Q4 2023 Carlyle Secured Lending Inc Earnings Call

Participants

Daniel Hahn; MD of Global Credit for Illiquid Credit; Carlyle Secured Lending Inc

Aren LeeKong; Chief Executive Officer, Director; Carlyle Secured Lending Inc

Thomas Hennigan; CFO & & Chief Risk Officer; Carlyle Secured Lending Inc

Bryce Rowe; Analyst; B. Riley Securities, Inc

Finian O'Shea; Analyst; Wells Fargo Securities

Arren Cyganovich; Analyst; Citigroup Inc

Melissa Wedel; Analyst; J.P. Morgan

Presentation

Operator

Thank you for standing by, and welcome to The Carlyle secured lending Inc. fourth quarter 2023 earnings conference call. At this time, all participants are in a listen only mode after the speakers' presentation, there will be a question and answer session to ask a question. During the session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one one.
Again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Daniel Hahn, Shareholder Relations. Please go ahead, sir.

Daniel Hahn

Good morning, and welcome to Carlisle's lending's Fourth Quarter 2020 Earnings Call. With me on the call this morning at Air and the call is our Chief Executive Officer, Tom Hennigan, our Chief Financial Officer. Last night, we filed our Form 10 K and issued a press release with the presentation of our results, which are available on the Investor Relations section of our website.
Following our remarks today, we will hold a question and answer session for analysts and institutional investors this call is being webcast and a replay will be available on our website. Any forward-looking statements made today do not guarantee future performance and any undue reliance should not be placed on these statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section of our annual report on Form 10 K. These risks and uncertainties could cause actual results to differ materially from those indicated, Carl, our secured lending assumes no obligation to update any forward-looking statements at any time.
With that, I'll turn the call over to Eric.

Aren LeeKong

Thanks, Dan. Good morning, everyone, and thank you all for joining. As has become custom, I will focus my remarks on three topics for today's call. First, I'll provide an overview of the fourth quarter and full year 2023 financial results. Next, I'll touch on the current market environment. And finally, I'll conclude with a few comments on the quarter's investment activity and portfolio positioning.
Starting off with earnings, we continue to see our financial performance benefit from the higher base rate impacts in the fourth quarter. We generated net investment income of $0.56 per share, which is an increase of 8% from the prior quarter and represents an annual yield of 13% based on [1231]. This continues the trend upward from last quarter and the LTM period. As a result of our continued execution of our strategy, the quality of our portfolio and our confidence in the future. Beginning this quarter, we are increasing the base dividend by $0.03 from $0.37 to $0.4 per share. Our Board of Directors declared a total first quarter dividend of $0.48 per share, consisting of our new base dividend of $0.4 plus an $0.08 supplemental, a total increase of 9% compared to the prior quarter and an increase of 8% on the base division. Our net asset value as of December 31st was $16 and $0.99 per share. That's up $0.13 or approximately 1% from the September 30th period, primarily as a result of our Q4 earnings outpacing our dividend.
Turning now to the market environment, 2023 was defined by market volatility, slow private equity capital formation and muted M&A activity for most of the year. For context, private equity deal activity and M&A activity were down significantly in 23 compared to 22 and 21, though there was a pickup in M&A activity in the fourth quarter. With this backdrop, throughout the year, our investment team leveraged the breadth and depth of the one Carlyle platform to drive value in the evolving market environment by generating significant volume across our existing portfolio of borrowers and Carlyle's broad sourcing network, leveraging our incumbencies allowed us to source transactions where we had diligence and information advantages and existing portfolio companies accounted for approximately half of our deal closings during the year. Our flexible origination capabilities enabled us to source transactions from the lower end of the middle market at $25 million of EBITDA and opportunistically all the way up to $450 million of EBITDA in the last year that includes sponsored and nonsponsored companies across North America and Europe. Outside of our core middle market strategy, we leverage the one Carlyle network to source complementary, differentiated specialty lending transactions within the asset based and recurring revenue markets. These trends were evident throughout the year and continue with Q4 origination activity. We continue to be pleased with the overall credit performance of our existing portfolio with revenue and EBITDA up quarter over quarter and since inception compared to the prior year, portfolio company revenue and EBITDA both expanded by an average of approximately 13% and compared to the prior quarter, 1% and 3% respectively. Nonaccruals were stable in the fourth quarter. And as Tom will discuss in detail later, we expect these levels to improve in the coming quarters.
Tactical origination activity, strong credit fundamentals and the current rate environment drove record income for CGBD. despite the rising base rate environment over the last two years, we have been intentionally conservative with our dividend through the cycle. In our view, our new dividend policy, which Tom will expand upon later, provides a sustainable base dividend along with a transparent framework for supplemental dividends that will enable investors to better anchored their expertise.
Lastly, I'd like to spend a few minutes on current positioning. Our portfolio remains highly diversified and is comprised of 173 investments in 128 companies across over 25 industries. The median EBITDA across our portfolio at the end of the quarter was $76 million. The average exposure in any single portfolio company is less than 1% and 95% of our investments are in senior secured loans.
I'll now hand the call over to our CFO, Tom Hennigan.

