Capital Southwest (CSWC) Q3 2022 Earnings Call Transcript

Capital Southwest (CSWC 0.43%)
Q3 2022 Earnings Call
Feb 01, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for joining today's Capital Southwest third quarter fiscal year 2022 earnings call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP Finance. I will now turn the call over to Chris Rehberger.

Chris Rehberger -- Vice President of Finance and Treasurer

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 earnings call for the quarter ended December 31, 2021, which is the  third quarter of our 2022 fiscal year, which ends March 31, 2022. We're pleased to be with you this morning and look forward to giving you an update on the performance of our company, our portfolio and our progress on executing our investment strategy as stewards of your capital. Throughout our prepared remarks, we will refer to the various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com.

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 $0.51 per share, which more than earned our regular dividend paid for the quarter of $0.47 per share. Total dividends for the quarter were $0.97 per share, which consisted of a regular dividend of $0.47, and the supplemental dividend of $0.50 per share. We're also pleased to announce that our board has declared an increase in our regular dividend per share to $0.48 for the quarter ended March 31, 2022.

An increase of 2.1% from the $0.47 per share paid in the December quarter. This increase in our recurring regular dividend reflects the increased earnings power of our portfolio, resulting from the growth and performance of our credit portfolio and the continued reductions in our cost of capital and improvements in our operating leverage. During the quarter, acquisition and financing activity in the lower middle market was very strong, resulting in record new originations for capital southwest. As expected, we also saw record prepayments activity across our portfolio.

On a net basis, we were able to grow our investment portfolio by 7.2% to $877 million. Portfolio growth during the quarter was driven by $268 million in commitments to 14 new portfolio companies and 12 existing portfolio companies, of which, $213 million was funded it closed. This was offset by $158 million in proceeds from 11 debt prepayments and 1 equity exit during the quarter. Notably, the equity exit was a very successful outcome as it generated a realized gain of $5.6 million and an IRR of 99.2%.

As we have previously stated, our intention over time is to distribute these realized gains periodically through special dividends to our shareholders. On the capitalization front. On November 2021, we completed an add-on of $50 million in aggregate principal to 03:58 our 3 and 3 eight October 26 notes. Furthermore, in lockstep with our strong deal pipeline, we raised $16 million of equity through our ATM program at an average price of $25.97 per share, representing an average of 159% of the prevailing net asset value per share.

On Slide 7 and 8, we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage and value creation since the launch of our credit strategy. We believe the solid performance of our portfolio and our company's sustained access to the capital markets has demonstrated the strength of our investment and capitalization management strategies. Maintenance and growth of both NAV per share and shareholder dividends remain as core tenants of our long term investment objective of creating long term value for our shareholders. Turning to Slide 9, as a refresher, our investment strategy has remained consistent since its launch in January of 2015.

We continue to focus on our core lower middle market lending strategy while also maintaining the ability to opportunistically invest in the upper middle market when attractive risk adjusted returns exist. In the lower middle market, we directly originate and lead opportunities consisting primarily of personally and senior secured loans with smaller equity investments made alongside many of our loans. We believe that this combination is powerful for BDC as it provides strong security for the vast majority of our invested capital, while also providing NAV upside from equity investments in many of these growing businesses. Building out a well performing and granular portfolio of equity co-investment is important to driving growth an NAV per share while aiding in the mitigation of any credit losses over time.

As of the end of the quarter, our equity co-investment portfolio consisted of 39 investments, with a total fair value of $74.5 million, which included $17.7 million in embedded unrealized appreciation, or approximately $0.74 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 attractive upside from growing lower middle market businesses. The successful exit of one of our lower middle market equity co-investment this quarter, which produced a realized gain of $5.6 million, is an example of the benefits of this component of our strategy. As illustrated on Slide 10, are on balance sheet credit portfolio as of the end of the quarter, excluding our I-45 senior loan fund, grew 8% to $745 million, as compared to $689 million as of the end of the prior quarter.

For the quarter, 99% of our new portfolio company debt originations were first lien senior secured and all of the debt originations for the quarter were senior secured. Finally, as of the end of the quarter, 91% of the credit portfolio was first lien senior secured. On Slide 11 and 12, we layout the $268 million of capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter included $204 million in first lien senior secured debt committed to 14 new portfolio companies, including one in which we also invested $3.3 million and secondly, alongside our first lien debt.

