Capital Southwest (CSWC) Q1 2021 Earnings Call Transcript

Capital Southwest (CSWC 1.10%)
Q1 2021 Earnings Call
Aug 04, 2020, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for joining today's Capital Southwest first-quarter fiscal-year 2021 earnings call. Participating on today's call are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, vice president. I would now like to turn the call over to Chris Rehberger.

Chris Rehberger -- Treasurer and Vice President, Finance

Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management's expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements.

For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release, except as required by law. I will now hand the call off to our President and Chief Executive Officer Bowen Diehl.

Bowen Diehl -- Chief Executive Officer

Thanks, Chris. And thank you to everyone for joining us for our first-quarter fiscal 2021 year earnings call. 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 are pleased to be with you this morning to announce our results for our first fiscal quarter ended June 30, 2020.

I want to first say that I hope everyone, their families and their employees continue to be safe and well. Here at Capital Southwest, we have continued to prioritize the health and safety of our employees and of the employees of our portfolio companies. We remain in regular dialogue with our portfolio of company financial sponsors and management teams and have been pleased with the quick responses to the pandemic and the risk and cost-mitigation work that has been done across the portfolio. While the pandemic continues to be an overhang on the market in general, we continue to feel good about the quality of the assets and earnings power of our portfolio.

During the quarter, our portfolio performance stabilized as evidenced by $2.1 million of net appreciation across the portfolio. For the quarter, we had two investment rating upgrades, no investment rating downgrades and no new loans placed on nonaccrual. As a well-capitalized first-lien lender with ample liquidity, Capital Southwest continues to be in a favorable position to seek attractive financing opportunities and to provide financial support to our portfolio companies and, where warranted, receive enhanced economics for doing so. Executing our investment strategy under our shareholder-friendly, internally managed structure, closely aligns the interest of our board and management team with that of our fellow shareholders in generating sustainable long-term value through recurring dividends, capital preservation and operating cost efficiency.

On Slide 6 of the earnings presentation, we have summarized some of the key performance highlights for the quarter. During the quarter, we generated pre-tax net investment income of $0.40 per share and paid out a regular dividend of $0.41 per share. We also continued our supplemental dividend program, paying out a $0.10 per share quarterly supplemental dividend, funded by our sizable undistributed taxable income balance. Total dividends for the quarter of $0.51 per share represented an annualized dividend yield on last Friday's stock price per share of 15.3% and an annualized yield on NAV per share of 13.6%.

During the quarter, we grew our total portfolio over 6% to $587 million as of June 30, 2020. Portfolio growth during the quarter was driven by $30 million in total commitments to two new portfolio companies and five existing portfolio companies. The total originations for the quarter included investing $1.3 million in equity alongside two of our loans. Additionally, on the equity capitalization front, despite the recent market volatility, we raised $5.7 million in gross proceeds during the quarter through our equity ATM program, representing the seventh straight quarter we have judiciously raised permanent capital for the BDC above NAV.

Our diligence in selling limited amounts of equity each quarter when our stock price is trading above NAV, in lockstep with our ability to deploy the capital continues to be one of the key contributors to our financial flexibility in today's environment. At quarter end, we had approximately $155 million in total liquidity available between our revolving credit facility and cash on the balance sheet, while having only about $15 million in unfunded revolver commitments to our portfolio companies, in which the criteria for draws have been met. Finally, we are excited to announce that the U.S. Small Business Administration issued Capital Southwest a green light letter inviting Capital Southwest to apply for an SBIC license.

Operating an SBIC subsidiary has been a strategic priority for Capital Southwest, and we are looking forward to partnering with the SBA in their mission of providing capital to underserved markets, including businesses in low to moderate-income areas and businesses owned by minorities, women or veterans. As a reminder, final approval and issuance to Capital Southwest of an SBIC license would provide a 10-year commitment to provide Capital Southwest with up to $175 million in debt financing to be drawn to fund investments in lower middle-market companies that qualify as small businesses per the SBA definition. Each draw from the SBIC debenture program separately represents a new debt security in our capital structure with a 10-year maturity from the date of draw. From a cost perspective, if the treasury rates remain close to today's levels, the all-in cost of the SBIC debentures will be between 2.5% and 3%.

This program is clearly a perfect fit for our lower middle market focus. And we look forward to continuing to work with the SBA in completing the application process. Turning to Slide 7 and 8, we illustrate our continued track record of producing a strong dividend yield, consistent dividend coverage and value creation since the launch of our credit strategy. As a reminder, we previously announced that our board declared total dividends of $0.51 per share, again for the coming quarter ending September 30, 2020, consisting a regular dividend of $0.41 per share and a supplemental dividend of $0.10 per share.

Turning to Slide 9. As a reminder, our investment strategy has remained consistent since its launch in January 2015. We continue to focus on our core lower middle market, while also maintaining the ability to invest in the upper middle market when attractive risk-adjusted returns exist. In the lower middle market, we directly originate opportunities consisting of debt investments and equity co-investments.

Building out a well-performing and granular portfolio of equity co-investments is important to driving NAV per share growth, as well as aiding in the mitigation of any credit losses over time. Overall, we believe that maximizing the top end of our deal origination funnel in both markets is critical to generating strong credit performance over time as it ensures that we consider a wide array of deals, allowing us to employ our conservative underwriting standards and thoughtfully building a portfolio that will perform through any economic cycle. Though we are currently taking a cautious and extremely selective approach toward deploying new capital, taking into account the new normal of potential pandemics, among other risk, we are pleased to have the capital to invest to support acquisitions and growth across our markets. We have been excited about the opportunities that we have pursued and closed.

