day, spattered across the Permian basin. And there is no — the economics don&#39;t make sense to build pipelines up to those wells and they&#39;ve been producing for decades. And so, someone has to go pick up all that oil and take it to market. And so it&#39;s a very — and you can&#39;t shut those wells off. I mean you can&#39;t really — they&#39;re long-tail wells. And you can&#39;t really shut them off and efficiently turn them back on or even to be able to turn them back on. And then, they also clean out oil tanks that are part of the production process.

And so, pretty stable — very stable business, it exists whether prices are up or prices are down. It had a little bit of flexibility — a little bit of fluctuation with the commodity prices and that they — actually, some of the oil that they clean our of their tanks, they do sell that oil into markets. So there&#39;s a little bit of a commodity exposure. But — we think that&#39;s more than offset by the low leverage, as it exists, but like I said, it&#39;s kind of in the 1.5 to 1.8 kind of multiple EBITDA leverage.

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Got it. D & # 39; agreement.

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And I should also say it&#39;s a sponsor that&#39;s very experienced in the energy space.

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Got it. D & # 39; agreement. Great. That&#39;s all for me. Thanks for taking my questions.

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Thanks, Chris.

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And it looks like we do have a follow-up from Chris York with JMP Securities. Your line is open.

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Hi, guys. I had two follow ups. In reference to your hire of an investment bankers associated with the sale of Media Recovery. Is the payout of that fee on a contingency basis or should we expect some G&A pickup in &#39;19?

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So it&#39;s a typical investment banker relationship, it&#39;s going to have a retainer and it&#39;s going to have a success fee. The vast majority of the fee is paid out to that banker are going to be on the success fee side upon its sale. And that all flows through — that&#39;s a Media Recovery expense.

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Droite.

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It&#39;s actually on the flip side. We&#39;re actually going to get a success fee with the sale of MRI that will show up in fees in the quarter of the exit.

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Got it. D & # 39; agreement. So that&#39;s helpful to clarify. So the reference of your hire was Media Recovery, you made the hire of the banker, so its expense borne by MRI as opposed to Capital Southwest. D & # 39; agreement.

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Alternatively speaking, that&#39;s exactly right.

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D & # 39; agreement. And then the last one is just on dividends. So the context of your core dividend being increased for 12 consecutive quarters. And Michael you said, $0.40 per share in pre-tax NII appeared to be reoccurring. How should investors think about the payout ratio going forward? And then maybe, even longer term the ROE target under your leverage above 1 times?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="227">Michael S. SarnerChief Financial Officer

Yes. So I&#39;d tell you, I think what we&#39;re going to — our dividend coverage will continue to be above 100%. I think we&#39;re looking at something more in the neighborhood of like 105% going forward. So I think the 40 — the NII still has a tail to it, but the dividend pace might slow down a bit. What was your second question Chris?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher Robert TestaNational Securities Corporation — Analyst" data-reactid="229">Christopher Robert TestaNational Securities Corporation — Analyst

The longer-term ROE target maybe 1 times leverage or 1.25 times?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="231">Michael S. SarnerChief Financial Officer

Sure, sure. I think that we&#39;re actually looking at a target somewhere between 9.5% to 10% on an NII, ROE and total earnings probably closer in the 11, 11.5 with our equity investment as they appreciate over time.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher Robert TestaNational Securities Corporation — Analyst" data-reactid="233">Christopher Robert TestaNational Securities Corporation — Analyst

Great. That&#39;s it for me. Thanks, Michael. Thank you, Bowen.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="235">Bowen S. DiehlPresident, Chief Executive Officer and Director

Thanks Chris.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="237">Michael S. SarnerChief Financial Officer

Thanks, Chris.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="239">Operator

Our next question comes from the line of Tim Hayes with B. Riley FBR. Your line is open.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Timothy Paul HayesB. Riley FBR — Analyst" data-reactid="241">Timothy Paul HayesB. Riley FBR — Analyst

Hi. Good morning guys. Just a few questions on MRI to start. We don&#39;t have a queue in front of us, but you mentioned that revenues and EBITDA continues to grow there. Was there any material change in the fair value mark this quarter over the last quarter? We saw the mark on control investments is pretty stable quarter-over-quarter, but I assume the JV was marked down a little bit. So was that offset by some appreciation in MRI?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="243">Bowen S. DiehlPresident, Chief Executive Officer and Director

Yes. So MRI, appreciated this quarter by about $4.3 million. So — go ahead.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Timothy Paul HayesB. Riley FBR — Analyst" data-reactid="245">Timothy Paul HayesB. Riley FBR — Analyst

D & # 39; agreement. No I was just — so does any of that appreciation is that at all fundamental to the company or does any of that reflect any kind of take out premium or increased visibility into the timing of the sale following the hiring of the banker?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="247">Bowen S. DiehlPresident, Chief Executive Officer and Director

So there&#39;s no — it doesn&#39;t take into account any official IOIs (ph) or visibility into the market valuation from specifics in sale process. We did do a quality of earnings analysis. We had a third-party account that come in and actually kind of do a QEA, quality of earnings analysis on the company. And that is validated a higher EBITDA number incorporating some of the profit growth that the companies then driving over the last 12 months. And so it is based on that level of EBITDA, which was higher than EBITDA last quarter for example, so that&#39;s part of the growth as well.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Timothy Paul HayesB. Riley FBR — Analyst" data-reactid="249">Timothy Paul HayesB. Riley FBR — Analyst

