Capital Southwest - Earnings Call - Q1 2026

Executive Summary

• Q1 FY26 delivered higher total investment income ($55.9M) and stronger pre-tax NII ($32.7M; $0.61/share) sequentially, with non-accruals reduced to 0.8% of fair value and weighted average debt yield at 11.8%.
• Results beat Wall Street consensus: EPS $0.59 vs $0.586* and revenue $55.9M vs $54.3M*, driven by higher cash interest and increased average investment cost basis; PIK income fell to 5.8%*.
• Management shifted regular dividends from quarterly to monthly (three payments of $0.1934 each for Jul–Sep plus $0.06 supplemental), maintaining total $0.64 per quarter; later extended monthly cadence for Oct–Dec with total $0.64.
• Strategic positioning improved: corporate leverage at 0.82x, $397M unused credit facility capacity, second SBIC license enabling up to $175M of additional debentures, and $41.7M raised via ATM at ~123% of NAV—supporting continued originations and dividend sustainability.

Note: Asterisk (*) indicates values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Non-accruals declined to 0.8% of the portfolio at fair value (from 1.7% in Q4), and weighted average leverage through the security improved to 3.4x, indicating lower portfolio risk.
• Realized gains of ~$27.2M from two equity exits increased Undistributed Taxable Income (UTI) to $1.00/share, bolstering supplemental dividend capacity: “we were able to increase our undistributed taxable income balance to $1 per share”.
• Operating leverage remained best-in-class and is tracking lower: quarterized 1.5% in Q1 with LTM 1.7%, trending 1.4–1.5% by year-end; management emphasized benefits of the internally managed model.

What Went Wrong

• Spread compression persists amid competitive lending and bank “risk-on” posture; management noted weighted average spreads around “7% over…as SOFR comes down, spreads will probably widen out,” but near-term compression continues.
• Net realized/unrealized losses of $4.9M reflect credit mark dynamics despite equity appreciation; debt marks produced $9.6M depreciation in the quarter.
• Sensitivity to base rate cuts: management modeled ~100 bps decline over 15 months; while they expect to maintain regular dividend coverage, larger-than-expected rate declines could pressure NII and require use of UTI buffer.

Transcript

Speaker 6

Thank you for joining today's Capital Southwest Corporation first quarter fiscal year 2026 earnings call. Participating on today's call are Michael Sarner, Chief Executive Officer, Chris Rehberger, Chief Financial Officer, Josh Weinstein, Chief Investment Officer, and Amy Baker, Executive Vice President, Accounting. I'll now turn the call over to Amy Baker.

Speaker 3

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 Corporation 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 over to our President and Chief Executive Officer Michael Sarner.

Speaker 2

Thanks, Amy, and thank you, everyone.

Speaker 6

Joining us for our first quarter fiscal year 2026 earnings call. We are pleased to be with you today to discuss our first fiscal quarter. The June quarter was another productive quarter for the company as we continue to strengthen both sides of our balance sheet. During the quarter, we reduced the investment portfolio weighted average debt to EBITDA from 3.5 times to 3.4 times, the investment revenue tick rate from 7.6% to 5.8%, and our non-accrual rate from 1.7% to 0.8% of the investment portfolio at fair value. These metrics, coupled with corporate leverage of 0.82 times and a weighted average yield on debt investments of 11.8%, provide shareholders with an attractive risk return profile to support both our regular and supplemental dividend. Looking forward to the future, during the first fiscal quarter we generated pre-tax net investment income of $0.61 per share.

Additionally, as a result of harvesting $27.2 million in realized gains from two equity investment exits during the quarter, we were able to increase our undistributed taxable income balance to $1.00 per share from $0.79 per share as at the end of the prior quarter. Furthermore, as previously announced, we transitioned our regular dividend payment frequency from quarterly to monthly. We believe that transitioning to a monthly regular dividend is a shareholder-friendly initiative that will benefit all stakeholders of Capital Southwest Corporation. Our Board of Directors has declared a total of $0.58 in regular dividends for the quarter payable monthly in each of July, August, and September 2025, and has also declared a quarterly supplemental dividend of $0.06 per share, bringing total dividends declared for the September quarter to $0.64 per share.