And we continue to find superior risk-adjusted return opportunities in the lower middle market, where we can lend at lower leverage and loan-to-value levels while maintaining tighter covenants and other terms in the loan documents. As illustrated on Slide 10, our balance sheet credit portfolio, excluding I-45, grew 3% during the quarter to $487 million as compared to $474 million as of the end of the prior quarter, resulting in our credit portfolio now being weighted 85% to lower middle market loans. We continue to heavily emphasize first-lien senior secured debt lending, with 100% of the debt origination this quarter being first-lien senior secured. As a result, as of the end of the quarter, 90% of the credit portfolio was in first-lien senior secured debt.

On Slide 11, we lay out the $30 million of capital invested in and committed to portfolio companies during the quarter. This included $20.8 million in first-lien senior secured debt provided to two new portfolio companies and $9.2 million of additional capital to five existing portfolio companies, which included $8.9 million of first-lien senior secured debt and the $400,000 of equity. Deal flow since the quarter end has remained solid. As post quarter end, we have originated an additional $34 million in commitments, which included $27 million invested in two new portfolio companies and $7 million to fund add-on acquisitions at two existing portfolio companies.

Total commitments post quarter end consisted of $32.2 million in first-lien senior secured debt and $2.1 million in equity co-investments. On Slide 12, we break out our on-balance sheet portfolio as of the end of the quarter between lower middle market and the upper middle market, excluding I-45. As of the end of the quarter, the total portfolio included equity co-investments -- including equity co-investments was weighted approximately 85% to the lower middle market and 15% to the upper middle market on a fair-value basis. We had 36 lower middle market portfolio companies, with an average hold size of $12.6 million, a weighted-average EBITDA of $8.2 million, a weighted-average yield of 10.8% and a leverage ratio measured as debt-to-EBITDA through our security of 4.1 times.

Within our lower middle market portfolio, as of the end of the quarter, we held equity ownership in approximately two-thirds of our portfolio companies. Our on-balance sheet upper middle market portfolio, excluding I-45, consisted of 11 companies with an average hold size of $8.4 million, a weighted average EBITDA of $73.1 million, a weighted average yield of 6.8% and a leverage ratio through our security of 4.4 times. Our on-balance sheet upper middle market portfolio leverage metrics are shown excluding our investments in American Addiction and Delphi Behavioral Health as the EBITDA, while improving in both cases on a run-rate basis, remained as of the end of the quarter at levels that would skew the aggregate portfolio leverage ratios to a degree that would obscure the ratios of the remainder of the upper middle-market portfolio. We should note that post quarter end, Delphi was restructured out of court.

Capital Southwest now holds a first-lien senior secured debt investment in the company, which should come back on accrual this quarter, and an equity ownership position in the company with representation on the company's board of directors. We continue to be pleased with the high-quality care that Delphi provides its patients and the company's improving financial performance. We are optimistic about the company's future and the ultimate recovery of our capital. In the case of American Addiction, as many of you have seen, the company has filed bankruptcy, a very necessary step in restructuring the balance sheet to set the company up financially for success going forward.

We are also pleased with the high-quality care that American Addiction provides its patients and in its improving financial performance. Turning to Slide 13. We have laid out the rating migration within our portfolio for the quarter. During the quarter, we had two upgrades in the portfolio for companies that continue to significantly outperform expectations, while having no further portfolio downgrades.

As a reminder, all the investments 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. The upgrades included two loans previously rated at two that were upgraded to a one rating based on superior performance and deleveraging. Almost 16% of the portfolio is at fair value, now has our highest investment rating. As of the end of the quarter, we had nine loans or 12% of the investments at fair value rated at three and only two loans or 2% of the portfolio at fair value rated at four.

The remaining 70% of the investments at fair value remained rated at two. Given the severity of the economic downturn endured as a result of the pandemic, we are quite pleased that over 82% of our investment portfolio continues to hold one of our top two investment ratings. As illustrated on Slide 14, we have established a portfolio well diversified across industries with an asset mix that should provide strong security for our shareholder's capital. The portfolio remains heavily weighted toward first-lien senior secured debt, with only 6% of the portfolio in second-lien senior secured debt and only 2% of the portfolio in one remaining subordinated debt investment.

Shown on Slide 15, as of the end of the quarter, 96% of the I-45 portfolio was invested in first-lien senior secured debt with the diversity among industries and an average hold size of 2.4% of the portfolio. The I-45 portfolio also showed signs of stabilization as our investment in I-45 appreciated by $4.2 million or 8% during the quarter. I will now hand the call over to Michael to review the specifics of our financial performance for the quarter.

Michael Sarner -- Chief Financial Officer

Thanks, Bowen. Specific to our performance during the -- for the June quarter, as summarized on Slide 16, we earned pre-tax net investment income of $7.2 million or $0.40 per share. This was consistent with the $0.40 per share earned during the prior quarter. We paid out $0.41 per share in regular dividends for the quarter, flat from the $0.41 regular dividend per share paid out in the prior quarter.