Additionally, we invested $6.4 million in equity alongside 8 of our new portfolio companies. Finally, during the quarter, we also committed $54.3 million in first lien senior secured debt to 9 existing portfolio companies. Turning Slide 13, we continue a track record of successful exits, with 11 debt investment exits and 1 equity exit during the quarter. In total, these exits generated over $158 million in total proceeds.

Realizing gains of $7.4 million and generating a weighted average IRR of 16.2% percent. Since launch of our credit strategy over seven years ago, we have generated a cumulative weighted average IRR of 14.6% on 56 portfolio exits, representing approximately $638 million in proceeds. As previously mentioned, the market for acquisition and refinancing capital was very robust during the quarter, resulting in heavy volume in both origination refinancing activity. Our investment pipeline as we have mentioned on previous earnings calls has been robust throughout 2021 in both volume and quality of deals in the December quarter was especially so.

I'm very pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital partner. I'm especially encouraged by the increasing number of deal sources, private equity firms and otherwise that have been cultivated where we have closed multiple transactions together. We are finding these firms are willing to be references for us as we prospect for new relationships. Additionally, it is exciting to also see the number of new deals coming in from very relevant deal sources that are new to us.

As we have always contended, this broadening of our sourcing network and deal final is a critical component of building and maintaining a quality investment portfolio in a competitive market. On Slide 14, we illustrate some key stats from our own balance sheet portfolio as of the end of the quarter. Again, excluding our I-45 senior loan fund, as of the end of the quarter, the total on balance sheet portfolio at fair value was weighted 82.9% of first lien investments, 6.5% of second lien investments, 1.5% of subordinated investments, and nine 9.1% to equity co-investment. Turning to Slide 15, we have laid out the rating migration within the portfolio.

During the quarter, we had 2 loans upgraded from a two to a one; and two loans upgraded from a three to two. We had no loans downgraded this quarter. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four point scale, with one being the highest rating and for being the lowest rating. As of the end of the quarter, we have 68 loans, representing approximately 95.4% of our investment portfolio at fair value, rated in one of the top two categories a one or a two.

We had 5 loans representing 4.6% of portfolio rated of 3 and 1 loan representing less than 1% of the portfolio rated of 4. During the quarter, we had no new loans placed on non-accrual and 1 loan at a fair value of $5.2 million come off of not accrual. As we discussed last quarter, this company successfully completed a restructuring of its balance sheet in December, which allowed us to place a portion of the original loan back on accrual this quarter. As illustrate on Slide 16, our total investment portfolio continues to be well diversified across industries with an asset mix to provide strong security for our shareholders capital.

Portfolio remains heavily weighted toward first lien senior secured debt with only 6% of of the portfolio and secondly, in senior secured debt and only 1% of the portfolio in subordinated debt. Turning Slide 17, the I-45 senior loan fund continues its solid performance. As of the end of the quarter, 95% of the I-45 portfolio was invested in first lien senior secured debt, weighted average EBITDA and leverage across the companies in the I-45 portfolio was $72.8 million and 5 times respectively. The portfolio continues to have diversity among industries in an average full size of 2.4% of the portfolio.

Leverage of the I-45 fun level is currently 1.5 two times debt to equity. I will now hand the call over to Michael to review more specifics of our financial performance for the quarter.

Michael Sarner -- President/CEO

Thanks, Bowen. Specific to a performance for the December quarter, as summarized on Slide 18. He earned pre-tax net investment income of $11.8 million, or $0.51 per share. We paid out $0.47 per share in regular dividends for the quarter, an increase from the $0.44 regular dividend per share paid out in the September quarter.

As mentioned earlier, our board has increased the regular dividend, declaring a regular dividend of $0.48 per share for the March quarter. Maintaining a consistent track record of meaningfully covering our dividend with pre-tax NII is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with 105% for the last 12 months ended December 31, 2021, and 107% cumulative since the launch of our credit strategy in January 2015. Our investment portfolio continues to perform well, generating 700,000 in net realized and unrealized gains this quarter, bringing the net realized and unrealized gains over the past four quarters to $12.2 million.