D & # 39; agreement. That&#39;s helpful. Thank you. And then have you put any more thought and I&#39;m sure you have, but into how you intend to distribute the proceeds once the sale closes in your early investment. Just assuming no further markup in MRI, do you have an idea of how much of the gain or any other exits you might see over that same time? How much of the gain do you believe you&#39;d be willing to payout to shareholders versus retain and reinvest?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="251">Bowen S. DiehlPresident, Chief Executive Officer and Director

Yeah. So Tim thanks for the question. I mean, we have not made that decision yet. I would tell you there&#39;s three things we can do with the gain. One is that and we will do this which is basically restuff the UTI bucket and there&#39;s a limit as you know as to how much UTI we can hold. So whatever that limit is which is a moving target, so at the end of — lets just say we sell the company in 2019. The tax year 2019 at the end of that tax year we will make an estimation as to how much UTI we can hold. And so whatever that amount is we&#39;ll stuff as much of the gain into that bucket as we can because then you will have — at the current valuation, you most probably would have a significant amount more that you would have to do something with.

And the other two options are retain it and do a deemed distribution to the shareholders or distribute it to shareholders or both — some of both. And that&#39;s the decision that we haven&#39;t made yet. And that&#39;s going to be a function of a lot of different variables including things like where our stocks trading on a multiples NAV, what our pipeline looks like various things whether we retain or distribute the capital. And so we just haven&#39;t made that decision. That&#39;s probably a decision that we&#39;re making after we closed the sale.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Timothy Paul HayesB. Riley FBR — Analyst" data-reactid="254">Timothy Paul HayesB. Riley FBR — Analyst

Got it. That makes sense. Appreciate those comments. And just one more for me. You had one small equity co-investment this quarter and obviously the majority of the existing portfolios come in the form of MRI. Just wondering, how big you see the equity portfolio getting relative to the debt portfolio once MRI is sold?

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director"data-reactid =" 256 ">Bowen S. DiehlPresident, Chief Executive Officer and Director

Yeah. I mean, just as longer-term kind of asset allocation comment I would make. I think for a BDC, I mean, income is really important and that comes from, primarily from interest on loans. And then we&#39;ve talked about 1st Lien versus sub debt in our view that were very — it were very heavily emphasizing 1st Lien debt. But within that having some level of equity in the portfolio to drive NAV per share growth over time and to mitigate credit losses as well, we think the equity is also important — the question is the mix. And I think kind of overall comment I would tell you is kind of 10% to 15% of the portfolio in equity and 85% to 90% of it in income generating debt is probably the right general mix with — I&#39;d say over time probably, yeah that&#39;s probably the range 10% to 15% over time.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="258">Michael S. SarnerChief Financial Officer

After the MRI exit I think our expectation its going to be around 6% to 7%, so it&#39;s going to take a bit of time to those point to actually get up to that level over time.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="260">Bowen S. DiehlPresident, Chief Executive Officer and Director

And you may end up hanging around 10% for a long period of time. And that&#39;s OK. I mean, we don&#39;t make — we&#39;re not out making equity investments solely. I mean, it&#39;s usually there equity vast majority of time its equity co-investments alongside, its senior loan we are making as well. So you can&#39;t migrate — we can&#39;t migrate it super quickly, but like you said we will come out the gates around 6% or so after we sell MRI.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Timothy Paul HayesB. Riley FBR — Analyst" data-reactid="262">Timothy Paul HayesB. Riley FBR — Analyst

Great. D & # 39; agreement. Appreciate taking my questions.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Operator" data-reactid="264">Operator

I&#39;m not showing any further questions. So I&#39;ll now turn the call back over to Bowen Diehl for closing remarks.

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Thanks operator. And again, thank you everyone for participating on our call today. We look forward to keeping you apprised of our progress on future calls. Passe une bonne semaine.

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Ladies and gentlemen, this does conclude the program. You may now disconnect.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Duration: 54 minutes" data-reactid="270">Duration: 54 minutes

Call participants:

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Chris RehbergerVice President Finance" data-reactid="272">Chris RehbergerVice President Finance

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Bowen S. DiehlPresident, Chief Executive Officer and Director" data-reactid="273">Bowen S. DiehlPresident, Chief Executive Officer and Director

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Michael S. SarnerChief Financial Officer" data-reactid="274">Michael S. SarnerChief Financial Officer

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Mickey Max SchleienLadenburg Thalmann &amp; Co. Inc. — Analyst" data-reactid="275">Mickey Max SchleienLadenburg Thalmann & Co. Inc. — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher John YorkJMP Securities — Analyst" data-reactid="276">Christopher John YorkJMP Securities — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Christopher Robert TestaNational Securities Corporation — Analyst" data-reactid="277">Christopher Robert TestaNational Securities Corporation — Analyst

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Timothy Paul HayesB. Riley FBR — Analyst" data-reactid="278">Timothy Paul HayesB. Riley FBR — Analyst

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