On the capitalization front, we received final approval from the SBA for our second SBIC license during the quarter, which allows us to access up to $175 million in additional SBA ventures over time. Additionally, we increased our existing ING-led corporate credit facility by $25 million, bringing total commitments to $510 million. Finally, we raised $42 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $20.50 per share, or 123% of the prevailing NAV per share. We are pleased with the progress we have made on the capitalization front and will continue to take measures to further improve our balance sheet as we look ahead. From an originations perspective, we took a conservative approach to underwriting this quarter due.

Speaker 2

To the noise and uncertainty related to.

Speaker 6

Tariffs and government policies impacting healthcare and government services. Despite this noise, deal flow in the lower middle market remained solid this quarter with $115 million in total new commitments to three new portfolio companies and 12 existing portfolio companies. Add-on financings continue to be an important source of originations for us as approximately 55% of the total capital commitments during the quarter were follow-on offerings in performing portfolio companies over the last 12 months.

Speaker 2

Add-ons as a % of total.

Speaker 6

New commitments have been 38%, so clearly a strong source of origination volume in deals we know well and have experience with the management team and sponsor. Looking ahead, we have seen a distinct pickup in the volume and quality of deals in the past six weeks. As such, we are anticipating significant activity in terms of new platform company originations as well as add-on activity in the existing portfolio. Finally, from a BDC perspective, there's been some long-awaited progress on the AFFE rule for affiliated fund fees and expenses. On June 23, 2025, there was a unanimous House passage of the Access to Small Business Investor Capital Act, which corrects the misleading efficacy disclosure requirement that overstates the actual cost of investment in BDC.

Speaker 2

The bill will exempt funds that invest.

Speaker 6

In BDCs from including the acquired fund fees and expenses calculation in the prospectus fee table, providing more accurate information for investors. If BDCs are exempt from the AFFE rule, they could significantly increase trading volumes in the sector, especially through mutual funds and ETFs. If you recall the onset of this rule in 2014, precipitated the Russell and S&P to remove BDCs from their indices. We believe the impact of this corrective legislation could be meaningful.

Speaker 2

I will now hand the call over.

Speaker 6

To Josh to review more specifics, our investment activity and the market environment.

Speaker 0

Thanks Michael. This quarter we deployed a total of $51 million of new committed capital, including $50 million in first lien senior secured debt and $1 million of equity across three new portfolio companies. In addition, we closed add-on financings for 12 existing portfolio companies consisting of $64 million in first lien senior secured debt and $1 million in equity. Our on-balance sheet credit portfolio ended the quarter at $1.6 billion, representing year-over-year growth of 21% from $1.3 billion as of June 2024. For the current quarter, 100% of the new portfolio company debt originations were first lien senior secured, and as of the end of the quarter, 99% of the credit portfolio was first lien senior secured with a weighted average exposure per company of only 0.9%.

We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms. Currently, approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies as well as the potential for junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies pursuant with the private equity firm when we believe the equity thesis is compelling. As of the end of the quarter, our equity co-investment portfolio consisted of 80 investments with a total fair value of $166 million, representing 9% of our total portfolio.

At fair value, our equity portfolio was marked at 125% of our cost, representing $33.2 million in embedded unrealized appreciation or $0.60 per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, often resulting from the institutionalization of the.

Speaker 6

Businesses by experienced private equity firms.

Speaker 0

As the significant value accretion potential from strategic add-on acquisitions, equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation as well as equity distributions to Capital Southwest Corporation over time. This is playing out in real time as this quarter we harvested two sizable equity exits which generated $27.2 million in realized gains over the past two quarters. Our equity portfolio has produced $41.3 million in total realized gains. As noted earlier, these realized gains grow our UTI balance and thus support both regular and supplemental dividends going forward. Consistent with previous quarters, the lower middle market continues to be quite competitive as this segment of the market is highly attractive to both bank and non-bank lenders.

While this has resulted in tight loan pricing for high quality opportunities that are not exposed to the macroeconomic uncertainty, the depth and strength of the relationships our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk-return profiles. As a point of reference, currently there are 80 unique private equity firms represented across our investment portfolio. Additionally, in the last 12 months we closed 13 new platforms with financial sponsors with which we had not previously closed a deal, demonstrating our continued penetration in the market. Since the launch of our credit strategy, we have completed transactions with over 119 different private equity firms across the country, including over 20% with which we have completed multiple transactions.

