Capital Southwest Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

CFO and Chris Reberger, VP Finance. I will now turn the call over to Chris Reberger.

Speaker 1

Thank you. I would like to remind everyone that in the course

Speaker 2

of this call, we will

Speaker 1

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.

Speaker 1

I will now hand the call off to our President and Chief Executive Officer, Bowen Diehl.

Speaker 3

Thanks, Chris, and thank you everyone for joining us for our Q1 fiscal year 2024 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 www.capitalsouthwest.com. You will also find a quarterly earnings press release Issued last evening on our website. We'll begin on Slide 6 of the earnings presentation, where we have summarized some of the key performance highlights for the quarter.

Speaker 3

During the quarter, we generated pre tax net investment income of $0.67 per share, which represented 3% growth Over the $0.65 per share in the prior quarter and 34% growth over the $0.50 per share generated a year ago in the June quarter. $0.67 per share more than covered both our regular dividend and our supplemental dividend paid during the quarter of $0.54 And $0.05 per share respectively. As of the end of the quarter, we estimate that our undistributed taxable income was $0.34 per share. We're also pleased to announce today that our Board has declared a $0.02 per share increase in our regular dividend $0.56 per share for the quarter ending September 30, 2023. This represents an increase of 4% compared to the $0.54 per share regular dividend These increases in our regular dividend are a result of the increased fundamental earnings power of our portfolio Given its growth and performance as well as further improvements in our operating leverage, in addition, due to the excess earnings being Generated by our floating rate debt investment portfolio in this high interest rate environment, our Board has declared a $0.01 per share increase To our supplemental dividend of $0.06 per share for the September 23 quarter, bringing total dividends declared for the September quarter to $0.62 per share.

Speaker 3

While future dividend declarations are at the discretion of our Board of Directors, it is our intent and expectation The Capital Southwest will continue to distribute quarterly supplemental dividends for the foreseeable future, while base rates are above historical averages And we have meaningful UTI generated by earnings in excess of our dividends and realized gains from our equity co investment portfolio. During the quarter, deal quality and activity in the lower middle market continued to be strong. Activity continued to be focused mainly on acquisitions Present refinancings and the environment continued to be a favorable one for non bank first lien lenders on Capital Southwest. Private equity firms and business owners continue to transact, while non bank lenders continue to provide more We continue to see loan pricing spread on new portfolio company loans that 50 to 100 basis points higher than a year ago and leverage level on new portfolio company loans that were generally lower by half to a full turn of EBITDA. We also continue to see loan to value levels on new loans calculated as our 1st lien loan divided by the enterprise value being paid for an acquisition.

Speaker 3

They were down meaningfully from a year ago as private equity firms remain willing to pay relatively full multiples for quality companies. Portfolio growth during the quarter was driven by $111,900,000 in new commitments, Consisting of commitments to 6 new portfolio companies totaling $98,600,000 and to 7 Existing portfolio companies totaling $13,300,000 This was offset by $3,400,000 in proceeds from one equity Exit during the quarter. On the capitalization front, we are pleased to announce that subsequent to quarter end, we successfully amended and Our corporate revolving credit facility. Total commitments under the facility increased from $400,000,000 to $435,000,000 And the final maturity of the facility was extended from August 2026 to August 2028. Additionally, during the quarter, we issued $71,900,000 in aggregate principal of 7.75% Notes due August 2028.

Speaker 3

These unsecured notes commonly referred to as baby bonds Are publicly traded on the NASDAQ under the ticker CSWCZ. These notes have a 5 year maturity And are fully callable after year 2, giving us significant flexibility to manage our balance sheet in all rate environments. Furthermore, in lockstep with our strong deal pipeline, we raised a total of $45,600,000 in gross equity proceeds At a weighted average price of $18.03 per share or 110% of the prevailing NAV per share. We have remained diligent in funding a meaningful portion of our investment activity with accretive equity issuances as we believe it is important to Maintain a conservative mindset to BDC leverage. We continue to manage our BDC with a full cycle Full economic cycle mentality.

Speaker 3

This starts with our underwriting of new opportunities, but it also applies to how we manage BDC's capitalization. Managing leverage to the lower end of our target range positions us to invest throughout a potential recession When risk adjusted return can be particularly attractive, it also allows us to support our portfolio companies, While also opportunistically repurchasing our stock, if it were to trade meaningfully below NAV. With this as context, we are very pleased with the strength of our balance sheet. Regulatory leverage remains slightly below our stated target range At 0.87:one. And as of the end of the quarter, we had approximately $225,000,000 in cash An undrawn capital commitment on our revolving credit facility.