Thomas Hennigan

Thanks, Aaron. Today I'll begin with a review of our fourth quarter earnings. Then I'll discuss portfolio performance, and I'll conclude with detail on our balance sheet positioning. As Eric previewed, we had another strong quarter on the earnings front. Total investment income for the fourth quarter was $63 million, up about $2 million from the prior quarter. This increase was driven by the continued positive impact of base rate and an increase in both other income and OID acceleration, which were aided by prepayment activity. Total expenses of $34 million were flat versus prior quarter. Of note, total interest expense was up modestly as base rates stabilized during the quarter. The result was net investment income for the fourth quarter of $28 million, or $0.56 per share, up nearly 8% from the prior quarter. And this level represents an all-time high for core ENI in any quarter. Our Board of Directors declared the dividends for the first quarter of 2024 at a total level of $0.48 per share. That's comprised of the new $0.4 base dividend, plus an $0.08 supplemental, which is payable to shareholders of record as of the close of business on March 29th. The total dividend level reflects an increase of 9% over the previous $0.44 per share and reflects the earnings power and stability of our portfolio despite a complex macroeconomic environment. Our base dividend coverage of 140% for the quarter remains above the BDC peer set average, and we've grown the base dividend by 25% since 2022. At the same time, the total dividend level also represents an attractive yield of over 12% based on the recent share price in terms of the forward outlook for earnings for the rest of 2024, we see stability at this $0.5 plus level based on the latest interest rate curves and our current conservative positioning on leverage. Despite rising rates, we've maintained a conservative, disciplined approach that we believe will enable us to continue consistent dividend payouts in a variety of rate environments, including when rates normalize. So we remain highly confident in our ability to comfortably meet and exceed our new $0.4 base dividend and continue paying out supplemental dividends each quarter and going forward, we're going to shift to a floating supplemental dividend construct and target paying out at least 50% of excess earnings through the supplemental dividend, which will allow us to be flexible as the portfolio evolves and base rates fluctuate on valuations. Our total aggregate realized and unrealized net gain was about $0.5 million for the quarter, supported by slight net positive movement in valuations. This increase in valuations combined with Q4 earnings exceeding the dividend resulted in their NAB increasing from $16.86 to $16.99 per share Turning to the portfolio, we continue to see overall stability in credit quality across the book. Similar to last quarter, there were no new nonaccruals and no additions to our watch list which are deals with risk ratings four or five total non-accruals were effectively flat quarter over quarter, and we're very pleased to report that dermatology associates was successfully recapitalized in early February with the lenders taking equity control. So we expect an improvement in non-accruals when we report March results. We continue to proactively manage the portfolio and are working with sponsors to ensure borrowers have adequate liquidity, you'll see the pick interest ticked up over the course of 2023 in almost all cases when we provided pick relief for existing borrowers, that was accompanied by significant equity support from the sponsor.
I'll finish by touching on our financing facilities and leverage. We continue to be well positioned on the right side of our balance sheet leverage is down quarter over quarter, and we're intentionally running leverage conservatively at the lower end of our target range to maintain the flexibility to invest in attractive opportunities.
Statutory leverage was about 1.2 times. And net financial leverage ended the quarter modestly lower, right, about one turn the lowest level since early 2022. This positioning allows us to remain opportunistic as the macro economic environment evolves and deal activity looks to pick up in 2024.
With that, I'll turn it back to Aaron.

Aren LeeKong

Thanks, Tom. I would like to finish by highlighting the consistency of our investment approach and reiterate our overall investment strategy. We are primarily focused on making senior secured floating rate investments to U.S. companies backed by high-quality sponsors primarily in the mid-market market. Demand for private credit remains high, and we continue to focus on sourcing transactions with significant equity cushion, attractive leverage levels, strong documentation and attractive spreads relative to not only the current market, but also historical originations through our disciplined underwriting, prudent portfolio construction and conservative approach to risk manage with attractive new originations, a stable portfolio and reduced nonaccruals. We benefited from continued execution of our strategy in 2023 and remain committed to delivering a nonvolatile cash flow stream to our investors through consistent income and solid credit performance. I'd like to now hand the call over to the operator to take your questions. And thank you so much.

