Capital Southwest Corporation [CSWC] Conference call transcript for 2021 q4
2022-02-01 13:35:04
Fiscal: 2022 q3
Operator: Thank you for joining today's Capital Southwest Third Quarter Fiscal Year 2022 Earnings Call. Participating on the call today are Bowen Diehl, CEO; and Michael Sarner, CFO; and Chris Rehberger, VP Finance. I will now turn the call over to Chris Rehberger.
Chris Rehberger: Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management's expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release, except as required by law. I will now hand the call off to our President and Chief Executive Officer, Bowen Diehl.
Bowen Diehl: Thanks, Chris, and thank you to everyone for joining us for our earnings call for the quarter ended December 31, 2021, which is the third quarter of our 2022 fiscal year, which ends March 31, 2022. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company, our portfolio and our progress on executing our investment strategy as stewards of your capital. Throughout our prepared remarks, we will refer to the various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com. We'll begin on Slide 6 of the earnings presentation, where we have summarized some of the key performance highlights for the quarter. During the quarter, we generated pretax net investment income of $0.51 per share, which more than earned our regular dividend paid for the quarter of $0.47 per share. Total dividends for the quarter were $0.97 per share, which consisted of a regular dividend of $0.47 and a supplemental dividend of $0.50 per share. We are also pleased to announce that our Board has declared an increase in our regular dividend per share to $0.48 for the quarter ended March 31, 2022, an increase of 2.1% from the $0.47 per share paid in the December quarter. This increase in our recurring regular dividend reflects the increased earnings power of our portfolio, resulting from the growth and performance of our credit portfolio and the continued reductions in our cost of capital and improvements in our operating leverage. During the quarter, acquisition and financing activity in the lower middle market was very strong, resulting in record new origination for Capital Southwest. As expected, we also saw record prepayment activity across our portfolio. On a net basis, we were able to grow our investment portfolio by 7.2% to $877 million. Portfolio growth during the quarter was driven by $268 million in commitments to 14 new portfolio companies and 12 existing portfolio companies, of which, $213 million was funded at close. This was offset by $158 million in proceeds from a 11 debt prepayments and 1 equity exit during the quarter. Notably, the equity exit was a very successful outcome as it generated a realized gain of $5.6 million and an IRR of 99.2%. As we have previously stated, our intention over time is to distribute these realized gains periodically through special dividends to our shareholders. On the capitalization front, on November 2021, we completed an add-on of $50 million in aggregate principal to our 3.375% October '26 notes. Furthermore, in lockstep with our strong deal pipeline, we raised $16 million of equity through our ATM program at an average price of $25.97 per share, representing an average of 159% of the prevailing net asset value per share. On Slide 7 and 8 we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage and value creation since the launch of our credit strategy. We believe the solid performance of our portfolio and our company's sustained access to the capital markets has demonstrated the strength of our investment and capitalization management strategies. Maintenance and growth of both NAV per share and shareholder dividends remain as core tenets of our long-term investment objective of creating long-term value for our shareholders. Turning to Slide 9. As a refresher, our investment strategy has remained consistent since its launch in January of 2015. We continue to focus on our core lower middle market lending strategy, while also maintaining the ability to opportunistically invest in the upper middle market when attractive risk-adjusted returns exist. In the lower middle market, we directly originate and lead opportunities consisting primarily of first lien senior secured loans with smaller equity co-investments made alongside many of our loans. We believe that this combination is powerful for BDC as it provides strong security for the vast majority of our invested capital, while also providing NAV upside from equity investments in many of these growing businesses. Building out a well-performing and granular portfolio of equity co-investments is important to driving growth in NAV per share while aiding in the mitigation of any credit losses over time. As of the end of the quarter, our equity co-investment portfolio consisted of 39 investments with a total fair value of $74.5 million, which included $17.7 million in embedded unrealized appreciation or approximately $0.74 per share. Our equity portfolio, which represented approximately 9% of our total portfolio at fair value as of the