Bryce Rowe • B. Riley Securities

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CIO Michael Grisius explained that recent modest equity markdowns were specific to individual business dynamics rather than a broader negative consumer trend. He also confirmed the origination pipeline includes both new platforms and, more frequently, upsizing opportunities with existing relationships. CEO Christian Oberbeck provided a detailed defense of the company's leverage, highlighting the safe, long-term, covenant-lite nature of its SBIC and baby bond debt, which provides a stable capital structure that he views as a strategic asset, not a risk.

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Executive Dwayne Hyzak explained that the lower middle market pipeline adjustment was due to several deals slipping into Q4 and others falling through after due diligence. He noted the private loan pipeline cooled to 'average' following two exceptionally active quarters. Regarding private loan pricing, Hyzak and Managing Director Nicholas Meserve confirmed spread compression of 75-100 basis points year-over-year, with sporadic but aggressive competition from local banks. Hyzak attributed the lower Q3 leverage to a conservative stance taken when the expected large lower middle market deals did not close within the quarter, leading to higher-than-anticipated ATM program usage.

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President Dave Dullum described a strong pipeline of high-quality, larger-than-usual deals, expressing confidence in closing several soon. CFO Rachael Easton outlined a flexible funding strategy using the credit facility, the ATM program, and potential debt issuances. She also confirmed dividend income was from one company and explained that the stable portfolio yield resulted from the exit of a lower-yielding asset offsetting SOFR declines, supported by a 12% weighted average floor.

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Michael Forman, CEO, and Daniel Pietrzak, CIO, explained that the yield compression resulted from both the Federal Reserve's rate cuts and tighter credit spreads due to a competitive market with an imbalance of capital versus deal flow. Daniel Pietrzak confirmed that FSK has substantial spillover income, nearly three-quarters worth, available to support the dividend, but also noted that an anticipated increase in 2025 M&A activity could boost fee income, providing an offset.

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Executive Stuart Aronson explained that "redoubling" involves directing originators to focus on non-sponsor opportunities through targeted networking. He confirmed that if current aggressive market conditions persist, the portfolio's non-sponsor ratio would likely rise. Aronson described the non-sponsor market as having limited competition compared to the sponsor space. On yield compression, he attributed it to both lower base rates and spread compression, noting that while call protections help, pressure remains as they roll off.

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Co-CEO Bruce Spohler stated that the Webster acquisition is targeting a low to mid-teens ROE on the equity invested. He confirmed that leverage in the SSLP is at the desired level and that the focus is on rotating out of cash flow loans. Chairman and Co-CEO Michael Gross added that while increased M&A activity provides more opportunities, he does not expect a dramatic widening of spreads in sponsor finance due to the large amount of capital in the market.

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CEO Justin Plouffe expressed optimism, noting a meaningful and increasing M&A pipeline. CFO Tom Hennigan added that the leverage target for the combined entities at merger close is 1.1x and that CGBD's current leverage is on track to exceed 1.0x by year-end. Hennigan also anticipates that new deal originations will outpace the lighter repayment volume expected in the current quarter.

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CEO Joshua Easterly responded that it is difficult to gauge net portfolio growth, as velocity is macro-driven, but noted that a large portion of the portfolio was invested in a higher-spread environment and may turn over. Regarding the dividend, he explained that the $0.46 base dividend is set at a level they believe is sustainable through cycles, post-credit losses, and with low activity fees. He emphasized that the company prefers to return excess earnings to shareholders via the quarterly supplemental and special dividends.

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Executive Edward Ross confirmed that several companies are still in the process of exploring strategic alternatives after three exited via that path in Q3, leading to expected portfolio churn. He clarified that the 20 basis points of yield compression was driven by new originations at lower rates, not by changes in SOFR. Ross attributed the increase in 'Grade 3' ratings to idiosyncratic, company-specific underperformance rather than broad economic issues, highlighting that overall portfolio loan-to-values remain strong in the low 40s.

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CEO Kyle Brown stated that while the expense ratio should decline over the next year with scale and off-balance sheet fee growth, the current focus is on investing for growth. He affirmed the origination pace is sustainable due to a larger top-of-funnel from expanded verticals and attributed the warrant portfolio's growth to new originations and a better market.

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CEO Bowen Diehl noted the backlog mix is roughly two-thirds new platforms and one-third add-ons, with slight spread tightening since September. CFO Michael Sarner explained that Q3 yield compression was driven by a drop in SOFR and new non-accruals, and he anticipates another 50 basis point compression in Q4 due to SOFR resets. Diehl detailed that the two new non-accruals, a consumer-facing business and a video editing company, are expected to be restructured by year-end. Sarner provided a normalized quarterly run rate of approximately $4.5 million for compensation and $7 million for total SG&A.

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