管理層發言
Thank you for joining today's earnings call. Participating on today's call 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 would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information, and management's expectations, assumptions, and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties, and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see the company'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 to everyone for joining us for our third quarter fiscal year 2024 earnings call. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio, as we continue to diligently execute our investment strategy as stewards of your capital. Throughout our prepared remarks, we will refer to various slides in our Earnings Presentation, which can be found in the Investor Relations section of our website. You will also find our quarterly earnings press release issued last evening on our website. We'll begin on Slide 6 of the earnings presentation, where we have summarized some of the key performance highlights for the quarter. During the quarter, we generated pre-tax net investment income of $0.72 per share, which represented 20% growth over the $0.60 per share generated a year ago in the December quarter.
The $0.72 per share more than covered both our regular dividend of $0.57 per share and our supplemental dividend of $0.06 per share paid during the quarter. Portfolio earnings continue to be strong as of the end of the quarter. As of the end of the quarter, we estimate our undistributable taxable income was $0.52 per share. Additionally, net asset value per share increased 1.9% for the quarter to $16.77 per share from $16.46 per share as of the end of the prior quarter. This increase represented the fourth consecutive quarterly NAV per share increase for Capital Southwest. We are also pleased to announce today that our Board of Directors has declared a regular dividend of $0.57 per share for the March 2024 quarter. This represents 7.5% growth over the $0.53 per share paid a year ago in the March quarter. In addition, due to the excess earnings generated by our floating debt investment portfolio in this high interest rate environment, our Board has declared a supplemental dividend of $0.06 per share for the March 2024 quarter, bringing total dividends declared for the March 2024 quarter to $0.63 per share, which in total represents 9% growth over total dividends paid out in the same quarter a year ago.
While future dividend declarations are at the discretion of our Board of Directors, it is our intent and expectation that Capital Southwest will continue to distribute quarterly supplemental dividends for the foreseeable future. While base rates are above historical averages and we have meaningful undistributed taxable income, which is generated by earnings in excess of our dividends and realized gains from our equity co-investment portfolio. During the quarter, deal quality and activity in the lower middle market continued at a healthy pace, and we continue to be able to source attractive investment opportunities. Private equity firms and business owners continue to transact, while non-bank lenders like Capital Southwest continue to provide more certainty in closing than traditional bank financing structures. That said, competition from other non-bank lenders for quality lower middle market opportunities has largely returned to the more normal levels seen 12 to 18 months ago, resulting in tighter pricing spreads as well as slightly higher leverage and loan-to-value ratios in the closing capital structures.
In the larger end of the lower middle market, which is typically where we exit our investments, M&A activity picked up during the quarter as well, resulting in increased prepayments across our portfolio. Portfolio growth during the quarter was driven by $116.3 million in new commitments, consisting of $70.7 million in commitments to four new portfolio companies and $45.6 million in commitments to 12 existing portfolio companies. This was offset by $79 million in proceeds from five debt prepayments and one equity exit during the quarter, generating a weighted average IRR of 12.2%. On the capitalization front, we are pleased to announce that during the quarter, we successfully upsized our corporate revolving credit facility to $460 million from $435 million, with the addition of one new lender to the bank syndicate. We also raised $66.5 million in gross equity proceeds during the quarter through our equity ATM program, at a weighted average price of $21.92 per share or 133% of the prevailing NAV per share.
In addition, subsequent to the quarter-end, the I-45 credit facility was repaid in full and we are currently in the process of winding down the I-45 Senior Loan Fund. As most of you know, the I-45 Fund was initially created to invest in small pieces of large syndicated loans, and while I-45 has been a success through the years, the market for syndicated loans has evolved. We no longer view this market as a favorable place to generate attractive risk-adjusted returns for our shareholders. Michael will discuss the timing and mechanics of the dissolution of I-45 in further detail in a moment. We have remained diligent in ensuring we have strong balance sheet liquidity while also funding a meaningful portion of our investment activity with accretive equity issuances. We continue to maintain a conservative mindset to both balance sheet liquidity and BDC leverage, managing the company with a full economic cycle mentality.