end of the quarter, continues to provide our shareholders attractive upside from growing lower middle market businesses. The successful exit of one of our lower middle market equity co-investments this quarter, which produced a realized gain of $5.6 million, is an example of the benefits of this component of our strategy. As illustrated on Slide 10, our on-balance sheet credit portfolio as of the end of the quarter, excluding our I-45 senior loan fund grew 8% to $745 million as compared to $689 million as of the end of the prior quarter. For the quarter, 99% of our new portfolio company debt originations were first lien senior secured, and all of the debt originations for the quarter were senior secured. Finally, as of the end of the quarter, 91% of the credit portfolio was first lien senior secured. On Slides 11 and 12, we lay out the $268 million of capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter included $204 million in first lien senior secured debt committed to 14 new portfolio companies, including 1 in which we also invested $3.3 million in second lien alongside our first lien debt. Additionally, we invested $6.4 million in equity alongside 8 of our new portfolio companies. Finally, during the quarter, we also committed $54.3 million in first lien senior secured debt to 9 existing portfolio companies. Turning to Slide 13. We continue our track record of successful exits, with 11 debt investment exits and 1 equity exit during the quarter. In total, these exits generated over $158 million in total proceeds, realizing gains of $7.4 million and generating a weighted average IRR of 16.2%. Since the launch of our credit strategy over 7 years ago, we have generated a cumulative weighted average IRR of 14.6% on 56 portfolio exits, representing approximately $638 million in proceeds. As previously mentioned, the market for acquisition and refinancing capital was very robust during the quarter, resulting in heavy volume in both origination and refinancing activity. Our investment pipeline, as we have mentioned on previous earnings calls, has been robust throughout 2021 in both volume and quality of deals and the December quarter was especially so. I'm very pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital partner. I'm especially encouraged by the increasing number of deal sources, private equity firms and otherwise, that have been cultivated where we have closed multiple transactions together. We are finding that these firms are willing to be references for us as we prospect for new relationships. Additionally, it is exciting to also see the number of new deals coming in from very relevant deal sources that are new to us. As we have always contended this broadening of our sourcing network in deal funnel is a critical component of building and maintaining a quality investment portfolio in a competitive market. On Slide 14, we illustrate some key stats from our on-balance sheet portfolio as of the end of the quarter, again, excluding our I-45 senior loan fund. As of the end of the quarter, the total on-balance sheet portfolio at fair value was weighted 82.9% to first lien investments, 6.5% to second lien investments, 1.5% to subordinated investments and 9.1% to equity co-investments. Turning to Slide 15. We have laid out the rating migration within the portfolio. During the quarter, we had 2 loans upgraded from a 2 to a 1 and 2 loans upgraded from a 3 to a 2. We had no loans downgraded this 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. As of the end of the quarter, we had 68 loans, representing approximately 95.4% of our investment portfolio at fair value rated in 1 of the top 2 categories, a 1 or a 2. We had 5 loans representing 4.6% of the portfolio, rated a 3 and 1 loan representing less than 1% of the portfolio rated a 4. During the quarter, we had no new loans placed on nonaccrual and 1 loan at a fair value of $5.2 million come off of nonaccrual. As we discussed last quarter, this company successfully completed the restructuring of its balance sheet in December, which allowed us to place a portion of the original loan back on accrual this quarter. As illustrated on Slide 16, our total investment portfolio continues to be well diversified across industries, with an asset mix that provides strong security for our shareholders' capital. Portfolio remains heavily weighted towards first lien senior secured debt, with only 6% of the portfolio in second lien senior secured debt and only 1% of the portfolio in subordinated debt. Turning to Slide 17. The I-45 senior loan fund continues its solid performance. As of the end of the quarter, 95% of the I-45 portfolio was invested in first lien senior secured debt. Weighted average EBITDA and leverage across the companies in the I-45 portfolio was $72.8 million and 5x, respectively. The portfolio continues to have diversity among industries and an average hold size of 2.4% of the portfolio. Leverage at the I-45 fund level is currently 1.52x debt to equity. I will now hand the call over to Michael to review more specifics of our financial performance for the quarter.
