Thank you for joining today's Capital Southwest second quarter 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. You may begin.
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'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.
Thanks, Chris, and thank you everyone for joining us for our earnings call for the quarter ended September 30, 2021, which is the second quarter of our 2022 fiscal year, which ends March 31, 2022. We're 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 various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com. We'll begin on slide six of the earnings presentation, where we have summarized some of the key performance highlights for the quarter. During the quarter, we generated pre-tax net investment income of $0.45 per share, which more than earned our regular dividend for the quarter of $0.44 per share.
Total dividends for the quarter were $0.54 per share, which included a $0.10 per share supplemental dividend. Total dividends paid during the quarter represented an annualized dividend yield on our stock price on the last trading day of the quarter of 8.6% and an annualized yield on net asset value per share of 13.2%. As a reminder, we previously announced that our board declared an increase in our regular dividend per share to $0.47 per share for the quarter ended December 2021 from the $0.44 per share paid in the September quarter. This increase in our regular recurring dividend reflects the increased earnings power of our portfolio resulting from portfolio growth, continued reductions in our cost to capital, and continued improvements in operating leverage achieved through our internally managed structure.
Our board also declared a supplemental dividend of $0.50 per share to be paid out in the December quarter. This supplemental dividend represents an accelerated payout of our prior supplemental dividend program, which had been paying out $0.10 per share per quarter over the past several years. We believe that this accelerated distribution of UTI maximizes value for our shareholders today while also maintaining an adequate UTI balance into the future. Going forward, we expect that shareholders will continue to participate in the successful exits of our investment portfolio through special distributions as we monetize the unrealized appreciation in our portfolio over time. During the quarter, we grew our investment portfolio on a net basis by 2.4% to $818 million.
Portfolio growth during the quarter was driven primarily by a total of $112.9 million in commitments to six new portfolio companies and four existing portfolio companies, of which $77.2 million was funded at close. This was offset by $60.9 million in proceeds from six debt prepayments and two equity exits during the quarter. The portfolio generated net realized and unrealized gains of $2.8 million during the quarter, driven primarily by unrealized appreciation in our equity co-investment portfolio. On the capitalization front, we completed an amendment to our ING credit facility, extending the maturity to August 2026 and decreasing the interest rate to LIBOR + 215 basis points, down from LIBOR + 250 basis points.
Additionally, we issued $100 million in aggregate principal of 3. 375 % notes due October 2026 and repaid in full our 5. 375% notes due October 2024. Furthermore, in lockstep with our strong deal pipeline, we raised $30.3 million of equity through our ATM program at an average price of $26.59 per share, representing an average of 160% of the prevailing net asset value per share. On slides seven and eight, 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 nine, 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 our loans. We believe that this combination is powerful for our 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 31 investments across approximately half of our portfolio companies. The equity portfolio had a fair value of $69.2 million, which included $17.7 million in embedded unrealized appreciation, or approximately $0.76 per share. Our equity portfolio, which represented 8% of our portfolio at fair value as of the end of the quarter, continues to provide our shareholders attractive upside from the growing lower middle market businesses.
As illustrated on slide 10, our balance sheet Credit Portfolio as of the end of the quarter, excluding our I-45 Senior Loan Fund, grew 3% to $689 million compared to $671 million as of the end of the prior quarter. For the quarter, all 6 of the new portfolio company debt originations were first lien senior secured. As of the quarter end, 91% of the Credit Portfolio was first lien senior secured. On slide 11, we lay out the $112.9 million of capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter included $107.8 million in first lien senior secured debt, committed to 6 new portfolio companies, one of which we also invested $1 million in equity alongside our debt.
$3.8 million in first lien senior secured debt committed to one existing portfolio company. $400,000 in sub-debt and equity follow-on investments in three existing companies. Turning to slide 12, we continued our track record of successful exits with six exits during the quarter. These exits generated $60.9 million in total proceeds, realized gains of $3.3 million and a weighted average IRR of 17.5%. To date, we have generated a cumulative weighted average IRR of 15.2% on 45 portfolio exits, representing approximately $462 million in proceeds. From a macro perspective, the market for acquisition and refinancing capital was robust this quarter and has continued its strong momentum into the December 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 in both volume and quality of deals. The deal team continues to do an excellent job broadening the top end of our deal funnel, which maximizes the number of deals in the market for which we have the opportunity to review and consider. As we have always contended, this is a critical component of building and maintaining a quality investment portfolio in a competitive market. Finally, we believe that the returns realized on exits over the past several years has proven out the investment acumen of our investment team and the merits of our investment strategy in generating strong risk-adjusted returns over the long term. On slide 13, 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. Beginning this quarter, we have decided to consolidate reporting on our on-balance sheet upper middle market and lower middle market loans in order to give shareholders a more concise view of our portfolio makeup in total. As of the end of the quarter, the total on-balance sheet portfolio at fair value was weighted 82.4% to first lien investments, 6.8% to second lien investments, 1.6% to subordinated debt investments, and 9.1% in equity co-investments. Turning to slide 14, we have laid out the rating migration within our portfolio. During the quarter, we had two loans upgraded from a 2 to a 1, one loan downgraded from a 2 to a 3, and one loan downgraded from a 3 to a 4.