While this starts with our underwriting of new investment opportunities, it also applies to how we manage the BDC's capitalization and liquidity, managing leverage to the lower end of our target range, while ensuring strong balance sheet liquidity, affording us the ability to invest in new platform companies even in periods of volatile capital markets when risk-adjusted returns can be particularly attractive. Additionally, it allows us to support our portfolio companies while also opportunistically repurchasing our stock if it were to trade meaningfully below NAV. On slides 7 and 8, 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 2015. Since that time, we have increased our quarterly regular dividend 28 times, and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pre-tax net investment income.
Over the same period, we have paid or declared 23 special or supplemental dividends, totaling $3.89 per share, including the $0.06 per share the Board has declared for the March 2024 quarter, all generated from excess earnings and realized gains from our investment portfolio. We believe our track record of thoughtfully growing our dividend and consistently solid performance in our portfolio, as well as our company's sustained access to multiple capital sources has demonstrated the strength of our investment and capitalization management strategies, as well as the absolute alignment of all our decisions with the interest of our shareholders. Turning to slide 9, we lay out the core tenets of our investment strategy. Our strategy focuses on lending and investing in the lower middle market, the vast majority of which is in first lien senior secured loans to companies backed by private equity firms.
In fact, approximately 92% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies, as well as the potential for new junior capital support if needed. As of the end of the quarter, our equity co-investment portfolio consisted of 62 investments, with a total fair value of $129.1 million, which was marked at 143% of cost, representing $38.5 million in embedded unrealized appreciation or $0.90 per share. Our equity portfolio, which represented approximately 9% of our total portfolio at fair value as of the end of the quarter, continues to provide our shareholders with 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 over time. As illustrated on slide 10, our on-balance sheet credit portfolio ended the quarter at $1.2 billion, representing year-over-year growth of 19% from $990 million as of the December 2022 quarter.
For the current quarter, 100% of our new portfolio company debt originations were first lien senior secured, and as of the end of the quarter, 97% of our credit portfolio was first lien senior secured. The weighted average credit exposure per company remains granular at 1.2%. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. We fully expect that this metric will continue to improve as our asset base grows. On slide 11, we detailed the $116.3 million of capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter included $66.7 million in first lien senior secured debt committed to four new portfolio companies, where we also invested a total of $4 million in equity. We also committed a total of $43.5 million in first lien senior secured debt and $2.1 million in equity to 12 existing portfolio companies.
We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital provider, as evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities, as well as the consistency of our origination activity. In fact, deal activity post-quarter end has continued at a healthy pace, and we expect solid net portfolio growth in the coming quarter. Turning to Slide 12, as I mentioned earlier, increased M&A and refinancing activity during the quarter resulted in greater than average prepayment activity. We continued our track record of strong returns on our exits, with five debt prepayments and one equity exit during the quarter. In total, these exits generated approximately $79 million in total proceeds, generating a weighted average IRR of 12.2%. Since the launch of our credit strategy nine years ago, we have realized 73 portfolio company exits, representing $885 million in proceeds that have generated a cumulative weighted average IRR of 13.9%.
On Slide 13, we detail some key steps for our on-balance sheet portfolio as of the end of the quarter, excluding our I-45 joint venture. As of the end of the quarter, the total portfolio at fair value was weighted 87.5% to first lien senior secured debt, 2.6% to second lien senior secured debt, 0.1% to subordinated debt, and 9.8% to equity co-investments. The credit portfolio had a weighted average yield of 13.5% and weighted average leverage through our security of 3.6 times. Cash flow coverage of debt obligations across our portfolio continued to be strong despite the high base rate environment, with weighted average interest coverage of three times and weighted average fixed charge coverage of 2.5 times. As seen on Slide 14, our total investment portfolio continues to be well diversified across industry with an asset mix that provides strong security for our shareholders' capital. Turning to Slide 15, we have laid out the rating migration within our portfolio during the quarter.