As Bowen mentioned, going forward, we intend to periodically distribute special dividends to our shareholders as we monetize the unrealized appreciation in the portfolio. As of December 31, 2021, our estimated UTI balance was $0.32 per share. The end of the year UTI balance excludes the %5.6 million gain on the sale of one of our equity investments this quarter as this company was held at our taxable subsidiary. Post quarter end, we distributed taxable income from our taxable subsidiary to CSWC, and these proceeds are now available for distribution to our shareholders.

Our investment portfolio produced $22.3 million of investment income this quarter, with the weighted average yield on all investments of 9.4%. Investment income was $2 million higher this quarter to primarily to an increase in average credit investments outstanding, as well as fees paid on debt prepayments. There were 3 loans on non-accrual with an aggregate fair value of $14 million, or 1.6% of the investment portfolio as of the end of the quarter. Our weighted average yield on our credit portfolio was 9.5% for the quarter.

As seen on Slide 19, we maintained LTM operating leverage at 2.3% as of the end of the quarter. We are targeting operating leverage to approach 2% or better in the coming quarters. Turning to Slide 20, the company's NAV per share as of December 31, 2021 was $16.19 as compared to sixteen dollars and thirty six cents at September 30, 2021. The driver of the NAV per share decrease was the $0.50 per share supplemental dividend that was distributed to shareholders this quarter from our UTI balance.

As we have discussed on prior calls, we continue to originate assets within our SBIC subsidiary, which you will see, going forward, denoted as SBIC-1. As a reminder, our initial equity commitment to the fund is $40 million, and we have received an initial commitment from the SBA for $40 million of fund leverage, which is also referred to as one tier of leverage. We have funded our initial $40 million of equity capital to the fund and have drawn $29 million of the initial $40 million commitment and debt capital at a weighted average interest rate of 1.43%. We have applied for our second $40 million tier of fund leverage, which we are hopeful will be approved in the coming days.

Overall, we are pleased to report that our balance sheet liquidity continues to be strong, with approximately $171 million in cash and undrawn leverage commitments as of the end of the quarter. As of December 31, 2021, approximately 57% of our capital structure liabilities were unsecured and our earliest debt maturity is in January 2026. A regulatory leverage, as seen on Slide 22 and in the quarter at a debt to equity ratio of 1.23:1. 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 continues to perform well and consistent with our original vision and strategy we communicate our shareholders when we began this journey. Our team has done an outstanding job building a robust asset base deal origination capability, as well as a flexible capital structure that prepares us for all environments throughout the economic cycle. We believe that our performance continues to demonstrate the investment acumen of our team at Capital Southwest and the merits of our first lien senior secured debt strategy.

We feel very good about the health of our company and portfolio, and we are excited to continue to execute our investment strategy going forward. Everyone here at Capital Southwest is totally dedicated to being good stewards of our shareholders capital by continuing to deliver strong performance and creating long term sustainable value for all our stakeholders. This concludes our prepared remarks operator. We are ready to open the lines up for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Mickey Schleien with Ladenburg Thalmann. Your line is now open.

Mickey Schleien -- President/CEO

Yes, good morning, everyone. Bowen, this year, looking ahead, borrowers are probably going to see more inflation in their cross inputs like we saw last year, but they're also probably going to see the cost of their floating rate, debt borrowings climb meaningfully once we get passed through floors. So when you look at your portfolio and stress tested, how do you see their cash flows performing in 2022?

Bowen Diehl -- Chief Executive Officer

Yeah, thanks for the question, Mickey, I would say -- kind of starts with our original underwriting of these loans and then we always stress test, the fixed charge coverage across the portfolio from -- a lender perspective,[Audio gap] pretty large cushions from a servicing their debt perspective. So we're not we're not concerned about that across the portfolio. I would expect to the increased -- can you hear me, Mickey?

Mickey Schleien -- President/CEO

I hear you fine.

Bowen Diehl -- Chief Executive Officer

Okay. Okay, fine. As far as the the companies themselves, I mean, yes, I would say that the two common teams across the portfolio we hear from companies management teams is the rising cost of inputs being labor being as most folks know from [Inaudible] labor cost inflation is a big piece of it. Commodity inputs, cost increases are a big part of it.