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 61 loans representing approximately 90% of our investment portfolio at fair value rated in one of the top two categories, a 1 or a 2. We had six loans representing 9.7% of the portfolio at fair value rated a 3, and one loan representing less than 1% of the portfolio rated a 4. During the quarter, we placed 1 first lien senior secured loan on non-accrual with a fair value of $10.4 million or 1.3% of the total investment portfolio.
This company is currently working through a restructuring of its balance sheet, so we have decided to place the loan on non-accrual pending more clarity on the post-restructure loan terms. Based on conversations with the company to date, we expect a portion of this loan to come off non-accrual in the near term once the restructuring is finalized, which should be completed in the coming weeks. As illustrated on slide 15, our total investment portfolio continues to be well diversified across industries with an asset mix which 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 2% of the portfolio in subordinated debt. Turning to slide 16, 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 $75 million or 4.7x respectively, down slightly from last quarter. Portfolio continues to have diversity among industries at an average hold size of 2.6% of the portfolio. Leverage at the I-45 fund level is currently 1.3x debt to equity. I'll now hand the call over to Michael to review more specifics of our financial performance for the quarter.
Thanks, Bowen. Specific to our performance for the September quarter, as summarized on slide 17, we earned pre-tax net investment income of $10 million or $0.45 per share. We paid out $0.44 per share in regular dividends for the quarter, an increase from the $0.43 per share regular dividend paid out in the June quarter. As mentioned earlier, our board has again this quarter increased the regular dividend, declaring a quarterly dividend of $0.47 per share for the December quarter. Additionally, our board previously declared a final supplemental dividend of $0.50 per share, which will also be paid out during the December quarter. Our investment portfolio continues to perform very well, generating $2.8 million in net unrealized and realized gains this quarter, bringing the net realized and unrealized gains over the past four quarters to $18.7 million.
Though we are accelerating the current supplemental dividend program as of December 31, 2021, going forward, we will continue to distribute special dividends as we monetize the unrealized appreciation in the portfolio. As of September 30th, 2021, our estimated UTI balance was $0.69 per share. Maintaining a consistent track record of meaningfully covering our regular dividend with pre-tax net investment income is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with 109% for the last 12 months ended September 30, 2021, and 107% cumulative since the launch of our credit strategy in January 2015.
Our investment portfolio produced $20.3 million of investment income this quarter, with a weighted average yield on all investments of 9.6%. Investment income was $1.7 million higher this quarter, due primarily to an increase in average credit investments outstanding and prepayment fees. There were three loans on non-accrual with an aggregate fair value of $24.2 million or 3% of the investment portfolio as of the end of the quarter. Our weighted average yield on our Credit Portfolio was 9.7% for the quarter. As seen on slide 18, 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 19, the company's NAV per share as of September 30, 2021 was $16.36 as compared to $16.58 at June 30, 2021, representing a quarter-over-quarter decrease of 1.3%. The main driver of the NAV per share decrease was $17.1 million in realized losses on the extinguishment of debt on the full prepayment of our 5 .375% note due October 2024. The realized loss consists of a make-whole premium payment of $15.2 million, as well as the write-off of related unamortized debt issuance costs of $1.9 million.
Refinancing of these notes with a new 5-year 3 .375% issuance significantly reduces our cost of capital and increases our annual net investment income run rate by approximately $0.10 per share on a risk-free basis. This was the primary catalyst for our decision to increase the regular dividend by $0.03 this quarter from $0.44 per share to $0.47 per share. We believe this considerable increase in earnings power enhances our market capitalization on a dividend yield basis and allows us to pass the cost of capital savings directly to our shareholders in the form of increased dividends. This transaction also pushes out our nearest debt maturity to 2026, providing significant balance sheet flexibility going forward. On slide 20, we lay out our multiple pockets of capital.
As we have mentioned on our prior calls, a strategic priority for our company is to continually evaluate approaches to de-risk our liability structure while ensuring that we have adequate investable capital throughout the economic cycle. Our debt capitalization today includes a $335 million on-balance sheet revolving line of credit with 10 syndicate banks maturing in August 2026, a $140 million institutional bond maturing in January 2026, the newly issued $100 million institutional bond maturing in October 2026, a $150 million revolving line of credit at I-45 maturing in March 2026, and an initial $40 million leverage commitment from the SBA, which is $22.5 million left to be drawn upon.