As mentioned earlier, our board has also declared a further $0.41 regular dividend per share to be paid out during the current September quarter. In the near and long term, we have built a consistent track record of meaningfully covering our regular dividend with pre-tax net investment income as demonstrated by our 102% regular dividend coverage over the last 12 months and 106% cumulative regular dividend coverage since the launch of our credit strategy. During the quarter, we maintained our supplemental dividend at $0.10 per share. And again, our board also declared a further $0.10 per share supplemental dividend to be paid out during the current September quarter.

As a reminder, the supplemental dividend program allows our shareholders to meaningfully participate in the successful exits of our investment portfolio through distributions from our UTI balance over time. Due to the successful sale of Media Recovery in late 2019, we were able to replenish our UTI balance to the maximum allowable level as of the end of the 2019 tax year, providing visibility on the longevity of the program well into the future. The program will continue to be funded from UTI earned from realized gains on both debt and equity, as well as undistributed net investment income earned each quarter in excess of our regular dividends. As of June 30, 2020, our estimated UTI balance was $1.27 per share.

Our investment portfolio produced $15.2 million of investment income this quarter with a weighted average yield on all investments of 10.4%. This represents an increase of approximately $130,000 from the previous quarter. As Bowen mentioned, we had no new nonaccruals as of the end of the quarter. Currently, there remains three assets on nonaccrual with a fair value of $11.3 million, representing 1.9% of our total investment portfolio at fair value.

The weighted-average yield on our credit portfolio was 10.1% for the quarter. Excluding interest expense, we incurred $3.7 million in operating expenses for the quarter, which was approximately $150,000 higher than the previous quarter. As seen on Slide 17, we reported operating leverage of 2.4% for the quarter, which puts us below our initial target operating leverage of 2.5%. We are fully committed to actively managing our operating costs in lockstep with portfolio growth and have our longer-term sights set on achieving target operating leverage of 2% or better.

Our operating leverage should continue to improve as the investment portfolio grows due to the relatively fixed nature of the operating costs associated with our internally managed structure flipping over to Slide 19. The company's NAV per share as of June 30, 2020, was $14.95 per share as compared to $15.13 per share at March 31, 2020. The main driver of the slight NAV per share decrease was from the annual RSU grant to employees as the $0.11 per share of net appreciation on the portfolio offset the $0.10 per share quarterly supplemental dividend paid. On Slide 20, we lay out our multiple pockets of capital.

As we have mentioned on prior calls, a strategic priority for our company is to continually evaluate approaches to derisk the liability structure of the company while ensuring that we have adequate investable capital throughout the economic cycle. To that end, as Bowen mentioned earlier, we are happy to report we received a green light letter from the SBA. From a capitalization perspective, this is a significant event for Capital Southwest in the long term. We believe this program provides access to efficiently priced long-term capital, which will allow us to both be more competitive on deal originations and increase our total returns to shareholders.

We have consistently stated that one of our long-term goals is to achieve an investment-grade rating. We believe accessing the SBA program further enhances our resume toward achieving that goal as it further diversifies our funding sources. In addition to the potential of accessing up to $175 million associated with the SBIC license, our debt capitalization today includes a $325 million on-balance sheet revolving line of credit with 11 syndicate banks, a $77 million publicly traded baby bond maturing in two and a half years, a $75 million institutional bond, with 21 institutional investors maturing in four years, as well as our $150 million revolving credit facility at I-45 with four syndicate banks. Additionally, we are pleased to report that our liquidity is strong with approximately $155 million in cash and undrawn commitments as of the end of the quarter with ample borrowing base capacity and covenant cushions on our senior secured revolving credit facility.

In addition, approximately 46% of our current capital structure liabilities are unsecured with the earliest debt maturity at December 2022. Our balance sheet leverage, as seen on Slide 18, ended the quarter at debt-to-equity ratio of 1.19:1. Finally, despite the heightened market volatility during the quarter, we were able to sell 373,177 shares of Capital Southwest common stock under the equity ATM program at a weighted average price of $15.38 per share, raising $5.7 million of gross proceeds. We now have raised $51 million in equity capital over the past seven quarters, accessing our ATM program diligently every quarter during that period in lockstep with our investment activity.

I will now hand the call back to Bowen for some final comments.

Bowen Diehl -- Chief Executive Officer

Thanks, Michael. And thank you, everyone, for joining us today. Capital Southwest has grown, and the business and portfolio have developed consistent with the vision and strategy we communicated to our shareholders over five years ago. Our team has done an excellent job building both a robust asset base, as well as a flexible capital structure that prepares us for tough environments like the one we have experienced over the past few months.

While we are not immune to the challenges the economy faces today, we feel good about the health of our company and the opportunities that the environment will present to us as we consider places to invest capital in what should prove to be a less competitive environment. 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 in troubled times such as these. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Kyle Joseph of Jefferies. Your line is open.

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning, guys. Congrats on a good quarter. And thanks for taking my questions first. First question, just about deal flow and actually more specifically on repayments.

I didn't see the repayment level in the quarter. And can you just give us a sense for your expectations for repayment trends in the portfolio given the current environment we're in?

Bowen Diehl -- Chief Executive Officer

Yeah. So repayments were, other than amortization and revolvers, draws back and forth, virtually zero.

Michael Sarner -- Chief Financial Officer

Yeah. I think it's $2.5 million, maybe the amortization result.

Bowen Diehl -- Chief Executive Officer

And the second -- the last part of your question was what?

Kyle Joseph -- Jefferies -- Analyst

Would you sort of anticipate repayment levels being fairly muted given the overall deal environment?