And then the other team is just supply chain cadence and pace. And so, as far as the labor and cost inputs, fortunately, so far, these businesses are growing nicely and they are able to pass those costs inputs. The vast majority of the costs onto their customers, but we think that trend is going to continue this year. I think from the rising again, from a rising interest cost on floating rate borrowings across the portfolio, it just the level of leverage versus cash flow across our portfolio.

We think it kind of started from how we originally underwrote the loans. There's a lot of caution there to actually be, what would have to happen before they can't service their debt. That's how I'd say it.

Mickey Schleien -- President/CEO

I appreciate that, but that's good to hear. My follow up question regards spreads, there's an enormous amount of capital being injected into the upper middle market, private debt market as these lenders continue to disintermediate the syndicated loan market. And obviously, that's driving down spreads in that market. How do you feel about that trend? potentially trickling down into the middle market and even into the lower middle market over time and impacting the economics in the business?

Bowen Diehl -- Chief Executive Officer

Yes, that's definitely a dynamic that could continue to happen if happening a little bit. We don't see the big syndicated funds moving down into the to the middle market in droves, but we'd see it. We do see it so we certainly see a lot of capital being raised in the middle market. And so, you know, look at the end of the day, we, you know, we generate earnings off our net interest margin.

And so that's obviously our asset yield and different asset yield and our operating and financing costs. And so we also take advantage of the quantum of capital being wanting to invest in the middle market and lower in the market through our capital providers on the leverage side. And so, you know, as long as we can keep that net interest margin maintained, which we feel very good about that, that that ultimately, you know, that's what really drives our earnings and our business model at the end of the day.

Mickey Schleien -- President/CEO

I understand. I appreciate that. Thank you for your time, Bowen, and I will follow up if I have any more questions. Have a good morning.

Operator

Thank you. Our next question comes from Kevin Fultz with JMP Securities. Your line is open.

Kevin Fultz -- President/CEO

Good morning, and thank you for taking my questions. Clearly, Q3 was a very strong quarter for both originations activity and régimen activity, which slide the solid portfolio growth. Can you give us a sense how originations are tracking so far this quarter relative to last quarter as well as prepayment activity? 

Bowen Diehl -- Chief Executive Officer

Yes, a general comment, I mean, clearly and you'll probably hear this across the industry as earnings come out you, the December quarter was very robust in just transaction activity, both from an M&A was primarily from an M&A perspective which drove, financing activity and then obviously, if we're if we have a portfolio company that is doing a large fund debt funded acquisition, then we have a chance to fund that or we have, if the leverage market provides a leverage package for that acquisition, that's more leverage or a lower yield than we're comfortable with. In many cases across our repayments, we have the opportunity to stay in the deals and we chose to let it go and let it be refinanced just from a risk adjusted return perspective. So that was a very big flurry of activity in the December quarter. So I would tell you that the activity in the March and June quarter, we would expect to be down from where it was in the December quarter.

But our origination activity right now is still from a long term average deal flow perspective is still strong, but it's down from a very flowery pace in the fourth in the December quarter last year. 

Michael Sarner -- President/CEO

I think from a [Inaudible] perspective, I think Bowen's point was right. I think we assume we're going to originate somewhere in the $60 to $75 million per quarter of new investments. We also have seen an uptick in our DDTLs or Delayed Draw Term Loans so that we see maybe five to $10 million being funded off of those DDTLs each quarter, and our repayment activity is somewhere in the $20 to $30 million each quarter. We look to see, somewhere in the $30 to $50 million net growth or quarter as a general run rate. 

Bowen Diehl -- Chief Executive Officer

Yeah. So our repayment activity is down as well. So I think Michael's comments are right. 

Kevin Fultz -- President/CEO

Okay. That's really helpful. And then a question relating to interest rate sensitivity. Could you provide the weighted average LIBOR for floating rate investments and also what percent of floating rate investments contain interest rate force?

Michael Sarner -- President/CEO

Yes, so the four is about one point one on a weighted basis. And I would say it's close to 100% have a floor in them. The range of between 75 basis points and 2%. But again, almost all of them is weighted toward one at this point.

So one point one is really the bogey.

Kevin Fultz -- President/CEO

Got it. And thank you for taking my questions and congrats on a strong quarter.

Michael Sarner -- President/CEO

Thank you,

Operator

Thank you. Our next question comes from Bryce Rowe of Hovde Group. Your line is now open.

