UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): November 6, 2018
CAPITAL SOUTHWEST CORPORATION
(Exact Name Of Registrant As Specified In Charter)
Texas | 814-00061 | 75-1072796 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
5400 Lyndon B. Johnson Freeway, Suite 1300
Dallas, Texas 75240
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (214) 238-5700
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ||
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ||
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ||
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition.
On November 6, 2018, Capital Southwest Corporation (the “Company”) issued a press release, a copy of which has been furnished as Exhibit 99.1 hereto.
The information furnished in this Current Report on Form 8-K under Item 2.02, including Exhibit 99.1, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1934, except as shall be expressly set forth by reference in a future filing.
Item 7.01 Regulation FD Disclosure.
The Company expects to hold a conference call with analysts and investors on November 7, 2018. A copy of the investor presentation slides to be used by the Company on such conference call is furnished as Exhibit 99.2 to this Form 8-K and incorporated herein by reference.
The information set forth under this Item 7.01, including Exhibit 99.2, is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: November 6, 2018
By: | /s/ Bowen S. Diehl | |
Name: Bowen S. Diehl | ||
Title: Chief Executive Officer and President | ||
Exhibit 99.1
 | Lincoln Centre Tower I 5400 Lyndon B. Johnson Freeway, Suite 1300 Dallas, Texas 75240 T 214.238.5700 F 214.238.5701 | |
Capital Southwest Announces Financial Results for Second Fiscal Quarter Ended September 30, 2018
CSWC Reports Pre-Tax Net Investment Income of $0.36 Per Share
Dallas, Texas – November 6, 2018 – Capital Southwest Corporation (“Capital Southwest,” “CSWC” or the “Company”) (Nasdaq: CSWC), an internally managed business development company focused on providing flexible financing solutions to support the acquisition and growth of middle market businesses, today announced its financial results for the second fiscal quarter ended September 30, 2018.
Second Quarter Fiscal Year 2019 Financial Highlights
• | Total Investment Portfolio: $491.6 million |
◦ | Credit Portfolio of $336.7 million: |
▪ | No investments currently on non-accrual |
▪ | 85% 1st Lien Debt |
▪ | $81.9 million in new committed credit investments |
◦ | Equity Portfolio of $88.6 million, excluding investment in I-45 Senior Loan Fund ("I-45 SLF"): |
▪ | $9.4 million in new equity investments and $5.4 million in follow-on equity investments during the quarter |
◦ | CSWC Investment in I-45 SLF of $66.3 million |
▪ | I-45 SLF portfolio of $229.7 million |
▪ | Portfolio consists of 46 issuers: 94% 1st Lien Debt and 6% 2nd Lien Debt |
▪ | I-45 SLF paid a $2.3 million quarterly dividend to CSWC, an effective yield of 13.9% |
• | Pre-Tax Net Investment Income of $5.8 million, or $0.36 per weighted average diluted share |
• | Declared and Paid Total Dividend of $0.44 per share |
◦ | Regular Dividend of $0.34 per share and Supplemental Dividend of $0.10 per share |
• | Net Realized and Unrealized Portfolio Appreciation: $1.0 million |
• | Cash and Cash Equivalents: $10.2 million |
• | Total Net Assets: $307.8 million |
• | Net Asset Value (“NAV”) per Share: $18.84 |
• | Weighted Average Yield on Debt Investments: 11.6% |
In commenting on the Company's results, Bowen Diehl, President and Chief Executive Officer, stated, “We had a very robust quarter of originations, as we closed on six new investments and three follow-on investments during the quarter. As discussed in recent earnings releases, our deal teams have done an excellent job developing strong relationships and market presence which has resulted in strong deal flow. This quarter, we were also able to originate some interesting new equity co-investment opportunities alongside our first lien loans. In addition, I am pleased to report that credit quality remains strong, with no portfolio companies on non-accrual. From a capitalization perspective, we continue to diversify our sources of capital in an effort to strengthen our balance sheet. This quarter we successfully raised an additional $17.0 million in gross proceeds from the December 2022 Notes under our ATM debt distribution agreement. Additionally, subsequent to quarter end, we opportunistically raised $13.2 million of new equity issuing 700,000 shares of common stock at $18.90 per share. We were able to execute this capital raise above our NAV and at only a 1.9% discount to our closing stock price on the day before the offering.”