Bowen Diehl -- Chief Executive Officer

It's interesting. So yes and no. We definitely have seen -- we see deal activity pretty strong at the moment as I mentioned in our prepared remarks, but now we have our portfolios. 16% of the portfolio is now rated at one, so those are clearly companies that are performing very, very well.

And so we don't see any in particular that we think are going to be refinanced quickly, but those are strong and very refinanceable. So that would be the yes to the question potentially. But I think it's generally probably relatively slow prepayments in the future but subject to that fairly sizable chunk of our portfolio that are outperforming.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then, in terms of the outlook for yields, obviously, there's portfolio mix shift. And it looks like you had some very attractive yields on the new deals in the quarter. So can you kind of give us a sense of weighing mix shift, yields on new deals, the rate environment, just kind of your outlook for the consolidated yield?

Bowen Diehl -- Chief Executive Officer

Yeah, you want to take that one?

Michael Sarner -- Chief Financial Officer

Yeah, sure, sure. So you saw we -- our yield came down from 10.5% to 10.1% mainly due to LIBOR during the period. We saw, obviously, volatility from the previous quarter to now. And now it seems to have flattened out.

Obviously, we are around 30 to 35 basis points. You will see it retrace up a bit because, like you noted, some of the assets we put on during the quarter were higher yield. I'd also tell you that the number was slightly down due to us having investments that were late-stage for the previous quarter. So even though it was in the balance, you didn't -- it was in the weighted average balance, you didn't see the income.

So you'll see that in the subsequent quarter. So while saying all of that, I think 10.5%, it seems like the right bogey going forward.

Bowen Diehl -- Chief Executive Officer

Yeah. And as far as the market environment, I would say right now, as we sit here, spreads, while earlier in the COVID kind of pandemic time period, you'd say, maybe 100 to 150 basis points higher than pre-COVID. I would say now it's probably 50 to 100 basis points higher in the market than pre-COVID. You still have some market participants that are essentially out of the market, but there are quite a few in the market.

People are being more disciplined as far as spreads that they're offering in the market. So I'd say it kind of feels like it's kind of a 50- to 100-basis-point spread difference to the positive now versus pre-COVID. I assume that was part of your question, too.

Kyle Joseph -- Jefferies -- Analyst

Yes. Absolutely. Thanks very much for answering my questions guys. Take care.

Bowen Diehl -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Tim Hayes of F.B. Riley. Your line is open.

Tim Hayes -- B. Riley FBR -- Analyst

Good morning, Bowen and Michael, just a few questions on credit to start. I guess, you had one less nonaccrual this quarter. Did you exit that -- I guess, you said there were no real repayments this quarter. What happened was one credit taken off nonaccrual status because I'm assuming you didn't exit that.

And I'm just -- I guess, I was curious if that was what drove the realized loss, but if not that credit, then what did?

Bowen Diehl -- Chief Executive Officer

Yeah. So thanks for the question. So Delphi that I mentioned in my remarks, that was on nonaccrual. We restructured that out of court, and it's back on accrual.

And a transaction that's restructured like that can often be a realizable -- a taxable event. So you realize the tax -- you realize a loss, but then we've got pretty substantial equity ownership. And as I said, we've got a board -- representation on the board. And so we actually feel pretty good about recouping our par at least on that loan over time.

Tim Hayes -- B. Riley FBR -- Analyst

OK, got it. Thanks for clarifying that. And then, how many credits in the portfolio would you say have been extended some type of forbearance or modification? I'm just wondering if you've seen those requests decline.

Bowen Diehl -- Chief Executive Officer

Well, we've definitely seen the request decline as it's kind of -- the whole kind of state of play from the COVID pandemic kind of shocked everybody in March and then it kind of played out in June, right? In the June quarter. So as we look back at it, we had -- to give you an idea, we had three loans that we agreed to pick a portion of our interest for a period of time. And I think in all cases in exchange for equity support of the company. And then, we had six loans that we essentially just amended covenants in exchange for economics, but they are all current on interest.

It wasn't really a cash interest issue. It's just more of a covenant issue, and we extracted economics for giving them a little bit more leeway.

Tim Hayes -- B. Riley FBR -- Analyst

Got it. Got it. OK. And on the follow-ons you funded this quarter, were those all sponsored credits? And did you require sponsors or inject more equity in order for you to participate as well? And then, just curious if you denied any follow-on requests this quarter.

Bowen Diehl -- Chief Executive Officer

Well, yes, in both add-ons, we financed a portion of the acquisition, and sponsors put in equity to fund the acquisition. So we really look at -- frankly, we look at leverage pro forma for the acquisition and say what is the appropriate leverage level in this market in this particular industry and this particular company? And then, we'll finance a leverage amount to bring leverage up to whatever we deem as the appropriate leverage level and not higher than that. So virtually always results in the equity, putting more equity into the acquisition. As far as did we deny any follow-on request, I mean, we certainly turned down deals all the time.

I don't think -- I can't recall a deal this quarter where a sponsor called us and said, we want you to finance our acquisition, and we said, no. I mean, obviously, that would be pretty significant, a host of reasons. We didn't have any companies that would fall into that bucket.

Tim Hayes -- B. Riley FBR -- Analyst

OK, got it. And then, can you just help reconcile the unrealized depreciation in the upper middle market portfolio? You saw $25 million of depreciation last quarter. I think only $5 million of appreciation this quarter despite spreads coming in and asset values recovering more than just 20%, I believe, in most cases. So was there some company-specific depreciation that offset the mark-to-market gains this quarter?