Michael Sarner: Thanks, Bowen. Specific to our performance for the December quarter, as summarized on Slide 18, we earned pretax net investment income of $11.8 million or $0.51 per share. We paid out $0.47 per share in regular dividends for the quarter, an increase from the $0.44 regular dividend per share paid out in the September quarter. As mentioned earlier, our Board has increased the regular dividend, declaring a regular dividend of $0.48 per share for the March quarter. Maintaining a consistent track record of meaningfully covering our dividend with pretax NII is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with 105% for the last 12 months ended December 31, 2021, and 107% cumulative since the launch of our credit strategy in January 2015. Our investment portfolio continues to perform well, generating $700,000 in net realized and unrealized gains this quarter, bringing the net realized and unrealized gains over the past 4 quarters to $12.2 million. As Bowen mentioned, going forward, we intend to periodically distribute special dividends to our shareholders as we monetize the unrealized appreciation in the portfolio. As of December 31, 2021, our estimated UTI balance was $0.32 per share. The end of the year UTI balance excludes the $5.6 million gain on the sale of one of our equity investments this quarter as this company was held at our taxable subsidiary. Post quarter end, we distributed taxable income from our taxable subsidiary to CSWC and these proceeds are now available for distribution to our shareholders. Our investment portfolio produced $22.3 million of investment income this quarter with a weighted average yield on all investments of 9.4%. Investment income was $2 million higher this quarter due primarily to an increase in average credit investments outstanding as well as fees paid on debt prepayments. There were 3 loans on nonaccrual with an aggregate fair value of $14 million or 1.6% of the investment portfolio as of the end of the quarter. Our weighted average yield on our credit portfolio was 9.5% for the quarter. As seen on Slide 19, we maintained LTM operating leverage at 2.3% as of the end of the quarter. We are targeting operating leverage to approach 2% or better in the coming quarters. Turning to Slide 20. The company's NAV per share as of December 31, 2021, was $16.19 as compared to $16.36 at September 30, 2021. The driver of the NAV per share decrease was the $0.50 per share supplemental dividend that was distributed to shareholders this quarter from our UTI balance. As we have discussed on prior calls, we continue to originate assets within our SBIC subsidiary, which you will see going forward denoted as SBIC-1. As a reminder, our initial equity commitment to the fund is $40 million, and we have received an initial commitment from the SBA for $40 million of fund leverage, which is also referred to as one tier of leverage. We have funded our initial $40 million of equity capital to the fund and have drawn $29 million of the initial $40 million commitment in debt capital at a weighted average interest rate of 1.43%. We have applied for a second $40 million tier of fund leverage, which we are hopeful will be approved in the coming days. Overall, we are pleased to report that our balance sheet liquidity continues to be strong with approximately $171 million in cash and undrawn leverage commitments as of the end of the quarter. As of December 31, 2021, approximately 57% of our capital structure liabilities were unsecured, and our earliest debt maturity is in January 2026. Our regulatory leverage, as seen on Slide 22, ended the quarter at a debt-to-equity ratio of 1.23:1. I will now hand the call back to Bowen for some final comments.
Bowen Diehl: Thanks, Michael, and thank you, everyone, for joining us today. Capital Southwest continues to perform well and consistent with our original vision and strategy we communicated to our shareholders when we began this journey. Our team has done an outstanding job, building a robust asset base, deal origination capability as well as a flexible capital structure that provides us -- that prepares us for all environments throughout the economic cycle. We believe that our performance continues to demonstrate the investment acumen of our team at Capital Southwest and the merits of our first lien senior secured debt strategy. We feel very good about the health of our company and portfolio, and we are excited to continue to execute our investment strategy going forward. Everyone here at Capital Southwest is totally dedicated to being good stewards of our shareholders' capital by continuing to deliver strong performance and creating long-term sustainable value for all our stakeholders. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.
Operator: Our first question comes from Mickey Scheien with Ladenburg Thalmann.
Mickey Schleien: Bowen, this year, looking ahead, borrowers are probably going to see more inflation in their cost inputs like we saw last year, but they're also probably going to see the cost of their floating rate debt borrowings climb meaningfully once we get passed through floors. So when you look at your portfolio and stress test it, how do you see their cash flows performing in 2022? And how concerned are you about their ability to service their debt?
