Capital Southwest (CSWC) Q4 2022 Earnings Call Transcript

Capital Southwest (CSWC 0.39%)
Q4 2022 Earnings Call
May 24, 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 fourth quarter and 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 -- Treasurer and Vice President, Finance

Thank you. I'd like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, credible available information, and management's expectations, assumptions, and beliefs. That 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 end of this press release, except as required by law. I will now hand the call over to our president, and chief executive officer, Bowen Diehl.

Bowen Diehl -- Chief Executive Officer

Thanks, Chris. And thank you, everyone, for joining us for our fourth quarter and fiscal year 2022 earnings call. We appreciate being with you this morning and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our business strategy as stewards of your capital. Through our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com.

I'll start by saying that during tumultuous times like we have seen recently in the public markets, it's comforting to have a portfolio heavily weighted to firstly senior secured debt, both with the full cycle underwriting entirely that we have deployed over the past seven years since the launch of our credit strategy. It is also comforting that 89% of our credit book is in sponsor-backed companies, which provides companies with potential capital in offering support if needed. On the capitalization front, we've been diligent about maintaining over half of our liabilities and unsecured debt by consistently raising equity through our cost-efficient equity ATM program. Finally, we are well-positioned for a rising interest rate environment with 98% of our debt assets in floating rate securities and only 38% of our liabilities in floating-rate securities.

Now turning to Slide 6 of the earnings presentation, we will begin with a summary of the key performance highlights for the fiscal year. Total return to shareholders for the fiscal year was 18%, which consisted of a share price appreciation of 7% and total dividends paid during the year of $2.52. Our NAV per share grew 5% to $16.86 from $16.01 in the prior year, driven primarily by over $17 million in net realized and unrealized gains on the portfolio. During the fiscal year, we grew our total portfolio at fair value by 36% year over year to $937 million from $688 million in the prior year, while increasing our pre-tax net investment income by 6% to $1.90 from $1.79 per share in the prior year.

Furthermore, to strengthen our balance sheet capitalization during the year through the opportunistic issuance of $150 million of 3.38% unsecured notes, approximately $100 million in equity proceeds raised through our equity ATM Program, and 80 million in SBA debentures and which we are currently drawing. Moreover, in May, we received $45 million in additional commitments on our ING-led revolving credit facility, which now brings the credit facility commitment to $380 million. Michael will provide further detail on this later in our prepared remarks. On Slide 7 of the earnings presentation, we'll summarize some of the key performance highlights for the fourth quarter of the fiscal year.

During the quarter, we generated a pre-tax net investment income of $0.50 per share, which more than covered our regular dividend paid during the quarter or $0.48 per share. As previously announced, our board has declared a special dividend of $0.15 per share for the June quarter, which will be in addition to the $0.48 per share regular dividend also declared for the June quarter. This special dividend of $0.15 per share is a result of another successful equity exit and demonstrates our continued track record of distributing realized gains to our shareholders in these special dividends. During the quarter acquisition and financing activity in the lower middle market continued to be strong, albeit slightly below the record activity we saw in the December 2021 quarter.

And on that basis, we were able to grow our investment portfolio by approximately $60 million, or 6.8% to $937 million. Portfolio growth during the quarter was driven by $103 million in new commitments consisting of investments in three new portfolio companies totaling 50 million, two refinancing transactions totaling $41 million, and add-on commitments in eight existing portfolio companies totaling $12 million. This was offset by $49 million in proceeds from forward debt prepayments during the quarter. On the capitalization front, we raised $25.2 million of equity through the ATM Program at an average price of $24.27 per share, representing an average of 150% of the prevailing net asset value per share.

Additionally, we received approval for an additional 40 million of leverage from the SBA, increasing our total leverage commitment from the SBA to $80 million. As a reminder, the total leverage expected from our current SBIC license is $175 million. On Slides 8 to 9, we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage, and value creation since the launch of our growth strategy. We believe the solid performance of our portfolio and our company's sustained access to the capital markets have demonstrated the strength of our investment in capitalization management strategy.

The maintenance and growth of both NAV share and shareholder dividends remain a core tenet of our long-term investment objective of creating long-term value for our shareholders. Turning to Slide 10, as a refresher, our investment strategy has remained consistent since its launch in January 2015. We continue to focus on our core lower-middle market lending strategy while also maintaining the ability to opportunistically invest in the upper-middle market, which attractive risk-adjusted returns exist. In the lower middle market, we directly originate and lead opportunities consisting primarily of the first lien senior secured loans with smaller equity co-investments in many of our loans.