Although the majority of our outstanding debt is currently due in 2026, we will look to opportunistically amend and extend our credit facilities well before maturity, consistent with past practice. Finally, as we've discussed on prior calls, we have now begun operations within our SBIC subsidiary, which you will see going forward denoted as SBIC I. As a reminder, our initial equity commitment to the fund is $40 million, and we have received an additional commitment from the SBA for $40 million of fund leverage, which is also referred to as one tier of leverage. We expect to fully invest this initial $80 million of capital over the next six months, at which point we will apply for a second tier of leverage.
Over the life of the fund, we plan to draw the full $175 million in SBIC debentures alongside $87.5 million in capital from Capital Southwest. We are excited to be part of this program and believe it is a natural fit with our investment strategy. Overall, we are pleased to report that our balance sheet liquidity continues to be strong with approximately $166 million in cash and undrawn leverage commitments as of the end of the quarter. As of September 30, 2021, approximately 50% of our capital structure liabilities were unsecured, and our earliest debt maturity is in January 2026. Our regulatory leverage, as seen on slide 21, ended the quarter at a debt-to-equity ratio of 1.18x to 1x. I will now hand the call back to Bowen for some final comments.
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 excellent job building a robust asset base deal origination capability as well as a flexible capital structure 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 for Q&A.
Our first question comes from the line of Devin Ryan with JMP Securities. Your line is open. Please go ahead.
Hi. Good morning. This is [Kevin Steinke] on for Devin. First question, just looking at non-accruals, can you provide the name of the new company that was added to non-accrual? Then separately, can you share any developments in the two existing non-accrual investments?
Yeah. I'd rather not say the name of the non-accrual on a public call like this because it'll end up in a transcript, but it'll be in the queue, which will be announced later tonight. It's a company that's been affected by the supply chain that we've all heard about out in the market and which, you know, certainly we all hope is temporary, but real. Just the company's sales cycle as a result of that in its market has extended. Restructuring this quarter, we think about a third of it or so will come back on accrual, and we'll own equity in the business going forward as it recovers.
The other two.
What's the other two?
[Premier Kings].
Oh, Premier. Yeah, one of them is, you know, a large syndicated deal. It's currently still working on its restructuring, and really no update on that.
It's debt, right?
The other one, you know, continues to actually improve. It's in the pharmaceutical services space. Kinda same report as last quarter. You know, pipeline continues to build, starting to convert the increased pipeline, actually pretty encouragingly. You know, we think that one's gonna end up being fine.
Yeah, we've accrued a bit of PIK. There's a bit of PIK accrued on that company. As the recovery occurs and the enterprise value exceeds the debt value, that'll come back on accrual as well.
Okay. Thank you. That information is helpful. Just touching on quarter-to-date investment activity, can you give us a sense how originations are tracking so far and then also, repayment activity as well?
Yeah. I mean, originations this quarter are strong. They'll be strong through the end of the quarter. Prepayments, you know, as you can imagine with all the market activity that's out there, prepayments are gonna be, you know, heavy this quarter too. We do believe we'll have net portfolio growth for the quarter. You know, it's a fair amount of churn, which you would expect with a strong portfolio like ours that we're gonna get refinanced out of a number of deals. Our guys, our deal team have done a fantastic job, like as I said in my remarks, expanding the top end of the funnel. We've been very active in the market. Again, at the end of the day, we believe we'll get to have net portfolio growth this quarter.
Great. Thank you for taking my questions, and congratulations on the quarter.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Mickey Schleien with Ladenburg Thalmann. Your line is open. Please go ahead.
Good morning, Bowen and Michael. Bowen, as we all know, there's this tremendous search for yield, and that's attracting more and more capital to private debt, which seems to be increasing payment risk, prepayment risk across the sector. Obviously, those can generate near-term fees, which is great. Can you maybe talk a little bit more about what you're doing in your organization, to help defend your market share as we look forward?
Yeah, I mean, defending your market share really is a function of covering the market, you know, being good partners with your deal sources, sponsors mainly, and really the track record you develop over a lot of years. You know, we have every market across the country covered with a primary, secondary, coverage person. You know, it's pretty interesting to me anyway, that's been doing this in this business for a long time, the number of sponsors that we've been doing business with or we have deals from that candidly that I had yet heard of, and usually that's, you know, junior partners at PE funds that spin off into their own PE funds, start their own funds and that type of thing, and kind of.