Question and Answer Session

Operator

Certainly One moment for our first question and our first question comes from the line of Bryce Rowe from B. Riley. Your question, please.

Bryce Rowe

Thanks a lot. Good morning, Doug, I'm going to I'm going to take here.
Wanted to maybe piggyback on some of the prepared comments there around a potential pickup in activity. We've heard that from you or from other BDCs. And if you could kind of just help us think about what that might look like, especially relative to the leverage profile of your balance sheet at this point? I mean, you've noted that you're at one of the lowest leverage points come in quite a while. So just kind of want to understand how that could evolve over the course of 24.

Aren LeeKong

Yes. So as usual, you ask you ask question probably has multi facets. So when we think of leverage, I'll just start there. That's and Tom then should happen if he'd like. But that is a sort of multivariable topic. So one we're able to in today's market originate loans that add S plus six plus. I think last year, the average loan in the CTBT. was probably around x plus 650 and the team here will tell me if I'm off, by a few basis points, you're able to actually pay out that sustainable and nonvolatile cash flow stream, which is actually the ultimate product of any BDC without being over-levered.
And Brian, you and I and the team have talked about this behind closed doors many times. The goal here isn't to run hot just for the sake of being invested. The goal here is to yield payout that that nonvolatile cash flow stream. So for us, the leverage is really just a function of the rest of the stretch, so would be in terms of a pickup in I'm just go into the fourth quarter. So there was a pickup in transactions in the fourth quarter and the first quarter has actually been it's been stable to the fourth quarter. The reality, though, is our first question, is it, hey, how do we do 10 more deals? Our first question is the incremental transaction that we're doing for you and I've talked about this behind closed doors, is it going to improve the current portfolio period?
So when we think about whether we have to take up leverage, we think about how an uptick in volume impacts the fund.
The first question is it oh, how many more deals can we do the first question is how do we actually create cleanest most nonvolatile cash flow stream that we can so that they can is leverage done? I'm going to stay down at one turn forever. No, we don't need it to. But in this market, based on our current base returns, we actually have the benefit of being able to do that. And the same token and I'm sorry for this doesn't perfectly get to your question. Hopefully, it's getting around it even of deal flow picks up effectively that I'd rather have the biggest funnel to be able to choose the best deal side rather always see more deals, but just because originations and see more transactions has picked up again, my product and our team's product to you the street and this is kind of the strategy we tried to execute is how do you create a clean portfolio that kicks off the cash flows that you all can predict. Is that helpful?

Bryce Rowe

Yes, for sure, appreciate it.
Definitely. I definitely get gets to the meat of the question. And maybe a maybe a follow-up for Tom. Since you talked about it in the prepared remarks, the dermatology associates investment crystallized here in February, as you noted. Can you talk about what the mechanics of that might look like in the first quarter given that you're actually carrying it at a at a fair value mark above cost, right?

Thomas Hennigan

So the new capital structure, like the similar structure is going to have to trust the data first out in the last out. And then you'll see there will be a new equity traunch on our SOI. one and four notice in the aggregate, our total fair value will be crystal ball right now is roughly unchanged. So total fair value is not going to change very much. It's just it will be different instruments and there'll will be more value moving from what is now our last out on non-accrual to an equity tranche and then will be more debt on accrual status in those new tranches. So net-net, positive impact on a quarterly bit full quarter basis of about $0.01 penny per share.
Okay. No impact on fair value, but by end non-accruals going down materially with that transaction in the aggregate being removed from nonaccrual status?

Bryce Rowe

Yes. Okay. Got it. And then maybe last one for me. I mean, you all had swapped out the fixed rate for a floating rate on the on the on the baby bonds and maybe an obvious answer from you all. But just any thought around, you know, why do that as opposed to as opposed to just keeping a keep keeping a fixed rate there.

Thomas Hennigan

Price would be 8%. And when we were looking at our maturities at the end of 24, we wanted to be measured and not put all eggs in one basket and wait for the market to rebound. So we consider this kind of step one in addressing those upcoming maturities 8.2 for the market was a good rate, but candidly, not a rate we wanted to stick with for any long term amount of time. So felt the right thing to do would be to swap that to floating, certainly seeing that, but likely that base rates are going to come down. So over time paying much less than the 8.2. And that's at least with the rate where the rate curves are going to go. That's what we anticipate happening with that instrument.
And in terms of the next step is we're going to look to do potentially an index eligible deal, whether it be later in 24, early 25, increase our overall unsecured debt exposure. That's something that we'll be working on and working more say in the course of the course of the next year.