[Inaudible] a quarter, our equity co-investment portfolio consists of 41 investments with a fair value of 85.2 million, which included 25.1 million in embedded unrealized appreciation, or approximately $1.01 per share. Our equity portfolio, which represents approximately 9% of our total portfolio fair value at the end of the quarter, continues to provide our shareholders with attractive upside from growing lower middle-market businesses. As illustrated on Slide 11, our on-balance sheet credit portfolios at the end of the quarter, excluding our I-45 Senior Loan Fund grew 7% to $794 million as compared to $745 million as of the end of the prior quarter. For the quarter 100% of the new portfolio debt originations were first lien senior secured debt.

Finally, as of quarter-end, 93% of the credit portfolio was first lien senior secured. On Slide 12, we allowed the $130 million of capital invested and committed to portfolio companies during the quarter. Capital committed this quarter included $49 billion in first lien senior secured debt committed to three new portfolio companies, including one in which we also invested $1 million in equity. Finally, during the quarter we also committed $51 million in first lien senior secured debt to nine existing portfolio companies.

Turning to slide 13. We continue our track record of successful exits with four debt investment prepayments, two of these loan prepayments were refinancings related to acquisitions in which Capital Southwest was able to participate in the new credit facility. In total, these net exits generated over $49 million in total proceeds realizing a gain of $512,000 and generating a weighted average IRR of 12.9%. Since the launch of our credit strategy over seven years ago.

We have generated a cumulative weighted average IRR of 14.4% on 60 portfolio exits, representing approximately $695 million in proceeds. As previously mentioned, the market for acquisition and refinancing capital continues to be strong. Our investment pipeline, as we have mentioned on previous calls, remains robust throughout the fiscal year 2022 on both volume and quality deals, and that trend has continued into the June quarter. Given the current activity we are seeing in the market, we expect the June quarter to again be a strong quarter for originations.

We are pleased with the strong market position our team has established in the lower middle market as a premier debt and equity capital partner. On Slide 14, we illustrate some key stats for our on-balance sheet portfolio at the end of the quarter. Again, excluding I-45 Senior Loan Fund. As of the end of the quarter, the total portfolio of fair value was weighted 84.2% to first lien investments, 6% to the second lien, 0.1% to subordinated debt, and 99.7% to equity co-investments.

Turning to slide 15. We have laid out the rating migration within our portfolio. During the quarter, we had no loans upgraded and one small loan position downgraded from a 2.3. As a reminder, all loans upon origination are initially defined with an investment rating of two on a four-point scale, with one being the highest rating and four being the lowest rate.

As of the end of the quarter, we had 71 loans representing 95.3% of our investment portfolio at fair value rated in one of the top two categories, a one or a two. We had six loans representing 4.6% of the portfolio at fair value rated at three, and one loan representing less than 1% of the portfolio rated at four. During the quarter, we had no new loans placed on non-accrual. As illustrated on Slide 16, our total investment portfolio continues to be well-diversified across industries, with an asset mix, which provides strong security for our shareholders' capital.

The portfolio remains heavily weighted toward first lien senior secured debt, with only 6% of the total portfolio in second lien senior secured debt and only 0.1% exposure to subordinated debt. Turning to Slide 17, our I-45 Senior Loan Fund continued to generate solid performance. As of the end of the quarter, 97% of our [Inaudible] portfolio was invested in first lien senior secured debt. The average EBITDA and leverage across the companies in the I-45 portfolio were $72 million and 4.2 times, respectively.

The material decrease in leverage this quarter was due to the exclusion of a loan position in one portfolio company that had negligible fair value in EBITDA. As the stats for each of the December and March quarters excluded this portfolio company, pro forma leverage across the I-45 portfolio would have been 4.3 times and 4.2 times in each of the December and March quarters, respectively. The portfolio continues to add diversity among industries at an average hold size of 2.4% of the portfolio. The leverage of the I-45 fund level is currently 1.59 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 -- Chief Financial Officer

Thanks, Bowen. Specific to outperformance for the March quarter, to summarize on Slide 18, we earned pre-tax no investment income of $12 million or $0.50 per share. We paid out $0.48 per share in regular dividends for the quarter, an increase from the $0.47 per share paid out and regular dividends in the December quarter. As mentioned earlier, our board has declared a special dividend of $0.15 per share for the June quarter, while maintaining the regular dividend for the June quarter at $0.48 per share.