As a reminder, all loans upon origination are initially assigned an investment rating of two on a 4-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 95% of the portfolio at fair value rated in one of the top two categories of one or two. In fact, the portfolio generated weighted average revenue growth of 3% and weighted average EBITDA growth of 7% during the quarter. 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 quarter, as summarized on Slide 17, we increased pre-tax net investment income by 13% quarter-over-quarter to $29.8 million or $0.72 per share, compared to $26.4 million or $0.67 per share in the prior quarter. During the quarter, we paid out a $0.57 per share regular dividend and a $0.06 per share supplemental dividend. As mentioned earlier, our Board has declared a regular dividend of $0.57 per share and declared a supplemental dividend of $0.06 per share for the March 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 123% coverage for the last 12 months ended December 31, 2023, and 110% cumulative coverage since the launch of our credit strategy in January 2015.
As a reminder, our intent is to continue to distribute a portion of the excess of our quarterly pre-tax NII over our regular dividend to our shareholders in a quarterly supplemental dividend. We are confident in our ability to continue to distribute quarterly supplemental dividends for the foreseeable future based upon our current undistributed taxable income balance of $0.52 per share, our ability to grow UTI each quarter organically by over-earning our total dividend, and the expectation that we will harvest gains over time from our existing $0.90 per share in unrealized appreciation on the equity portfolio. For the quarter, we increased total investment income to $48.6 million, representing 14% growth quarter-over-quarter and 48% growth from a year ago. The weighted average yields in the portfolio on all investments was 13.7%. Total investment income was $5.8 million higher this quarter, primarily driven by an increase in the weighted average cost basis of our debt investments, as well as an increase in dividend and fee income.
As of the end of the quarter, we had three portfolio companies with loans on non-accrual, representing 2.2% of our investment portfolio at fair value. As seen on Slide 18, we maintained LTM operating leverage at 1.8% for the current quarter. To put this metric in perspective, our 1.8% operating leverage is the second best in the entire BDC industry. We believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to invest in people and infrastructure to continue to build a best-in-class BDC. As we look forward, we expect further improvements in operating leverage as we continue to grow the balance sheet over time. Turning to Slide 19, the company's NAV per share at the end of the quarter increased by $0.31 per share to $16.77, representing an increase of 1.9%, compared to the prior quarter.
The primary drivers of the NAV per share increase for the quarter were earnings in excess of our total dividends paid for the quarter and accretion from the issuance of common stock at a premium to NAV per share, partially offset by net unrealized depreciation on our investment portfolio. Turning to Slide 20, we are pleased to report that we have significant balance sheet liquidity with approximately $333 million in cash and undrawn leverage commitments on both our revolving credit facility and SBA debentures as of the end of the quarter. We recently completed an increase to our revolving credit facility, adding one new lender and bringing total revolver credit facility commitments to $460 million from $435 million in the prior quarter. Based on our current borrowing base, we have access to the full $460 million revolver capacity. The facility has an accordion feature allowing for the further increase of total commitments up to an aggregate of $750 million, allowing us to continue to grow our revolver capacity in lockstep with the growth of our overall balance sheet.
In addition, during the quarter, we received an additional leverage commitment in the amount of $45 million from the FDA, from which we can draw upon in the future. As of the end of the December quarter, 53% of our capital structure liabilities were in unsecured covenant-free bonds with our earliest debt maturity in January 2026. Finally, as Bowen mentioned earlier, subsequent to quarter end, the I-45 credit facility was repaid in full at the option of the joint venture partners. We are currently in the process of winding down the I-45 fund by allocating the residual assets in the fund to the joint venture partners. Assets from the fund will be allocated from the financing subsidiary to the balance sheet of each joint venture partner, consistent with their invested capital. The impact on Capital Southwest will be a small increase in assets, slightly higher leverage due to the pay down of the I-45 credit facility, and a modest increase in earnings as we eliminate frictional costs related to the fund.
Our regulatory leverage, as seen on Slide 21, ended the quarter at a debt-to-equity ratio of 0.77 to 1, down meaningfully from 0.91 to 1 as of the year ago December quarter. We opportunistically brought leverage slightly below our target range as of the end of December quarter, in part to accommodate the I-45 credit facility payoff and I-45's fund wind down. We will continue to methodically and opportunistically raise secured and unsecured debt capital, as well as equity capital through our ATM program to ensure we continue to maintain significant liquidity, conservative leverage, and adequate covenant cushions throughout all economic cycles. I will now hand the call back to Bowen for some final comments.