Bryce Rowe

Got it. Okay. Thanks for that first.
Thank you.

Operator

You One moment for our next question and our next question comes from the line of Finian O'Shea from Wells Fargo Securities. Your question please continue.

Finian O'Shea

Hey, everyone. Good morning. So, Aaron, I appreciate the portfolio cover as it relates to the core middle market strategy and opportunistically partaking in the larger market and or ARR deals. So in these instances, does that mean the direct lending platform that serves the BDC? And are you is opportunistically doing other styles? Or is it that the BDC complex is claiming this deal flow from other Carlyle credit verticals? And then second part, there are you still dedicated to the core middle market or are you drifting up the market by design things?

Aren LeeKong

And yet the first time into your math guys have been on an earnings call.

Finian O'Shea

Herkert issue is it should be a target school now.

Aren LeeKong

So let me start from the first question, which is a great one. So our meeting is core middle market. So if you think about the for our entire platforms, that's a great question. If you think about the median EBITDA of a company that we that we lend to, it's about $76 million. With that said, we have a pretty big and this is all within direct lending and private credit business.
We have a large origination footprint. So for us when I think the team thinks about direct lending, my ultimate goal and I'm going to go back to the previous question is we're putting together a big portfolio with the average position being less than 1%. So the my ultimate product is the cash flow stream that kicks out. So in the first half of last year, when there were a lot fewer transactions to be had. It was the first time in many years where quite frankly, the terms of the upper part of the market. So well north of $100 million of EBITDA, we were able to get at spreads that were on top of the mid-market. So call it 675, 700. We're able to get covenants that we're able to get terms that were the same. So from a from a risk standpoint, in the first half of the year, opportunistically, we're able to do direct lending and we have to make a choice for our investors. What is the safe? What is safer? If I can get similar term, similar protections and similar spread to the mid-market and actually have the protection of a much larger business. We historically have now those covenants and having that boots protections. We opportunistically went up market by the second half of the year. And you and I have talked about this behind closed doors as well as the upper part of the market got a little bit more crowded. Clo bid came back. Significant retail flows went into other direct lending strategies and some of our peers, we skewed a back down to the core mid-market. So that core mid-market, again, defined as somewhere between $25 million and in the second half of the year, probably $25 million to $75 million.
The point on ABL strategies, we do have a team focused on asset-backed lending. And when we think about asset-backed lending it is to core middle market companies, but as opposed to being infrastructure, the cash flow loan, we are literally thinking about downside protection being true assets, receivables, cash, et cetera, real estate. And then we have about us with obviously a very big software practice who also reports with a up to me and that team opportunistically has done some ARR deals. We are quite frankly, been probably less exposed. They are than some of our peers. But again, my my goal and this doesn't sound this is going to sound sexy. My goal is how do you get overpaid for taking less risk?
So you have to fill again, we're focused on direct lending once in a while. If I can go up market, if that market's dislocated. We do it and we did it last first half last year. Today we're probably more focused on the mid-market, though, opportunistically.
Would you go up market if something attractive Hopefully that answers the question.

Finian O'Shea

Yes, very much.
Thank you. And to give back to dermatology associates, sorry if I missed any of this part of the dialogue, but it sounds like you just control or received control. But this, of course, had been along some challenged credit where you had restructured the debt somewhat previously. So can you give some more color on that the state of the investment now, do you plan to put more money into it or maybe immediately bring in a new sponsor partner? And then how has the EBITDA trajectory stabilized or is it still in decline things?

Thomas Hennigan

Well, let me tackle the last part first because that's one of my favorite questions or answers that company has exhibited 12 consecutive quarters of EBITDA growth, steady performance, continued upward trend, modest increases every quarter, but 12 quarters in a row coming out of the pandemic of EBITDA increases. In terms of the future, it's stable growth. We're not looking to shoot for the fences and get it and put in material new dollars to grow. It will go into now is a new equity group assess the right time to exit the investments. We're going to invest prudently. I don't have any grand plans for the Company's performance. It's stable and improving, and we'll look at the at the right time to exit the Investment Group.