Maintaining a consistent track record of meaningfully covering our dividend with pre-tax net investment income is important to our investment strategy. We continue to maintain our strong track record of regular dividend coverage with 105% for the last 12 months ended March 31, 2022, and 107% cumulative since the launch of our credit strategy in January 2015. Our investment portfolio continues to perform well, generating $7.7 million in net realized and unrealized gains this quarter, bringing the net realized and unrealized gains on the investment portfolio over the past four quarters to $17.3 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 March 31, 2022, our estimated UTI balance was $0.47 per share. Our investment portfolio produced $21 million of investment income this quarter, with the weighted average yield on all investments of 9%. Total investment income was $1.3 million this quarter, due primarily to a decrease in one-time fees paid on debt repayments in the December quarter. There continue to be three loans and non-accrual with an aggregate fair value of $14 million or 1.5% of the investment portfolio as of the end of the quarter.

We did not place any new loans or non-accruals during the quarter. The weighted average yield on our credit portfolio was 9.3% for the quarter. As seen on Slide 19, we further improved LTM operating leverage to 2.2% 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 March 31, 2022, increased 4.1% for the quarter. To $16.86 per share, compared to $16.19 per share as of the end of the December quarter. The driver of the NAV per-share increase was due to the strong performance of the investment portfolio, coupled with the accretion from our equity ATM Program. Turning to Slide 21, we are pleased to report that our balance sheet liquidity continues to be strong with approximately $178 million in cash and undrawn leverage commitments as of the end of the quarter.

As Bowen mentioned earlier, in early May, we received broad support from our lender group which increased commitments on our ING-led senior secured credit facility by $45 million, bringing total commitments to $380 million. Our bank [Inaudible] continues to support our growth and we are pleased with the flexibility the increased revolving credit facility provides to our capital structure. In addition, we continue to draw debentures in our SBIC subsidiary as we originate SBIC-eligible assets. As of the end of the quarter, we had drawn $40 million in debentures, with an average capital cost of 2.6%.

Our current commitment from the SBA is $80 million, which we fully expect will increase over time to the maximum underwrite license of the $175 million as we continue our participation in the SBIC program. As of March 31, 2022, approximately 54% of our capital structure liabilities were unsecured and our earliest debt maturity is in January of 2026. Our regulatory leverage, as seen on Slide 22, ended the quarter at a debt-to-equity ratio of 1.16 to 1. Turning to Slide 26, our balance sheet is well-positioned to benefit from rising interest rates.

Short-term interest rates have increased significantly with LIBOR increasing from 21 basis points at the end of December to 96 basis points at the end of March. And as of yesterday, LIBOR is approximately 150 basis points. The weighted average flow on our investments is approximately 1%, with the short-term rates exceeding the floor on our investments, this will have a positive impact on net investment income. Based on quarter-end rates, we estimate a 50 basis point and a 150 basis point increase in reference rates would result in annual incremental earnings of approximately $0.10 and $0.33 per share.

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 consistently with the original vision and strategy we communicated to our shareholders when we began this journey. Within underwriting with a full economic cycle mentality since day one, which we believe has prepared us well for any environment presented to us in the coming months and years. I continue to be impressed by the job our team has done in building a robust asset base, deal origination capability, as well as a flexible capital structure.

We believe that our performance continues to demonstrate the investment acumen of our team at Capital Southwest and [Inaudible] to first lien senior secured debt strategy. We feel very good about the health and positioning of our company and portfolio, and we are excited to continue to execute our investment strategy going forward. Everyone here at Capital Southwest is totally dedicated to being good stewards of our shareholders' capital by continuing to deliver strong performance and creating long-term sustainable value for all our stakeholders. This concludes our prepared remarks.

Operator, we are ready to open the lines for Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Mickey Schleien with Ladenburg.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Yes. Good morning, Bowen. We're experiencing macro headwinds that we haven't seen for a long time. And obviously, you have a lot of experience in the credit market, so I'd like to ask you where you think we'll see defaults and non-accruals head over the next couple of years?