Speaker 3

Furthermore, after our recent bond deal, Approximately 53 percent of our balance sheet liabilities are in unsecured covenant free bonds, the earliest of which mature in 2026. Finally, in June 2023, we received a BBB- investment grade rating with a stable outlook from Fitch Ratings. Michael will provide further detail on this later in our prepared remarks. On Slide 78, we illustrate our continued track record of producing Strong dividend growth, consistent dividend coverage and solid value creation since the launch of our credit strategy back in January of 2015. Since that time, we have increased our regular dividend paid to shareholders 27 times and have never cut the regular dividend.

Speaker 3

Even in the tumultuous environment we all experienced during the COVID pandemic. Additionally, over the same time period, We have paid or declared 21 special or supplemental dividends totaling $3.77 per share, Including the $0.06 per share the Board has declared for the September of 2023 quarter, all generated from excess earnings and realized gains from our investment Portfolio. We believe our track record of consistently growing our dividend, the solid performance of our portfolio as well as our company's Stained access to capital markets has demonstrated the strength of our investment and capitalization management strategies As well as the absolute alignment of all our decisions with the interest of our shareholders. Turning to Slide 9, We lay out the core tenets of our investment strategy. Our core strategy is lending and investing in the lower middle market, The vast majority of which is in 1st lien senior secured loans to sponsor backed companies.

Speaker 3

In fact, approximately 91% of our credit portfolio is backed Private equity firms, which provide important guidance and leadership to the portfolio companies as well as the potential for new junior capital support if needed. We have been pleased with the support that our private equity firm partners have provided in the few instances where capital has required to maintain the operating and growth strategies of the portfolio company in a rising interest rate environment. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity parity pursue 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 57 investments With a total fair value of $122,500,000 which was marked at 154 percent of our costs, Representing $42,900,000 in embedded unrealized depreciation or $1.11 per share. Our equity portfolio, which represented approximately 10% of our total portfolio of fair value as of the end of the quarter, Continues to provide our shareholders participation in the attractive upside potential for these growing lower middle market businesses, Which will come in the form of NAV per share growth and supplemental dividends over time.

Speaker 3

Our lower middle market strategy is complemented by Club participations in larger companies led by like minded lenders with whom we have relationships and have gained confidence in their post closing loan management From working together across multiple deals. Virtually all of these club deals are backed by private equity firms. As illustrated on Slide 10, our on balance sheet credit portfolio as of the end of the quarter grew 7% Quarter over quarter to $1,110,000,000 compared to $1,040,000,000 as of the end of the prior quarter. Year over year, portfolio grew 28% from $865,000,000 as of the June 2022 quarter end. For the current quarter, 100 percent of the new portfolio company debt originations were 1st lien senior secured and as of the end of the quarter, 97% of the credit portfolio was 1st lien senior security.

Speaker 3

We are also pleased with the trend and granularity in our credit portfolio As the average credit exposure per company across the portfolio is currently 1.2%. On Slide 11, we detail the $111,900,000 of capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter included $95,300,000 in 1st lien senior secured debt committed to 6 new portfolio companies, Including 4 in which we invested a total of $3,300,000 in equity. We also committed a total of $12,700,000 in 1st lien senior secured debt and $600,000 in equity to 7 existing portfolio companies. Turning to Slide 12.

Speaker 3

During the quarter, we had one equity exit associated with the sale of the portfolio company. This exit generated $3,400,000 in proceeds, generating a weighted average IRR of 13% and a realized gain of $1,900,000 Since its original closing in January 2016. Since the launch of our credit strategy, we have realized 68 portfolio exits, Representing approximately $802,000,000 in proceeds, we have generated a cumulative weighted average IRR of 14.1%. We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital provider, As evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities. Current deal activity continues to be strong, while refinancing activity is light due to the wider spreads in the market.