You know, being able to really broaden the number of deal sources that we get deals from. We've really seen that, which has been super encouraging. When you go through the pandemic, you know, things like a pandemic, and you have stress in the portfolio, and you sit across the table as a first lien lender, which by the way gives you the freedom to make good business decisions that balance your shareholders' capital interest with the interest of that company and that sponsor to make reasonable, fair decisions on how you deal with stress. You know, we had stress in the portfolio during the pandemic. Fortunately, everything recovered nicely, and we, you know, along the way, we extracted extra economics here and there where it was fair.
The sponsors supported the company where companies were necessary. Going through something like that, you know, really, you know, gives us street credibility that we might not have necessarily had three years ago. That's a big deal. We're also seeing more and more sponsors that are new to us ask us for references of other sponsors that we've been doing business with and actually calling those sponsors. You know, how you act, how you make decisions, and how you operate in the market is becoming increasingly important amongst the sponsors and other deal sources. For me, that's hugely encouraging. That's because that's what you want, that you wanna get a benefit from the way you act and the way you operate in the market. Those are all ways you defend your market share at the end of the day.
Yeah. The other thing, Mickey, is you know, over the last few years, we've reduced our cost of capital. You know, we were at 5.5%, now we're down closer to 3.5%. Operating leverage came down from 5% down to 2.3%. This allows us to be more competitive. It doesn't mean we're chasing deals and offering less yield for riskier businesses, but we are able to look at deals at L + 6.00% Or L + 6.50%, whereas those are deals we wouldn't have considered, you know, 2-3 years ago. It also helps us when you say defend. There are certain deals that get refinanced that historically, if it was an L + 8.50% deal, you know, it came down to L + 6.50%, we didn't bother staying in the deal just on yield alone.
Today, we have the ability to look at the credit, especially credits where we know well, and stay in the deal based on our net interest margin.
Of course, the reason that happens, as most people on the call know, is that these companies grow, leverage comes down, clearly spread or their cost of capital is gonna come down. The question really is how long can we stay in that credit from a net interest margin perspective? Michael's right. As we drop our cost of capital and increase our operating leverage, then it allows us to extend the tail on growing businesses. Then on new businesses, being able to lend to companies at lower loan-to-value, tighter spreads, that kind of thing.
Also, the ATM issuance we're doing at 1.6x or 1.7x. That's obviously a lot less diluted than raising equity at, you know, 1x or 1.2x, where we would have done so in the two years ago.
I agree, and thanks for that, Bowen and Michael. Bowen, you mentioned just now sitting across the table. You know, Zoom meetings are great, but in the end of the day, I agree with you, sitting at a table eye to eye, engaging a new relationship is important. Are you doing more of that now, or is travel still an issue for the origination team?
Well, you know, the industry has definitely become functional over Zoom. The answer is yes, we're traveling again. Management meetings in person are certainly superior to Zoom calls. Generally, you know, from a deal professional perspective, it also adds a dynamic to your job that's interesting, right? You get to travel, get to see manufacturing plants, operations, you know, that type of thing. It just adds a dynamic to, you know, the cadence of your work, which I believe, you know, as a former deal professional myself, that's a really important thing. We've seen that. Thankfully, yes, we're traveling again and very happy to be doing that.
Thank you for that. One other high-level question, Bowen. Apart from repayments this year, which is a trend across the sector, you know, BDCs have certainly had a lot of, you know, wind at their back in terms of, you know, very strong economic growth and a very low default environment. I'm starting to think next year will be more challenging with potential Fed tightening, probably lower economic growth, and volatility around the election. You know, how are you thinking about those risks in terms of, you know, new originations that you're seeking and your own balance sheet leverage?
Yeah. First of all, new deals we're kind of doing like we've always done, which is saying, okay, what could go wrong in the system, if you will? Part of that's a recession, part of that's pandemic, Black Swan events. Those are the type of things we stress test in models before we do deals up front. Hopefully, you know, we certainly believe that that's the best we can do in setting the asset base up to be able to weather different things. Obviously, as interest rates increase, we have, you know, the vast majority of our capital is in floating-rate loans
You know, we obviously are very attuned to fixing the rate on the liability side, hence, you know, being able to issue our most recent 3.375% bond issue on an unsecured basis. I think, you know, those are the things that we do as we look forward, you know, really to. You know, we've always, you've been hearing us say this from the very beginning. We're always paranoid about a recession in the next year or two. You know, that's what our shareholders pay us to do, and then to protect the institution for that. If we don't have a recession, fantastic, that's upside. You know? We always have to be thinking about that mentally.
You know, as far as the election year, you know, that can be, you know, there's gonna be volatility around that, clearly. At the end of the day, it's, you know, at the end of the day, it's economic volatility. Hopefully, all the things we do and we're underwriting and thinking about atmospherically in the system, things that can go wrong, you know, the election could be catalyst to that, but it could be other things be catalyst to that too. At the end of the day, it's the, it's the same answer, which is what's the economy gonna do?
