CAPITAL SOUTHWEST CORP Q2 FY2025 earnings call

• Generated pre-tax net investment income of $0.64 per share, which fully covered the regular dividend of $0.58 per share and supplemental dividend of $0.06 per share paid during the quarter.
• Board of directors declared a regular dividend of $0.58 per share and a supplemental dividend of $0.05 per share for the December 2024 quarter.
• Deal flow in the lower middle market was healthy, but competition was fierce, leading to tighter spreads on quality new deals.
• Portfolio activity included $89.8 million in new commitments to four new portfolio companies and 11 existing portfolio companies, with add-on financing being an important origination source.
• Increased the ING-led corporate credit facility to $485 million from $460 million and raised approximately $21 million in gross equity proceeds via the equity ATM program.
• Balance sheet liquidity remained robust with approximately $475 million in cash and undrawn leverage commitments.

During the quarter, Capital Southwest generated pre-tax net investment income of $0.64 per share. The on-balance sheet credit portfolio ended the quarter at $1.4 billion, representing a year-over-year growth of 17% from $1.2 billion as of September 2023. The equity co-investment portfolio consisted of 72 investments with a total fair value of $134 million, which is 9% of the total portfolio at fair value. The equity portfolio was marked at 132% of cost, representing $32.5 million in embedded unrealized appreciation or $0.68 per share.

• Backlog of deals indicates strong net portfolio growth in the December quarter.
• Board declared a regular dividend of $0.58 per share and a supplemental dividend of $0.05 per share for the December 2024 quarter.
• Expect significant net portfolio growth in the fourth quarter due to deals pushed into that period.

• Intense competition in the lower middle market leading to tighter spreads on quality new deals.
• Potential disruptions in deal flow affecting portfolio growth.
• Credit risks in sectors such as low-end consumer businesses and B2B businesses facing slower purchase decisions.

Q: Brian McKenna asked about quantifying deals pushed into 4Q and the magnitude of net portfolio growth.

A: Bowen Diehl stated that deals signed up or likely to win would result in significant net portfolio growth in 4Q. Michael Sarner mentioned an expected $150 million to $200 million net portfolio growth for the quarter.

Q: Doug Harter inquired about the appetite to raise capital.

A: Michael Sarner responded that they are opportunistically looking to raise additional capital, with an expectation of $20 million to $40 million in ATM proceeds quarterly.

Q: Bryce Rowe asked about the portfolio yield and non-accruals.

A: Michael Sarner explained yield compression due to SOFR and non-accruals, and expected further compression in the 12/31 quarter. Bowen Diehl discussed that non-accruals were expected to be restructured by the end of December.

Q: Robert Dodd asked about emerging signs of weakness.

A: Bowen Diehl mentioned low-end consumer businesses and B2B businesses with slower purchase decisions as areas of concern.