Capital Southwest Corporation Q2 FY2026 earnings call

• Generated pretax net investment income of $0.61 per share and increased undistributed taxable income balance to $1.13 per share. - Harvested $44.8 million in realized gains from equity exits over 12 months. - Board declared dividends: $0.58 regular and $0.06 supplemental per share. - Raised $350 million in 5.95% notes due 2030, used proceeds to redeem prior notes without make-whole premium. - Raised ~$40 million in gross equity proceeds via ATM program. - Robust deal flow in lower middle market: $245 million in new commitments to 7 new and 10 existing portfolio companies; add-on financings 32% of total capital commitments. - On-balance sheet credit portfolio $1.7 billion, 24% y-o-y growth; 99% first lien senior secured, weighted average yield 11.5%, leverage 3.5x EBITDA. - Equity co-investment portfolio: 83 investments, $172 million, 9% of total, marked at 126% of cost. - Portfolio diversified across industries, average exposure per company <1% of investment assets.

During the second fiscal quarter, Capital Southwest generated pretax net investment income of $0.61 per share. The undistributed taxable income balance increased to $1.13 per share from $1 per share as of the prior quarter. Over 12 months, $44.8 million in realized gains from equity exits were harvested. The Board declared $0.58 in regular dividends and a $0.06 per share supplemental dividend, totaling $0.64 per share for the December quarter. The company raised $350 million in 5.95% notes due 2030, used proceeds to redeem prior notes, and raised ~$40 million in gross equity proceeds via an ATM program. Deal flow in the lower middle market was robust with $245 million in new commitments to 7 new and 10 existing portfolio companies. The on-balance sheet credit portfolio ended the quarter at $1.7 billion (24% y-o-y growth), with 89.9% in first lien senior secured debt, weighted average yield 11.5%, and leverage 3.5x EBITDA. The equity co-investment portfolio had 83 investments, $172 million, 9% of total portfolio, marked at 126% of cost. NAV per share was $16.62.

• Expect similar origination volume in upcoming quarter to Q2 2026. - Confident in continuing to distribute dividends based on current UTI balance and expected equity gains. - Intend to maintain regulatory leverage cushion and continue raising debt and equity capital to ensure liquidity and conservative balance sheet construction.

• Macro-economic uncertainty impacting loan pricing for high-quality opportunities. - Idiosyncratic issues affecting some lower middle market portfolio companies. - Potential prepayment risk from high-performing portfolio companies, but portfolio granularity mitigates material impact.

Q: Pipeline and origination activity heading into year-end?

A: Michael Sarner stated there's a significant uptick in the pipeline, expecting similar volume to Q2 2026, with growth likely to continue.

Q: Credit quality and portfolio companies?

A: EBITDA and revenue growth of existing portfolio companies ~10% annually; diversified portfolio with conservative leverage and loan-to-value in deals.

Q: Stock-based compensation and salary expense?

A: Chris Rehberger said RSU expense consistent, cash compensation dependent on quarter performance, possibly slightly elevated due to staffing initiatives.

Q: Industries with discerning eye?

A: Michael Sarner mentioned health care due to uncertainty in Medicare and Medicaid reimbursement, but still evaluating with private equity partners.

Q: Monetizing investment platform?

A: Michael Sarner said they're seeking partners to monetize the investment platform, hopeful for an announcement within next 12 months.

Q: Equity co-investment allocation?

A: Michael Sarner expressed interest in increasing equity co-investment but gradual due to deal size considerations.

Q: Yield dilution with commitments growth?

A: Michael Sarner stated not expecting significant yield degradation, with similar yield profiles expected in upcoming deals.