Right. Obviously, that's by pushing out our maturities as far as we did. I mean, that's essentially taking a lot of that risk off the table, allowing us to draw additional debt off the SBA, which will have some interest rate, you know, volatility, but not nearly what you'd expect in the broader market.
I got you. Just one small housekeeping question for Michael. Did you reverse any previous income accruals for the new NPL?
No, we didn't accrue anything this quarter for that asset.
you didn't reverse anything for previous accruals?
No. We just reversed out whatever was reserved for this quarter.
Okay. Terrific. That's it for me. I appreciate your time. Thank you.
Thanks, Mickey.
Thank you. Our next question comes from the line of Bryce Rowe with Hovde Group. Your line is open. Please go ahead.
Thanks. Good morning. I wanted to ask kind of about the level of commitments here over the last couple quarters relative to funded debt investments. You've seen kind of an uptick in, you know, unfunded, so to speak, within the new investment activity. Bowen and Michael, maybe you could speak to, you know, whether you expect that structure to continue, and then any feel for, you know, kind of the pace of those unfunded commitments maybe converting to some level of funding here in the near future.
Yeah, sure. Well, thanks, Bryce. I mean, we're clearly managing, I mean, unfunded commitments as a first lien lender. Clearly, revolvers are oftentimes you're providing revolvers as well as the term loan. You know, revolvers that aren't used a whole lot aren't that interesting to banks, and so we can offer the revolver, get ticking fees, get, you know, the rate on the revolvers the same as the rate on the term loan, which is, you know, higher than a bank would charge.
It ends up being a nice security for us, but we have to manage our balance sheet liquidity, such that, you know, in the pandemic, for example, I think we had 35% of our revolver capital drawn, which is lower than I maybe would've thought it would've been, but we have to have the liquidity on our balance sheet to fund that. And obviously, those revolvers, obvious or not obvious, those revolver fundings are a function of the companies being within covenant compliance. That's the revolvers. You know, on the delayed draw term loan. So our unfunded commitments this quarter are about half revolver, about half delayed draw term loans. Delayed draw term loans are different. Those are usually a function of, you know, a specific acquisition strategy, based on buying similar businesses.
Maybe it's partly funding an earn-out on a purchase. In other words, the earn-out means that they hit a higher EBITDA number or higher earnings number. By definition, the earn-out's paying out when the companies are doing well. You know, those unfunded commitments are different. I mean, it's not like all of a sudden the world starts to fall apart, pandemic or otherwise, and they just all of a sudden draw on the delayed draw term loan. That's not how those work. What those are is future originations. Those are companies that, you know, again, if the company grows, hits a higher EBITDA target, we're gonna be funding a new origination. That's good, t hat's quality that we'd like to do that.
Or if there's an add-on acquisition, which obviously further diversifies that business, allows the business to realize synergies on the acquisition. Those are also originations that we'd like to do. It also sets us up in the facility to already have a pre-baked financing for that acquisition. It I believe it decreases the odds significantly that that company goes out on the outside and refinances us out with another deal on the acquisition. It just kinda puts you in the pole position to fund into a very attractive situation. Delayed draw term loans are future originations. Clearly, we'd expect to fund most of that, if not all of the delayed draw.
You know, some of the delayed draws are, you know, usually 12 months, maybe 18 months in extension. When you get closer to the 12 months and you're not gonna fund it or the earn-out period passes and they haven't earned the earn-out, then that would tend to fade. Most of the delayed draw term loan that we have in our financials, we would intend to, you know, we would expect to fund.
We've seen, you know, on a normal quarterly basis, we see about maybe 10% of the revolvers get drawn, but we also see 10% of them be repaid. On a quarterly basis, and this is most all quarters, you have a net funding of zero on the revolvers. To Bowen's point, you know, during COVID, the 35% that was funded, that was funded really soon after the COVID hit. Then those were all repaid as well. From a planning perspective, the DDTLs, those were all scheduled out. They have dates in which their, those earnings can be met. We're closely monitoring that, and that'll impact how much, you know, equity we raise on an ATM, or obviously our planning purposes for raising additional debt.
Okay. That's helpful. Kind of along those same lines in terms of kind of pace of investment activity, you know, when we think about it. It sounds like, you know, this current quarter, you know, you continue to see good activity both on the origination and on the repayment side of things. When you look at the income statement, you know, obviously you have some prepayment activity that came into the income statement here in the September quarter. Does that feel kind of outsized relative to the amount of repayment activity that you had, or would we expect at least, you know, another quarter of that level, you know, here in the December quarter?