Our portfolio currently consists of 122 different companies weighted 89.6% to first lien senior secured debt, 1% to second lien senior secured debt, and 9.3% to equity co-investments. The credit portfolio had a weighted average yield of 11.8% and a weighted average leverage through our security of 3.4 times EBITDA. We continue to be pleased with the operating performance across our loan portfolio. We have recently changed our loan grade structure from a four-point scale to a five-point scale. We have made this change in order to provide additional transparency for our shareholders. All our loans upon origination are initially assigned an investment rating of 2 on a five-point scale, with 1 being the highest and 5 being the lowest rating. Overall, the portfolio remains healthy with approximately 92% of the portfolio at fair value rated in one of the top two categories, A1 or A2.

Cash flow coverage of debt service obligations across the portfolio remains robust at 3.5 times, with our loans across the portfolio averaging approximately 42% of portfolio company enterprise value. We believe these performance metrics are indicative of a well performing and conservatively structured portfolio. Our portfolio continues to be broadly diversified across industries, and our average exposure per company is less than 1% of investment assets, which gives us great comfort in the overall risk profile of our portfolio for the deals we are currently underwriting. They continue to have tight covenant packages, loan to value levels ranging from 35% to 50%, resulting in significant equity capital accretion below our debt and reasonable leverage levels of 2.5 times to 4 times debt to EBITDA.

As Michael mentioned earlier, we believe our balance sheet is well positioned with low leverage and significant liquidity, which should allow us to be opportunistic should the market become less competitive, resulting in more attractive risk return profile deals. I will now hand the call over to Chris to review the specifics of our financial performance for the quarter.

Speaker 6

Thanks, Josh. Specific to our performance for the quarter, pre-tax net investment income was $32.7 million or $0.61 per share. For the quarter, total investment income increased to $55.9 million from $52.4 million in the prior quarter. The increase was driven by a $5.2 million increase in cash interest and dividend income, offset by a decrease of $900,000 in fees and a decrease of $700,000 in PIK income compared to the prior quarter. Importantly, PIK as a percentage of our total investment revenue decreased to 5.8% compared to 7.6% in the prior quarter. Additionally, as of the end of the quarter, our loans on non-accrual represented 0.8% of our investment portfolio at fair value, a decrease from 1.7% as of the end of the prior quarter. During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend.

As mentioned earlier, we have transitioned the frequency of our regular dividend payment to monthly, with our board declaring a total of $0.58 per share in regular dividends for the quarter payable monthly in each of July, August, and September 2025, while also maintaining the quarterly supplemental dividend at $0.06 per share, bringing total dividends to $0.64 per share for the September 2025 quarter. We continued our strong track record of regular dividend coverage with 106% coverage for the 12 months ended June 30, 2025, and 110% cumulative coverage since the launch of our credit strategy. We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of $1 per share and the expectation that we will continue to harvest gains over time from our sizable unrealized depreciation balance on the equity portfolio. LCM operating leverage ended the quarter at 1.7%.

Looking ahead, we anticipate our run rate operating leverage to be in the 1.4% to 1.5% range by the end of our current fiscal year. Our operating leverage is significantly better than the BDC industry average of approximately 2.7%, and we believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage a best in class BDC. The company's NAV per share at the end of the quarter was $16.59 per share, a decrease from $16.70 per share in the prior quarter. The primary driver of the NAV per share decline was the annual issuance of restricted stock compensation to employees during the quarter.

We are pleased to report that our balance sheet liquidity is robust with approximately $444 million in cash and undrawn leverage commitments on our two credit facilities, which represents two times the $223 million of unfunded commitments we had across our portfolio as of the end of the quarter. During the June quarter, we increased our corporate credit facility by $25 million, bringing total commitments on the facility to $510 million. Additionally, as of the end of the June quarter, 48% of our capital structure liabilities were in unsecured covenant free bonds with our earliest debt maturity in October 2026. As previously mentioned, during the June quarter we received final approval from the SBA for our second SBIC license. This license allows us to access up to $175 million in additional SBA debentures over time, which is a cost effective way to finance our lower middle market investment strategy.