Michael Sarner -- Chief Financial Officer

No. I'm trying to figure out actually with your question where -- what you're seeing as different than that reconciliation. The two things that have happened. We saw that depreciation last quarter, we put in capital alongside Main Street to delever the credit facility from then to now.

And then, we saw $5 million of appreciation. I don't know that there's -- what is -- I'm not sure what the missing piece is.

Tim Hayes -- B. Riley FBR -- Analyst

I guess, I was just -- I would have expected more of a markup on the upper middle market portfolio given what we've seen in the market. And that's really the nature of my question.

Bowen Diehl -- Chief Executive Officer

Sure. Yeah. OK. I mean, obviously, we had gives and takes in the portfolio, clearly.

So we had some specific depreciation in the upper market -- upper middle market portfolio, and then we had the spread. The thing about the upper middle market, as you guys know, is it's -- there is a secondary market, but it's not -- candidly, it's not super liquid. So quotes tend to go down faster than they come up. It's just a negative bias in the market.

And I think we talked about that before. And so that could have some effect on it.

Michael Sarner -- Chief Financial Officer

And I think the other piece, probably actually now that you're missing, CPK is the one name that I would tell you that is idiosyncratic or, obviously, related to COVID. It had significant depreciation for the quarter that sort of muted what otherwise would have been higher appreciation. That might be what you're looking at.

Tim Hayes -- B. Riley FBR -- Analyst

Got it. Yes. I think that makes sense.

Bowen Diehl -- Chief Executive Officer

Yes. That's actually a big part of it. That's a big part of it. That's a good point.

Tim Hayes -- B. Riley FBR -- Analyst

That's -- yeah, thanks, Michael. That's probably exactly the missing piece there. Makes sense. OK, well, I'm going to jump back in the queue for a couple more, but I thank you for taking my questions.

Bowen Diehl -- Chief Executive Officer

Thanks.

Operator

Our next question comes from Bryce Rowe of National Securities. Your line is open.

Bryce Rowe -- National Securities -- Analyst

Thanks. Good morning, Bowen and Michael.

Bowen Diehl -- Chief Executive Officer

Morning.

Michael Sarner -- Chief Financial Officer

Morning.

Bryce Rowe -- National Securities -- Analyst

Yeah. Maybe to follow up on Tim's question there and talking about depreciation within the lower middle market portfolio, I don't know if there was a specific driver there, Bowen, or Michael, but just curious what fueled that this quarter.

Bowen Diehl -- Chief Executive Officer

Yeah. So I mean, if you look at the lower middle market, I mean, it's obviously -- the loan indices is a portion of the valuation, but it's a more thorough modeling-type exercise, relative yield analysis. And so as everyone asked about last quarter and -- correctly asked about last quarter, a lot -- most of the EBITDA effects from the pandemic was in the June quarter, not in the March quarter. And so the pig has got to flow through the python, right? So EBITDA in the portfolio, as a general matter, went down on an LTM basis, right? It's usually on the LTM-EBITDA basis.

And so hence, you saw the leverage in our lower middle market migrate up to 4.1 times, which is, again, that that pig kind of going through the python. And so -- but the good news is we've seen that stabilize and frankly improving in a real-time basis. But that's kind of what you're seeing. So leverage went up.

So that's going to affect the loan values -- that affected loan values, I guess, more than the index effect of the loan value, if that makes sense.

Bryce Rowe -- National Securities -- Analyst

Yeah. OK, yeah, that's fair. I wanted to ask about the internal ratings. Obviously, the four-rated credits went from two to three and understand that Delphi got restructured.

So I would assume that might have been one that moved out, but I was curious if that's correct. And then, any update, I saw in the add-ons this quarter, there was an add-on to AG King. So maybe you could provide an update there, too.

Bowen Diehl -- Chief Executive Officer

Sure. So what was the first part of the question?

Michael Sarner -- Chief Financial Officer

The loan from going from four?

Bowen Diehl -- Chief Executive Officer

Yeah, yeah, four and three. So that was Delphi, you're correct.

Michael Sarner -- Chief Financial Officer

Four to two.

Bowen Diehl -- Chief Executive Officer

I'm sorry, four -- it went from a four to a two because that's rating the debt security, so it's two. So as far as AG Kings, I mean, obviously, I don't want to comment on companies, in particular. I mean, it's a grocery business, right? So you can imagine it's doing well in the pandemic. Still happy with the management team.

It's kind of a long process to kind of work through restructuring and what that looks like exactly. So I'm just going to leave it at that because it's a private company, obviously. So I want to be careful about commentary on that. But you can probably correctly speculate that it's a grocery business and it's probably doing better from that perspective.

Bryce Rowe -- National Securities -- Analyst

Yeah, OK, that's helpful. And then, one last one for me. In terms of possibly capitalizing the SBIC license or subsidiary, Michael, maybe you can walk us through how you envision that kind of playing out. And maybe talk about how you would -- you might be able to go about accessing that initial tranche of debt and when that might happen relative to capitalizing that subsidiary.

Michael Sarner -- Chief Financial Officer

Sure. So we are going to go through the application process between now and really, that should be a two- to three-week process of just getting that submitted. We expect, based on feedback from the SBA that we should hopefully get through this process successfully by maybe November or as late as December. So therefore, we'll be able to start investing inside that, the SBIC.