Bowen Diehl: Yes. Thanks for the question, Mickey. I would say it kind of starts with our original underwriting of these loans and then how we stress test the fixed charge coverage across the portfolio from a vendor's perspective. And there's pretty large cushions from -- we're getting some -- pretty large cushions from a servicing or debt perspective. And so we're not concerned about that across the portfolio. With respect to the increase -- can you hear me, Mickey?
Mickey Schleien: I hear you fine.
Bowen Diehl: Okay, fine. As far as the companies themselves, I mean, yes, I would say that the 2 common themes across the portfolio we hear from companies management teams is the rising cost of inputs, being labor, being -- as most folks know from reading on the news, labor cost inflation is a big piece of it. Commodity inputs, cost increases are a big part of it. And then the other theme is just supply chain cadence and pace. And so as far as the labor and cost inputs, fortunately, so far, these businesses are growing nicely, and they are able to pass those cost inputs, vast majority of the costs on to their customers. But we think that trend is going to continue this year. I think from the rising -- again, from a rising interest cost on floating rate borrowings across the portfolio, just the level of leverage versus cash flow across our portfolio, we think there's -- it kind of started from how we originally underwrote the loans. There's a lot of cushion there to actually be -- what would have to happen before they can't service their debt. I guess so how I'd say it.
Mickey Schleien: I appreciate that, Bowen. That's good to hear. My follow-up question regards spreads. There's an enormous amount of capital being injected into the upper middle market -- private debt market as these lenders continue to disintermediate the syndicated loan market. And obviously, that's driving down spreads in that market. How do you feel about that trend potentially trickling down into the middle market and even into the lower middle market over time and impacting the economics in the business?
Bowen Diehl: Yes. So I mean that's definitely a dynamic that could continue to happen. It's happening a little bit. We don't see the big syndicated funds moving down into the middle market in droves. But we see it -- we do see it some, and we certainly see a lot of capital being raised in the middle market. And so look, at the end of the day, we generate earnings off our net interest margin. And so that's obviously our asset yield and difference between our asset yield and our operating and financing costs. And so we also take advantage of the quantum of capital being -- wanting to invest in the middle market and lower middle market through our capital providers on the leverage side. And so as long as we can keep that net interest margin maintained, which we feel very good about that, that ultimately -- that's what really drives our earnings and our business model at the end of the day.
Operator: Our next question comes from Kevin Fultz with JMP Securities.
Kevin Fultz: Clearly, Q3 was a very strong quarter for both origination activity and repayment activity, which led the solid portfolio growth. Can you give us a sense how originations are tracking so far this quarter relative to last quarter as well as repayment activity?
Bowen Diehl: Yes. So a general comment, I mean, clearly -- and you'll probably hear this across the industry as earnings come out. I mean the December quarter was very robust and just transaction activity both from an M&A versus -- primarily from an M&A perspective, which drove financing activity. And then obviously, if we have a portfolio company that is doing a large debt-funded acquisition, then we have a chance to fund that or we have -- if the leverage market provides a leverage package for that acquisition, that's more leveraged and/or lower yield than we're comfortable with, we -- in many cases -- in many cases, across our repayments, we have the opportunity to stay in the deals. And we chose to let it go and let it be refinanced just from a risk-adjusted return perspective. So -- that was a big flurry of activity in the December quarter. So I would tell you that activity in the March and June quarter, we would expect to be down from where it was in the December quarter. But our origination activity right now is still from a long-term average deal flow perspective, is still strong, but it's down from a very flurry pace in the fourth -- in the December quarter last year.
Michael Sarner: Yes. I think from a run rate perspective, I think Bowen's point is right. I think we assume we're going to originate somewhere in the $60 million to $75 million per quarter of new investments. We also have seen an uptick in our DDTLs or delayed draw term loans so that we see maybe $5 million to $10 million being funded off of those DDTLs each quarter, and our repayment activity is somewhere in the $20 million to $30 million each quarter. So net, we look to see somewhere in the $30 million to $50 million of net growth per quarter as a general run rate.
Bowen Diehl: Yes. So our repayment activity is down as well. So -- and so I think Michael's comments are right.
