Thank you for joining today's Capital Southwest fourth quarter and fiscal year 2022 earnings call. Participating on the call today are Bowen Diehl, CEO, Michael Sarner, CFO, and Chris Rehberger, VP Finance. I will now turn the call over to Chris Rehberger.
Thank you. I'd 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 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.
Thanks, Chris, and thank you everyone for joining us for our fourth quarter and fiscal year 2022 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 real capital. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com. I'll start by saying that during tumultuous times like we have seen recently in the public markets, it's comforting to have a portfolio heavily weighted to first lien senior secured debt, built with the full cycle underwriting mentality that we have deployed over the past seven years since the launch of our credit strategy.
It is also comforting that 89% of our credit book is in sponsor-backed companies, which provide these companies with potential capital and operating support if needed. On the capitalization front, we have been diligent about maintaining over half of our liabilities in unsecured debt while consistently raising equity through our cost-efficient equity ATM program. Finally, we are well-positioned for a rising interest rate environment with 98% of our debt assets in floating rate securities and only 38% of our liabilities in floating rate securities. Now turning to slide six of the earnings presentation. We will begin with a summary of the key performance highlights for the fiscal year. Total return to shareholders for the fiscal year was 18%, which consisted of share price appreciation of 7% and total dividends paid during the year of $2.52.
Our NAV per share grew 5% to $16.86 from $16.01 in the prior year, driven primarily by over $17 million in net realized and unrealized gains on the portfolio. During the fiscal year, we grew our total portfolio at fair value by 36% year-over-year to $937 million from $688 million in the prior year, while increasing our pre-tax net investment income by 6% to $1.90 per share from $1.79 per share in the prior year. Furthermore, we strengthened our balance sheet capitalization during the year through the opportunistic issuance of $150 million of three 3/8 unsecured notes, approximately $100 million in equity proceeds raised through our equity ATM program, and $80 million in SBA debentures on which we are currently drawing.
Moreover, in May, we received $45 million in additional commitments on our ING-led revolving credit facility, which now brings the credit facility commitment to $380 million. Michael will provide further detail on this later in our prepared remarks. On slide seven of the earnings presentation, we have summarized some of the key performance highlights for the fourth quarter of our fiscal year. During the quarter, we generated pre-tax net investment income of $0.50 per share, which more than covered our regular dividend paid during the quarter of $0.48 per share. As previously announced, our board has declared a special dividend of $0.15 per share for the June quarter, which will be in addition to the $0.48 per share regular dividend also declared for the June quarter.
This special dividend of $0.15 per share is a result of another successful equity exit and demonstrates our continued track record of distributing realized gains to our shareholders through special dividends. During the quarter, acquisition and financing activity in the lower middle market continued to be strong, albeit slightly below the record activity we saw in the December 2021 quarter. On a net basis, we were able to grow our investment portfolio by approximately $60 million or 6.8% to $937 million. Portfolio growth during the quarter was driven by $103 million in new commitments consisting of investments in portfolio companies totaling $50 million, two refinancing transactions totaling $41 million, and add-on commitments in eight existing portfolio companies totaling $12 million. This was offset by $49 million in proceeds from four debt prepayments during the quarter.
On the capitalization front, we raised $25.2 million of equity through our ATM program at an average price of $24.27 per share, representing an average of 150% of the prevailing net asset value per share. Additionally, we received approval for an additional $40 million of leverage from the SBA, increasing our total leverage commitment from the SBA to $80 million. As a reminder, the total leverage expected from our current SBIC license is $175 million. On slide eight and nine, 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 10, as a refresher, our investment strategy has remained consistent since its launch in January 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. As of the end of the quarter, our equity co-investment portfolio consisted of 41 investments with a fair value of $85.2 million, which included $25.1 million in embedded unrealized appreciation, or approximately $1.01 per share.
