• Pre-Tax Net Investment Income: $0.64 per share.
• Regular Dividend: $0.58 per share.
• Supplemental Dividend: $0.06 per share for the quarter, with an additional $0.05 per share declared for the December quarter.
• Portfolio Commitments: $89.8 million in new commitments to four new and 11 existing portfolio companies.
• Debt Prepayments: $45.2 million in proceeds with a weighted average realized IRR of 14.5%.
• Corporate Credit Facility: Increased to $485 million from $460 million.
• Equity Proceeds: Approximately $21 million raised through the equity ATM program.
• On-Balance Sheet Credit Portfolio: $1.4 billion, representing 17% year-over-year growth.
• Net Investment Income After Tax: $31.2 million or $0.66 per share.
• Total Investment Income: $48.7 million, a decrease from $51.4 million in the prior quarter.
• Loans on Nonaccrual: 3.5% of the investment portfolio at fair value.
• Weighted Average Yield: 12.7% on the portfolio.
• NAV per Share: Decreased slightly by $0.01 to $16.59 per share.
• Balance Sheet Liquidity: Approximately $475 million in cash and undrawn leverage commitments.
• Regulatory Leverage: Debt-to-equity ratio of 0.8 to 1.

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Release Date: October 29, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Capital Southwest Corp (NASDAQ:CSWC) generated pre-tax net investment income of $0.64 per share, fully covering both its regular and supplemental dividends.
• The company declared a regular dividend of $0.58 per share and a supplemental dividend of $0.05 per share for the December quarter, indicating strong dividend coverage.
• CSWC's portfolio activity included $89.8 million in new commitments, with a significant portion in first lien senior secured debt, reflecting a conservative investment strategy.
• The company increased its corporate credit facility to $485 million, enhancing its balance sheet liquidity and financial flexibility.
• CSWC's equity co-investment portfolio showed a fair value of $134 million, representing 9% of the total portfolio, with significant unrealized appreciation, providing potential for future gains.

Negative Points

• Competition in the lower middle market remains fierce, leading to tighter spreads on quality new deals and slower net portfolio growth.
• The company experienced a decrease in total investment income to $48.7 million, primarily due to a reduction in one-time cash dividends and fee revenue.
• Loans on nonaccrual represented 3.5% of the investment portfolio at fair value, indicating some credit challenges.
• CSWC's net asset value per share decreased slightly by $0.01 to $16.59, driven by net realized and unrealized depreciation on the investment portfolio.
• The company faces potential yield compression due to anticipated lower interest rates, which could impact future earnings and dividend sustainability.

Q & A Highlights

Q: Can you quantify the deals pushed into calendar Q4 and discuss the expected net portfolio growth into year-end and 2025? A: We expect significant net portfolio growth in Q4, with anticipated net portfolio growth of $150 million to $200 million for the quarter. Half of the originations are either closed or will close shortly, indicating strong portfolio growth and income.

Q: What are you seeing in the lower middle markets and broader markets in terms of new deal activity and competition? A: Deal flow in the lower middle market remains stable, but competition has increased due to larger players moving down market. This has resulted in tighter loan pricing. However, we continue to source opportunities with attractive risk-return profiles.

Q: What is your appetite for raising capital given the premium to book value and increased pipeline? A: We have close to $500 million in available capital and are actively raising capital through our ATM program. We expect to raise $20 million to $40 million per quarter and are considering increasing secured capacity and unsecured activity over the next six to nine months.

Q: Can you discuss the mix of the backlog between new and existing portfolio companies and any spread compression since September? A: The backlog consists of about two-thirds new platform companies and one-third add-ons, consistent with historical trends. Spreads have tightened slightly since September, but not significantly.

Q: Can you provide details on the non-accruals and expectations for those assets? A: We had two new non-accruals this quarter, both of which are expected to be restructured by the end of December. One is a consumer-focused company affected by inflation, and the other is a digital content company impacted by industry strikes. We anticipate restructuring will involve converting some debt to equity.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.