Bryce Rowe -- President/CEO

Great. Thanks. Maybe Bowen, I just wanted to follow up on some of the comments you just made about, having the ability to possibly participate in deals and or in refinancing and choosing not to do that. Can you can you speak to kind of maybe what's what's driving the decision to not participate in some of the opportunities?

Bowen Diehl -- Chief Executive Officer

Yeah. I'll just throw our hypothetical example, right? So we do our original. We went to a company, three times EBITDA. And a year and a half later, companies grown, performed well, they're going to do a large acquisition and when we live it like 700 basis points over LIBOR, LIBOR for example -- A year later, they do a large acquisition and because it's more diverse and bunch of reasons that the market is willing to lend them five times EBITDA and LIBOR plus 600.

That's a different. If so, we have. At that point, we can decide whether five times leverage on admittedly a better business -- LIBOR 600 is a risk adjusted return. We're willing to invest it.

And, sometimes you're not that the companies a bad company, but it's got risks in it that we've lived and seen. Kind of play out three times, leverage. That's fine at five times LIBOR 600. We just opt to not participate.

So that would be an example, this the time that's happening in a doing an acquisition where they're going out to the market with a larger credit facility, higher leverage on admittedly a better company. But the leverage is higher and the pricing is lower than we would think is appropriate for the the risk of that situation. So that would be a tip. That would be a situation where we would just say, you know what? Generally, in these situations, we have equity in investment too, so we'll go for it on the equity.

We love it. But we think the credit risk we could find risk adjusted returns in lower middle market on our credit book somewhere else. So that's a decision we have to make from time to time.

Michael Sarner -- President/CEO

We're also looking down the road, Bryce, just we talk about net interest margin. I think Bow mentioned earlier, we really monitor to make certain that tracking toward NAI are we, or 11.5%. So when we're looking at individual investments, we're also track it, looking to see what it is were in terms of portfolio turnover. This quarter.

12:31, we saw 20% of our portfolio turnover. And so some of those were higher yielding assets and we originate with some slightly lower yield. So our portfolio leverage went from 4.1 down to 3.9. So to some extent, things are safer credit.

But when we're looking to see making certain that we're able to produce a growing dividend over time, we're monitoring that yield on an asset by asset basis to make certain it fits into our our strategy going forward. And so some of these credits to bonus point will fall below the threshold and the risk reward doesn't make sense. We'll move on from it. 

Bryce Rowe -- President/CEO

Understood. And a follow up to that topic. Any kind of rush to exit the stand-alone equity investments now? Or, is it just going to be kind of opportunistic in terms of how that business and that sponsor relationship kind of plays out?

Bowen Diehl -- Chief Executive Officer

Yeah, so I mean, keep in mind, we're the vast majority of those equity co-investments are alongside institutional private equity firm that's managing their own liquidity. And so they buy a company, they grow it and they sell the company. And so we ride side saddle with that, that dynamic. And so those obviously those PE firms don't get their carry payments until they sell the companies until they need to grow up and they need to exit them.

So, we feel pretty good about that portfolio over the next small number of years, monetizing alongside that liquidity curve, if you will, of those private equity firms.

Bryce Rowe -- President/CEO

Okay. And then, Michael, kind of a question for you on the comp line. Just any help you can give us obviously went up? I assume that's a function of a performance accrual getting getting baked in here for the December quarter. But any kind of thoughts around that would be helpful.

Michael Sarner -- President/CEO

Sure, Sure. So for this quarter, I would tell you looking at it holistically, we had about $2 million in revenue this quarter. That was essentially one time in nature, and our bonus accrual for the quarter was about $104 million above our normal run rate. So essentially about 600,000 of one time income or net income, or $0.03.

So I think, you know, when we look at our performance to date for the year and where we're tracking for the full fiscal year 2022. We did accrue a bonus above the target commensurate with the performance so far of our staff. 

Bryce Rowe -- President/CEO

OK. Appreciate the the answers.

Michael Sarner -- President/CEO

Thanks, Bryce.

Bowen Diehl -- Chief Executive Officer

Thanks, Bryce.

Operator

Thank you. Next question comes from Sarkis Sherbetchyan with B. Riley Securities. Your line is open.