Our equity portfolio, which represents approximately 9% of our total portfolio fair value as of the end of the quarter, continues to provide our shareholders attractive upside from growing lower middle market businesses. As illustrated on slide 11, our on-balance sheet credit portfolio as of the end of the quarter, excluding our I-45 Senior Loan Fund, grew 7% to $794 million, as compared to $745 million as of the end of the prior quarter. For the quarter, 100% of the new portfolio debt originations were first lien senior secured debt. Finally, as of quarter end, 93% of the credit portfolio was first lien senior secured. On slide 12, we lay out the $103 million of capital invested in and committed to portfolio companies during the quarter.
Capital committed this quarter included $49 million in first lien senior secured debt committed to three new portfolio companies, including one in which we also invested $1 million in equity. Finally, during the quarter, we also committed $51 million in first lien senior secured debt to nine existing portfolio companies. Turning to slide 13, we continue our track record of successful exits with four debt investment prepayments. Two of these loan prepayments were refinancings related to acquisitions in which Capital Southwest was able to participate in the new credit facility. In total, these debt exits generated over $49 million in total proceeds, realizing gains of $512 thousand and generating a weighted average IRR of 12.9%.
Since the launch of our credit strategy over seven years ago, we have generated a cumulative weighted average IRR of 14.4% on 60 portfolio exits, representing approximately $695 million in proceeds. As previously mentioned, the market for acquisition and refinancing capital continues to be strong. Our investment pipeline, as we have mentioned on previous calls, remained robust throughout fiscal year 2022 on both volume and quality deals, and that trend has continued into the June quarter. Given the current activity we are seeing in the market, we expect the June quarter to again be a strong quarter for originations. 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 partner.
On slide 14, we illustrate some key stats for 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 portfolio fair value was weighted 84.2% to first lien investments, 6% to second lien, and 0.1% to subordinated debt, and 99.7% to equity co-investments. Turning to slide 15, we have laid out the rating migration within our portfolio. During the quarter, we had no loans upgraded and one small loan position downgraded from a two to a three. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four-point scale, with one being the highest rating and four being the lowest rating.
As of the end of the quarter, we had 71 loans representing 95.3% of our investment portfolio fair value rated in one of the top two categories, a one or a two. We had six loans representing 4.6% of the portfolio fair value rated a three, and one loan representing less than 1% of the portfolio rated a four. During the quarter, we had no new loans placed on non-accrual. As illustrated on slide 16, our total investment portfolio continues to be well-diversified across industries with an asset mix which provides strong security for our shareholders' capital. The portfolio remains heavily weighted towards first lien senior secured debt, with only 6% of the total portfolio in second lien senior secured debt and only 0.1% exposure to subordinated debt.
Turning to slide 17, our I-45 Senior Loan Fund continued to generate solid performance. As of the end of the quarter, 97% of the I-45 portfolio was invested in first lien senior secured debt, where the average EBITDA and leverage across of the companies in the I-45 portfolio was $72 million and 4.2x, respectively. The material decrease in leverage this quarter was due to the exclusion of a loan position in one portfolio company that had negligible fair value and EBITDA. Had the stats for each of the December and March quarters excluded this portfolio company, pro forma leverage across the I-45 portfolio would have been 4.3x and 4.2x in each of the December and March quarters, 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 1.59x debt to equity. I will now hand the call over to Michael to review more specifics about financial performance for the quarter.
Thanks, Bowen. Specific to our performance for the March quarter, as summarized on slide 18, we earned pretax net investment income of $12 million or $0.50 per share. We paid out $0.48 per share in regular dividends for the quarter, an increase from the $0.47 per share paid out in regular dividends in the December quarter. As mentioned earlier, our board has declared a special dividend of $0.15 per share for the June quarter, while maintaining the regular dividend for the June quarter at $0.48 per share. Maintaining a consistent track record of meaningfully covering our dividend with pretax net investment income 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 March 31, 2022, and 107% cumulative since the launch of our credit strategy in January 2015. Our investment portfolio continues to perform well, generating $7.7 million in net realized and unrealized gains this quarter, bringing the net realized and unrealized gains on the investment portfolio over the past four quarters to $17.3 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 March 31, 2022, our estimated UTI balance was $0.47 per share.