We'd have to put to work our first -- as you said, our first tier, which are $40 million of capital before we start drawing. So we'd expect to start levering up by March or April of 2021. And then, start -- if the rates are where they are today, I mean, we see this as a fairly large meaningful move to NII. We are assuming without the SBA debt, you'd assume you're using baby bonds, which are, obviously, less predictable when the markets are open or shut.

And you've seen rates that have vacillated between 5% and 7%. So when we look at it, our average ROE on an asset is usually around 15% at our current cost. Using the SBIC, we think that our ROE is going to go up over 20% once this -- on an asset-by-asset basis. And we think once it's fully ramped, when you have the whole $175 million put to work, this is a pretty significant mover, $0.20 to $0.25 of NII a year.

So something very meaningful. So in terms of when you get to fully ramp, we would probably tell you that's going to be somewhere between the end of '22 and '23.

Bowen Diehl -- Chief Executive Officer

Yeah. It's just a function of putting the money to work. Yes.

Bryce Rowe -- National Securities -- Analyst

Yeah. That's helpful. And in terms of kind of targeted leverage on a statutory basis, does that kind of change here if you're adding that level of debt?

Michael Sarner -- Chief Financial Officer

You know what, I think that we are probably going to be between -- I'm going to give you a wide range, probably 1.1% to 1.5% on a total economic leverage. From a regulatory perspective, you'll probably still be in that 1.1% -- 1% to 1.2%

Bryce Rowe -- National Securities -- Analyst

OK, all right, thank you so much.

Michael Sarner -- Chief Financial Officer

You bet.

Operator

Our next question comes from Robert Dodd of Raymond James. Your line is open.

Robert Dodd -- Raymond James -- Analyst

Hi, guys. And yeah, congrats on the quarter. Just sticking with the SBIC for a second. Can you, if you've got the data, consider that the pipeline of deals that you've seen and exited on over, say, the next -- last 12 months beyond the pandemic, what proportion of those were SBIC-eligible versus, i.e., is there a necessity to change targeting in any way to produce SBIC eligible deal? So is that the pipeline just right with them already?

Bowen Diehl -- Chief Executive Officer

Yeah. It's a good question. I mean, it's a vast majority of them fit the SBIC definition by our estimation, so it's 90%-plus. I mean, we don't have to change our strategy at all.

That's why the program is so interesting to us. It's efficient financing -- flexible financing that allows us to go out and invest in the exact market that we invest in today.

Robert Dodd -- Raymond James -- Analyst

Got it. Thank you. And then, just on -- obviously, we don't have the full schedule investments and all the details yet. If I presume the realized loss related to Delphi for the equitization of debt, if that was a reversal, that means you had net kind of $2.5 million of unrealized appreciation except for Delphi.

$4.5 million of that seems to have been from the I-45. So there was some deterioration or depreciation in kind of the rest of the book. Could you give us any color on what the drivers were there given spreads have narrowed somewhat? But you made some comments last quarter about the potential for trailing 12 EBITDA trends to kind of outweigh kind of market rebound in valuation multiples and things like that. Can you give us any dynamics on how that played out in where your NAV came out this quarter?

Bowen Diehl -- Chief Executive Officer

Yeah, sure. So as I said a minute ago, it's lower middle market-credit valuation, a loan index, of course, across the debt portfolio, the loan indices are a component to the valuation, and that's, obviously, a positive influencer. The larger influencer is really leverage as it relates to LTM EBITDA. And so as you move through the pandemic, most of the pandemic effect on the portfolio and on the economy was in the March -- in the June quarter as opposed to the March quarter.

So it's really a pig going through the python-type thing. And as you -- EBITDA across the portfolio on an LTM basis, went down March to June. And so as you see, our leverage in our lower middle market went up to 4.1 times and so like in the -- right now we're seeing fairly encouraging stabilization and frankly, improving in performance. But as of the end of the June quarter, where you stood was you had LTM EBITDA had come down as the pandemic months where a greater percentage of the LTM EBITDA as measured for the valuations.

And so in the lower middle market, as you would expect, it went down slightly, although on a $415 million portfolio of debt, it went down by $1.5 million, so not a huge amount. Frankly, we thought it was a pretty good outcome, actually, given what one might have expected sitting in March. But it was -- but it went down as a portfolio primarily for that reason.

Robert Dodd -- Raymond James -- Analyst

Got it. Got it. I appreciate that. And then, just if I can flip back to the SBIC because I forgot one of the other questions.

I mean, to your point, you, obviously, when -- yes. You received the final license, there's capital commitments, and you made reference to $40 million. So is the expectation that you'd put an initial $40 million in? And if that's the case, I mean, what would be the funding mechanism for that? Obviously, you've got plenty of liquidity, but do you have any particular plans around that right now?

Michael Sarner -- Chief Financial Officer

Sure. So I mean, the way it works with that $40 million, you just invest in -- you originate assets using your -- the capital you have available and place those assets into the fund. Obviously, we have $155 million on the revolver and cash. We will be opportunistic looking at the bond market as it presents opportunities that are attractive.

And we'll continue the ATM equity program, assuming we're trading above book. So I think all in all, we have ample liquidity today. And we'll certainly continue to raise additional capital to make certain that we're ready to fund that equity check.

Bowen Diehl -- Chief Executive Officer

So from my perspective, at the end of the day, the SBIC has a 10-year commitment to provide $175 million of capital irrespective of the economy. And certainly, it's -- we need to refine the assets, and we need to continue our performance, but we need to do that anyway. And so it's really a debt commitment that we don't have to rely on the capital markets or anything like that to obtain. And on top of that, it's extremely cost-effective.