Sarkis Sherbetchyan -- President/CEO

Hey, good morning, and thank you for taking my question here. I just wanted to start off with a question regarding, the opportunities or the field of opportunities. If it's changed so far in the first month of January, given the potential acceleration in the shift in the interest rate regime, if you can comment on that, please.[Audio gap]

Bowen Diehl -- Chief Executive Officer

So as far as the opportunity set, the deals we're looking at. I don't know that I would say they've changed with as it relates to the interest rate scheme, which I think is your question. I think I mean, honestly, the drivers of the business are sales and investment opportunities that we're seeing in the market is a really kind of very similar teams as they were in the December quarter. Just the quantum of activity is lower than the December quarter, but the teams are the same.

And so I hope that is your question. I don't why we haven't seen the interest rate regime change narrative from the Fed affecting our deal activity.

Sarkis Sherbetchyan -- President/CEO

Got it, that's helpful. And I guess if we can kind of touch on the SBIC side of the business, obviously a very attractive cost of capital proposition for you. Any ideas or any help on on the glide path to filling that capacity that you have on on the SBA side?

Michael Sarner -- President/CEO

Yes, sure. I would I would tell you, looking ahead, we would expect to see probably maybe two thirds of the deals get funded through the SBIC and the other third through ING and equity, ING being a revolving credit facility. So, today we have as a top 31, I think we had drawn $29 million of debt. We're going to receive our leverage application for the following 40, likely this week, and we would probably expect to have drawn somewhere in the $75 to $100 million in the next 12 to 15 months.

That's probably where I place it.

Sarkis Sherbetchyan -- President/CEO

Great, thanks for that and just one final one for me. Clearly, their earnings power of the businesses is starting to much higher and you're raising the dividend to seems like reflect that. I think as we kind of look at the earnings power kind of going forward and based on the commentary you provided for net originations continuing. Is it reasonable to think that you continue to kind of walk the dividend higher at the same pace you've demonstrated?

Michael Sarner -- President/CEO

So the answer for the question, we'll do anticipate increasing the dividend. I would say as LIBOR/SOFR increases with the Fed announcing know three or four price hikes the rate hikes in the next year, it'll battles to be some level of compression still, NII and the dividend should grow. I think once we get beyond those, the next 75 basis points of hikes, then you'll see significant expansion. So maybe, you know, from here, maybe as much as two dividend increases, potentially for the year, though, and we're not saying that segment stone, but that would be the hope. 

Bowen Diehl -- Chief Executive Officer

Yeah, I would say the rate increases are headwind, but the tailwinds had to do with improved operating leverage, as well as cost of capital effective layering in the SBIC. So you have some gives and takes. So it's not all negative. We got some tailwinds as well.

So we're kind of managing the balance between those two dynamics.

Michael Sarner -- President/CEO

Currently, w have 60% of our liabilities are fixed and we think that'll grow as the SBIC gets drawn. And, so absolutely come [Inaudible]

Sarkis Sherbetchyan -- President/CEO

Fantastic, that's all for me, thank you.

Michael Sarner -- President/CEO

Thanks, Sarkis. 

Operator

Thank you. Our question comes from Robert Dodd with Raymond James. Your line is now open.

Robert Dodd -- President/CEO

Hi, guys, and congratulations on the quarter both earnings and net capital support. First, a question on credit and not your credit is in really good shape. But last quarter, not, of course, the $24 million this quarter that 14 is the same number you said $5 million came off because of a restructuring. I think another $2 million was your category four assets which one that is, that leaves you with the other $3 million in write downs on nonaccruals.

Can I assume that came from the affiliate investment, which is the only other nonaccrual selling the affiliate investment in healthcare? Or, was there anything else going on with with the less than a handful? Of course, you've got left right.

Michael Sarner -- President/CEO

Yeah. It was reduction in one of the companies that are nonaccrual. So the two of the companies on nonaccrual had significant depreciation and and the other been which you mentioned on the call coming off of nonaccrual.

Robert Dodd -- President/CEO

Got it. Going back to kind of the pricing power question in this environment. Rates up, commodities up, labor costs up. I mean, but some of your industry sector segments, I think clearly have, a lot of pricing power in this transportation and logistics of 4% portfolio, it's probably got a lot of pricing power in this environment, given the constraints and things like that.