Our investment portfolio produced $21 million of investment income this quarter, with a weighted average yield on all investments of 9%. Total investment income was $1.3 million lower this quarter, due primarily to a decrease in one-time fees paid on debt repayments in the December quarter. There continued to be three loans on non-accrual, with an aggregate fair value of $14 million or 1.5% of the investment portfolio as of the end of the quarter. We did not place any new loans on non-accrual during the quarter. The weighted average yield on our credit portfolio was 9.3% for the quarter. As seen on slide 19, we further improved LTM operating leverage to 2.2% 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 March 31, 2022 increased 4.1% for the quarter to $16.86 per share, compared to $16.19 per share as of the end of the December quarter. The driver of the NAV per share increase was due to the strong performance of the investment portfolio, coupled with the accretion from our equity ATM program. Turning to slide 21, we are pleased to report that our balance sheet liquidity continues to be strong, with approximately $178 million in cash and undrawn leverage commitments as of the end of the quarter.
As Bowen mentioned earlier, in early May, we received broad support from our lender group, which increased commitments on our ING-led senior secured credit facility by $45 million, bringing total commitments to $380 million. Our bank syndicate continues to support our growth, and we are pleased with the flexibility the increased revolving credit facility provides to our capital structure. In addition, we continue to draw debentures in our SBIC subsidiary as we originate SBIC-eligible assets. As of the end of the quarter, we had drawn $40 million in debentures with an average capital cost of 2.6%. Our current commitment from the SBA is $80 million, which we fully expect will increase over time to the maximum under our license of $175 million as we continue our participation in the SBIC program.
As of March 31, 2022, approximately 54% 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 debt-to-equity ratio of 1.16 to one. Turning to slide 26, our balance sheet is well-positioned to benefit from rising interest rates. Short-term interest rates have increased significantly, with LIBOR increasing from 21 basis points at the end of December to 96 basis points at the end of March. As of yesterday, LIBOR is approximately 150 basis points. The weighted average floor on our investments is approximately 1%. With the short-term rates exceeding the floor on our investments, this will have a positive impact on net investment income.
Based on quarter-end rates, we estimate a 50 basis points and a 150 basis points increase in reference rates would result in annual incremental earnings of approximately $0.10 and $0.33 per share. I'll now hand the call back to Bowen for some final comments.
Thanks, Michael. Thank you everyone for joining us today. Capital Southwest continues to perform well and consistent with the original vision and strategy we communicated to our shareholders when we began this journey. We have been underwriting with a full economic cycle mentality since day one, which we believe has prepared us well for any environment presented to us in the coming months and years. I continue to be impressed by the job our team has done in building a robust asset base, deal origination capability, as well as a flexible capital structure.
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 and positioning 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 for Q&A.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. Our first question comes from Mickey Schleien with Ladenburg.
Yes, good morning, Bowen. We're experiencing macro headwinds that we haven't seen for a long time, and obviously, you have a lot of experience in the credit market. I'd like to ask you where you think we'll see defaults and non-accruals head over the next couple of years.
Yeah, it's hard to predict, Mickey. We have been doing this for a while. You know, honestly, when we took over the BDC seven years ago, we were paranoid about a recession, and we've underwritten to the Great Recession for seven years now. So we've kind of always expected or had to plan for increased defaults in a portfolio. You know, we've underwritten a debt portfolio that will perform well in a Great Recession-type economic environment. While it's hard to predict the actual numbers, you know, if we look at our underwriting deal by deal, and you know, our portfolio will perform very well in that in kind of a full cycle. You know, when you have...