Bowen Diehl -- Chief Executive Officer

Yes, it's hard to predict, Mickey. We have been doing this for a while. Honestly, when we took over the BDC seven years ago, we were paranoid about a recession, and we've underwritten to the great recession for seven years now. And so we've kind of always expected or had to plan for increased defaults in the portfolio.

And so we've underwritten a debt portfolio that will perform well in a great recession-type economic environment. So while it's hard to predict the actual numbers, if we look at our underwriting deal by deal and our portfolio performed very well in kind of a full cycle. When you have -- we underwrite 30% to 50% LTV on a typical deal, and 89% of our portfolio are sponsors, are sponsor back deals. And as you all know, the sponsor community is pretty flush with liquidity.

So when I think about a portfolio, it's going to generate a dividend for the shareholders, which includes us, I feel pretty good about that. So it's not --

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Thanks for that, Bowen.

Bowen Diehl -- Chief Executive Officer

Not a specific answer to your question on a prediction. But we've again been kind of worried about recession or making sure we have a portfolio that would withstand a recession since the beginning.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

I understand.

Michael Sarner -- Chief Financial Officer

On the dividend side, the other way that we plan for this is obviously to maintain that dividend coverage that's conservative as we've done. I think we keep noting each period that we're 107% dividend coverage since we began this and 105%, I believe, in the last year. So I think it will be important for us to continue to lead enough cushion as we move through this and see how severe the recession could be to make certain that our dividend is conservative, respective of what the environment might look like.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

I understand, Michael. I appreciate that. Thank you. When we look at the forward LIBOR and so far curves, they're obviously very steep, and that implies nominal rates on the debt investments you've made could go up fairly sharply over the next year or so.

So how do you see that trend affecting your borrowers in terms of their appetite for capital and their ability to service their existing debt?

Bowen Diehl -- Chief Executive Officer

Yeah. So it's a good question. So we look at that at least every quarter. It does start with the underwriting leverage that you're putting on companies, and the leverage needs to be appropriate for the potential volatility of those particular industries.

So it starts with that. But we look at our portfolio and our weighted average fixed charge coverage across the book is a little over three times. So EBITDA to that -- to fix earnings to that for a fixed charge, so a little over three times. And you kind of synthesize it, if you were to increase so for LIBOR by 200 basis points from where it is today, that three times would go to about a little over 2.4 times.

And if you were to increase that by 300 basis points, that coverage would be about 2.2 times. So those numbers are pretty solid, so that gives me confidence that pretty substantial increase in interest rates, you still got 2.2 times kind of coverage of your fixed charges across your portfolio.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

That's interesting, Bowen. And that's obviously assuming everything else remains equal, right?

Bowen Diehl -- Chief Executive Officer

No, that's right. I mean obviously, if the economy starts to slow down, you're going to have increased default -- covenant default to first lien lender doesn't necessarily mean it is a disaster. It means that we charge additional economics on those loans, fees, or otherwise. But certainly, in a slowing economy, you start to have a little bit more noise in the portfolio for sure.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Of course. Bowen, when we think about those rising interest rates, that could provide a big tailwind to you and to other BDCs since most portfolios are floating rates. How much of that increase in short-term rates do you think the lenders will keep versus perhaps passing some of that through to the borrowers as spread compression to help support them?

Bowen Diehl -- Chief Executive Officer

Yes, that's a good question. I've been doing this for a while. And I would tell you, rates start to increase, lenders do have a tendency to -- or the market generally has a tendency to give some of the increase in the index back in the spread. I do -- the vast majority of the increase in the index will be kept by the lenders, but there's -- our job is to make sure we minimize how much we get back, but that is a dynamic that does happen.

If you think about our capital structure, we've got over 50% of our liabilities into fixed-rate notes. And so -- and then our assets were all floating rate. So we're pretty level upside on interest rates.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Exactly.

Bowen Diehl -- Chief Executive Officer

At the margin, you're right. I mean that's something that the lending industry does to an extent as the index goes up, they get a little bit of the spread back. At the end of the day, we're net interest margin. We eat the net interest margin at the end of the day.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Yeah.

Bowen Diehl -- Chief Executive Officer

So we have to minimize the amount of that dynamic, but it does -- it has in past cycles has been that way at the margin.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Yeah, I agree with that. My last question sort of housekeeping, maybe for Michael, could you just give us, what the main drivers were the realized and unrealized gains this quarter?