Our regulatory leverage ended the quarter at a debt to equity ratio of 0.82:1, down from 0.89:1 as of the prior quarter. While our optimal target leverage continues to be in the 0.8 to 0.95 range, we are weighing the impacts of the current macroeconomic landscape and intend to maintain a regulatory leverage cushion which will mitigate capital markets volatility. We will continue to methodically and opportunistically raise secured and unsecured debt capital as well as equity capital through our ATM program to ensure we maintain significant liquidity and conservative balance sheet construction with adequate covenant cushions. I will now hand the call back to Michael for some final comments. Thank you Chris, Josh and Amy and all the employees who help us tell the story on a quarterly basis, and thank you everyone for joining us today. This concludes our prepared remarks.

Speaker 2

Operator, we are ready to open the.

Speaker 6

Lines up for Q&A.

Speaker 7

Thank you. To ask a question, you need to press Star 11 on your telephone and wait for you to be announced. To withdraw your question, please press Star 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Doug Harder from UBS.

Speaker 6

Your line is open.

Thanks. Can you just talk a little bit more about the competitive landscape right now, and you know, kind of how you see that sort of playing out over the coming quarters?

Speaker 0

Yeah, I mean, look, there's a bit of a supply-demand dynamic here, and if you think about the supply, there's, you know, private equity sponsors have turned their attention away from consumer discretionary businesses.

A little bit as well as companies.

With international supply chain, there's a little bit of a scarcity of quality assets out there, and there's a bit of a pullback in the supply a little bit. On the demand side, you have banks and non-bank lenders continue to be aggressive and incentivized to deploy capital. We've seen spread compression over the last six months or so. While we have seen that spread compression, the structures, which is something we focus on heavily—loan to value, leverage, quality credit agreements, those kinds of things—have stayed. We stayed prudent on structuring. We've been able to continue to deploy capital and leverage the relationships to continue to find opportunities. It's continued to be competitive; it always has been competitive, but we've been able to compete candidly, and we've got a lot of good traction in this upcoming quarter as well.

Speaker 2

Yeah, I mean our overall weighted average spread has been, you know, two years ago it was 850. Currently, it's around 750. The deals that we saw in this previous quarter were around 7% over, and the deals that we're looking at in a very robust September quarter are, you know, around 7, a little north of 7 as well. To Josh's point, even though things are compressed, we still.

Speaker 6

Are able to find our marks.

Got it.

I mean, I guess, how do you.

Think about whether there is actually a floor on that around. Do you think that's going to be able to hold seven if the supply demand imbalance continues? How do you think about any floor on spreads?

Speaker 2

You know, it feels like it is settled to some degree. What we've seen is, you know, lower middle market credits that are extremely tight have been as low as, you know, 5.25%, which is 125 to 150 basis points tighter than what we're used to. There still are plenty of deals that are still somewhere between the 5.25% and 7.50% to 8%. We have a pretty wide group of sponsors that we work with. We're also willing to be originating deals on the smaller side. You know, $3 million to $6 million EBITDA companies that are probably garnering closer to 6.50% over. Again, still being able to find Fardar Marks. I do think that as SOFR comes down, history would tell us that the spreads will probably widen out. We might be at that kind of at the trough right now.

Speaker 6

Great.

Speaker 2

I appreciate that answer.

Speaker 6

Thank you.

Speaker 7

Thank you. One moment for our next question. Our next question comes from the line of Mickey Schleien from Clear Street.

Speaker 6

Line is open.

Yes. Good afternoon everyone. Michael, we received sort of mixed signals on the M&A market. Most folks are claiming it's still pretty muted relative to where it was a couple of years ago. You're pretty optimistic, it sounds like, on your third calendar quarter and the fourth calendar quarter tends to be the busiest. I'm assuming the second half looks pretty good. What's underpinning that optimism in a market that seems to be sort of trudging along?

Speaker 2

I would say some of the deals that were in the June quarter bled over into the September quarter. I can tell you right now we've closed $110 million of originations through this morning, and we have another $40 million in deals that are signed up and would be pending close later this month. We already know we're probably at $150 million, and there's a number of deals that we're in the mix for. I think where we live in the lower middle market, we've seen plenty of deal activity. I let Josh chime in as well.