You know, we underwrite to 30%-50% LTV on a typical deal, and you know, 89% of our portfolio are sponsor-backed deals. As you all know, the sponsor community is pretty flush with liquidity. You know, when I think about a portfolio that's gonna generate a dividend for the shareholders, which includes us, you know, I feel pretty good about that. It's not.
Thanks for that, Bowen.
Not a specific answer to your question on a prediction, but we've, you know, again, been, you know, kind of worried about recessions or making sure we had a portfolio that would withstand a recession since the beginning.
Yeah, in the.
I understand.
On the dividend side, you know, the other way that we plan for this is obviously to maintain that, you know, a dividend coverage that's conservative as we've done. I think, you know, we keep noting each period that, you know, we're 107% dividend coverage since we began this, and, you know, 105%, I believe, in the last year. I think it'll be important for us to continue to leave, you know, enough cushion as we move through this, and see how severe a recession could be, to make certain that our dividend is conservative, respective of what the environment might look like.
I understand, Michael. I appreciate that. Thank you. When we look at the forward LIBOR and SOFR curves, they're obviously very steep, and that implies that nominal rates on the debt investments you've made could go up fairly sharply over the next year or so. How do you see that trend affecting your borrowers in terms of their appetite for capital and their ability to service their existing debt?
It's a good question. We look at that at least every quarter. You know, and it does start with the underwriting leverage that you're putting on companies, and the leverage needs to be appropriate for the potential volatility of those particular industries. It starts with that. We look at our portfolio, and our weighted average Fixed Charge Coverage across the book is a little over 3x EBITDA divided by fixed charges, so a little over 3x If you kind of sensitize it, if you were to increase SOFR or LIBOR by 200 basis points from where it is today, you know, that 3x would go to about a little over 2.4x .
If you were to increase that by 300 basis points, that coverage would be about 2.2x . That, you know, those numbers are pretty solid. That's, you know, that gives me confidence that pretty substantial increase in interest rates, you've still got, you know, 2.2x kind of coverage of your fixed charges across your portfolio.
That's interesting, Bowen. That's obviously assuming everything else remains equal, right?
No, that's right. I mean, you know, obviously, you're, you know, if the economy starts to slow down, you're gonna have increased defaults, you know. Covenant default to a first lien lender doesn't necessarily mean it's a disaster. It means that we charge additional economics on those loans, fees or otherwise. Certainly, in a slowing economy, you start to have a little bit more noise in the portfolio, for sure.
Of course. Bowen, when we think about those rising interest rates, that could provide a big tailwind to you and to other BDCs, since most portfolios are floating rates. How much of that, you know, increase in short-term rates do you think the lenders will keep versus perhaps passing some of that through to the borrowers as spread compression, to help support them?
Yeah, that's a good question. I mean, I've been doing this for a while, and I would tell you, when rates start to increase, you know, lenders do have a tendency to, or the market generally has a tendency to give some of the increase in index back in spread. I do, you know, the vast majority of the increase in index will be kept by the lenders. But, you know, there's. You know, our job is to make sure we minimize how much we give back. But, you know, that's, that is a dynamic that does happen. If you think about our capital structure, we've got over 50% of our liabilities in fixed rate notes. Our assets are all floating rates.
We're pretty levered to the upside on interest rates.
Exactly.
At the margin, you're right. I mean, you know, that's something that the lending industry does to an extent, you know, as the index goes up, they give a little bit of the spread back. You know, at the end of the day, we're Net Interest Margin. We eat Net Interest Margin at the end of the day.
Yeah.
You know, we have to minimize the amount of that dynamic, but it does, it has in past cycles, been that way at the margin.
Yeah. I agree with that. My last question, sort of housekeeping maybe for Michael. Could you just give us what the main drivers were of the realized and unrealized gains this quarter?