Thanks, Michael. And again, thank you, everyone, for joining us today. We appreciate the opportunity to provide you with an update on our business, our portfolio, and the market environment. Our company and portfolio continue to demonstrate strong performance, and we continue to be impressed by the job our team has done in building a robust asset base deal origination and portfolio management capability, as well as a flexible capital structure. We believe we have prepared our company well for future growth and performance, and we feel very good about how our shareholders' capital is positioned in the market. In summary, we have a credit portfolio predominantly made up of first lien senior secured debt allocated across a broad array of companies and industries, over 90% of which is backed by private equity firms. While also enjoying participation in the equity upside of many of these growing lower middle market businesses. Further, we have a well-capitalized balance sheet with multiple capital sources, very strong liquidity, and a flexible capital structure. This concludes our prepared remarks, operator. We are ready to open the lines up for Q&A.
分析師問答
Thank you. Our first question comes from Mike Schleien with Ladenburg Thalmann. Your line is open.
Yes, good morning everyone. Bowen, there was this theory that M&A volumes really wouldn't pick up until there was certainty that the Fed would cut rates and I'm in the camp that we don't know and inflation is still not at their target. And obviously, rates have not come down yet. So, from your perspective, what's driving this increase, which you mentioned has spilled over into the first quarter?
It's interesting to note that out of our five exits, three were sales and two were refinancings. The sales involved private equity-backed firms, indicating a strategic interest in the assets. These were essentially private equity firms seeking to realize gains from companies that are performing well. We acknowledge that there is strategic interest in these assets. While we share the same insights as you, the trends you've mentioned appear to be somewhat random. Our portfolio happened to include a number of sales, which I believe is partly due to the overall increase in M&A activity we've noticed. Additionally, our deal flow remains notably strong.
We've also seen in the top half of our portfolio, the loan grade ones. These companies, we have a significant number of companies that have deleveraged underneath two times even to the extent that our half turn to 1.5 turns. And so those guys will find potentially a lower-yielding option than where maybe they were when we originated them.
Yes. That's more of a company performance aspect. That's true, for sure. But the M&A activity, just looking at these names, I mean, there just has been interest in those assets. And those private equity firms, obviously, they don't get paid until they sell and monetize, pay their carry. So, they hit the bid.
I understand. That's helpful. I noticed there were a couple of credit downgrades during the quarter. Can you describe general trends in credit quality in the portfolio? And in particular, what these two were about?
Yes. I mean if you can just take a step back and look at trends in our portfolio, if you look at revenue and EBITDA growth, if you look at the number of upgrades versus downgrades, I'd say credit performance in our portfolio as a whole is excellent. The two downgrades, one was already a challenge. We basically had a term loan B and a downgrade and we downlift grade the term loan A. And the other one was a company that's kind of bumping along and we decided to go ahead and upgrade it. So it’s a new downgrade, not an existing. But again, if you look at 60-something million of upgrades and 30 million downgrades, I'd say from a general trend perspective, it looks okay.
Fair enough. And my last question, more housekeeping. Can you help me understand the net realized loss? Because on Page 12 of the Investor Presentation, there's a realized gain, but there's a much more meaningful net realized loss on the income statement. Can you just reconcile that?
One of our portfolio companies went through a restructuring, where part of their debt was converted into equity. From an accounting standpoint, this will appear as a realized loss for the quarter. When the 10-Q is released, there will be a complete reconciliation for the quarter detailing what occurred with each of the companies.
And that was one of our non-accruals. It's been non-accrual, and I think we mentioned on a previous earnings call that we anticipated that restructuring would occur in the calendar year, and it indeed happened.
I got it. And Michael, the Q is coming out tonight?
Yes.
Okay. Those are all my questions. I appreciate your time as always. Thank you.
Thanks, Mike.
Yes, thanks, Mike.
Our next question comes from the line of Robert Dodd with Raymond James. Your line is open.