Yeah. I think September, the originations and the repayments were both above what we would've anticipated, but the net growth was, you know, modest, but fine. I think this coming quarter, as I think Bowen said earlier, we expect to see net portfolio growth, but it's gonna be on significant repayments as well as significant originations. I mean, what we're seeing, and I think Bowen can speak to this best, is, you know, there's a lot of deals that are just being pulled forward into the 12/31 quarter.
I think the question mark we have is gonna see how much deals in the 3/31 quarter will be left over or how much was pulled forward, and therefore it's gonna be until 6/30 when you see sort of or an increase come back again. I'll let Bowen
Yeah. I mean, that's more of a theory. I mean, I think a lot of people in the market have that theory, you know, that with tax regime changes and that type of thing, that if you were a founder of a business and you were looking to, you know, monetize a portion of your earnings, a private equity transaction is attractive because you can roll over a heavy amount, stay involved with the company, but you can also monetize some of your lifelong work. If you were thinking about doing that sometime in the next, you know, couple of years or year or whatever, you know, this would be a pretty good year to do it. You just lived through the pandemic. You know, you learn that life is not forever and things can happen and you're not getting any younger.
Oh, by the way, tax regimes are changing. There's a lot of things that would drive a founder-owned business to seek a, you know, seek a sale if a sale was already on the docket in their mind. That's also sponsors selling too. We'll see. You know, theoretically, I believe that a lot of the market activity is some of the dynamics, at least in the lower middle market, some of the dynamic I just described. You know, we'll see.
On the P&L, to your question, we would expect to see inflated prepayment penalties in the 12/31 quarter. The exits are sort of spread across. I mean, we've already had a significant amount of exits that have already occurred, and we're anticipating more, you know, in November and December. You'll get some level of interest off of those assets, but you're also gonna see those prepayment penalties.
Got it. Okay. Maybe one last one for me. You know, so you've got your liability structure, you know, quote, unquote, "cleaned up," in terms of extending. Do you all expect the same pace of ATM activity to continue, or is that, you know, is that really more a function of, you know, net originations and where the stock's trading relative to now?
It's a lot of variables. You know, certainly, you know, one of the, you know, the metrics we look at and manage to is leverage, right? We've talked about kind of target leverage range, but that's a function of, you know, originations. It's a function of prepayments. At the end of the day, net portfolio growth. Against the backdrop of where the stock price trades too. I mean, it's mainly, you know, it's net portfolio growth and portfolio BDC leverage. It's less a function of the actual stock price. It's more of a, you know I mean, our business model is an organic growth story with respect to just developing an excellent track record, just keeping our head down and just executing what our guys know how to do.
You know, have access to the equity market to grow, slowly grow the equity, as the permanent capital base in lockstep with the net portfolio growth. At the end of the day, again, it's your BDC leverage is what you're looking at, but you're raising equity in lockstep with portfolio growth for the partners.
No, I mean.
Anything to add, Michael?
Yeah, I agree. I mean, it's very variable. I mean, this quarter, you know, at this point right now, we know there's a lot of repayments. We're expecting a lot of originations. If we think that, you know, if some of the originations don't occur, then we will pull back on ATM usage. You know, we certainly are cognizant of the dilution that the ATM brings to following quarters. We're not gonna raise equity for equity's sake.
Yeah.
It's about being prudent. You know, one thing actually, I'll just take the opportunity to also mention is that, you know, we put in our a shelf registration. Last week, we refreshed it, as well as, you know, our ATM equity distributions agreements. And that the whole point of that was not to raise equity in a secondary offering, but to have a shelf available to raise capital over the next three years, public debt and ATM equity. I know that there may be some level of confusion in the market on that, but we're still resolved to raise ATM equity as our primary source, if not only source of equity going forward.
I'd say, Bryce, the other thing we look at besides portfolio leverage, as I mentioned earlier, you know, balance sheet liquidity, i.e., availability on the credit facility. That's also another important you know, metric that we watch and manage to.
Got it. Okay. Thanks guys. I appreciate it.
Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Your line is open. Please go ahead.
Hi, guys, congratulations on the quarter. Just a couple of kind of market questions more than anything else. Obviously, a very high level of activity in this quarter, the quarter you reported. $112 million, give or take, but only about 1% of that, just over 1% was equity co-invest. I mean, I don't wanna read, you know, a quarter into a trend, but is there anything to read in there? Is it. You know, the market's great right now for equity valuations within your equity portfolio, but is that making it less appealing for co-invest right now with elevated valuations or are they all. Are co-invest harder to get right now?
Any color you can give us on that on maybe not just the quarter, but just the environment for that opportunity?