Speaker 3

As a result, we expect solid net portfolio growth in the coming quarters. On Slide 13, we detail some key stats of our on balance sheet portfolio as of the end of the quarter, excluding our I-forty five joint venture. As of the end of the quarter, the Total portfolio at fair value was weighted 87.2% to 1st lien senior secured debt, 2.8% To 2nd lien senior secured debt, 0.1% to sub debt and 9.9% To Equity Co Investments. Credit portfolio had a weighted average yield of 12.9% and weighted average leverage Through our security of 3.8 times. As seen on Slide 14, our total investment portfolio now including I-forty 5 Continues to be well diversified across industries with an asset mix which provides strong security for our shareholders' capital.

Speaker 3

The portfolio remains predominantly weighted towards 1st lien senior secured debt with only 3% of the total portfolio in 2nd lien senior secured debt. Turning to Slide 15, we have laid out the rating migration within our portfolio during the quarter. As a reminder, all loans upon origination are initially assigned an investment rating of 2 on a 4 point scale, With 1 being the highest rating and 4 being the lowest rating. We feel very good about the performance of our portfolio with 96 0.1% of the portfolio at fair value rated in 1 of the top 2 categories, a 1 or a 2. I will now hand the call over to Michael to review more specifics of our financial performance for the quarter.

Speaker 2

Thanks, Bowen. Specific to our performance for the quarter, as summarized on Slide 17, we increased pretax net investment income By 10% quarter over quarter to $25,000,000 or $0.67 per share compared to $22,800,000 We're $0.65 per share in the prior quarter. During the quarter, we paid out $0.54 per share regular dividend and a $0.05 per share supplemental dividend. As mentioned earlier, our Board has approved both a $0.02 per share increase to the regular dividend for the September quarter To $0.56 per share and a $0.01 per share increase to the supplemental dividend for the September quarter to $0.06 per share. Maintaining a consistent track record of meaningfully covering our dividend with pre tax net investment income is important to our investment strategy.

Speaker 2

We continue our strong track record of regular dividend coverage with 118% coverage for the last 12 months ended June 30, 2023 And a 109% cumulative coverage since the launch of our credit strategy in January 2015. Given the floating rate nature of our credit portfolio, elevated interest rates continue to be a tailwind to our net investment income. The base rate index used to calculate interest on a majority of our loans reset in early July to approximately 5.24%, Representing an increase of 35 basis points from its early April base rate reset of approximately 4.89%. Our intent is to distribute approximately half of the excess of our quarterly pre tax net investment income over our regular dividend To our shareholders in a quarterly supplemental dividend. We are confident in our ability to continue to distribute quarterly supplemental dividends For the foreseeable future based on our current UTI balance of $0.34 per share, our ability to grow UTI each quarter organically by over earning our total Dividend and the expectation that we will harvest gains over time from our existing $1.11 For the quarter, we increased total investment income from our portfolio 9% Quarter over quarter, it took $40,400,000 producing a weighted average yield on all investments of 12.6%.

Speaker 2

Total investment income was $3,200,000 higher this quarter due to growth in our credit portfolio as well as increased average base rates. As of the end of the quarter, we had 3 loans on non accrual representing 1.7% of our investment portfolio at fair value. As seen on Slide 18, we maintain LTM operating leverage at 1.9% for the current quarter. Achieving 2% or lower operating leverage was one of our initial long term goals when we relaunched CSWC as a middle market lender back in 2015. Put this metric in perspective, our 1.9% operating leverage is the 2nd best in the entire BDC industry.

Speaker 2

We believe this metric speaks to our fiscal responsibility as well as our absolute alignment with shareholders. Though we are pleased to have reached this milestone, Looking ahead, we expect our internally managed structure to produce incremental improvements in operating leverage over time. Turning to Slide 19, the company's NAV per share at the end of the quarter increased by $0.01 per share to $16.38 The primary drivers of the NAV per share increase for the quarter were earnings in excess of our dividends for the quarter An accretion from the issuance of common stock at a premium to NAV per share, partially offset by the annual issuance of restricted stock awards to employees. Turning to Slide 20, as Bowen mentioned earlier, we are pleased to report that our balance sheet liquidity remains strong with approximately $225,000,000 in cash undrawn leverage commitments on our revolving credit facility as of the end of the quarter. We are thrilled to have recently completed an amendment up an extension on our revolving credit facility as our bank syndicate continues to support our growth.