Yes, I apologize for being on mute. Regarding the leverage, you are currently below the lowest end of your target range. Some of that is related to planning for I-45. Can you share if you feel more comfortable remaining at the bottom or below the target range for leverage, or provide an update on your outlook if the economy improves more than you expected? Your credit quality appears to be holding up well. Can you provide some insights on your medium-term expectations related to I-45?
Sure, I can provide an update. We adjusted I-45, and we are currently at about 0.83 times leverage. Looking ahead, I would estimate a range of 0.8 to 0.95, which is where we aim to remain. At this time, we expect positive conditions, and our portfolio is performing well. It's possible we may approach the higher end of that range in the coming quarters. However, considering our earnings relative to our net asset value, we are one of the more efficient companies in the BDC sector, producing $0.72 on $0.77 leverage. Therefore, we don't feel the need to increase our leverage aggressively, and we will likely stay around the middle of that range.
Thank you. Regarding I-45, it currently has $27 million in unrealized depreciation. When the assets are onboarded, will they be recorded at the existing cost and fair value, meaning the unrealized depreciation will remain, or will some of that be realized during the onboarding process?
Sure. So, a portion of the assets that are being assigned to each of our balance sheets will come over at cost and fair value. The amount of losses or gains that have been incurred in the portfolio of companies that have already exited will just get reclassified from unrealized equity to retained earnings.
Got it. Thank you. Please continue.
No, go ahead, I apologize.
The last point is more of a housekeeping matter. The dividend income was quite significant, and it seems there was possibly a $2 million non-recurring item related to one of the portfolio company sales. Can you provide any insight on whether this was a one-time amount or if there has been a change in the performance of the portfolio companies that indicates we might start receiving a consistent dividend?
No. So yes. So this quarter, we had one portfolio company, it's probably one of our most successful portfolio companies that had essentially levered less than one time to the dividend recap. We have an equity position with significant appreciation on the company. And so we participated in that dividend to the tune of $2.3 million, and that's a one-time occurrence.
Got it. Thank you.
Thank you. We'll stand by for our next question. Our next question comes from the line of Kyle Joseph with Jefferies. Your line is open.
Good morning everyone. I appreciate you taking my questions. Most of them have been addressed, but could you please discuss any inflows or outflows related to non-accrual? I understand the quarterly report is coming out, and I remember you mentioning a restructuring that resulted in a fair value increase of 20 basis points. Could you provide more detail on the inflows and outflows?
We had one portfolio company that came off non-accrual, specifically the one that was restructured and had the realized loss. Additionally, we had another portfolio company with a term loan A where the B was already on non-accrual. This company went on non-accrual, which resulted in a reduction of $15 million at cost basis coming off and $12 million coming on. So, there was a slight decrease in the cost basis, but the fair value was slightly higher.
Got it. As you consider the dividend moving forward, the forward curve has changed significantly since our last discussion. I understand you have strong coverage, particularly regarding the run rate dividend, but what are your thoughts on the dividend from this point?
Yeah. So obviously, we bifurcated between the regular dividend and the supplemental dividend. So on the regular dividend, obviously, we had $0.72 this quarter, which we would tell you the run rate absent that cash dividend was really like $0.69. So, we compare that $0.69 to the $0.57 we pay. So, there's still significant coverage there. You noted we're still kind of in a wait-and-see approach to see what the Fed does, to see the pace of rate reductions. We feel comfortable that, if the rates come down to a neutral spot in the next 18 months to 24 months, we would expect that our NII would trough in the low 60s, so there's still plenty of room for growth on the regular dividend. And having said that, we will wait to just see how things play out. On the supplemental dividend, we continue to bank UTI by over-earning our dividend. We have $0.90 of unrealized depreciation on the balance sheet that we would hope to exit a portion of either something between $0.24 or beyond. And so that, coupled with the $0.52 of UTI we have, currently, we feel very comfortable that this program will continue into the future at $0.06 today that may vacillate up or down, but we feel comfortable about that program going forward.
Got it. Helpful. And then last one for me. We talked about credit. We talked about the ratings. But just in terms of classified revenue or EBITDA growth and any sort of changes since we last spoke?