Speaker 6

It feels like a quality deal.

Speaker 0

Yeah, I think when I talk to other low middle market lenders, they are very surprised at how full our pipeline is. I really do think that speaks to the efforts we put forth in the last three years, four years, five years in cultivating private equity relationships to put us in a position to see all their deal flow or the majority of their deal flow. I do think that that's paying dividends now and will continue to in the future.

Do you have any insight into, you know, prepayment or repayment activity in the third and fourth quarter? We just saw, you know, we.

Speaker 2

Had $80 million plus of repayments in this quarter. It's obviously a heavy quarter. We do have a few companies that we know are going to market there, some larger holds. That's probably posted in the Q to December quarter. Aside from that, I don't think we have a beat in on the September quarter. We really don't have much of anything.

Speaker 6

In the pipeline at this point.

That's good news. My last question relates to your operating leverage. I looked at the page in the presentation and it looks like it's sort of bottomed out at 1.7%. Is that where we can expect it to stay or do you think there's some more leverage there that can be extracted as you continue to grow?

Speaker 2

Now this is definitely coming down. The metric for the quarter based on actuals for the LTM was 1.7. The run rate was 1.6, trending down to 1.5. We would tell you, you know, we sometimes accrue additional bonus during the year before our final decision at the end of the year where the board makes the decision on bonus. Maybe we have an over accrual, but we would tell you the run rate when it all settles for this year should be 1.4 or 1.5. We still think there'll be room to continue to reduce that over time while we're, and I would say this as well, while still reducing, increasing our staff and paying our people.

We think that there's, you know, obviously this internally managed structure has a lot of benefits from that perspective and we expect that to continue to be a strong point for us especially with rates coming back in. That's going to be a big differentiator for our business model relative to certainly the externals as rates come in.

Yeah, I agree with that, and I just want to make sure I understood what you said. $1.4 to $1.5 run rate in the fourth calendar quarter. That's the fourth quarter annualized rate.

For the March 31 quarter, the LTM number we believe will be 1.4 or 1.5.

Speaker 6

Maybe just give a sense for the current quarter. For the 6/30 quarter, the quarterized was 1.5%. We're just, you know, the LTM has some overhang from some of the one-time expenses incurred in the prior quarter. We're already sort of at 1.5%, which we expect to continue to come down on an LTM basis as Michael described.

Okay. In terms of leverage, Michael, you've tapped into the ATM, but the balance sheet leverage is not particularly high. Can we expect you to continue to issue common equity at sort of the pace that you've been at, or do you prefer to lever up the balance sheet a little bit and maybe optimize your returns?

Speaker 2

Yeah, leverage came down this quarter probably mainly because we have so much in repayments during the quarter and that happened late stage. I think that, you know, I think Chris has said in the past we were raising about $40 to $60 million on a given quarter. I think that you should expect that each quarter will look like that. I think we'd like to be closer to 0.85 leverage. I can also say that it wouldn't bother me if our portfolio is in as good a shape as it is today with our debt to EBITDA and our fixed charge covenant. You know, we could maybe move closer to 0.9. We're certainly at a low point.

Speaker 6

For leverage at the moment.

Speaker 2

Part of it is, you know.

Speaker 6

We try to be consistent, Mickey. As Michael said, we're raising, if you look at the last kind of five or six quarters, it's about exactly an average of $40 million a quarter. We try to be consistently in the market. Some of the deals, as Michael described, pushed into July, which optically made the June leverage a little bit low. I would expect we'll be in the 0.85 to 0.9 range, sort of in the September and December quarters. That seems about right.

Most BDCs or many BDCs sort of run at more like 1.1. Obviously you're in the lower middle market and maybe that causes you to be a little bit more conservative, but conceptually, you know, why not run the balance sheet with a little bit more leverage than you've been doing recently?

Speaker 2

Yeah, I think the fact of the matter is that we're able to find yield kind of way Josh described earlier and meet or exceed, you know, analysts' expectations, have operating leverage where it needs to be. We don't really feel like the need to reach for additional leverage unnecessarily. All of these metrics can move around over time, but generally speaking, we're going to take a more conservative bend. Especially, you know, we're a smaller BDC. Right. I think we've earned our credibility in the market, but we still believe having conservative infrastructure, having conservative leverage communicates to the market sort of the way we do business here. We think that's a probably help.