Speaker 2

In fact, 8 of our existing lenders in the facility upsized their commitments, which we believe demonstrates their confidence in our stewardship, especially in the current capital markets Environment. The amendment increased total revolving facility commitments to $435,000,000 and extended the maturity of the facility To August 2028. Based on our current borrowing base, we have full access to the incremental revolver capacity. In addition, we have $5,000,000 in committed but unfunded SBA debentures to be used to fund future SBIC eligible investments As well as $45,000,000 in uncommitted capacity to draw from in the future. As of the end of the June quarter, More than half of our capital structure liabilities were in unsecured covenant free bonds and our earliest debt maturity is in January 2026.

Speaker 2

As Bowen mentioned earlier, we received a BBB- investment grade rating from Fitch Ratings during the quarter. In addition to receiving a Baa3 investment grade rating from Moody's Investor Services earlier in March of this year. The 2nd investment grade rating is further validation of our 1st lien focused investment strategy, our strong credit underwriting track record And our prudent balance sheet management through a variety of capital markets environment. It is worth noting that CSWC is one of the smallest BDCs in terms of market capitalization Currently rated by either Moody's or Fitch, we believe both ratings will help immensely as we look to grow and diversify our investor base in future capital raises. Our regulatory leverage, as seen on Slide 21, ended the quarter at a debt to equity ratio of 0.87:one, Down significantly from 1.10 to 1 as of the June 2022 quarter.

Speaker 2

We believe we have further strengthened our balance sheet this quarter With the Babybond transaction as well as the upside and extension of the credit facility, these efforts along with our previous unsecured bond issuances, Our SBA license, which gives us access to long term fixed debt at attractive rates and our continued diligence in moderating leverage through accretive equity Instruencies utilizing both our ATM program as well as the secondary equity market ensure we will continue to maintain significant liquidity, Conservative leverage and adequate covenant cushions throughout the economic cycle. I will now hand the call back to Bowen for some final comments.

Speaker 3

Thanks, Michael. And again, thank you everyone for joining us today. We appreciate the opportunity to provide you an update on our business, Our portfolio and the market environment. Our company and portfolio continues to demonstrate strong performance and I continue to be impressed The job our team has done in building a robust asset base, deal origination capability as well as flexible capital structure. As to the uncertainty in the economy, again, we have been underwriting with a full cycle economic mentality since day 1, Which we believe has positioned us well for the potential economic volatility in the coming months years.

Speaker 3

In summary, We have a credit portfolio heavily weighted to 1st lien senior secured debt allocated across a broad array of companies and industries, 91% of which is backed by private equity firms. We have a well capitalized balance sheet with diverse capital sources, Strong liquidity and flexible capital, much of which is fixed rate and covenant life. We believe our 1st lien senior secured investment focus And our capitalization strategy provide us complete confidence in the health and positioning of our company and our portfolio as we look ahead. This concludes our prepared remarks. Operator, we are ready to open the lines for Q and A.

Speaker 4

Thank The first question that we have is coming from Kyle Joseph of Jefferies. Your line is open.

Speaker 5

Hey, good morning guys and thanks for taking my questions. Congrats on a good quarter. Just wanted to get your thoughts, There's been a lot on banks kind of in the post SVB world in higher capital requirements. But just get a sense If you think there's going to be any sort of reverberation down in the lower middle market where you guys focus.

Speaker 3

Yes. I'll make a comment on just the deal environment. We definitely are seeing less direct competition from banks In our world, mainly because we're just less reliable in this market to get into close. And so that's helping, like I said in my Remarks, I mean that's helping 1st lien unitranche type lenders like Capital Southwest and others. And so my guess is My expectation is that that will continue.

Speaker 3

On our 1st lien loans, a lot of them hold the revolvers ourselves. And Having a bank above us that holds a revolver that may not fund in the revolver, etcetera, if things were to get worse, for example, Doesn't really affect our portfolio in a meaningful way, as long as the companies, underlying companies are doing well across the portfolio.

Speaker 2

Yes. And probably on the liability side, just having gone through the amendment, we have of our 11 lenders,

Speaker 3

8

Speaker 2

of them Participated in the upsize. And essentially what they communicated was there was a flight to quality that they took a look at their portfolio and they were Get behind the horses that they thought were successful and that they trusted, and they were going to pare back commitments to those they had less confidence in. So I think that's probably the sort of the mantra right now in the market.

