Thank you for joining today's Capital Southwest Q2 fiscal year 2023 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 to everyone for joining us for our Q2 fiscal year 2023 earnings call. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our investment strategy as stewards of your capital. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com. You will also find our quarterly earnings press release issued last evening on our website. 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 $0.54 per share, which represented 20% growth over the $0.45 per share generated a year ago in the September quarter. The $0.54 per share more than earned our regular dividend paid during the quarter of $0.50 per share. As previously announced, our board has declared a $0.02 per share increase in our regular dividend to $0.52 per share for the quarter ending December 31, 2022. This increase represents 4% growth over the $0.50 per share paid in the September quarter and 11% growth over the $0.47 per share paid a year ago in the December quarter. These increases in our regular dividend are a result of the increased fundamental earnings power of our portfolio, given its growth and performance, as well as improvements in our operating leverage.
In addition, given the Federal Reserve's aggressive interest rate increases and the resulting excess earnings being generated by our floating debt portfolio, our board of directors has also declared a supplemental dividend of $0.05 per share for the December quarter, bringing total dividends declared for the December quarter to $0.57 per share. While future dividend declarations are at the discretion of our board of directors, it is our intent and expectation that Capital Southwest will distribute supplemental dividends for the foreseeable future while base rates remain materially above long-term historical averages. Finally, I should note that as we have done in the past, we intend to also distribute supplemental dividends as we harvest realized gains from our equity co-investment portfolio. During the quarter, acquisition and financing activity in the lower middle market continued to be strong.
Portfolio growth during the quarter was driven by $86 million in new commitments, consisting of commitments to five new portfolio companies totaling $67 million and add-on commitments to five existing portfolio companies totaling $19 million. This was offset by $14 million in proceeds from two debt prepayments and one debt sale during the quarter. On the capitalization front, we raised $26.9 million of equity through our ATM program at an average price of $19.48 per share, representing an average of 118% of the prevailing net asset value per share. Our liquidity remains robust, with approximately $170 million in cash and undrawn capital commitments as of the end of the quarter.
We have remained diligent in funding a meaningful portion of our investment asset growth with accretive equity issuances on our ATM equity ATM programs, as we think it is critical that we maintain a conservative mindset to BDC leverage given the uncertainty in the economy. Overall, we are pleased with the strength of our balance sheet with regulatory leverage of 1.1 to 1, a significant liquidity position, as well as the fact that almost half of our balance sheet liabilities are in fixed rate unsecured bonds, and our earliest debt maturity isn't until 2026. On slide seven and eight , we illustrate our continued track record of producing strong dividend growth, consistent dividend coverage, and solid value creation since the launch of our credit strategy back in January of 2015.
Since that time, we have increased our regular dividend paid to shareholders 24 times and have never cut the regular dividend, including during the tumultuous environment we all experienced during the COVID pandemic. Additionally, over the same time period, we have paid or declared 18 special or supplemental dividends totaling $3.61 per share, generated from excess earnings and realized gains from our investment portfolio. We believe our track record of consistently growing our dividend, the solid performance of our portfolio, as well as our company's sustained access to the capital markets has demonstrated the strength of our investment and capitalization management strategies, as well as the absolute alignment of all our decisions with the interest of our shareholders.
Continuing to generate the strong track record is critically important to us as long-term shareholder value creation through the maintenance and growth of both dividends and NAV per share are a top priority for our company. Turning to slide nine. Our investment strategy as laid out for our shareholders at its launch back in January of 2015 hasn't changed. The vast majority of our activity has been in our core lower middle market, where we are the first lien senior secured lender, most often backing a private equity firm's acquisition of a growing lower middle market company. We also often participate on a minority basis in the equity of the company through an equity co-investment made alongside the private equity firm.
In fact, 90% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership of the portfolio companies as well as the potential for new capital support if needed. Our lower middle market strategy is complemented by club participation in slightly larger companies led by like-minded lenders with which we have worked well across multiple deals. Virtually all of these club deals are also backed by private equity firms. As of the end of the quarter, our equity co-investment portfolio consisted of 46 investments with a total fair value of $102.6 million, which included $38.6 million in embedded unrealized appreciation, or approximately $1.34 per share.
Our equity portfolio, which represented approximately 10% of our total portfolio at fair value as of the end of the quarter, continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, which will come in the form of NAV per share growth and supplemental dividends paid over time. As illustrated on Slide 10, our on-balance sheet credit portfolios at the end of the quarter, excluding our I-45 Senior Loan Fund, grew 4% to $903 million as compared to $865 million as of the end of the prior quarter. Over the past year, our credit portfolio has grown by $214 million, or 31%, from $689 million as of the end of the September 2021 quarter.