Second Quarter Fiscal Year Investment Activities
During the quarter ended September 30, 2018, the Company originated six new investments and three follow-on investments totaling $96.7 million in commitments. New investment transactions that occurred during the quarter ended September 30, 2018 are summarized as follows:
Adams Publishing Group, LLC, $15.0 million 1st Lien Senior Secured Debt, $1.7 million Delayed Draw Term Loan: Adams Publishing Group is the owner of print and digital media assets in rural markets in 20 states, consisting primarily of local daily, weekly and monthly publications focused consumers and small to medium sized businesses.
Dynamic Communities, LLC, $11.2 million 1st Lien Senior Secured Debt, $0.5 million Revolving Loan, $2.0 million Preferred Equity: Dynamic Communities develops and manages technology and business-centric conferences, events, online community groups, and training courses specifically related to Microsoft's suite of business software.
Blaschak Coal Corp., $8.5 million Split Lien Senior Secured Debt: Blaschak Coal is a domestic miner, packager, and distributor of anthracite coal in Pennsylvania used primarily for home heating and other niche applications.
ASC Ortho Management Company, LLC, $9.3 million 1st Lien Senior Secured Debt, $3.1 million 2nd Lien Senior Secured Debt, $1.5 million Revolving Loan, $0.8 million Common Equity: OrthoBethesda is a provider of comprehensive orthopedic services to patients in the greater Washington, D.C. region.
SIMR, LLC, $11.7 million 1st Lien Senior Secured Debt and $5.7 million in Common Equity: SIMR, LLC (d/b/a STATinMED Research) is a technology-enabled health economics and outcomes research ("HEOR") company that provides research, consulting and targeted communications for global pharmaceutical, biotechnology and health information companies.
Danforth Advisors, LLC, $7.3 million 1st Lien Senior Secured Debt, $1.0 million Revolving Loan, $0.9 million Common Equity: Danforth Advisors provides operational accounting, finance support and strategy services to developing companies primarily in the life science and healthcare industries.
Prism Spectrum Holdings LLC, $9.1 million add-on to 1st Lien Senior Secured Debt, $2.0 million add-on to Revolving Loan, $4.8 million add-on to Common Stock: Prism Spectrum Holdings LLC is a provider of environmental remediation services.
Other Portfolio Companies, $0.6 million add-ons to Preferred Stock.
Second Fiscal Quarter 2019 Operating Results
For the quarter ended September 30, 2018, Capital Southwest reported total investment income of $12.6 million, compared to $11.1 million in the prior quarter. The increase in investment income was attributable to an increase in average debt investments outstanding.
For the quarter ended September 30, 2018, total operating expenses (excluding interest expense) remained flat at $3.7 million compared to the prior quarter.
For the quarter ended September 30, 2018, interest expense was $3.1 million, compared to $2.4 million in the prior quarter. The increase in interest expense was due to increased average debt outstanding on the revolving credit facility during the quarter, as well as an increase in the amount of December 2022 Notes outstanding.
For the quarter ended September 30, 2018, total pre-tax net investment income was $5.8 million, compared to $5.0 million in the prior quarter.
For the quarter ended September 30, 2018, there was tax expense of $0.3 million, compared to $0.4 million in the prior quarter.
During the quarter ended September 30, 2018, Capital Southwest recorded total realized and unrealized gains on investments of $1.0 million, compared to $7.0 million in the prior quarter. The net increase in net assets resulting from operations was $6.6 million for the quarter, compared to $11.7 million in the prior quarter.
The Company’s NAV at September 30, 2018 was $18.84 per share, as compared to $18.87 at June 30, 2018. The decrease in NAV from the prior quarter is due to the $0.10 per share supplemental dividend declared and paid in the current quarter, offset by net unrealized gains on the investment portfolio.
Liquidity and Capital Resources
At September 30, 2018, Capital Southwest had approximately $10.2 million in unrestricted cash and money market balances, $127 million of total debt outstanding on its revolving credit facility and $73.4 million, net of unamortized debt issuance costs, in 5.95% Notes due in 2022 (the "December 2022 Notes"). As of September 30, 2018, Capital Southwest had $83.0 million in available borrowings under the revolving credit facility. Regulatory leverage at the end of the quarter was 0.65 to 1.