Kevin Fultz: Okay. That's really helpful. And then a question relating to interest rate sensitivity. Could you provide the weighted average LIBOR floor for floating rate investments and also what percent of floating rate investments contain interest rate floors?
Michael Sarner: Yes. So the floor is about 1.1% on a weighted basis. And I would say it's close to 100%, have a floor in them. The range would be between 75 basis points and 2%. But again, almost all of them is weighted towards 1% at this point. So 1.1% is really the bogey.
Operator: Our next question comes from Bryce Rowe of Hovde Group.
Bryce Rowe: Maybe, Bowen, I just wanted to follow up on some of the comments you just made about having the ability to participate in deals or in refinancings and choosing not to do that. Can you speak to kind of maybe what's driving the decision to not participate in some of the opportunities?
Bowen Diehl: Yes. Let's just -- I'll just throw out a hypothetical example, right? So we do our original -- we lend to a company, let's say, 3x EBITDA. And a year later or 1.5 years later, company has grown and performed well. They're going to do a large acquisition. And we lend at like 700 basis points over LIBOR, LIBOR plus 700, plus-minus, that's an example. Year later, they do a large acquisition, and because it's more diverse and a bunch of reasons, the market is willing to lend them 5x EBITDA at LIBOR plus 600. That's a different -- so we have -- at that point, we can decide whether 5x leverage on admittedly a better business at LIBOR 600 is a risk-adjusted return that we're willing to invest in. And sometimes, not that the company is a bad company, but it's got risks in it that we've lived and seen kind of play out that 3x leverage, that's fine. At 5x leverage and LIBOR 600, we just opt to not participate. So that would be an example of -- and the -- and again, most of the time that's happening in -- doing an acquisition, where they're going after the market with a larger credit facility, higher leverage on admittedly a better company. But the leverage is higher and the pricing is lower than we would think is appropriate for the risk of that situation. So that would be a situation where we would just say, "You know what? Candidly, in most of these situations, we have equity in investment, too. So we're like go forward. On the equity, we love it. But we think the credit risk, we can find risk-adjusted returns in the lower middle market on our credit book somewhere else." And so that's a decision we have to make from time to time.
Michael Sarner: And we're also looking down the road, Bryce. Just we talked about net interest margin, I think Bowen mentioned earlier. We really monitor to make certain that we're tracking towards an NII ROE of 11.5%. So when we're looking at individual investments, we're also looking to see what it is we're -- in terms of portfolio turnover. This quarter, 12/31, we saw 20% of our portfolio turnover. And so some of those were higher-yielding assets, and we originated some slightly lower yield. So our portfolio leverage went from 4.1% down to 3.9%. So to some extent, these are safer credits. But when we're looking to see a concern that we were able to produce a growing dividend over time, we're monitoring that yield on an asset-by-asset basis to make certain -- it fits into our strategy going forward. And so some of these credits, to Bowen's point, will fall beneath the threshold. And if the risk reward doesn't make sense, we'll move on from it.
Bryce Rowe: Understood. And then a follow-up to that topic. Any kind of rush to exit the stand-alone equity investments now? Or is it just going to be kind of opportunistic in terms of how that business and that sponsor relationship kind of plays out?
Bowen Diehl: Yes. So I mean, keep in mind, I mean we're -- the vast majority of those equity investments are alongside an institutional private equity firm that's managing their own liquidity. And so they buy a company, they grow it and they sell the company. And so we ride sidesaddle with that dynamic. And so those -- obviously, those PE firms don't get their carry payments until they sell the companies. And so they need to grow and they need to exit them. So we feel pretty good about that portfolio over the next small number of years monetizing alongside that liquidity curve, if you will, of those private equity firms.
Bryce Rowe: Okay. And then Michael, kind of a question for you on the comp line. Just any help you can give us, obviously, it went up. I assume that's a function of a performance accrual getting baked in here for the December quarter, but any kind of thoughts around that would be helpful?
Michael Sarner: Sure. Sure. So for this quarter, I would tell you, looking at it holistically, we had about $2 million in revenue this quarter that was essentially onetime in nature. And our bonus accrual for the quarter was about $1.4 million above our normal run rate. So essentially, there's about $600,000 of onetime income or net income or $0.03. So I think when we look at our performance to date for the year and where we're tracking for the full fiscal year 2022, we did accrue a bonus above the target commensurate with the performance so far of our staff.