Michael Sarner -- Chief Financial Officer

The $6.3 million of the depreciation was related to the equity portfolio. And I think we had, I want to say, at least three portfolio companies on the equity side that are loan grade 1s that had sizable increases. And then across the board, really the -- I would say, debt was up as well, I think, about $1.4 million, I believe, for the quarter, which was fairly granular. I think even kind of a macro perspective our companies saw revenue growth.

We saw EBITDA growth as well despite increased labor and transportation costs. So overall -- and we saw EBITDA margins probably come down slightly. But overall, the portfolio performed individually quite strong.

Bowen Diehl -- Chief Executive Officer

One of the things, Mickey, I thought was encouraging this quarter was that across our equity portfolio, the equity co-investment portfolio market multiples were down slightly, but our portfolio appreciated. And so that was a really fundamental performance across that equity book as opposed to just market multiples expanding. So that was a healthy group of companies.

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Yeah, that's helpful. I appreciate your time this morning. Thank you for taking my questions.

Bowen Diehl -- Chief Executive Officer

Thanks, Mickey.

Operator

Our next question comes from Kevin Fultz with JMP Securities.

Kevin Fultz -- JMP Securities -- Analyst

Hi. Good morning and thank you for taking my questions. I'd like to start with a question on leverage. Regulatory leverage was 1.16 times at quarter-end.

Can you just remind us what your target leverage range is? And then also, could you talk about, if your target leverage range has shifted at all recently, given the current market backdrop?

Michael Sarner -- Chief Financial Officer

Sure. So, what we've said in the past is our economic leverage target is 1.2 to 1.4. Our regulatory would be between 1.0 and 1.2. So, we're obviously in the middle of those ranges.

But we are mindful of what's going on in the economic environment. And from that perspective, the notion is that we would like to be in the middle to the low end of those ranges entering into a possible recessionary period. So, how will we do that? We're likely, as we want to use the ATM fully as we've done before. Certainly, we don't want to be behind the curve and forced to raise equity to bring leverage back down.

So, you can kind of imagine it will probably be more conservative on that front and try to stay really around 1.2 to 1.5 -- 1.2 to 1.25 and probably 1.1 to 1.15 on regulatory.

Kevin Fultz -- JMP Securities -- Analyst

OK. That makes sense, Michael. And then just in regards to portfolio positioning, just curious if there are any pockets or industries that you find particularly attractive in the current climate?

Bowen Diehl -- Chief Executive Officer

Well, certainly, I mean importantly, everybody heard me beat this drum for years on the whole recession, full-cycle underwriting mentality we use. But if you kind of look at some of the deals we've done in the last quarter, you'll see American not as a food deal, you see American thrift store, which is a thrift retailer [Inaudible] a manager of supply chain parts, little screws and bolts and things and manufacturing plants of supply chain things that they have to manage is complex. Air conditioning specialists, which is an HVAC service company that people that come by your house and service your AC. So, these are all kinds of non -- very low cyclicality of any cyclicality associated with those industries.

And so that's kind of how we're thinking about the world. I mean we like industries that are stable high cash flow margin, aren't particularly discretionary-type purchases, and the ones that shouldn't be as affected by the economy kind of effect everything to some extent. But typically less -- much less cyclical or even countercyclical, you'll see a National Credit Care, for example, certainly a countercyclical-type industry. So, if you look at our deals, you'll see that theme.

So, I think that's how I'd answer that question.

Kevin Fultz -- JMP Securities -- Analyst

OK. Thanks, Bowen. That's helpful. And then just one more follow-up on Mickey's question.

You had some pretty nice unrealized gains on equity and debt investments in the quarter. That's kind of the opposite of what we saw in the public markets and other BDC portfolios in the March quarter. Just curious is in the equity portfolio, were -- was the unrealized gain primarily in a handful of equity securities, or was that kind broad across the portfolio?

Bowen Diehl -- Chief Executive Officer

So, I would say there's certainly a handful and half of the companies that were shining stars for sure. But we saw a pretty broad performance, I guess, across the portfolio, but certainly like a handful of shining stars. So, I think [Inaudible] is typically what happens in an equity portfolio. But that's -- I got to be pretty encouraged by the fact, again, that if you looked across our portfolio where market multiples come down -- index market multiples come down, as we all know, we saw that in the public, but the equity portfolio EBITDA grew and kind of increased the appreciation overall.