Yeah, that's a good question. I'm trying to think about I would say, first of all, I would definitely wouldn't read too much into the percentage of equity co-investments this quarter or past quarters. I wouldn't. I'd love to tell you, "Oh, we're, you know, we're so precise and everybody's way overpaying and we're just not choosing to participate." I mean, that would be an exaggeration. I mean, I think it's a little bit just the kinds of deals, and it could be, you know, it can be. I mean, there are times where, you know, the sponsor's got excess liquidity. They wanna over-equitize the balance sheet.
There may be a situation where they probably should, but the check is still small, you know, and they, you know, our equity co-investment might be so small, it's not worth the exercise of putting it on the books and valuing it. I mean, there's a number of things that do come into play over time. You know, most of the time, vast majority of time, if we have the relationship with the sponsor and we like the equity story, you know, we'll have an opportunity, you know, to invest in the equity of some amount. Yeah, I wouldn't read too much into this quarter in particular.
Fair enough. This one's sort of re-related follow-up. Since the credit strategy, as you said, I mean, the IRR on V2 capital is about 15%. My math says about 60% of that is coupon, roughly the other 40% is fees and equity gains, et cetera. Do you think going forward, right, is the market conducive to maintaining that kind of total IRR going forward?
I mean, you know, if coupons are coming down a little bit because your cost of debt has come down or, you know, other moving parts, I mean, do you think that's a reasonable target? Might or not be the wrong, the right word for it, but is that 15% kind of sustainable, or was that just benefit? You know, did that benefit from, you know, a couple of, you know, big wins while you were a smaller business and maybe that number comes down going forward?
You know, I think the debt comes down a little bit based on the fact that our yields have come down.
Mm-hmm.
You know, when we started this business, again, we were looking at deals that are probably, you know, a little more weighty of a, you know, the 8.50s and the 8%. You see now our yield has come down, where we're looking at deals that are L + 6.50 to L + 8.00. The likelihood is that the IRR might come down a few basis points, perhaps, relative to where we were before. I don't think from an overall yield NIM that will come down. On the individual deals themselves, you'd say maybe that 15% ends up being, you know, 13.5% or 14%.
Yeah. You made a comment that the exits being lumpy. I mean, if you look at the list of exits, I mean, you know, it's not. I mean, that track record that we referenced, the 45 exits or whatever it is, over $460 million of proceeds, that's pretty evenly distributed over time and over companies. I mean, it's a. You know, our guy, I'm gonna give the guys credit. That's pretty outstanding track record. I do think as a first lien lender, remember, you know, we always. A lot of people don't understand. I mean, when a company breaches covenants, I mean, that's. As a first lien lender, you have all kinds of options and things and way to extract a little bit of economics here and there, and it's market to do so.
It's not like you're breaking relationship glass to extract economics when small companies bump in the night. It is an element of a first lien role in a market strategy that, you know, we've been doing this for, I don't know, 20 years. That's the way that works. One of the reasons that you wanna be a first lien lender and not a sub debt lender is to be able to have some of that flexibility. Yeah, I do think maybe it comes down a little bit, but I mean, it you know, we think the business model is pretty attractive in that for, in the long term. We'll also have the
Robert, we also have the $18 million in unrealized appreciation in the portfolio. You know, we probably would have just somewhat of a glide path for us exiting some of those deals over the next 24 months. Those, some of those have sizable gains in there as well.
Understood. Yeah. No, I appreciate it. You obviously did have, you know, a particularly big winner, you know, going back, you know, two years, I guess. I mean, you have got a track record of delivering nice IRRs on more than those handful. I appreciate that.
Yeah. You know, that's interesting. It's a completely fair question. I think that IRR on that lumpy gain that you referred to is like something like 12%. It actually brought the 15% down on an average basis if you're talking about IRRs.
Yeah.
The lumpiness in, you know, in asset performance is a fair question that people should ask. It's just pretty broad.
That's true for TitanLiner and MRI, both of them were within the portfolio for years and years, so the IRRs were, yeah, in the teens.
Right.
Yeah.
Got it. Thank you.
Thank you. Our next question comes from the line of Sarkis Sherbetchyan with B. Riley Securities. Your line is open. Please go ahead.
Hey, good morning, and congrats on the quarter. Just wanted to touch on very quickly on kind of the cost of capital relative to the interest rate environment. Looks like you may have some nice tailwinds here to compete in the current backdrop, given your lower cost of debt. I was wondering if you can maybe give an update on pricing or spreads real-time, just kind of considering, you know, any potential interest rate regime shifts or kind of ideologies you guys are carrying going forward.
Are you looking on the asset side or the liability side?
Well, from an asset and liability perspective, right? I mean, in the totality of things.