Operator: Our next question comes from Sarkis Sherbetchyan with B. Riley Securities.
Sarkis Sherbetchyan: Just wanted to start off with a question regarding the opportunities or the field of opportunities. If it's changed so far in the first month of January, given the potential acceleration in the shift in the interest rate regime. If you can comment on that, please?
Bowen Diehl: I don't know that -- yes, by your question, -- can you hear me, Sarkis?
Sarkis Sherbetchyan: I can hear. Can you guys hear me?
Bowen Diehl: Yes, we can. So as far as the opportunity set, the deals we're looking at, I don't know that I would say they've changed with -- as it relates to the interest rate scheme, which I think is your question. I think -- I mean, honestly, the drivers of the business sales and investment opportunities that we're seeing in the market are really kind of very similar themes as they were in the December quarter. Just the quantum of activity is lower than the December quarter, but the themes are the same. And so I hope I answered your question? I don't -- we haven't seen the interest rate regime change narrative from the Fed affecting our deal activity.
Sarkis Sherbetchyan: Got it. That's helpful. And I guess if we can kind of touch on the SBIC side of the business. Obviously, a very attractive cost of capital proposition for you. Any ideas or any help on the glide path to filling that capacity that you have on the SBA side?
Michael Sarner: Yes, sure. I would tell you, looking ahead, we would expect to see probably maybe 2/3 of the deals get funded through the SBIC and the other 1/3 through ING and equity. ING being a revolving credit facility. So today, we have, as of 12/31, I think we had drawn $29 million of debt. We're going to receive our leverage application for the following $40 million likely this week. And we would probably expect to have drawn somewhere in the $75 million to $100 million in the next 12 to 15 months, is probably where I’d place it.
Sarkis Sherbetchyan: Great. And just one final one for me. Clearly, the earnings power of the business is starting to march higher, and you're raising the dividend, seems like reflect that. I think as we kind of look at the earnings power kind of going forward and based on the commentary you provided for net originations continuing, is it reasonable to think that you continue to kind of walk the dividend higher at the same pace you've demonstrated?
Michael Sarner: So the answer to the question is we will. We do anticipate increasing the dividend. I would say as LIBOR/SOFR increases with the Fed announcing 3 to 4 price hikes, or rate hikes is in the next year, that also will be some level of compression still NII and the dividend should grow. I think once we get beyond those -- the next 75 basis points of hikes, then you'll see significant expansion. So maybe -- from here, maybe as much as 2 dividend increases potentially for the year. Though we're not saying that setting that in stone, but that would be the hope.
Bowen Diehl: Yes. I would say the rate increases are a headwind, but the tailwinds had to do with improved operating leverage as well as cost of capital effect of layering in the SBIC. So you have some gives and takes. So it's not all negative. We've got some tailwinds as well. So we're kind of managing the balance between those 2 dynamics.
Michael Sarner: Right. We – currently, we have -- 60% our liabilities are fixed, and we think that will grow as the FDIC gets drawn. And so absolutely, Bowen's comment is correct.
Operator: Our next question comes from Robert Dodd with Raymond James.
Robert Dodd: Congratulations on the quarter, both earnings and capital -- net capital deployed. First, a question on credit, I'm not -- your credit is in really good shape. But last quarter, nonaccruals at $24 million. This quarter, that $14 million, it's the same number. You said $5 million came off because of the restructuring. I think another $2 million was your category 4 assets. We know which one that is. That leaves with the other $3 million in write-downs on nonaccruals. Can I assume that came from the affiliate investment, which is the only other nonaccrual fully investment in health care? Or was there anything else going on with the less than a handful and of course, you've got that?
Michael Sarner: Yes. It was a reduction in one of the companies that are on nonaccrual. So the 2 of the companies on nonaccrual had significant depreciation and the other been -- what you mentioned on the core coming off of nonaccrual.