On June 11, 2018, the Company entered into an "At-The-Market" ("ATM") debt distribution agreement, pursuant to which it may offer for sale, from time to time, up to $50 million in aggregate principal amount of December 2022 Notes through B. Riley FBR, Inc., acting as its sales agent. Sales of the December 2022 Notes may be made in negotiated transactions or transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on The Nasdaq Global Select Market, or similar securities exchanges or sales made through a market maker other than on an exchange at prices related to prevailing market prices or at negotiated prices.
During the quarter ended September 30, 2018, the Company sold a total of 671,621 of the December 2022 Notes under the ATM debt distribution agreement, generating approximately $17.0 million in gross proceeds at an effective yield of 5.86%. Cumulative to date, the Company has generated approximately $19.9 million in gross proceeds under the ATM debt distribution agreement.
Additionally, I-45 SLF has total commitments outstanding of $165 million from a group of four bank lenders in its Deutsche Bank led credit facility, which is scheduled to mature in July 2022. As of September 30, 2018, I-45 SLF had $147 million in borrowings outstanding under its credit facility.
Subsequent to quarter end, on October 4, 2018, the Company issued an aggregate of 700,000 shares of the Company's common stock at a net price of $18.90 per share. The total net proceeds of the offerings, before expenses, was approximately $13.2 million. The shares were sold at a 1.9% discount to the prior day closing price and above then current NAV of $18.87.
Share Repurchase Program
On January 25, 2016, Capital Southwest announced that its Board of Directors authorized the repurchase of up to $10.0 million of its common stock at prices significantly below the Company’s net asset value per share as reported in its most recent financial statements. The Board authorized the share repurchase program because it believes that the Company’s common stock may be undervalued from time to time due to market volatility.
During the quarter ended September 30, 2018, the Company did not repurchase any common stock under the program. Cumulative to date, the Company has repurchased a total of 35,911 shares at an average price of $16.37 per share, including commissions paid. The Company currently has approximately $9.4 million available for additional repurchases under the program.
Second Quarter 2019 Earnings Results Conference Call and Webcast
Capital Southwest has scheduled a conference call on Wednesday, November 7, 2018, at 11:00 a.m. Eastern Time to discuss the second quarter 2019 financial results. You may access the call by dialing (866) 502-8274 and using the Conference ID 8769879 at least 10 minutes before the call. The call can also be accessed using the Investor Relations section of Capital Southwest's website at www.capitalsouthwest.com, or by using http://edge.media-server.com/m6/p/c7dcav3v.
A telephonic replay will be available through November 14, 2018 by dialing (855) 859-2056 and using the Conference ID 8769879. An audio archive of the conference call will also be available on the Investor Relations section of Capital Southwest’s website.
For a more detailed discussion of the financial and other information included in this press release, please refer to the Capital Southwest Form 10-Q for the period ended September 30, 2018 to be filed with the Securities and Exchange Commission and Capital Southwest’s Second Fiscal Quarter 2019 Earnings Presentation to be posted on the Investor Relations section of Capital Southwest’s website at www.capitalsouthwest.com.
About Capital Southwest
Capital Southwest Corporation (Nasdaq: CSWC) is a Dallas, Texas-based, internally managed business development company with approximately $308 million in net assets as of September 30, 2018. Capital Southwest is a middle market lending firm focused on supporting the acquisition and growth of middle market businesses
with $5 million to $25 million investments across the capital structure, including first lien, unitranche, second lien, subordinated debt and non-control equity co-investments. As a public company with a permanent capital base, Capital Southwest has the flexibility to be creative in its financing solutions and to invest to support the growth of its portfolio companies over long periods of time.
Forward-Looking Statements
This press release contains historical information and forward-looking statements with respect to the business and investments of Capital Southwest. Forward-looking statements are statements that are not historical statements and can often be identified by words such as "will," "believe," "expect" and similar expressions and variations or negatives of these words. These statements are based on management's current expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. These risks include risks related to changes in the markets in which Capital Southwest invests, changes in the financial and lending markets, regulatory changes, tax treatment and general economic and business conditions.
Readers should not place undue reliance on any forward-looking statements and are encouraged to review Capital Southwest's Annual Report on Form 10-K for the year ended March 31, 2018 and subsequent filings with the Securities and Exchange Commission for a more complete discussion of the risks and other factors that could affect any forward-looking statements. Except as required by the federal securities laws, Capital Southwest does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release.