Yeah. The $6.3 million of the depreciation was related to the equity portfolio. I think we had, I wanna say, at least three portfolio companies on the equity side that are loan grade ones that had sizable increases. Then across the board, really there, I would say, you know, debt was up as well, I think about $1.4 million, I believe, for the quarter, which was fairly granular. I mean, I think from a, even a, kind of a macro perspective, our companies saw revenue growth. We saw, you know, EBITDA growth as well, despite, you know, with increased labor and transportation costs. You know, overall, we saw EBITDA margins probably come down slightly. Overall, the portfolio performed individually quite strong.
One of the things, Mickey, I thought was encouraging this quarter was that across our equity portfolio, the equity co-investment portfolio, you know, market multiples were down slightly, but our portfolio appreciated. That was a really fundamental performance across that equity book, as opposed to just market multiples expanding. That was, you know, it's a healthy group of companies.
Yeah, that's helpful. I appreciate your time this morning. Thank you for taking my questions.
Thanks, Mickey.
Our next question comes from Kevin Fultz with JMP Securities.
Hi, good morning, and thank you for taking my questions. I'd like to start with a question on leverage. You know, regulatory leverage was 1.16x at quarter end. Can you just remind us what your target leverage range is? Could you talk about if your target leverage range has shifted at all recently given the current market backdrop?
Sure. What we've said in the past is our economic leverage target is 1.2-1.4, and our regulatory would be between 1.0 and 1.2. We're obviously in the middle of those ranges. We are mindful of, you know, what's going on in the economic environment. You know, from that perspective, the notion is that we would like to be, you know, in the middle to the low end of those ranges, you know, entering into what a possible recessionary period. You know, how will we do that? You know, the likely is, you know, we wanna use the ATM, you know, fully as we've done before.
Certainly, we don't wanna be behind the curve and forced to raise equity to bring leverage back down. You can kind of imagine that we'll probably be more conservative on that front and try to stay, you know, really around 1.2-1.5, 1.2-1.25 and probably 1.1-1.15 on regulatory.
Okay. That makes sense, Michael. Just in regards to portfolio positioning, just curious if there are any pockets or industries that you find particularly attractive in the current climate.
Well, certainly, I mean, you've heard me, everybody's heard me beat this drum for years on the whole recession, full cycle underwriting mentality we use. If you kind of look at some of the deals, you know, we've done in the last quarter, you'll see American Nuts is a food deal. You see America's Thrift Stores, which is a thrift retailer. You know, Jax Pro is a manager of supply chain parts, little screws and bolts and things that in manufacturing plants. So supply chain things that they have to manage. It's complex. You know, Air Conditioning Specialists, which is HVAC service company that people that come by your house and service your AC. So those are all kind of, you know, non, you know, very low cyclicality, if any cyclicality associated with those industries.
You know, that's kinda how we're thinking about the world. I mean, we like industries that are, you know, stable, high cash flow margin, you know, aren't, you know, particularly discretionary type purchases, and the ones that shouldn't be as affected by the economy. You know, economy kind of affects everything to some extent, but typically less, much less cyclical or even countercyclical. You'll see National Credit Care, for example, certainly a countercyclical type industry. So if you look down our deals, you'll see that theme. So I think that's how I'd answer that question.
Okay. Thanks, Bowen. That's helpful. Just one more follow-up on Mickey's question. You had some pretty nice unrealized gains on equity and debt investments in the quarter. You know, that's kind of the opposite of what we saw in the public markets and other BDC portfolios in the March quarter. Just curious if in the equity portfolio, were-
Was the unrealized gain primarily in a handful of equity securities, or was that kind of broad across the portfolio?
Yeah. So I would say, you know, there's certainly a handful and a half of companies that were shining stars for sure. We saw a pretty broad, you know, performance, I guess, across the portfolio. Certainly, you know, like, a handful and a half of shining stars. I think, and that's, you know, kind of typically what happens in an equity portfolio. I got pretty encouraged by the fact again that if you looked across our portfolio, you had market multiples come down, you know, index market multiples come down, as we all know. We saw that in the public markets. The equity portfolio EBITDA grew and created appreciation overall.