Kevin Fultz -- JMP Securities -- Analyst

OK. I appreciate the color there and I'll leave it there. Congratulations on a nice quarter.

Bowen Diehl -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Kyle Joseph with Jefferies.

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning guys. Thanks for taking my questions. Most have been answered. But we talked about kind of the rising rate of environmental impact on demand for middle market credit.

Can you go to the kind of maybe the other side of the spectrum and talk about how you see rising rates impacting competition in the overall supply of credit to the middle market?

Bowen Diehl -- Chief Executive Officer

That's a good question. The supply as far as our competitors and capital availability of capital, I would say, I don't expect it to change all that much. I mean, the market is competitive now, it was competitive yesterday, and it will continue to be competitive. And so -- and I think, again, the private equity community is pretty flush with liquidity.

So I think people are all talking about recessions. And so I'd say that the sensitivity around recessions is certainly heightened. We've had that sensitivity for a while that's the market is certainly sensitive to that. So I think that could -- as the lender community is thinking more about recessions and trying to could underwrite through recessions, that does typically and it should increase the conservatism across the industry.

But I think the quality of the quantum of capital out there, I don't see it changing, but I do see the mentality of the lender community and sponsor community as well becoming more recession sensitive as they're thinking about investing capital.

Michael Sarner -- Chief Financial Officer

I guess also from a competitor's perspective, it's going to depend on the overall health of their portfolio and the leverage they have going into could be a cycle whether they're going to be able to be aggressive in finding unique opportunities, which is what you tend to see in the down market.

Kyle Joseph -- Jefferies -- Analyst

Got it. Very helpful. Thanks for answering my questions.

Bowen Diehl -- Chief Executive Officer

You bet.

Operator

Our next question comes from Bryce Rowe with Hovde.

Bryce Rowe -- Hovde Group -- Analyst

Thanks. Good morning. I wanted to maybe start on your commentary around the pipeline feels like you've got another healthy quarter coming up here. For the June quarter, we're two-thirds of the way through, maybe you could speak to what you're seeing kind of from the terms or pricing perspective with some of the shifting market dynamics that we've seen here over the last few months?

Bowen Diehl -- Chief Executive Officer

Yeah. Pricing and terms, I would say, really from the -- everything is down from a volume perspective from the December quarter of last year because it was a feverish pace then. But the June quarter is similar to the March quarter as far as general activity. And so as far as pricing and terms, it's been kind of the same.

It hasn't really been the general statement. It hasn't been that much difference between the quarters. There are differences between deals and things feel specific, but I think, generally speaking, it's not -- we haven't seen a material change in pricing in terms. I mean, we have -- in all middle-market, we get strong covenants, first lien, lower LTV cash flow businesses.

And so that's kind of the same in the June quarter as it was in the March quarter.

Bryce Rowe -- Hovde Group -- Analyst

That's helpful, Bowen. And you've obviously had some monetization exits, are you still seeing some opportunity for that here, or do you expect that activity to slow down here?

Bowen Diehl -- Chief Executive Officer

Well, I mean, again, kind of follows the market activity. So the market activity in the December quarter was obviously really high. Prepayments were high. Kind of into this year, they kind of a little bit of a steady.

I mean I could give a comment on it.

Michael Sarner -- Chief Financial Officer

I think, it definitely slowed down. But what I would say, just looking down for the next 6 to 12 months, some of the loan grade ones.

Bowen Diehl -- Chief Executive Officer

Yes.

Michael Sarner -- Chief Financial Officer

That is performing extremely well, those are always possibilities for repayment sort of exits. And I think if you look at our history, since 2016, we've had a large exit that we were able to provide a supplemental dividend or special dividend in every year since. And so looking at that list, we would think that's a high likelihood that there could be an exit before the end of the year.

Bowen Diehl -- Chief Executive Officer

And I think that's a fair comment. I mean, if you look at those names, if I was an owner of some of those businesses, I'd certainly be considering a sale. I mean, given the extreme outperformance of some of these names. So no line of sight on any particular one at the moment, but certainly not unreasonable, I think we would see something by the end of the year.

Bryce Rowe -- Hovde Group -- Analyst

OK. Maybe a couple of housekeeping questions for me. From access to future SBA draws, is that something, Michael, that you guys can access here now, or I'd seem to remember there being a review by the SBA now that you hit that first year?