Investor Relations Contact:
Michael S. Sarner, Chief Financial Officer
214-884-3829
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES | |||||||
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES | |||||||
(In thousands, except shares and per share data) | |||||||
September 30, | March 31, | ||||||
2018 | 2018 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Investments at fair value: | |||||||
Non-control/Non-affiliate investments (Cost: $287,656 and $200,981, respectively) | $ | 294,065 | $ | 199,949 | |||
Affiliate investments (Cost: $66,038 and $51,648, respectively) | 65,018 | 53,198 | |||||
Control investments (Cost: $91,425 and $82,768, respectively) | 132,518 | 139,948 | |||||
Total investments (Cost: $445,119 and $335,397, respectively) | 491,601 | 393,095 | |||||
Cash and cash equivalents | 10,193 | 7,907 | |||||
Receivables: | |||||||
Dividends and interest | 8,307 | 5,219 | |||||
Escrow | — | 119 | |||||
Other | 509 | 447 | |||||
Income tax receivable | 109 | 109 | |||||
Deferred tax asset | 2,060 | 2,050 | |||||
Debt issuance costs (net of accumulated amortization of $1,440 and $1,041, respectively) | 2,476 | 2,575 | |||||
Other assets | 1,252 | 5,969 | |||||
Total assets | $ | 516,507 | $ | 417,490 | |||
Liabilities | |||||||
Notes (Par value: $75,676 and $57,500, respectively) | $ | 73,407 | $ | 55,305 | |||
Credit facility | 127,000 | 40,000 | |||||
Other liabilities | 5,363 | 6,245 | |||||
Dividends payable | — | 4,525 | |||||
Accrued restoration plan liability | 2,889 | 2,937 | |||||
Deferred income taxes | — | 190 | |||||
Total liabilities | 208,659 | 109,202 | |||||
Commitments and contingencies (Note 11) | |||||||
Net Assets | |||||||
Common stock, $0.25 par value: authorized, 25,000,000 shares; issued, 18,682,706 shares at September 30, 2018 and 18,501,298 shares at March 31, 2018 | 4,671 | 4,625 | |||||
Additional paid-in capital | 263,680 | 260,713 | |||||
Net investment income in excess of (less than) distributions | (5,383 | ) | 6,147 | ||||
Accumulated undistributed net realized gain | 22,143 | 3,231 | |||||
Unrealized appreciation of investments, net of income taxes | 46,674 | 57,509 | |||||
Treasury stock - at cost, 2,339,512 shares | (23,937 | ) | (23,937 | ) | |||
Total net assets | 307,848 | 308,288 | |||||
Total liabilities and net assets | $ | 516,507 | $ | 417,490 | |||
Net asset value per share (16,343,194 shares outstanding at September 30, 2018 and 16,161,786 shares outstanding at March 31, 2018) | $ | 18.84 | $ | 19.08 | |||
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES | |||||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||
(Unaudited) | |||||||||||||||
(In thousands, except shares and per share data) | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
September 30, | September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Investment income: | |||||||||||||||
Interest income: | |||||||||||||||
Non-control/Non-affiliate investments | $ | 7,049 | $ | 5,136 | $ | 13,081 | $ | 9,438 | |||||||
Affiliate investments | 1,799 | 141 | 3,251 | 281 | |||||||||||
Control investments | 384 | — | 543 | — | |||||||||||
Dividend income: | |||||||||||||||
Non-control/Non-affiliate investments | 2 | 30 | 25 | 60 | |||||||||||
Affiliate investments | 44 | — | 82 | — | |||||||||||
Control investments | 3,112 | 3,058 | 6,126 | 6,103 | |||||||||||
Interest income from cash and cash equivalents | 5 | 5 | 9 | 12 | |||||||||||
Fees and other income | 200 | 139 | 585 | 339 | |||||||||||
Total investment income | 12,595 | 8,509 | 23,702 | 16,233 | |||||||||||
Operating expenses: | |||||||||||||||
Compensation | 1,963 | 1,606 | 3,873 | 3,244 | |||||||||||
Spin-off compensation plan | — | 173 | — | 345 | |||||||||||
Share-based compensation | 482 | 384 | 957 | 752 | |||||||||||
Interest | 3,109 | 911 | 5,482 | 1,649 | |||||||||||
Professional fees | 407 | 481 | 895 | 960 | |||||||||||
Net pension expense | 39 | 41 | 79 | 81 | |||||||||||
General and administrative | 793 | 842 | 1,618 | 1,551 | |||||||||||