Yeah. I mean, as I noted in our remarks, we had across the portfolio revenue growth quarter-over-quarter at 3% and EBITDA growth quarter-over-quarter of 7%. So, the portfolios feel pretty good about some of the portfolio's general performance for sure.
Got it. That's all for me. Thanks for answering my questions.
Thank you. Please stand by for our next question. Our next question comes from the line of Bryce Rowe with B. Riley. Your line is open.
Hi. Thanks. Good morning. Maybe, Bowen, wanted to start on some of the exit activity. You've got, I guess, a couple of equity investment stubs that remain after those exits. What's the plan there? Is the plan to stay in those equity investments, or are those potential exit opportunities here over the near term?
Thank you for the question. Generally speaking, most companies are owned by private equity firms, and when these firms sell, we don't retain an equity stake. The equity stakes we have are typically ones we've been refinanced out of. Essentially, we tend to follow the liquidity curve with the private equity firm. As we know, private equity firms earn their returns only upon exiting their investments, so they aim to maximize value and exit when it's the right time, and we go along with that process. In response to your question, yes, those are equity stakes or potential future exits. Usually, the company has been refinanced and is likely performing well. Just because it's valued at a certain amount today doesn't mean it will stay there; a private equity firm holding it for another year or two likely means it could be valued similarly or less, but it's very likely to be higher than the current valuation. We will continue to go along with the private equity firm until they exit.
Got it. Okay. That's helpful. And then maybe a couple more for me. In terms of the assets that come on your balance sheet from I-45, obviously, they have a different profile than what you might like to put in your portfolio today. Do you look for an opportunity to exit those to create some liquidity, or will you, in fact, ride those out as well?
Well, I would say they're over in I-45, but there's still assets that generate returns in true pressure force. So that won't change. Certainly, there are bigger companies, for the most part, syndicated credits for the most part, the one we don't need the liquidity. But on the other hand, yes, we'll look for opportunities to exit those names at attractive values. And over time, those names will get refinanced out, of course, as those companies grow and sell. But I hope for that.
And the spread to LIBOR on these assets is 6.5%, which is maybe on the slightly lower end of our yield continuum, but it's certainly on the fairway.
Yes, that's good. Okay. That's helpful. And maybe one more for you, Michael. You kind of laid out the potential, I guess, regulatory debt-to-equity range with the I-45 assets coming on balance sheet. Can you give us a feel for what the economic leverage range might look at? And I'm thinking about the ability to now draw $45 million more of SBA debentures and how that works into the equation? Thanks.
I don't have anything additional to add on this, but I expect it to be around the midpoint. We anticipate completing the $45 million on the SBA by summer. Our economic leverage should be approximately one time, subject to regulatory factors. This may fluctuate. There are opportunities to raise capital above book value right now, so we can reduce leverage at times when those opportunities arise and then adjust our strategy again later.
I was just saying that we have a lot of liquidity on the balance sheet, so funding the SBIC subsidiary and borrowing net leverage commitments is straightforward.
So, yeah. One other point I'd probably make just on longer term is like we have an eye to the future. We look at our 2026 bond to repay then there's clip maturities. That's obviously two years away, but we're starting that planning today. So, the collateral that comes back from I-45 comes on balance sheet, and we're going to look for opportunities to increase our secured financing. So, you give us that, if and when we want to pay down those bonds, if we don't like what's going on in the capital markets in terms of unsecured market, you can always fund it with unsecured facility. The I-45 consolidation gives us additional collateral to work with to really continue to diversify our capital sources.
Okay, appreciate you guys taking the time.
Thanks Rob.
Thank you. Our next question comes from the line of Erik Zwick with Hovde Group. Your line is open.
Good morning. I may have missed this in the earlier comments, but just in terms of the winding down of I-45, did you provide a timeframe? Will that be done at the end of this current quarter, or would it take a little bit longer? I may have I'm not sure if I caught that earlier.
Our expectation is that it will be completed by the end of the quarter. However, with some of these credits, when we allocate and process the assignments, some agents are more efficient than others. Therefore, if we are unable to assign every asset, it may carry over on a small scale for another quarter. We are currently making a concerted effort to ensure everything is completed.