Michael Sarner -- Chief Financial Officer

Yeah. No, correct. We already received that review, when we got to our first half-year, which was the $40 million. And so we're past that.

So we have access right now to $80 million. As of the end of this quarter, we had drawn the $40 million. And we would tell you that the activity seems robust this quarter and several of the deals we're looking at are SBIC eligible. We see ourselves being in the -- not quite at 80, but pushing it by the end of the June quarter or into July.

So we'll probably be back to the SBA in the summer, looking for additional leverage commitment.

Bryce Rowe -- Hovde Group -- Analyst

OK. OK. That's helpful. And then maybe one more around I-45.

It looks like the dividend that came into the BDC from I-45 was up. Is this a good run rate, anything kind of driving that that might cause that to fall back down?

Bowen Diehl -- Chief Executive Officer

Honestly, it was a strong quarter. We did see, I would tell you, toward the end of the quarter some exits in I-45. And then we're ramping that back up right now more late stage, so I would say that number is coming down a bit, but it's not going to be too far off.

Bryce Rowe -- Hovde Group -- Analyst

OK. OK. Great. Thank you.

Operator

Our next question comes from Robert Dodd with Raymond James.

Robert Dodd -- Raymond James -- Analyst

Thanks. Congratulations on the quarter. If I can on the -- going back to the special dividends. Spillover is now $0.47.

I mean you've paid over the last 12 months, a lot of special dividends to shareholders who've done quite well. Is it the intent to kind of like better term level off spillover here and basic payout over earning if you have a realized gain, or if you continue to over earn the dividend dollar just a more NII basis, or if rates come up, obviously, there's earnings power here as well or is there -- is it just going to be more -- is there a potential that there's a plan basically pay out the over-earning each quarter or something like that to manage the spillover down, so you don't have the excise tax, or can you give us any thoughts on that front?

Michael Sarner -- Chief Financial Officer

Sure. Sure. So honestly, that is what we have been doing. Our balance was quite -- obviously, you go back to the MRI days, we had over $1 in UTI, and they were paying significant excise tax.

We paid that down through the supplemental dividend program. And this $0.15 was related to an exit of one of our equity portfolio companies that produced this $0.15 distribution that we're paying off. This brings us down to approximately $0.30, $0.32 on a UTI balance, which we would tell you that, we think we should be somewhere between $0.20 and $0.30. And so where we want to be from this point going forward, I think normal activities will maintain that balance.

And then as we see exits, with -- I think we noted we have, again, $25 million of unrealized appreciation. So we do expect to see exits that will generate gains and that would be included in special distributions going forward, but while maintaining this $0.20 to $0.30 UTI balance.

Robert Dodd -- Raymond James -- Analyst

Got it. I appreciate that. Thank you. And then one more, if I can, on the color you gave that revenues and EBITDA both grew margins came down slightly.

I don't think that's a great suppose. Were there any areas of the portfolio, not necessarily specific business, but any areas where you saw margin compression that maybe you didn't anticipate? I mean, obviously, labor costs are up, raw materials are up, but was there any other kind of drivers that came out of the left field, so to speak?

Bowen Diehl -- Chief Executive Officer

Yeah. So I mean, obviously, labor inputs are up, and material inputs are up. Fortunately, for the vast majority of the companies, when you have an inflationary environment, the inflationary environment narrative out in the public square easier to call your customers and raise prices, right, who is not extensive when you do so. So that helps.

I think the one area that you haven't mentioned, we all know about the supply chain, and just not only the cost of a good place but the difficulty to get input. And we have seen a couple of companies utilize working capital to pre-buy and bulk up their working capital base, and their inventories. And so -- and the cost of doing that is essentially a cash flow margin hit, right? So that's been something. I wouldn't say, we didn't expect it, I mean, like it kind of makes sense, right, with the supply chain being what it's been for several months.

But that is definitely a dynamic that affects companies across the economy, and we've seen people utilize the capital to increase their inventory to defend against just the availability of inputs.

Robert Dodd -- Raymond James -- Analyst

Has that been one of the drivers of the strength of the pipeline in terms of -- or is that just at the margin, some are using working capital, or is that pretty I want to say pervasive, but pretty common across the portfolio?