And so I don't know that we do anything differently in the future. It's the same pipeline. It's the same sandbox that we play in today. It's just now we have a commitment from a capital provider with a very cost-effective, long-term commitment.

And then, each time it draws, it's a new 10-year bond, which is also long-dated and attractive. So that's kind of -- so I don't really see us doing anything different at all. We're just going to keep doing what we're doing. But we have an additional capital source.

It's very attractive.

Michael Sarner -- Chief Financial Officer

Yeah. And no, but from a capitalization perspective, over the next few years, we'll start -- we'll raise bonds. As I noted, we'll pay down our revolver. We'll also sort of peck away at the existing bonds as well.

So we're making certain that we're keeping ample liquidity on the revolver, as well as making certain there isn't a large cliff in terms of maturities on the bonds as we get closer to those maturity dates.

Robert Dodd -- Raymond James -- Analyst

Got it. I appreciate all that. One last one. Obviously, you could, in principle, long term, get more than one license, and they are 10-year licenses.

I mean, I presume that this is intended to be the first SBIC might not be the only one, and this is not just in it for a decade. I mean, is this going to be a perpetual part of the capital structure of the business going forward and maybe even grow with the second license? Would that be fair?

Bowen Diehl -- Chief Executive Officer

Yeah, that's absolutely the case. I mean, we're lower middle market, first-lien lenders. I mean, that's what we are. We've been -- the team here has been doing that for decade and a half plus.

And the SBIC, as long as they have that program, supporting lower middle market lending and investing, we're there. So one of the things that's really important to us is the performance of the first license. Obviously, we want the license to perform for our shareholders, but we also want the first license to perform because that's the biggest criteria on getting the second license. And so we're already looking ahead of the second license.

So the answer to your question is absolutely. It's a permanent foundational part of our strategy.

Michael Sarner -- Chief Financial Officer

And just backing up, it's always been -- when we first started the entity in '15, this was going to be part of our process. They do the nascent stage of us post-spin. They wanted to see us build our resume. And what we've heard back from them going through this process is they're glad we did, and we certainly are more impressed with the resume we put together today.

So this is -- definitely was and is part of the strategy going forward.

Robert Dodd -- Raymond James -- Analyst

Got it. I appreciate it. Thank you, guys.

Operator

Our next question comes from Chris York of JMP Securities. Your line is open.

Kevin Fultz -- JMP Securities -- Analyst

Good morning, this is Kevin Fultz on for Chris. My first question, the dividend from the SLF dropped again for the second consecutive quarter. The Q isn't out yet, but what drove the decline? And do you expect any further pressure on that sort of income to CSWC?

Michael Sarner -- Chief Financial Officer

Yes. So for I-45, the biggest impact there was LIBOR. So the weighted average floor on our -- on loans in that facility is 80 basis points. And where the quarter started to where it end, it crossed over the LIBOR floors, but we took a pretty big hit in terms of -- if you think about the lower middle market companies, the floors tend to be somewhere in the 1% to 2%, and you'll see a lot lower floor on the syndicated credits.

So you saw about a $275,000 hit. That's almost all due to LIBOR.

Kevin Fultz -- JMP Securities -- Analyst

OK, that makes sense. And then, my next question is a two-part question. How much did you receive in amendment fees in the quarter? And then, secondly, when you made amendments to portfolio companies, what was the most common form of amendment? And did the borrower sponsor provide an equity injection or concession along with your amendment?

Michael Sarner -- Chief Financial Officer

So the first part was approximately $300,000 of onetime amendment fees. I think Bowen can speak to the description.

Bowen Diehl -- Chief Executive Officer

Yes. So most often, the COVID effect on the few companies that affected pretty materially that I referenced earlier, there's a concern about the future and uncertainty about the future but confidence that the COVID will pass eventually. And so it's usually a request of, OK, well, we'd like to kind of store up liquidity at the Fed portfolio company. And so lender, would you pick your interest for a period of time that's usually one or two quarters? And we, owner, will contribute x to the company in exchange for that.

And then, maybe there's slight covenant really for a couple of few quarters. And there's economic fees paid. I mean, that's kind of just a base case conversation. And then, you had other companies where there wasn't a liquidity issue, but it was like, well, covenants a little bit tight.

We'd like a little bit of covenant relief in the next -- for the next couple few quarters. We'll pay you all fee to do that. And in those cases, we're getting enhanced economics for the increased leverage. A lot of times, we'll put in a rate grid.

So LIBOR, let's say, let's make up a scenario, LIBOR 700 loan. Now it's going to get close or even break through the previously negotiated covenant. So the sponsor comes to us and want some covenant relief, meaning that they want covenants widened. And then, we'll put in a rate grid where as the leverage travels up to the new allowed range, our yield goes up, our spread goes up.

So that may be a certain leverage level it goes to LIBOR 750 and then LIBOR 800, LIBOR 850, what have you. And then, it allows them also as the COVID passes and the company continues to perform, they can earn their way back into a lower spread, maybe something closer to where it was in the original deal, if that makes sense. And so that's typically how the conversation goes.

Kevin Fultz -- JMP Securities -- Analyst

OK, that makes sense, and I appreciate the insight. And then, next question, we weren't expecting you to be active in the ATM this quarter. Now we think investors appreciate your historical approach to capital management and allocation, but how should we think about your future desire for primary equity at these prices?