For the current quarter, 95% of new portfolio company debt originations were first lien senior secured debt, and as of the end of the quarter, 94% of our total credit portfolio was first lien senior secured. On Slide 11, we detailed the $86 million of capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter includes $64 million in first lien senior secured debt and $3 million in second lien senior secured debt to five new portfolio companies. Additionally, we committed $18 million in first lien senior secured debt to five existing portfolio companies and $816,000 in equity co-investments to two existing portfolio companies. Turning to slide 12. We continued our track record of successful exits with two debt prepayments and one debt sale during the quarter.
In total, these exits generated approximately $14 million in total proceeds, generating a weighted average IRR of 10.1%. Since the launch of our credit strategy, we have realized 66 portfolio exits representing $763 million in proceeds that have generated a cumulative weighted average IRR of 14.7%. The market for acquisition capital continues to be active. Not surprisingly, we have also seen a slowdown in refinancing activity. As a result, we would expect continued solid net portfolio growth in the near term. The activity in our investment pipeline is strong in terms of both volume and breadth of deal sources.
We are pleased with the strong market position our team has established in the lower middle market as a premier debt and equity capital partner, as evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities. In terms of deal origination, we find that underwriting certain industries is more challenging given today's economic uncertainty. However, for eight years now, an important component of our underwriting has always been to run a stress case downside model for every new deal, simulating an extreme recession occurring soon after closing. In many respects, our underwriting in the current environment hasn't changed, although our models today include much higher base rates than we have experienced historically.
We continue to tie the leverage level we are willing to put on a company to the potential performance volatility of a particular business and industry throughout the economic cycle. Performance across different industries can be very different through the economic cycle, so getting this right is an important component of the underwriting process. Specifically, we require as a fundamental underwriting standard that we see our loan remain well within the portfolio company's enterprise value and our interest being paid through the cycle in a stress case financial model. On Slide 13, we detail 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 at fair value was weighted approximately 85% first lien senior secured debt, 5% to second lien senior secured debt, and 10% to equity co-investments. The credit portfolio had a weighted average yield of 10.6% and weighted average leverage through our security of 4.1x. Turning to slide 14. We have laid out the rating migration within our portfolio for the quarter. During the quarter, we upgraded six loans with a total fair value of $37.9 million, and downgraded three loans with a total fair value of $18.3 million. 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.
We feel very good about the performance of our portfolio, with 97% of the portfolio at fair value rated in one of the top two categories, a one or a two. As illustrated on slide 15, our total investment portfolio, including our I-45 Senior Loan Fund, 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 5% of the portfolio in second lien senior secured debt. I will 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 $15 million or $0.54 per share. We paid out $0.50 per share in regular dividends. As mentioned earlier, our board has approved an increase to the regular dividend for the December quarter to $0.52 per share and declared a $0.05 per share supplemental dividend per share for the December quarter. Maintaining a consistent track record of meaningfully covering our dividend with pre-tax net investment income is important to our investment strategy. We continue our strong track record of regular dividend coverage with 106% for the last 12 months, ended September 3, 2022, and 107% cumulative since the launch of our credit strategy in January 2015.
Given the floating rate nature of our credit portfolio, rising interest rates continue to be a significant tailwind to our net investment income. The base rate index used to calculate interest on a majority of our loans reset in early October to 3.75%, up from its early July reset at 2.29%. This significant increase quarter-over-quarter will provide another immediate step-up in portfolio income in the December quarter. With that as context, we will continue to execute our policy of having regular dividends follow the trajectory of recurring pre-tax NII per share. As such, we will thoughtfully grow our regular dividend to a level which can be sustained should interest rates decrease to a neutral level. In addition, while interest rates remain elevated, our intent is to distribute excess pre-tax NII to our shareholders each quarter through supplemental dividends.
As in the past, it is also our intent to distribute future additional supplemental dividends as we realize gains in our equity portfolio. Based upon the interest rate environment and the continued strong performance of our equity portfolio, we expect to continue to distribute quarterly supplemental dividends for the foreseeable future. For the quarter, our investment portfolio generated total investment income of $26.8 million, producing a weighted average yield on all investments of 10.3%. Total investment income was $4.3 million higher this quarter due to our higher average balance of credit investments outstanding, in addition to the tailwind provided from a significant increase in LIBOR and SOFR base rates. As of the end of the quarter, we had approximately $9 million of our investments on non-accrual, representing 0.9% of our investment portfolio at fair value.