Speaker 6

Our price to book in the end.

Got it. I understand. That's it for me this afternoon. Thanks for taking my questions.

Speaker 7

Thank you. One moment for our next question. Our next question comes online of Robert Dodd from Raymond James. Your line is open.

Speaker 0

Hi guys.

If I can go back to kind of the competitive environment for a moment and to your point, with the leverage you're doing, you know, two and a half to four, I mean, banks can kind of play in that market and keep those loans on balance sheet. You mentioned, I mean obviously that it can be attractive to them. Where would you know that banks tend to be boom and bust though, whether they're actually targeting the market? Where would you say the competitive pressure from banks is right?

Speaker 2

Now in terms of how it flows through a cycle?

I mean, are they being pretty pushy right now, and is that one of the factors driving down the spreads, or are they more, you know, moderate placed as to where you'd aggression?

Speaker 6

If I can put it that way.

Speaker 0

Yeah, you're spot on. They're boom or bust and right now they're boom. They're risk on from what I'm seeing. They're competing with us because you're right, the leverage profiles that we generally are seeing, banks can be competitive there. We have other ways to compete with banks, but candidly, it's tough for sponsors to turn down 150 or 200 basis points lower pricing when they have the opportunity to do it. Right now banks are being competitive. It definitely is one of the factors driving the lower spreads. You're right, they will be risk off at some point. Pretty tough for me to predict when that'll be, but they will be and that might be a factor for spreads to widen out a little bit.

Speaker 2

Got it. Got it. Thank you.

Yeah. One of the other advantages of being an internally managed BDC, as we see from some of your internally managed peers, is you can run an asset manager and you've talked about that. It feeds from the asset and manager accrued to shareholders' benefit rather than some external manager benefit. You've talked about that before. Are there any updates on efforts on that front about adding an asset manager kind of vehicle within the BDC to benefit ROE, lower your effective efficiency ratio, etc.

Speaker 0

Any updates there?

Speaker 2

Yes, we're continuing to pursue those type of options. We're probably also looking at a strategic initiative to maybe look to enhance earnings and origination capabilities on some of the larger deals, which, you know, nothing I want to formally state now, but certainly that would help capture additional yield while winning deals within our same bailiwick. Lower middle market deals, maybe between $8 million and $15 million, which we've typically having to share those companies out with no economic, finding ways to structure those assets with other partners to basically maintain the assets and maybe bring in a scrape and the management date.

You might not want to formally articulate it, but that's formally enough for me. Thank you on that one, and then last one because I'm not going to touch AFFE because I don't want to jinx it. To your point on deployments, it seemed like you were saying you're likely, you could be, could be $150 million plus in September with moderate repayments. The indication from leverage maybe not going up that much.

The 0.8 to 0.9 would tend to.

Imply that you might be running the ATM program at the high end of the range this quarter rather than the average, which is more the low end of the range. Am I doing my math like that?

Yeah, I think that's right. I think this quarter, if we say 40 to 60, and we've sort of.

Speaker 6

Been running at 40%, you're probably looking.

At more like 50.

Obviously, we'll make that judgment as, you know, knock on wood, as some of these deals look like they're going to close. Yeah, it's probably more in the $50 million range this quarter. That's right. Got it.

Thank you.

Speaker 7

Thank you. One moment for our next question. Our next question will come from the line of Erik Zwick from Lucid Capital Markets. Your line is open.

Good afternoon, everyone.

Speaker 0

Just curious that you mentioned the strong.

Pace of origination so far this quarter. I'm curious if you could maybe provide a little color in terms of the breakout between that from new versus add on opportunities.

Speaker 2

You know, this quarter feels like it's fairly robust on the new. The last quarter was like, what, 65, 35.

This quarter?

Yeah. The 9/30 numbers look like what, 75% new versus 25% add-ons.

Got it. No, it's interesting change. I think as I look across here, some of your competitors in the rest of the industry, it's been fairly heavy on the add ons recently. To switch back to new would indicate maybe kind of more market activity, a little more confidence there. Interesting to hear that. Thanks for sharing.