Michael Sarner -- Chief Financial Officer

Yeah. You know we've said before, the ATM program is going to be something that we plan to turn on and stay on whether above NAV because we don't -- what we don't want to see happen is us to basically create a cliff where we need to go out and go to the market with a large equity raise and be subject to whatever discounts that would -- the negotiated discount we'd have to take on. An average deal on a primary deal would be 7% to 10%. So we're raising it at a 2% fee.

So we think that's quite frankly a better use of a -- to better process for our shareholders. And so we're going to continue to use -- I think we're going to turn it on and leave it on and continually build up an equity base over time.

Bowen Diehl -- Chief Executive Officer

Yeah. But I wouldn't think about it as, OK, now our stock price is going to be capped at NAV. I mean, it's not a matter of just sell every share you can above -- at NAV or slightly above. I mean, it's a full -- we look at everything long-term and kind of full cycle.

And so we want to just diligently -- just like we explained it, diligently raise small amounts of equity each quarter and lockstep of us putting the capital to work. And again, like Michael said, we're taking a 2% spread, not a 7% to 10% spread on a large marketed deal. And so if you look at it over a long period of time, we raised -- we referenced $51 million. Well, we raised it that at a lot lower spread than we would have raised if we went out and marketed a deal that size.

And on top of that, you can't rely on the capital markets. You can't be presumptuous that the markets will be there exactly when you need the offering. And so we think it's better for our shareholders long-term to just take little pieces out each quarter.

Michael Sarner -- Chief Financial Officer

And to that point, I would point out, we had -- we raised $5.7 million. We had the ability to do more. We actually turned it off about a week before the window closed because we -- looking at our uses and sources, we didn't need more than that. So we're not trying, to Bowen's point, bring home every dollar that we can.

Kevin Fultz -- JMP Securities -- Analyst

OK, that makes sense. And then, my last question, we think most investors see your core dividend to be safe, but the shortfall of coverage could worry some investors. So looking at your coverage a different way, under what conditions do you think you would need to adjust your dividend?

Michael Sarner -- Chief Financial Officer

Well, we tell you that where we are right now, the $0.41 is stable relative to what our earnings power is. With LIBOR having dropped down to where it is, and with everything you read, the notion that LIBOR is going to be stable for the next 12 to 18 months, barring nonaccruals, we would expect to see our NII jump up over the next few quarters. And so we'll probably likely retain the dividend level at $0.41 and build up additional dividend coverage. But we would tell you we feel very comfortable where the dividend is.

There would be no plans to have to cut it at any point in time.

Kevin Fultz -- JMP Securities -- Analyst

OK, that's very reassuring. And that's it for me. And congrats on the quarter.

Bowen Diehl -- Chief Executive Officer

Thanks.

Operator

Our next question comes from Greg Mason of Ares Management. Your line is open.

Greg Mason -- Ares Management -- Analyst

Good morning, guys. Thanks for taking my question. I really just had one left, and that was the impact of the realized losses on the undistributed taxable income. How will that impact the UTI spillover and from a tax characteristic? And if there are further losses that ultimately are realized kind of through this pandemic as you continue to restructure things, how will that impact the UTI going forward?

Michael Sarner -- Chief Financial Officer

All right. Thanks for the question. So the good news is the UTI balance that you have is not affected by having realized losses. What it does create is sort of an amount that you have to overcome with realized gains before you're able to book additional pennies into the UTI bucket.

So this $5.5 million will need to be -- we'll have to have a $5.5 million gain over time and/or retain UTI by holding back on our dividend to continue to put capital into the piggy bank.

Bowen Diehl -- Chief Executive Officer

No. But what's important is, as a first-lien lender, as the capital structure collapses, meaning the first-lien lenders become the owners and the equity gets wiped out, junior capital gets wiped out. In the case of Delphi, obviously, our equity ownership in that business, to the extent the business turns around, which we're definitely seeing that, and then succeeds and is successful retracing the valuations lost in the next couple of years, then that is a mechanism to recoup the realized loss. And so if we were to recoup that realized loss, then everything else kind of starts and can contribute to additional UTI, if that makes sense.

So it's pretty important to be able to get in those types of situations to be able to get that -- to end up owning a piece of that company.

Michael Sarner -- Chief Financial Officer

Yeah, and I think the good news on that is, I mean, with the $1.27 balance, we feel like we've got two to three years of runway to create those gains to apply against those losses to continue this program without any interruption.

Greg Mason -- Ares Management -- Analyst

Great. Thanks guys appreciate it.

Bowen Diehl -- Chief Executive Officer

You bet.

Operator

There are no further questions. I'd like to turn the call back over to Bowen Diehl for any closing remarks.

Bowen Diehl -- Chief Executive Officer

Well, thanks, everybody, for joining us. We appreciate your support, and we'll continue to work hard for you all. And we look forward to keeping you posted next quarter on updating us on our business.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Chris Rehberger -- Treasurer and Vice President, Finance

Bowen Diehl -- Chief Executive Officer

Michael Sarner -- Chief Financial Officer

Kyle Joseph -- Jefferies -- Analyst

Tim Hayes -- B. Riley FBR -- Analyst

Bryce Rowe -- National Securities -- Analyst

Robert Dodd -- Raymond James -- Analyst

Kevin Fultz -- JMP Securities -- Analyst

Greg Mason -- Ares Management -- Analyst

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