Are there any sectors in within the portfolio, you don't have a lot of concentration, many sectors in the portfolio, where you are incrementally more worried about whether they can exercise the pricing power versus of dislike, I guess, transportation and logistics, where I'd be less worried but maybe I'm wrong.

Bowen Diehl -- Chief Executive Officer

Yes, interesting question. I think there's a range of pricing power across the different industries, I would say, good news. I guess the slight good news is, misery deserves company in the sense that when this when these inputs are happening to all of your competitors in a certain sector, it's easier to to pass those costs onto your customers if all of your competitors also have to do the same thing. So I think that that's been a major, I guess, called benefit or certainly a benefit in defending these portfolio companies against margin deterioration at the end of the day.

But, you know, certainly transportation logistics would be one, healthcare might have a different dynamic. Consumer products, retail have another dynamic, right? And so, varying levels. But I think again, when it's across, you take any of the industry sectors when that inflation is across the entire sector, then it's obviously easier to pass pass those costs on to your customer, right?

Robert Dodd -- President/CEO

Yeah, understood. One more, if I can, I think, Michael, you mentioned that delayed draw term loans are being accessed at a greater rate. You Obviously, companies have got to borrowers have got to hit milestones, etcetera or whatever, before they could do that. But can you identify or qualitatively maybe tell us how much of that the BPTL draws are for ad-on acquisitions? Can you tell versus are they using them for growth? Or, to support working capital? Can you give us any color on kind of what's driving that if you have the data?

Bowen Diehl -- Chief Executive Officer

Yeah, the strong the strong majority of the details are for acquisition strategies. With a minority, but a significant minority of them being for like, earn out payments were a companies bought and the founder, the sponsors negotiated maybe slightly lower purchase price but the founders really did take risk on the upside and get paid for increased performance. And so obviously, we want them to hit those earnings, right? Because that means by definition, the business is doing well if the economy falters or whatever those earn out. The vast majority of cases won't fund, right? So we want those to fund, we do have very specific restrictions on leverage levels, etcetera, on how that burnout is going to be paid, $10 million burnout might be paid, $5 million for the delay draw, and $5 million equity contribution from the equity owner.

So we have those restrictions on a company by companies basis. But the vast, I mean, a strong majority of the time, this acquisition strategy.

Michael Sarner -- President/CEO

I guess, also from the capital side, like we monitor like I think $158 million and DDTLs and revolvers. We follow closely the utilization of these facilities, what we've seen our revolvers, the $6 million revolvers. Historically, revolvers are net draws of zero. The only time that we've seen an uptick was during the the first wave of COVID, which would be in March and April of 2020, where we saw about a third of our portfolio draw their revolvers and then pay it back down.

And then on the DDTL side, from that balance, those are all they have expiration dates in 2022 and 2023. And we've seen historical maybe, 50% of these get drawn. And so we are we monitor that and make certain that we're planning for our capital planning to assume for this level of draws in our portfolio. 

Robert Dodd -- President/CEO

So just to clarify the last one. So, you're assuming currently in the capital planning, etc. and you've got plenty of capital. I'm not worried about that.

The historic average amount of these deals will be drawn out I live for. Given the fact that so many assets seem to be doing quite well, which we're seeing with equity appreciation, etc., which can trigger more earn outs, for example of the assuming that a greater than average proportion of DDTLs are going to get through.

Michael Sarner -- President/CEO

We're assuming that half of these details get drawn in less for earnout as Bowen noted more for acquisition and growth.

Robert Dodd -- President/CEO

Right. Understood. Thank you. 

Operator

This concludes the Q&A portion, I'd like to hand the conference back over to Bowen Diehl for closing comments.

Bowen Diehl -- Chief Executive Officer

Thanks, operator. Thanks, everybody, for joining the call, appreciate the good questions, as always. And we look forward to continuing to give you updates quarterly as we move forward and have a great rest of the week.[Operator signoff]

Duration: 43 minutes

Call participants:

Chris Rehberger -- Vice President of Finance and Treasurer

Bowen Diehl -- Chief Executive Officer

Michael Sarner -- President/CEO

Mickey Schleien -- President/CEO

Kevin Fultz -- President/CEO

Bryce Rowe -- President/CEO

Sarkis Sherbetchyan -- President/CEO

Robert Dodd -- President/CEO

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