Yeah. Well, I mean, Bowen, you can speak to the asset side, and I can go through what-
Yeah. I mean, spreads in the market. I mean, clearly, if that's your ask, clearly there's competition in the market. It's you know any kind of COVID premiums long gone. You know, generally speaking, I wouldn't say that the universe of deals that we're working on and chasing the spreads have come down terribly in the last quarter. You know, I mean, I think it's been relatively flat. I think our situation is really mainly it is being able to compete in deals that just priced tighter. So you need to get your cost of capital down because at the end of the day, you live on net interest margin. That's been the main thing. I mean, you know, market's definitely competitive, so I don't wanna lead anybody wrong in that respect.
You know, also, you know, I mean, lenders, you know, we'll see what happens throughout the end of the year, but lenders' barns are pretty full right now, right? I mean, they got a lot of deals going on. When someone shows up December first and say, "I gotta get a deal done by the end of the year," you know, that incremental lender in the market might not be quite as aggressive on pricing that deal. I mean, that's a little bit more just supply and demand theory, but that's, you know, we'll be interested to see what happens. But that's the asset side. I think it's mainly a cost of capital story, I believe so.
Yeah. I mean, on the right side, obviously, with the we amended and extended our credit facility with ING to L + 2.15%, and so that's gonna be locked in for a number of years. We think that's pretty competitive for, you know, small mid-to-cap BDC. We did look down the road and opportunistically did that bond deal at 3 .375% for the very reason of we do believe it's not a, you know, it's not an if, it's a when you see the rates start coming back up. And so blocking that in was the prudent thing to do. Then on the SBA side, you know, they pool the debentures twice a year. In between those poolings, the cost of capital is about 1%, and we're in between there right now.
Over the next six months, you know, we would anticipate drawing around, you know, $60 million off of the SBA at 1%. That gets pooled into, you know, maybe it'll be 1.5%, maybe be a little higher than that. That's kind of what we alluded to earlier. Our all-in cost of capital is, you know, really trending down towards the 3%-3.5%. You'll start seeing that as the SBA is fully ramped in the next, you know, 12-24 months.
Yep, understood. I guess, if we kinda think about things here in the near term, you know, obviously, a lot of liquidity, everyone's flush with it. I suppose if you look at the next, you know, six, nine, and 12 months, if there's any dislocations, given your liability side of the equation is pretty attractive. Do you think there would be an opportunity to kind of take advantage of that NIM potentially, you know, expanding a little bit?
Well, potentially, 'cause I mean, by, you know, we manage our assets in kind of a what if world, right? What happens if there's a dislocation in the market? What happens? What if? What if? What if, right? Obviously locking in and extending out our maturities on our liability side and then maintaining adequate, you know, liquidity or, you know, flexible liquidity on our balance sheet, then if there are dislocations, the only variable that moves in your world is your asset yields expand. If we have the liquidity to invest in a dislocation like that, then that's exactly what would happen. Your net interest margin would expand. We feel like we've kinda set the business up to weather storms on the downside and potentially take advantage of things on the upside from an asset yield perspective.
Yeah. I think also on the right side, I think we would look opportunistically to raise potentially additional debt, on that 3 .375% issuance, as we see the volume there. I mean, certainly that's at those rates, it's opportunistic, and it would expand NIM, immediately.
Yep. No, sounds good. One more for me. If you can maybe describe some key factors on some of the deal quality you're seeing real time. I just wanna understand if, you know, maybe covenants are getting looser out there, and if this is impacting the way you're underwriting, if so.
Yeah, no, just a macro comment in the lower middle market. You know, I would say at least our deals. I don't know, I would imagine other lower middle market lenders would be the same way here. I don't think covenants are really the things you have to watch for. Covenants getting looser, that's obvious. The definition of EBITDA and add backs and adjustments, those are things that we watch very carefully. You know, we just really haven't seen a lot of that. You know, it's a competitive market, smart sponsors that are well financed with multiple lender relationships, clearly, and the ones that prove to support companies when they bump in the night get better financing terms. I mean, they just do.
They deserve better financing terms. You know, situations where the EBITDA earnings margin, EBITDA margin is higher and loan-to-value on the loan is lower, you get better terms, which the risk of those loans is lower, and you should have better terms. Generally speaking, loan for loan, you know, we haven't seen a bunch of. In a lower middle market, and it's very different than the syndicated market, we just haven't seen a lot of deterioration on kind of covenant cushions and that kind of thing. I mean, the looser covenant cushions are the safer deals. But just generally broad, you know, covenant deterioration in our market, we really haven't seen it.
Great. Thank you. That's all for me.
Thank you. This concludes our question and answer session, and I would like to turn the conference back over to Bowen Diehl for any further remarks.
Thank you, everybody, and thanks for joining us, and thanks for all the questions. We like answering the questions. For the shareholders that are not asking the questions, they get to hear more about our business. Thanks for that, and I look forward to giving everyone further updates as we go forward.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.