Finally, as at the end of the quarter, the weighted average yield on our loan portfolio was 10.6% for the quarter. As seen on slide 18, we further improved LTM operating leverage to 2% as of the end of the quarter. Achieving 2% or lower operating leverage was one of our initial long-term goals when we relaunched CSWC as a middle market lender back in 2015. Though we are pleased to have reached this milestone, looking ahead, we expect to experience continued operating leverage efficiencies due to our internally managed structure. Turning to slide 19. The company's NAV per share at the end of the September quarter decreased by $0.01 per share to $16.53.
The primary driver of the NAV per share decrease for the quarter was $8.4 million of unrealized depreciation on the on-balance sheet debt portfolio, partially offset by $4.2 million of net appreciation on the equity portfolio. Additionally, there was approximately $800,000 of depreciation at I-45, most of which was mark-to-market quote activity in the syndicated market. We also generated $0.13 per share of accretion from the issuance of common stock at a premium to NAV per share under our equity ATM program. Despite the sustained volatility in the equity markets, we are pleased to have had the ability to continually raise equity above NAV per share through the equity ATM program. Turning to slide 20.
As Bowen mentioned earlier, we are pleased to report that our balance sheet liquidity continues to be strong, with approximately $170 million in cash and undrawn leverage commitments as of the end of the quarter. Based on our borrowing base at the end of the quarter, we have full access to the incremental revolver capacity and will look to opportunistically increase commitment to the facility in the near term. Our bank syndicate continues to support our growth, and we are pleased with the flexibility the revolving credit facility provides to our capital structure. In addition, we have submitted a new leverage commitment application to the SBA to obtain an additional $50 million in debentures, which we expect to receive in the coming weeks. We continue to see strong origination volume in SBA eligible investments and will opportunistically invest given the lower cost nature of the SBA debentures.
As of September 30, 2022, approximately 47% 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 1.11 to 1, down from 1.23 to 1 as of the December 2021 quarter. Over the past year, we have made a concerted effort to strengthen our balance sheet to ensure we are prepared for any macroeconomic headwinds that we may encounter. These efforts have included our opportunistic unsecured bond issuances at record low rates in late calendar year 2021, our continued support from banking relationships, which have allowed for steady growth in our revolver facility commitments, and our continued diligence in moderating leverage through accretive share issuances on our equity ATM program.
We will continue to work towards strengthening the balance sheet, ensuring adequate liquidity, and maintaining conservative leverage and covenant cushions throughout the economic cycle. I will now hand the call back to Bowen for some final comments.
Thanks, Michael, and thank you everyone for joining us today. We appreciate the opportunity to provide you an update on our business and progress executing our strategy as stewards of our stakeholders' capital. Our company and portfolio continue to perform well. 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. As to the uncertainty in the economy, again, we have been underwriting with a full economic cycle mentality since day one, which we believe has positioned us well for the potential economic volatility in the coming months and years. In summary, we have a credit portfolio heavily weighted to first lien senior secured debt, allocated across a broad array of companies and industries, 90% of which is backed by private equity firms.
We believe our first lien senior secured debt strategy is working, and we feel very good about the health and positioning of our company and portfolio. Finally, we continue to believe that our performance demonstrates the investment acumen and capital structure management capability of our team at Capital Southwest, and we are excited to continue to execute our investment strategy as stewards of our stakeholders' capital. This concludes our prepared remarks. Operator, we are ready to open the lines for Q&A.
To ask a question, you need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question will come from the line of Kevin Fultz from JMP Securities. Your line is open.
Hi, good morning, and thank you for taking my question. You know, my first question is on portfolio company interest coverage. Clearly the Fed has hiked rates more aggressively than we anticipated six months ago. I'm just curious if you could share your thoughts on the potential impact that the forward LIBOR or SOFR curve could have on portfolio company interest coverage.
Yeah, thanks for the question. You know, as we did, I think I've mentioned the last couple of quarter calls, we look at a fixed charge coverage analysis of our portfolio. We basically take the company's performance and compare it to the current base rate interest coverage. Then we take that model, and we sensitize it by increasing the base rates to simulate the increases and see when we start getting a number of companies kind of in the red zone on just a pure static fixed charge coverage ratio calculation, which I would tell you that when that base rate gets to 5.5%, there's a handful of companies that are definitely in the red zone.