Speaker 5

Got it. That's helpful. And then, I mean, it seems like the outlook for the economy changes every week with each macro Data point we get, but if you could just give us a sense for kind of the rev and EBITDA growth trends you're seeing at your portfolio and how that's changed over the last few quarters?

Speaker 3

Yes. So it's kind of been

Speaker 6

the same over the last

Speaker 3

few quarters. So our revenue growth kind of year over year is kind of tracking in high single digits kind of 8% or 9% On the top line and EBITDA growth on a weighted average basis is 2.5%, 3% growth over the last year. It's kind of tracking. It's a good question to ask us and all the BDCs every quarter. But for us, it's kind of been tracking there for the last several quarters.

Speaker 5

Got it. That's it for me. Thanks for answering my questions.

Speaker 3

Thanks, Kyle.

Speaker 4

Thank you. And one moment while we prepare for the next question. The next question will be coming from Sean Paul Adams of Raymond James. Your line is open.

Speaker 7

Good morning, guys. Can you provide some commentary on the portfolio companies for the jump in non accruals as well as the general amendment outlook for the rest of 2023, and just provide some light on Whether sponsors have been eager to provide equity infusions or cash infusions, just some of the struggling businesses within the portfolio?

Speaker 3

Sure. That's a good question. As I alluded to my comments, across the portfolio, we've been absolutely Very happy with the support the private equity firms are willing to provide. It's not only just in struggling situations. It's in their interest burden is going up.

Speaker 3

So they're looking for ways Cut operating costs to get the business efficient, providing that leadership to the company is obviously I think healthy for the companies, But also just definitely like to see them doing that. Also, if they want to continue to spend Extra growth capital to maintain CapEx budgets, etcetera, they put putting capital in to support those growth initiatives has been definitely there. In the struggling situations, there's only a few of them fortunately, knock on wood in our portfolio, but in those situations, the sponsors have been stepping up and supporting the businesses. Yes. The 2 non accruals this quarter, both were free rated last quarter.

Speaker 3

The company is I would just they're both sponsor backed. I would tell you our expectation is probably the most relevant thing. Our expectation is that both of those will be restructured by the end of Here, which would we would expect to be partially debt go back on accrual and then part of our debt be converted to equity and we would I own a portion of the business. And so I'd say in both of those situations that is absolutely our expectation based on what's going on with the companies. And those two companies, it's pretty idiosyncratic.

Speaker 3

I mean, it's things like customer shifts, Business lines, they're shutting down because they were candidly because they were underperforming and so making a smart decision to stop them and there's costs associated with that. Basically top line moving, but not really it's more specific to those companies and those management teams as opposed to anything I Point to the economy.

Speaker 7

Perfect. Thank you. And is there any specific Struggles with any sectors or any certain part of the market?

Speaker 3

Yes. I mean, looking at our portfolio and kind of look at what are the signals we're seeing in the portfolio. And I would say across the portfolio, no sectors that I would say are Like bright light struggling. It's interesting on the we saw a couple of quarters ago Trends with a couple of our portfolio companies that sell into retailers' inventories and those retailer inventories were pulling back, readjusting, if you will. And those companies sales declined in the short term.

Speaker 3

Once that inventory is normalized and the sales kind of Sales from our portfolio company that's supplying those inventories stabilizes and starts to increase and that's happening in those two cases Because the retailers' inventories have been reset. On the consumer side, it's kind of mixed. I mean, half our companies are looking down the list of them, half of them You're doing great. And the other half are starting to talk about softness, but in one case, we started we're starting to see some softness. So I would say pretty mixed from a consumer perspective across our portfolio.

Speaker 3

The transport sector, we've got a company in the transport sector. It's Clearly reporting softness, not enough to really worry you as a 1st lien lender, but it's definitely seeing softness. The industrial companies are doing great. We've got 2 or 3 industrial companies They're just they're knock on wood, cranking along. So data points, I guess, are going different directions.

Speaker 3

And again, no one sector that's causing us angst, but some of those are some of the interesting kind of signals we've seen across the portfolio.

Speaker 7

Okay, perfect. Thank you for the commentary.

Speaker 4

Thank you. One moment. Our next question will be coming from Bryce Roe of B. Riley, your line is open.

