• Pretax Net Investment Income: $0.64 per share, covering regular and supplemental dividends.
• Undistributed Taxable Income: $0.68 per share, up from $0.64 per share in the prior quarter.
• Dividends Declared: Regular dividend of $0.58 per share and supplemental dividend increased to $0.06 per share for the March quarter.
• New Commitments: $317.5 million in new commitments to nine new and 20 existing portfolio companies.
• Convertible Notes Issued: $230 million with a coupon of 5.125% and conversion price of $25 per share.
• Gross Equity Proceeds: Approximately $54 million raised through equity ATM program.
• On Balance Sheet Credit Portfolio: $1.5 billion, a 31% year-over-year growth.
• Portfolio Yield: Weighted average yield of 12.1% on the credit portfolio.
• Net Investment Income: $30.7 million or $0.64 per share for the quarter.
• Total Investment Income: Increased to $52 million from $48.7 million in the prior quarter.
• Loans on Non-Accrual: Represented 2.7% of the investment portfolio at fair value.
• Net Asset Value (NAV) Per Share: Flat at $16.59 per share.
• Balance Sheet Liquidity: Approximately $412 million in cash and undrawn leverage commitments.
• Debt-to-Equity Ratio: 0.9 to 1, up from 0.8 to 1 in the prior quarter.

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Release Date: February 04, 2025

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

Positive Points

• Capital Southwest Corp (NASDAQ:CSWC) generated pretax net investment income of $0.64 per share, covering both regular and supplemental dividends.
• The company declared an increase in the supplemental dividend to $0.06 per share for the March quarter, indicating strong financial health.
• CSWC's portfolio activity included $317.5 million in new commitments, showcasing robust deal flow and investment opportunities.
• The company issued $230 million in convertible notes, effectively managing its debt and enhancing balance sheet flexibility.
• CSWC maintained a conservative leverage ratio, with a debt-to-equity ratio of 0.9 to 1, ensuring financial stability and liquidity.

Negative Points

• The competitive environment in the lower middle market has led to tight loan pricing, potentially impacting future returns.
• CSWC's portfolio includes some non-accrual loans, representing 2.7% of the investment portfolio at fair value, which could affect earnings.
• The company faces potential risks from tariffs and immigration policies, with around 10% of the portfolio possibly impacted.
• There is ongoing pressure from spread compression due to market competition, which may affect profitability.
• The company anticipates some refinancing risk in the portfolio, with expectations of 10% to 15% portfolio rotation in 2025.

Q & A Highlights

Q: Bowen, you mentioned follow-on investments were significant this quarter. Can you provide insights into new investment M&A activity trends, especially post-election and with interest rate certainty? A: The M&A market was active in Q4 and continues to be so in Q1. We see visibility on some exits in our portfolio for 2025. The market shows early signs of increased activity, and we are well-positioned to participate in M&A activity in 2025.

Q: How did call protection impact low repayment activity, and what refinancing risk do you see given spread pressures? A: We expect some prepayments in the future. Call protection generated approximately $600,000 in fees last quarter. We anticipate 10-15% of the portfolio to rotate in 2025. We usually get the opportunity to lower pricing and stay in deals before repricing occurs.

Q: How do you see tariffs impacting sectors like food and consumer machinery in your portfolio? A: About 10% of our portfolio could see some impact from tariffs. However, as first lien secured lenders, we believe our position will mitigate the impact. We are monitoring the situation closely.

Q: Can you provide more details on the SBA license and expected funding costs? A: We expect the license soon, despite current government delays. We anticipate ramping up quickly, with funding costs between 4-5%, which is favorable compared to other market rates.

Q: How do you view the option cost of the convertible bond, and its impact on stock trading? A: The convertible bond offers flexibility with a conversion price of $25. It's unlikely bondholders will convert unless the stock significantly exceeds this price. This issuance reduces interest expenses, benefiting shareholders, and any future conversion would be at a higher share price, which is accretive.

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