Now, when I look at that, most of them are private equity firm owned. Virtually all of them are private equity firm owned. If I look, about half of those companies have a lot of equity value below our debt and a private equity firm that's well funded that owns the company. There's no chance, in my view, that that private equity firm is gonna let that company go based on missing an interest payment. You know, I would expect we haven't gotten these calls yet, but if I was a private equity firm, I might call us and say, "Why don't we take 2% of your cash interest, and we'll pay you 3% PIK." That's a great trade for us in a scenario.
It gives the company some relief, and it accumulates a higher return for us for an interim period of time. Again, if there's a lot of equity value below you and a private equity firm owning the business, that would be a business trade, I think, that anyone on this phone would want us to make. I feel pretty good, and I'd create 5.5% and up, you know, and if you probably hear that from other BDCs, you know, it starts to get tight. Again, where I get comfort is, you know, the leverage levels of our portfolio companies and the fact that 90% of them are owned by private equity firms that are thinking about that exact same thing. They're a pretty smart bunch.
I feel pretty good as a lender sitting back that our shareholders will be in great shape through that.
Okay, that's really helpful, Bowen. Just one more, if I may. Your total PIK income increased to 5.9% of total interest income this quarter, which is up from 3.6% in the June quarter. Can you just discuss what drove that increase? You know, whether that was amendment driven or if you originated new investments that were structured with the PIK component?
Yeah. That's most of that really. That increase is essentially two companies. One is a company that we restructured this quarter. It was a non-accrual last quarter. Sponsor put a significant amount of money in the business, and the lender group agreed to pick the interest for a couple of quarters out of that restructuring. Then the other one was also a sponsor-owned business that made an acquisition that's been kind of challenging, so they asked us to pick a portion of our interest while they get that acquisition figured out. A little bit idiosyncratic, and that's kind of part of our business, but that was the increase quarter-over-quarter.
Okay. I appreciate the color there. I'll leave it there. Congratulations on a really nice quarter.
Thanks a lot.
One moment for our next question. Our next question from Mickey Schleien from Ladenburg. Your line is open.
Yes, good morning, everyone. Bowen, appreciate your comments on how you approach underwriting. I suppose what I'd like to ask is that, you know, what changed recently in the Q3 is that EBITDA, generally speaking, in the middle market, turned negative in terms of year-over-year changes. That includes healthcare, which is a major focus for you and a lot of BDCs. With that in mind, notwithstanding the fact that you're underwriting to the downside, in the healthcare sector, does that affect the sorts of companies you're willing to fund, given where we are in the cycle today?
Yeah, a couple of comments. First of all, thanks for the question. You know, healthcare space has got its own kind of risks that aren't necessarily economic risks, of course. A lot of those come around, you know, regulatory changes and reimbursement rate changes. Those are kind of the two significant grenades you gotta kinda tiptoe around in underwriting in the healthcare space. I would say it's interesting. I mean, we looked at our portfolio, and we looked at the 97% of the performing portfolio, so it's the ones and the twos. You know, normalized out a couple of companies that had done a larger number of acquisitions for the quarter, so it skews up their numbers of growth.
We looked at our weighted average revenue across the portfolio and weighted average EBITDA growth across the portfolio. On a weighted average basis, our portfolio revenue growth was about 4%, and our portfolio EBITDA growth was about 0.5%, 50 basis points. Both of those numbers are down slightly from last quarter. Maybe that's an indicator of a slowing economy, maybe it's not. You know, from a lender perspective, we feel like those are pretty strong stats. We have our handful of kind of challenged credits, which lenders like us always have a handful, and it's all how you manage those. If you look at 97% of our portfolios, you know. I mean, now granted, that's those are financials that are a month old, right?
A month or two old, 'cause that's the way the valuations and the quarters end. You know, we feel like it's hanging in there pretty well.
I appreciate that explanation, Bowen. Switching to the syndicated loan market and the senior loan fund. We've obviously seen a lot of volatility there. You know, there was sort of a head fake during the quarter, and then prices weakened as the quarter finished. Importantly, there's a lot of dispersion in pricing and distress ratios have really climbed. As managers of that portfolio, are you in a position to take advantage of that volatility in terms of, you know, credits that look mispriced to you? Perhaps you can take advantage of the pull-to-par effect or so concerned about the economic outlook that you'd prefer to sort of stand on the sidelines and see how things play out?