Speaker 6

Thanks a bunch. Good morning. Let's see, Bo, I wanted to maybe start on The prepared remarks about maybe M and A starting to pick up a bit here and just kind of wanted to Your view of potential repayment activity, it's been muted for the last few quarters And certainly don't I know it's hard to predict, but do you think that we could see some pickup in repayment activity relative to what we've seen here over the last few quarters?

Speaker 3

Yes. We have in our portfolio, out of 90 something companies, we have a handful of Companies that we have visibility on sale processes that are starting. And so obviously that would be an uptick from what we've seen in the past few quarters. But, generally, in most of the cases, those could have been end up being significant equity wins for us. And so if that happens, that'd be fantastic.

Speaker 3

I'm not sure our comments that we expect kind of net growth across the portfolio, I think is definitely still the case. But refinancing, like I said, no surprise. Refinancing activity tends to be relatively light because spreads are wider. But the M and A activity, there's a handful of situations where sponsors are seeking a chance to ring the

Speaker 6

bell. Yes.

Speaker 2

I think from a numbers perspective, I think potential to have something in the $35,000,000 to $75,000,000 of repayments between now and the end of the year.

Speaker 6

Okay. And maybe a follow-up. You've seen good Appreciation within the equity book, is that more a function of what you're seeing with potential M and A like you just talked about? Or Is it more kind of widespread across the portfolio?

Speaker 3

Well, I mean, our equity portfolio is exactly that So we have companies that are doing really well and others that are doing fine and then others that are The multiples in the sectors are coming down slightly or the companies are softening a bit from an equity perspective. But overall, the portfolio He has done really well and we would have some of these companies have a lot of growth left.

Speaker 6

Got it. Okay. And then one more from me from a kind of a balance sheet leverage perspective On the lower end of what we might see from other BDCs in terms of net debt to equity, certainly your access to capital markets Probably has something to do with that, but is that more is that signaling pipeline or some level of Conservatism on your part or maybe a combination of both?

Speaker 3

I would definitely say it's

Speaker 2

a combination of both. I mean, we would probably tell you that this is where we are right now is the low end and probably where we want to maintain. But having said your earlier question regarding repayments, If we do see a flurry of repayments towards the end of the year, originations are robust as well, but you might end up even delevering slightly more. But we will continue to use our ATM and we certainly with the bond issuance and the Revolver, we put in ample liquidity to be able to maintain net originations as well as your control leverage.

Speaker 3

Yes. Bryce, I mean to your more macro part of your question, I mean, we've been attempting to speak to What we're doing at the BDC from a leverage perspective in the last several quarters, as we've always said, I mean, we're managing everything here from a full cycle perspective. And so Certainly, I think everyone would agree that the potential for a recession is high. That's why I'll comment our questions about what's going on in the portfolio across All BDCs. And so we're at the top of the cycle, right?

Speaker 3

And so we want to be low levered at the top of the cycle. So when we go through the cycle, We can do all the things we want to be able to do. We want to be able to support our companies. The economics on support capital end up being very, very lender friendly, Very attractive. There'll be deals that we can underwrite and do throughout the recession.

Speaker 3

I think most Asset managers would agree that your vintage deals invested kind of in the second half of recession end up being the best vintages most of the time. So we want to be in a position to participate in that. And if our stock doesn't trade well, trades meaning below NAV, we want to buy it back. And so all those things and if we're not if our stock is not trading well, then all those things will be levering up events. And so We want to be at low leverage at the top of the cycle and then potentially lever up if the environment I just described came to pass.

Speaker 3

And so that's what we've done to position the BDC. And if you look at our earnings divided by NAV, it's 1 of the highest in the industry with 1 of the lowest utilization of leverage in the industry. So we don't really need to lever the BDC up as We sit here today. We can prepare for an economic cycle. And if for some reason it doesn't come, great, that we'd all be Thrilled.

Speaker 3

But that's kind of what we've been trying to do and feel really good about what we've accomplished and where we positioned ourselves.

Speaker 6

Great. Appreciate the comments. You all have a good day. Appreciate

Speaker 4

Thank you. This concludes the Q and A session. I would like to turn the call over to Bowen Diehl for closing remarks. Please go ahead.

Speaker 3

Thank you, everyone. And we appreciate everybody being on the call today And I look forward to giving you updates in the future and have a great rest of the week.

Speaker 4

This concludes today's conference call. Thank you all for joining. You may now disconnect. And everyone, enjoy the rest of your

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Capital Southwest Q1 2024
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