Robert Dodd: Yes. Got it. Going back to kind of the pricing power question in this environment, rates up commodities up, labor costs up. I mean, -- but some of your industry sector segments I think clearly have a lot of pricing power in the -- I mean, transportation and logistics are 4% of your portfolio. It's probably got a lot of placing power in this environment, given the constraints and things like that. Are there any sectors in -- within the portfolio, and you don't have a lot of concentration, but any sectors in the portfolio where you're incrementally more worried about whether they can exercise the pricing power versus others like, I guess, transportation and logistics, where I'd be less worried, but maybe I'm wrong?
Bowen Diehl: Yes. That's an interesting question. I think there's a range of pricing power across the different industries. I would say good news -- I guess the slight good news is reserves company in the sense that when these inputs are happening to all of your competitors in a certain sector, it's easier to pass those costs on to your customers, if all of your competitors also have to do the same thing. So I think that's been a major, I guess, call it, benefit or certainly a benefit in defending these portfolio companies against margin deterioration at the end of the day. But certainly, transportation, logistics would be one. Health care might have a different dynamic. Consumer products, retail have another dynamic, right? And so varying levels. But I think again, when it's across -- you take any of the industry sectors, when that inflation is across the entire sector, then it's obviously easier to pass those costs on to your customer, right?
Robert Dodd: Yes. Understood. And one more, more, if I can. I think, Michael, you mentioned that delayed draw term loans are being accessed at a greater rate. Obviously, companies have got and borrowers have got to hit milestones, et cetera, or whatever before they can do that. But can you identify or -- qualitatively maybe, how much of that the DDPL draws are for add-on acquisitions? Can you tell versus are they using them for growth or to support working capital? Can you give us any color on kind of what's driving that if you have the data?
Bowen Diehl: Yes. Robert, the strong majority of DDTLs are for acquisition strategies, with minority -- but a significant minority of them being for like earn-out payments, where our companies bought -- and the founder -- the sponsors negotiated maybe slightly lower purchase price that the founders really to take risk on the upside and get paid for increased performance. And so obviously, we want them to hit those earn-outs, right? Because that means by definition, the business is doing well. If the economy falters or whatever, those earn-outs in vast majority of the cases won't fund, right? So we want those to fund. We do have very specific restrictions on leverage levels, et cetera, on how that earn-out is going to be paid. $10 million earn-out might be paid, $5 million delayed draw and $5 million equity contribution from the equity owners. So we have those restrictions on a company-by-company basis. But the vast -- I mean, the strong majority of the time is acquisition strategy. And also --
Michael Sarner: We monitor -- just, I guess, also from the capital side, like we monitor -- we have, I think, $158 million in DDTLs and revolvers. And we've done -- we closely the utilization of these facilities. We've seen our revolver, the $60 million revolvers -- historically, revolvers are net draws of 0. The only time that we've seen an uptick was during the first wave of COVID, which would have been March and April of 2020 where we saw about 1/3 of our portfolio draw their revolvers and then pay it back down. And then on the DDTL side, from that balance, those are all -- have expiration dates in 2022 and 2023. And we've seen historical, maybe 50% of these get drawn. And so we are -- we monitor that and make certain that we're planning for our capital planning to assume for this level of draws in our portfolio.
Robert Dodd: Just to clarify the last one, sorry -- are you assuming currently in the capital planning, et cetera, and you've got plenty of capital, right? So I'm not worried about that. The historic average amount of DDTLs will be drawn over the LIBOR, given the fact that so many assets seem to be doing quite well, which we're seeing with equity appreciation, et cetera, which can trigger more earn-outs. For example, are you assuming that greater than average proportion of DDTLs are going to give throughput?
Michael Sarner: We're assuming that half of these DDTLs get drawn and less for earn-outs as Bowen noted, more for acquisitions and growth, and then LIBOR.
Operator: This concludes the Q&A portion. I'd like to hand the conference back over to Bowen Diehl for closing comments.
Bowen Diehl: Thanks, operator. Thanks, everybody, for joining the call. Appreciate the good questions as always. And we look forward to continuing to give you updates quarterly as we move forward and have a great rest of the week.
Operator: Ladies and gentlemen, thank you for your participation. This concludes the conference call. You may now disconnect. Everyone, have a wonderful day.