You know, it's an interesting question. I mean, you know, the vast majority of what we do is lead deals in the lower middle market, and our returns are very attractive there. You know, on the syndicated side, you know, as you can see, we really haven't done any new activity in the syndicated book. As far as having the ability, if there are some large discrepancies in price and value, yeah, between us and Main Street, we certainly have the ability to take advantage of that. That said, you know, we haven't really seen it enough yet. You know, the challenge with the syndicated credit is you just have really imperfect information. You're a small piece of a large loan, kind of just along with the crowd.
If you're wrong, you know, it's lender committees and consultants, and it's, you know, it's really hard to make you don't get to make decisions on restructuring or managing like we do in the lower middle market. It's just a different world. We haven't spent a lot of time, Mickey, to be honest, on, like, let's go find a list of syndicated names and let's load up on them. You know, I'm sure if it got really extreme, you know, we certainly have the touch points. We certainly have the capital. Main Street, you know, I'm certain they have the capital to take advantage of it, but we just haven't spent a lot of time on it.
It's not a top priority to us because of the opportunities that we're seeing and the performance and steady performance of the lower middle market. It's not something, you know, never say never, and it may be something if it gets extreme, that we might pick off a couple of names here and there, but it's not really gonna be a primary focus for us.
You know, we've also seen either on balance sheet or with I-45, just the mark-to-market volatility, as you noted earlier, Mickey, which, you know, from an earnings perspective, you know, in sort of managing the shift, you know, that's probably a little less stable, certainly less stable than having lower middle market companies, that have more stable valuations.
You know, if it got extreme and you're buying loans very, very cheap, it would be tempting. It's not a priority for us.
I understand. Bowen, my last question. You know, we're all talking about rising interest rates, but the forward curve actually has rates starting to go down later next year. I'd like to understand what kind of floor rates you're negotiating today. And what I'm really thinking about is, you know, the long-term sort of recurring earnings power of the portfolio as rates start to go down perhaps a year from now.
Yeah. Thanks for the question. A couple things. You know, Michael commented in his prepared remarks, you know, we're increasing our regular dividend along the trajectory of our NII, but we're keeping it muted to a level that would be sustained or covered with earnings NII if rates went back down to more normal levels. That's how we think about it, because you're right, on the back end of a recession, rates will come back down, you know, we believe back down to more neutral levels. On the floor side, you know, we have started to, on our, you know, on all our deals, we've started to ask for a 2% floor. We used to be 1%, now it's 2%. So far we're not getting a lot of pushback.
Feel pretty good about that. We'll see as time goes on, but we are asking for, you know, our base case term sheet is gonna be, it has 2% floors in it.
That's helpful. That's it for me this morning. Thank you very much for your time.
Thanks, Mickey.
One moment for next question. Our next question comes from the line of Kyle Joseph from Jefferies. Your line is open.
Hey, guys. Good morning. Congrats on a nice quarter, and thanks for taking my questions. Just start in terms of non-accruals, just help us kind of reconcile what, obviously they went down in the quarter. I think you highlighted you restructured one of the investments, but just give us a sense for the inflows and outflows there and how we can, you know, reconcile that with the realized loss and the unrealized appreciation in the quarter.
Sure. Yeah. We had two non-accrual roll-off, and we had two non-accrual roll-on. You know, both in both cases, there were more, you know, regulatory, and customer related as opposed to any kind of economic thing.
All right. You know, transitioning to the origination side, it sounds like you guys still have a decent pipeline despite macroeconomic activity. Can you just give a sense for, you know, behavior of other originators? Have you seen some players have to pull back because of either leverage or economic concerns? Then give us a sense for what kind of spreads you're seeing on the lower middle market deals you guys are leading.
Yeah, sure. It's a good question. I'd say, you know, all those questions and the inherent answers are all imprecise, but I would tell you that I think spreads across the market have increased 25-50 basis points. We think there are some lenders that have been pulling back, either from a funding perspective or otherwise. But the market's still pretty robust. I mean, the lenders are there. We've lost a couple of deals in the last month on pricing and leverage. Two or three deals on pricing and leverage. In other words, where our pricing is a little high and our leverage is a little bit low versus what someone else is willing to give. That's kind of normal.
We haven't seen, you know, I'd love to see spreads widen 100 basis points and not see lenders out there being extremely aggressive. Maybe we could, you know, that would be helpful to us. There's definitely competition out there for sure.
Got it. Very helpful. Thanks for answering my questions.
Yeah, thanks.
Thank you. One moment for our next question. Our next question will come from the line of Robert Dodd from Raymond James. Your line is open.