Bowen Diehl -- Chief Executive Officer

No. I mean, our pipeline is not really working capital deals, obviously, we have revolvers across the portfolio. I'd say at the margin some of the revolvers may be done in part without those reasons. The pipeline really is still basically -- it's founder-owned businesses that are selling or diversifying their holdings as they get later in their life, right? So they're a private equity transaction and an interesting alternative because it allows the founder to roll over a portion of their proceeds into the company -- stay involved in the company but diversify their holdings.

And with having the pandemic in the rearview mirror, the economy being a concern, I mean, it's people that might not have not quite ready to sell, might, you know what, maybe a deal where I take a few of my chips off the table might make some sense, and it's given private equity guides a chance to invest in companies. So I think that the general dynamic still is there. So it's not necessarily working capital, looking for working capital as much as it's an M&A kind of transaction.

Robert Dodd -- Raymond James -- Analyst

Got it. Thanks and that makes sense. I mean you only had $12 million add-ons this quarter. The last one, if I can, how -- when underwriting and to your point, you always underwrite for a recession to occur during the life of the loan.

How -- what increment -- what do you think of the quality of your incremental knowledge about the borrower, if you are given the COVID and those that the new portfolio, a new leading portfolio, obviously survived COVID and managed supply chain disruptions there and economic issues there. Do you think that the financial information you have about borrowers that so relatively recent compared to the financial crisis, which was more than a decade ago at this point? Does that give you more confidence in the ability of borrowers to withstand any economic hiccups over the next couple of years, or do you think COVID was just so odd that it doesn't tell us much about survivability or success during efforts around normal recession if that comes to pass?

Bowen Diehl -- Chief Executive Officer

Yes, there's like several parts to that answer. I mean --

Robert Dodd -- Raymond James -- Analyst

Yeah.

Bowen Diehl -- Chief Executive Officer

Certainly, the COVID stress created a slowdown in business. And so whether the slowdown in business in a recession or COVID or otherwise, you get to see how well these companies handle or the business models handle kind of stress in the economy. COVID is a little different because it was a flash crash and of course, then didn't thankfully, didn't end up being a lasting thing from an economic perspective. But the COVID dynamic is interesting.

We have probably had certainly a bunch of business models that we've seen out there in new deal flow and to some extent, in our portfolio that actually from a pure EBITDA perspective, benefited from COVID I mean -- meaning that their product or service was needed more in COVID in that COVID environment and before. And so we're underwriting deals now, we're underwriting the downside, but we're also thinking a lot about what in certain businesses we're looking at in underwriting is any of the EBITDA that we're underwriting COVID bump and kind of lasting effect of COVID. So when that kind of pace all else equal, EBITDA will come down. So it's a little bit of that, there's -- our business is out there that, like I said, EBITDA increased guarantee for various specific reasons.

And of course, there are a lot of businesses that decreased substantially during COVID. So I would say, just general, just seeing the portfolio stress in an environment like that, it's helpful, sure, to some extent. As you said, it's comforting to see our borrowers that withstand, if you have [Inaudible] listing out and the like, but a lot of these companies didn't use the banks to take them to pay them back. So yeah, so it was good.

I mean it was good. The great recession is a long time ago, but having something more recent that stressed the portfolio and portfolio performance, it's certainly confidence.

Michael Sarner -- Chief Financial Officer

And on the liquidity side, Robert, we did see -- even though there was seamless money out there, we saw probably one-third of our portfolio companies draw on the revolver and then pay it back down actually almost, essentially all of them paid it back down within one month or a month a half, but you kind of give a sense of just how they operate in a recession environment, in a stressed environment.

Robert Dodd -- Raymond James -- Analyst

Got it. Thank you.

Bowen Diehl -- Chief Executive Officer

Thank you.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back to Bowen for any closing remarks.

Bowen Diehl -- Chief Executive Officer

All right. Well, thanks, everybody. Thanks for joining us and we appreciate your time. And we look forward to giving you further updates as we go forward.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Chris Rehberger -- Treasurer and Vice President, Finance

Bowen Diehl -- Chief Executive Officer

Michael Sarner -- Chief Financial Officer

Mickey Schleien -- Ladenburg Thalmann and Company -- Analyst

Kevin Fultz -- JMP Securities -- Analyst

Kyle Joseph -- Jefferies -- Analyst

Bryce Rowe -- Hovde Group -- Analyst

Robert Dodd -- Raymond James -- Analyst

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