Aren LeeKong

And Jim, you know, it's a good question. I think where we are in the cycle. We hear a call direct lending spent a lot of time a year plus ago, I think was behind the scenes, looking at our processes, figuring out exactly how to be prudent and more careful in terms of, again being proactive in situations that were teetering. So I would say that we're kind of we're not in the first inning of that for our portfolio. We're close to the end of the game and where we have full control of it. I think a lot of our peers are are are just on the front end of that. So for us, part of the boring stuff is you're not going to Tom is not going to be in front of the street like we are today saying, hey, we turned the quarter without those 12 consecutive quarters of positive numbers. So for us, the key is and the key to making sure that we have a clean portfolio when we come to you and we're being conservative. So we've we feel pretty good about where things are pass-on.

Finian O'Shea

Thank you, both.
Appreciate you.

Aren LeeKong

Hopefully we get you for next quarter to trend lower our elements.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Arren Cyganovich from Citi. Your question, please.

Arren Cyganovich

Thanks for the question. And maybe just the competitive dynamics in Air Act will increase.

Aren LeeKong

And do you mind we can give you a little muffled a muffled.

Arren Cyganovich

Sorry, better.

Aren LeeKong

Sure.

Arren Cyganovich

Sorry about that. And I guess from a competitive standpoint, as activity is increasing and we're hearing spreads are tightening a bit. Tom, how is that changing, I guess relative to maybe three or six months ago?

Aren LeeKong

Yes. I've listened to a few of our peers' calls, and that seems to be a common question. So and I've been saying this a lot recently, this time isn't different. Usually when you're getting outsized returns, just what we learned in economics. One or one is capital comes into trying to attract those outsized returns, and that's what gets the spreads to go back to normal. I would say that relative to first quarter and first half of last year where and again, I'm giving you directional numbers. I actually don't have off the top of my head. So the average deal we're seeing was probably close to 675, 700. That's not normal. So relative to an abnormally why that spread and quite frankly, a very high base rate where base returns were going to be nearly 13%-plus things have come in significantly since that, let's say at the upper end of the market. If you are talking about a transaction that North is north of $100 million and could easily be considered for the BSL market in a previous slide. Those transactions have certainly gone from north of 600 to somewhere between Yes, on the larger end 500 and up to 550 for a regular way, direct lending deal. That is market. What we're seeing is somewhere between it's 550 and 625 on average of those have come in.
With that said, with base rates still where they are, you are where you are achieving sort of a store level of return without much leverage. And what you haven't seen or at least we've been we tried to be disciplined here, but what you're seeing on the upper part of the market certainly covenants of look look-alike or covenants and the existence of covenants looks a lot more like the BSL market there. So there's a lot more color light in the upper end of the direct lending market in the regular way, mid-market, I'd say more times than not you're seeing and covenants. And then the documentation is still holding in at all, say what's what else is holding in leverage levels. So just because of the overall now, even if spreads have come in, you're still talking about a 530 base rate give or take so the average leverage level that we're seeing hasn't really increased much. You're still talking about low fives and in some cases, high fours. So you're still seeing a fairly low amount of leverage. So what I'd say is dependent on where you are and this goes to the previous person's the previous analyst's question. That's why we're opportunistic as to where we play there certain times for certain parts of the market that are much more competitive and aggressive. And we at times avoid those so that we can actually get overpaid in other parts of the market. I would say that the larger market is probably the most competitive today of what it would have saved, but things are and that's why we're being a little bit more opportunistic and the mid-market, I think you're seeing a little bit more value there, more likelihood of covenants, more likelihood of stronger documentation. And I'd say from all of the market, not just the mid-market, I'd say the leverage levels are continuing to be lower than historical leverage levels. Is that does that work counting?

Arren Cyganovich

Yes, contract links.
And then just a quick one on the on your other income, I think you said that that was the kind of quarter to quarter. The prepayment activity was going to happen with some more prepayment fees, would you expect that your other income line will revert back to more of your longer-term historical in this kind of environment for us? Would that would you expect that to come back down over the past few months, two preceding quarters?

Thomas Hennigan

Aaron, it's Tom. When we look at other income or event-driven income, we look at a combination of total OID acceleration plus other income. And that line item generally will move based on repayments, amendment activity. And historically that has been a little under $4 million per quarter earlier in 23 based on lower prepayment activity was lower in a couple of quarters. It was more like $3 million per quarter than less than $3 million this quarter. That combined number was about $4.5 million. So relative to the historical trend, it was about $0.5 million or about a penny higher than the historical trend line. It was it was a pop versus the rest of 2023, which was abnormally low. So yes, upon for 20 for the fourth quarter, but only about a penny higher than the historical average.