Hi, guys. Yeah, back to the interest coverage and then, if I can. I mean, Bowen, you seem to say that you haven't got a lot of incoming amendment requests for PIK toggles or anything like that. I mean, you know, obviously, I mean, Michael's remarks, I mean, your index has gone from 229 to 375. If we go forward and look at the, so that's 150 basis points in three months for these buyers. The forward curve says maybe the next reset would be up another 100. At what point do you think those amendment request calls actually start to come in?
I mean, obviously the curve doesn't quite hit the 5.50% flip point that you were talking about, but it is rising and you're not the only one so far that said you're just so far not getting the amendment calls. When do those start, do you think? If at all?
You know, yeah, no, it's an interesting question. I mean, now I'm gonna speculate, right? I mean, if you look at our analysis that I mentioned earlier, we have, you know, at 5.5%, you start having a handful of companies that it's pretty tight, right? You know, right now our weighted average interest coverage in our portfolio is, you know, 2.25%-2.5%, kind of in that range. So as a portfolio, you know, a company can handle a lot more base rate increase than many of us expect to see. However, you know, at the margin, some of the companies get pretty tight at, like, 5.5%.
My guess is around, you know, 5%-5.5% base rate, we'll start getting those phone calls. I mean, these are private equity firms. They're gonna be thoughtful about that request. You know, they're gonna. They're not gonna make that phone call until they have to. The debts, you know, rather than just pick debt on top of debt, you know, it's, you know, they make the interest payment and it effectively kind of reduces the interest burden versus what it would be if they continue to pay. I think they'll be thoughtful in making those calls. I would imagine if we see something 5%-5.5% base rates, I think we'll start. I think we and the industry will start getting some of those phone calls.
Understood. No, I don't think we're necessarily going that high, so maybe it doesn't happen at all. On the, you know, the robustness in the competitive market right now, I mean, you highlight. I mean, you lost a couple of deals. Was there anything or could you any particular areas of the market where that robustness is concentrated? Is it still businesses, business services and recurring revenue, most likely? Or is the market diverging a little bit where some types of deals maybe are being left out of that robust competition? Any color there?
Yeah, I would say it like this. It's a little bit of a barbell. You've got, you know, high quality credits that are gonna be high margin, service-based businesses and some critical service that you can get comfortable is not gonna get hit hugely in a recession. You know, the loan-to-value, so the portfolio, the debt that's being requested for the deal is at, you know, 30%-40% loan-to-value, strong margins, you know, not significant CapEx or working capital burden, those type deals. There's a lot of competition for those. We obviously like those too. There may be less, you know, people say, "Are there less lenders in the market?" Maybe.
I mean, we don't really get a feed in the lower middle market of how many lenders are out there. We just get very indirect kind of sense. There is competition for that higher quality credit deal. The cuspier credits, you know, there's much less competition. If you're gonna take some risk a bit on, you know, some story op, you know, with an operationally focused private equity firm that's gonna do a significant amount of surgery on that company's operations, et cetera, you know, it's a little riskier. You know, in this market, you're gonna get paid for that risk.
On, on-
That's-
Yeah, yeah.
That's the way I would say it. The amount you get paid for that risk incrementally is higher in this market than it would've been six or 12 months ago.
Got it. Understood. One more if I can. You mentioned two new non-accruals. On the sponsors, and obviously I know this is all confidential, but on the sponsor side for those two, I mean, you mentioned, I mean, sponsors aren't gonna walk away from a good business just as interest rates go up. They might eventually if a business is broken. I'm not saying that's the case in your situation, right. There's a difference between sponsor appetite to ride through a rate cycle, I would imagine, versus a you know, complete business rebuild cycle in some cases. For these two new non-accruals, I mean, has the sponsors stepped up. Have they put in more capital. Are they working through that?
Can you give us any careful color on that front?
Yeah, sure. Both sponsored deals. Sponsors are supporting both of them. There are situations where, you know, the business models have changed slightly. You know, we'll probably be negotiating a portion of our debt, you know, and an equity interest in the business going forward, which is good for us because that'll give us the upside as the business recovers. That's kind of part of kind of how our market works. The sponsors will support the business. You know, we may, if the company needs it, provide additional support as well. They're both sponsored by funded sponsors with capital.
Got it. Thank you.
Thank you. Now, I would now like to turn the conference back over to Bowen for any closing remarks.
Thanks, everyone. We appreciate the opportunity as always to give you an update on the business. Interesting times out there and these are really good questions. We appreciate them. So thanks for your all's time, and we look forward to giving you future updates in the future.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.