That's helpful. Thanks. I noticed that the PIK income increased to just above $4 million in the quarter, which is a higher run rate than we've seen recently. Could you talk about what drove that increase? Was there anything one-time, or should we expect something similar going forward?
Yes, it is slightly higher this quarter. To provide some context, two companies in our portfolio chose to increase their Payment-in-Kind (PIK) options. We don't have many PIK options in our portfolio, but we do have a few. One of these companies was impacted by the writer strike, which is now resolved, and it is showing positive signs of recovery. This company is quite healthy and has a PIK toggle. The other company is expected to perform very well in the upcoming years, suggesting it will have a significant year ahead. Therefore, for these two companies, we saw some PIK income. Overall, PIK income represents about 5% of our total income, while cash comprises 95%. Looking back at the previous quarters, we have consistently maintained around 95% to 96% in cash, so this trend continues.
The PIK-Pay toggles are generally only for a few quarters and are not indefinite for the loan. They will either roll off once they reach the end or the option will be taken to receive a substantial amount of cash along the way.
Got it. And then one last question for you. You seem fairly optimistic about the opportunity to make new commitments and fund new loans, at least for the next quarter. So, as you look at the pipeline, could you provide some commentary on any commonalities in the industries where you're seeing strength today, or is it more broad-based at this point?
The activity is quite strong at the moment, which is positive. As previously mentioned, our business primarily consists of family-owned and entrepreneurial companies that are being sold to private equity firms acquiring controlling stakes, with significant reinvestment from the founders. Additionally, we have a steady influx of add-ons in our portfolio, continuing a trend from previous quarters. These add-ons typically represent about one-third of our originations regularly. Since the end of the quarter, the activity has been notable not only in new platforms but also in existing ones.
And that's been a trend. We've seen that over the last probably four quarters. And I think with the portfolio size it is today, we expect that to continue.
Yes, this is a key aspect of our business model. Prime equity firms typically acquire a controlling interest in family-owned businesses, and the founders often reinvest a significant portion of their equity back into the company. One reason founders and families like this arrangement is that it allows private equity firms to purchase several of their competitors. This is why they are inclined to retain their equity, as it creates opportunities for growth. Given this nature of our deal flow, we anticipate a consistent influx of add-on acquisitions. This is beneficial because it means additional credit commitments to businesses we are already familiar with, rather than requiring us to learn about new platforms. Overall, it presents a very appealing segment of our deal flow.
And these are generally not delayed draw term loans, i.e., we are doing diligence on these add-ons to making a new investment decision.
Yes. Sounds great. Makes a lot of sense. Thanks for taking my question today.
Thank you.
Thank you. Our next question comes from the line of Vilas Abraham with UBS. Your line is open.
Hey, everybody. Just one for me. You guys mentioned in your prepared remarks competition coming back, where it was about 12 to 18 months ago. Can you just give a little bit more color on the nature of that competition and how you think that translates into a spread over the next few quarters?
Yes, the competition has certainly increased in the market, reflecting the overall health of the financial markets, primarily driven by non-bank lenders. It's similar to the competitive landscape we faced 18 months ago, which we've been navigating for eight years. I feel confident about our spreads; they are likely to remain stable where they are this quarter. They are not tightening to a level that would impact earnings. I want to highlight that for the last several quarters, competition has been lighter, but it's returning, which I don’t view as a negative development. Given our cost of capital and our institution, we are well-positioned to compete for quality deals and achieve solid risk-adjusted returns. Therefore, I expect spreads to remain consistent over the next few quarters.
Yes, we reviewed the last 12 months and closed 24 deals, with an average spread of around $750. However, the last nine deals in September were slightly over $700. For the entire year, the loan-to-value ratios were approximately 25% to 30% in the first half, and now they are around 30%. We may see the LTV increasing to between 35% and 40%. Overall, I believe Bowen is correct that the situation is stabilizing to where it typically is after being significantly lower for a while.
Got it. That's it for me. Thank you.
Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Bowen Diehl for closing remarks.
Well, thank you, everyone. As always, we enjoy talking about our business, your business, and your questions. And so we appreciate everybody's time and look forward to continuing to give you all quarterly updates.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.