Arren Cyganovich

Yes, that's helpful.
Thank you.

Aren LeeKong

Thank you.

Operator

Thank you.
And as a reminder, ladies and gentlemen, if you have a question at this time, please press star one one on your telephone One moment for our next questions.
And our next question comes from the line of Melissa Wedel from JP Morgan and your question, please.

Melissa Wedel

Good morning. Thanks for taking my question. Most of mine have already been asked and answered. And I wanted to follow up on one of the slides, in particular with the risk-rating distribution, really, it seems like in a side, given how strong it seems like the fundamental performance is of companies across the portfolio broadly, but did notice a very small tick up in three and four it rated portfolio companies. I guess the question is to the extent that you are seeing portfolio companies with any particular challenges, where is that coming from? Is it still inflationary pressures that labor costs curious what you're seeing.

Aren LeeKong

So maybe I'll start and Melissa, thank you for the question and Tom hub in So risk ratings and just so you have it. We behind these risk ratings. We have three or four other processes that we run to ensure that we have our arms around everything. They the overarching theme I'd give you, though, is sometimes when we're moving things from two to three, three to four. It is less a function so that the five is a function of their serious issues. But in many cases, Melissa, it's more of a function of us, ensuring that we are putting the appropriate level of resources around Carlyle on names, well ahead of when something goes well. So I think one of the issues that we forgotten direct lending sometimes is if something's wrong, if you are managing your book and you actually are looking at your numbers and you do typically designed the documentation correctly, you have 12 months, 24 months long ahead of time to start preparing. So it outset, I'll start that with a slight movement from two to three times from three to fours. That's generally going to be particularly for flight, not fire alarms. That's generally going to be us saying, hey, we want more resource to look at it, a name or two.
Then the last piece I'll tell you is relative to a year ago and a year ago, a lot of what we're seeing was inflationary driven. So you would have heard us a year ago when we had our issues in the health care space that then took care of the we've taken care of at this point. A lot of that was about inflationary pressure this past year. If you look at our overall portfolio, then I'll hand it's Tom, the inflationary theme, though it may still be there in small parts, but I think our average our average business was up about 13% in revenue with just a little bit north of that in EBITDA. So you are by definition, revenue and EBITDA are either growing or in line and as of late EBITDA is outpacing that. So you're right, that's a year ago. The inflationary theme was the was the conversation today, not as much. And by the way, Melissa, I'll tell you like picking up speed a year ago was the theme today not as much today. It's changed so much that we you and colleagues in the analyst build.
One of the other questions, no investors, what's your view on forward interest rates?
So think about the fact that we're asking we're talking about interest rates being cut and on the same call asking about inflationary pressure. So I think we turn that quarter generally, knock on wood on our portfolio. Tom, what did I miss

Thomas Hennigan

But it is specific to the changes in the risk ratings this quarter or the one on page that four categories, two, loans, two positions that contributed the fair value increased. One is dermatology which has continued to inch up every quarter. The other is pro PT., which is our home base side. That's the other deal that's on nonaccrual with value that again improved so it's slightly up. So that's that before movement this quarter. That's a positive or two deals on nonaccrual value actually going in the right direction in the three category that increased about $15 million was driven primarily by two deals. When I say that three category, it means to Aaron's point we're focused on at risk has increased probably for those particular credits leverages up. Ebitda is likely down when we close. But importantly, we're not worried about losing money. And so we're focused on it, but we're really not worried about losing money at the particular themes for those deals. One is consumer just to consumer discretionary deals. We don't have very much in the portfolio, but we've seen lower demand in consumer driven businesses and then across our industrial book, just destocking and one of the credits just headed. We've had that in a couple of credits in the book, and that was one of the downgrades just a general destocking in the current environment.

Aren LeeKong

So those are a couple of things I'd mentioned in terms of as we're looking at deals that migrates from a two to three categories much more EDO's relative to a year ago where everything was inflation now it's more idiosyncratic and we're on top of it. Does that help move it up?

Melissa Wedel

It's very helpful.

Aren LeeKong

Thanks. Thanks for joining the call.

Operator

Thank you.
This does conclude the question and answer session of today's program. I'd like to hand the program back to air and recon for any further remarks.

Aren LeeKong

Thank you, operator, everyone. Thanks for joining, and we look forward to talking to you later in the day. We appreciate your partnership and talk to you next quarter.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.
Good day.