Speaker 0

I think it was.

Chris, speaking about your confidence in maintaining the dividend, both the regular and the supplemental, given, you know, the spillover of $1 plus the expectation for continued ability to harvest gains from the equity portfolio within that expectation. Does that also include, I guess, the futures curve? Just looking at slide 24 in your deck would indicate, you know, if the futures curve is right, we do get about 100 basis points of reduction. There would be, you know, maybe a $0.06 or so per quarter headwind to the run rate of NII. Is that incorporated in kind of those dividend comments earlier?

Speaker 2

Yeah, I'll answer the question. When we're looking ahead, we're anticipating, to your point, a 100 bps drop in the next 15 months. We've kind of talked about where we expect our spreads to be, plus %, and seeing, receiving some operational efficiencies. We believe that we're going to be able to maintain $0.58 NII to cover our regular dividend. Looking ahead, the biggest risk I see is if the share turns over in the spring of next year and rates, instead of troughing at 3.50%, end up troughing at 1.5%. Now that's a different story altogether, and we'd have to rethink our regular dividend policy. Short of that, we feel that we'll be able to maintain that balance. Plus, we're at $1.00 UTI now.

We would anticipate that to grow sizably in the next six to nine months as well, which would be a support for both the supplemental and the regular. Our viewpoint is, if we're performing well, and even if in the draconian scenario we woke up at $0.56 or $0.57, but it wasn't because of non-accruals, it wasn't because of portfolio performance, but rather about macroeconomic issues that we thought we could grow out of, we may use our UTI bucket to support that $0.58 regular dividend and not grow it. The other thing I would say, Erik.

Speaker 6

Michael sort of touched on the operational efficiencies, which is an advantage as you look at that slide, but compared to the reality of the ROE with operating leverage coming down. The other thing is we still have the full $175 million of debentures to draw on, which obviously I can't predict where the 10-year is going to be, but right now that would be sort of 5% type fixed paper. As we're deploying assets with spread that we are today at 7% to 7.75% range with a 5% sort of fixed debenture as being our main source of growth on the liability side, we think that's going to also enhance those NII that we show on the table.

Yeah, those are all good points.

Thank you.

That's all I have today.

Thank you.

Speaker 7

One moment for our next question. Our next question comes online. Sean Paul Adams from B. Riley Securities.

Speaker 6

Your line is open. Hey guys.

Speaker 2

Good afternoon.

Speaker 6

On non-accruals, it seemed that the.

Speaker 2

Non-accruals decreased quarter over quarter.

Speaker 6

Though on the investment rating schedule, it seemed that it was pretty much flat.

Speaker 2

With risk rating of 5 at $3.8 million fair value, generally there was a general improvement in the risk rating. There was a slight convergence towards the 2 to 3.

Speaker 6

Mark, was there a specific reason towards some?

Speaker 2

Of that change, where are we?

Speaker 6

At with the remaining non-accrual runoff?

Speaker 2

This quarter we had Zips, which came back on accrual, which was a large position. I think that was around $25 million. We had a small second lien piece, which I think was like $3 million, that actually went on non-accrual. The net, you know, we picked up $22 million, although the number stayed flat. What was your second question? I apologize, Sean.

Correct.

The migration towards the two from the top rating of one, was there any general degradation in the top credit quality portfolio?

Speaker 6

Was there any idiosyncratic or just thematic themes towards that?

Speaker 2

I don't think so. I think there might have.

Been a credit where it was a.

Typically, when a company ends up looking towards an exit, it may be upgraded to A1, and the sale might not have gone forward and it's moved back to a 2, but it was performing in either case. That might be what you're referring to. Got it.

Speaker 6

That's perfect. Thank you for the color.

Speaker 2

Thank you.

Speaker 7

I'm not showing any further questions in the queue. I would now like to turn it back over to Michael Sarner, President and CEO, for closing remarks.

Speaker 2

I appreciate everybody joining us. We look forward to speaking to you next quarter.

Speaker 6

Have a good day.

Speaker 7

Thank you for participating in today's conference. This does conclude the program. You may now disconnect, everyone.

Speaker 6

Have a great day.