Okay. I appreciate the color there, and I'll leave it there. Congratulations on a nice quarter.
Thank you.
Our next question comes from Kyle Joseph with Jefferies.
Hey, good morning, guys. Thanks for taking my questions. Most have been answered. You know, we talked about the kind of the rising rate environment impact on demand for middle market credit. Can you go to the kind of the other side of the spectrum and talk about how you see rising rates impacting competition in the overall supply of credit to the middle market?
That's a good question. You know, the supply as far as our competitors and capital, you know, availability of capital, I would say, you know, I don't expect it changing all that much. I mean, if the market's competitive now, it was competitive yesterday, it'll continue to be competitive. You know, and I think, again, the private equity community is, you know, pretty flush with liquidity. So I think people are all talking about recessions. I'd say that the sensitivity around recessions is certainly heightened. You know, we've had that sensitivity for a while, but that's the market's certainly sensitive to that.
I think that could, you know, as the lender community is thinking more about recessions and trying to, quote, underwrite to recessions, that does typically, and it should, increase the conservatism across the industry. I think the quality, the quantum of capital out there, I don't see it changing. I do see the mentality of the lender community and, you know, sponsor community as well, becoming more recession sensitive as they're thinking about investing capital.
Yeah. I guess also from a competitor's perspective, it's gonna depend on their overall health of their portfolio and the leverage they have going into what could be a cycle, whether they're gonna be, you know, able to be aggressive in finding unique opportunities, which is what you tend to see in the down market.
Got it. Very helpful. Thanks for answering my questions.
You bet.
Our next question comes from Bryce Rowe with Hovde.
Thanks. Good morning. Wanted to maybe start on, you know, your commentary around the pipeline. Feels like you've got another healthy quarter coming up here. For the June quarter, we're two-thirds of the way through. Maybe you could speak to what you're seeing kind of from a terms or pricing perspective with, you know, some of the shifting market dynamics that we've seen here over the last few months.
Yeah. Pricing and terms, I would say really from the you know, everything's down from a volume perspective from the December quarter of last year 'cause it was a feverish pace then. The June quarter is, you know, similar to the March quarter, as far as general activity. Pricing and terms, it's been kind of the same. It hasn't really been, you know, the general statement. It hasn't been that much different between the quarters. There's differences between deals and everything's deal specific, but I think generally speaking, it's not. We haven't seen a material change in pricing and terms. I mean, in the lower middle market, we get strong covenants, first lien, lower LTV, you know, cash flow businesses.
That's kind of the same in the June quarter as it was in the March quarter.
That's helpful, Bowen. You know, you've obviously had some monetizations, exits. Are you still seeing, you know, some opportunity for that here? Or do you expect that activity to slow down here?
Well, I mean, it was again, it kind of follows the market activity. You know, the market activity in the December quarter was obviously really high. Prepayments were high. Kind of into this year, you know, they've kind of a little bit of a steady hum. You know, I mean, I'm not going to be able to comment on.
Yeah. I mean, I think.
I mean, I don't.
It's definitely slowed down. What I would say, just looking down, you know, to the next 6-12 months, some of the loan grade ones that are.
Yeah.
Performing extremely well, you know, those are always possibilities for repayments or exits. I think if you look to, you know, our history since 2016, we've had a large exit that we were able to provide a supplemental dividend or special dividend in every year since. You know, looking at that list, we would think that the high likelihood that there could be an exit before the end of the year and the opportunity for that.
I think that's a fair comment. I mean, if you look at those names, you know, if I was an owner of some of those businesses, I'd certainly be considering a sale, I mean, given the extreme outperformance of some of these names. You know, no line of sight on any particular one at the moment. Certainly not unreasonable to think we would see something by the end of the year.
Okay. Maybe a couple housekeeping questions for me. From an access to future SBA draws, you know, is that something, Michael, that you guys can access here now? I seem to remember there being you know, a review by the SBA now that you've hit that first tier.
Yeah, no. Correct. We already received that review, when we got to our first half year, which was the $40 million. So we're past that. So we have access right now to $80 million. As of the end of this quarter, we had drawn the $40. We tell you that, you know, the activity is seeming robust this quarter, and several of the deals we're looking at are SBIC eligible. You know, we see ourselves being in the not quite at $80, but pushing it by the end of the June quarter or into July. So we'll probably be back to the SBA in the summer looking for additional leverage commitment.
Okay, that's helpful. Then maybe one more around I-45. Looks like the dividend that came into the BDC from I-45 was up. Is this a good run rate? Anything kind of driving that might, you know, cause that to fall back down?
You know, honestly, it was a strong quarter. We did see, I would tell you, towards the end of the quarter, some exits in I-45. Then we're ramping that back up right now, more late stage. I would say that number comes down a bit, but it's not gonna be too far off.
Okay, great. Thank you.
Our next question comes from Robert Dodd with Raymond James.
Thanks. Congratulations on the quarter, guys. If I can, going back to the special dividend. Spillover is now $0.47. I mean, you've paid over the last 12 months a lot of special dividends to shareholders who've done quite well. Is it the intent to kind of, for lack of a better term, level off spillover here, and basically pay out overearning if you have a realized gain or if you continue to overearn the dividend on a more NII basis? Or if rates go up, obviously that's earnings power there as well. Or is it just gonna be more.
You know, is there a potential that there's a plan, you know, basically pay out the over earning each quarter or something like that to manage the spillover down so you don't have the excise tax? Or can you give us any thoughts on that front?
Sure. Honestly, that is what we have been doing. You know, our balance was quite high. Obviously, you go back to the MRI days, we had over $1 in UTI. They were paying, you know, significant excise tax. We paid that down through the supplemental dividend program.
Mm-hmm.
This $0.15 was related to an exit of one of our equity portfolio companies that produced this $0.15 distribution that we're paying off. This brings us down to approximately, you know, $0.30, $0.32 on a UTI balance, which we would tell you that we think that we should be somewhere between $0.20 and $0.30. We are really where we want to be. From this point going forward, I think normal activities will maintain that balance. Then as we see exits, with, I think we noted we have, again, $25 million of unrealized appreciation. We expect to see exits that'll generate gains, and would be included in special distributions going forward, but while maintaining this, you know, $0.20-$0.30 UTI balance.
Got it. I appreciate that. Thank you. One more, if I can, on the color you gave that, you know, revenues and EBITDA both grew, margins came down slightly. I don't think that's a great surprise. Were there any areas of the portfolio, not necessarily specific businesses, but any areas where you saw margin compression that maybe you didn't anticipate? I mean, obviously labor costs are up, raw materials are up. Was there any other kind of driver that came out of left field, so to speak?
Yeah. I mean, obviously labor inputs are up, you know, material inputs are up. You know, fortunately for the vast majority of the companies, you know, when you have an inflationary environment, quote, "inflationary environment" narrative out in the public square, it's easier to call your customers and raise prices, right? Because it's not offensive when you do so. That helps. I think the one area that you haven't mentioned, you know, we all know about the supply chain and just not only the cost of inputs, but the difficulty to get inputs. And you know, we have seen a couple of the companies utilize working capital to pre-buy and bulk up their working capital base, their inventories. The cost of doing that is essentially a cash flow margin hit, right?
That's been something. I wouldn't say we didn't expect it. I mean, like, it kinda makes sense, right? With the supply chain being what it's been for several months. That is definitely a dynamic that affects, you know, companies across the economy. We've seen people utilize capital to increase their inventory to defend against just availability of inputs.
Has that been one of the drivers of the strength of the pipeline in terms of or is that just, you know, at the margin, some are using working capital? Or is that pretty, I don't wanna say pervasive, but pretty common across the portfolio?
You know, I mean, our pipeline is not really working capital deals, obviously. You know, we have revolvers across the portfolio. I'd say at the margin, some of the revolvers may be drawn in part for that, those reasons. The pipeline really is still basically, you know, it's founder-owned businesses that are selling or diversifying their holdings as they get later in their life, right? A private equity transaction is an interesting alternative because it allows the founder to roll over a portion of their proceeds into the company, stay involved in the company, but diversify their holdings.
You know, with having the pandemic in the rearview mirror, the economy being a concern, I mean, you know, it's, you know, people, you know, that might not quite ready to sell might say, "You know what? This, you know, maybe a deal where I take a few of my chips off the table might make some sense." It's given private equity guys a chance to invest in companies. So I think that general dynamic still is there. It's not necessarily working capital looking for working capital as much as it's, you know, M&A kind of transactions.
Got it. Thank you. That makes sense. I mean, you only had $12 million of add-ons this quarter. Last one, if I can. When underwriting, to your point, you always underwrite for a recession to occur during the life of a loan. What do you think of the quality of your incremental knowledge about a borrower, if you will? Given that COVID and those that are in your portfolio and newly in your portfolio obviously survived COVID and managed supply chain disruptions there and economic issues there. Do you think that financial information you have about borrowers that's so relatively recent compared to the financial crisis, which was more than a decade ago at this point.
Does that give you more confidence in the ability of borrowers to withstand any economic hiccups over the next couple of years? Or do you think COVID was just so odd that it doesn't tell us much about survivability or success during a put air quotes around, "normal" recession, if that comes to pass?
Yeah. There's like several parts to that answer. I mean, you know.
Yeah.
COVID, the COVID stress created a slowdown in business. Whether the slowdown in business is a recession or COVID or otherwise, you know, you get to see how a lot of these companies handle or the business models handle kind of a stress in the economy. COVID's a little different because it was a flash crash and, you know, of course then didn't, thankfully, end up being, you know, a lasting thing from an economy perspective. You know, the COVID dynamic is interesting, and we probably have, you know, certainly a bunch of business models that we've you know or that we've seen out there in new deal flow and to some extent in our portfolio that actually from a pure EBITDA perspective benefited from COVID.
I mean, not meaning that, you know, their product or service was needed more in COVID, in that COVID environment than before. We're, you know, underwriting deals now. We're underwriting the downside, but we're also thinking a lot about what in certain businesses we're looking at in underwriting is any of the EBITDA that we're underwriting COVID bump, you know, and kind of a lasting effect of COVID. When that kind of fades, all else equal, EBITDA will come down. It's a little bit of a, you know, there are businesses out there that, you know, like I said, EBITDA increased during COVID for various specific reasons. Of course, there's a lot of businesses that decreased substantially during COVID.
I would say just generally seeing the portfolio stress in an environment like that is helpful, sure. To some extent, as you said, it's comforting to see our borrowers that withstand it, you know. You know, you had PPP funding out there and the like, but you know, a lot of these companies didn't use the funds. They took them and paid them back. You know, yeah. It was good. I mean, it was good. It you know, the Great Recession is a long time ago. But you know, having something more recent that stressed the portfolio and portfolio performed is certainly comforting.
Yeah, you know, on the liquidity side, Robert, like we did see, even though there was stimulus money out there, we saw probably a third of our portfolio companies draw on their revolver and then pay it back down, essentially all of them paid it back down within a month or a month and a half. You kind of get a sense of just how they operate in a recession environment, restricted environment.
Got it. Thank you. Thank you.
I'm not showing any further questions at this time. I'd like to turn the call back to Bowen for any closing remarks.
All right. Well, thanks, everybody. Thanks for joining us, and we appreciate your time, and we look forward to giving you further updates as we go forward.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.