Total operating expenses | 6,793 | 4,438 | 12,904 | 8,582 | |||||||||||
Income before taxes | 5,802 | 4,071 | 10,798 | 7,651 | |||||||||||
Income tax (benefit) expense | 256 | 134 | 635 | 278 | |||||||||||
Net investment income | $ | 5,546 | $ | 3,937 | $ | 10,163 | $ | 7,373 | |||||||
Realized gain | |||||||||||||||
Non-control/Non-affiliate investments | $ | 17 | $ | 210 | $ | 217 | $ | 834 | |||||||
Affiliate investments | 77 | — | 77 | — | |||||||||||
Control investments | — | — | 18,619 | — | |||||||||||
Total net realized gain on investments before income tax | 94 | 210 | 18,913 | 834 | |||||||||||
Change in unrealized appreciation of investments | |||||||||||||||
Non-control/Non-affiliate investments | 1,877 | (1,747 | ) | 6,409 | (4,166 | ) | |||||||||
Affiliate investments | (868 | ) | (322 | ) | (1,539 | ) | (654 | ) | |||||||
Control investments | (124 | ) | 6,445 | (16,087 | ) | 10,495 | |||||||||
Income tax (provision) benefit | 63 | 120 | 382 | 205 | |||||||||||
Total net change in unrealized appreciation of investments, net of tax | 948 | 4,496 | (10,835 | ) | 5,880 | ||||||||||
Net realized and unrealized gains on investments | $ | 1,042 | $ | 4,706 | $ | 8,078 | $ | 6,714 | |||||||
Net increase in net assets from operations | $ | 6,588 | $ | 8,643 | $ | 18,241 | $ | 14,087 | |||||||
Pre-tax net investment income per share - basic and diluted | $ | 0.36 | $ | 0.25 | $ | 0.67 | $ | 0.48 | |||||||
Net investment income per share – basic and diluted | $ | 0.34 | $ | 0.25 | $ | 0.63 | $ | 0.46 | |||||||
Net increase in net assets from operations – basic and diluted | $ | 0.40 | $ | 0.54 | $ | 1.12 | $ | 0.88 | |||||||
Weighted average shares outstanding – basic | 16,318,737 | 16,010,231 | 16,249,892 | 16,009,968 | |||||||||||
Weighted average shares outstanding – diluted | 16,323,477 | 16,077,837 | 16,254,365 | 16,075,193 | |||||||||||
Capital Southwest Corporation Q2 2019 Earnings Presentation November 7, 2018 5400 Lyndon B. Johnson Freeway, Suite 1300 | Dallas, Texas 75240 | 214.238.5700 | capitalsouthwest.com
Important Notices • These materials and any presentation of which they form a part are neither an offer to sell, nor a solicitation of an offer to purchase, any securities of Capital Southwest. • These materials and the presentations of which they are a part, and the summaries contained herein, do not purport to be complete and no obligation to update or otherwise revise such information is being assumed. Nothing shall be relied upon as a promise or representation as to the future performance of Capital Southwest. Such information is qualified in its entirety by reference to the more detailed discussions contained elsewhere in Capital Southwest’s public filings with the Securities and Exchange Commission. • There is no guarantee that any of the estimates, targets or projections illustrated in these materials and any presentation of which they form a part will be achieved. Any references herein to any of the Capital Southwest’s past or present investments or its past or present performance, have been provided for illustrative purposes only. It should not be assumed that these investments were or will be profitable or that any future investments by Capital Southwest will be profitable or will equal the performance of these investments. • The information contained herein has been derived from financial statements and other documents provided by the portfolio companies unless otherwise stated. • Past performance is not indicative of future results. In addition, there can be no assurance that unrealized investments will be realized at the expected multiples shown as actual realized returns will depend on, among other factors, future operating results of each of Capital Southwest’s current portfolio companies, the value of the assets and economic conditions at the time of disposition, any related transaction costs, and the timing and manner of sale, all of which may differ from the assumptions on which Capital Southwest’s expected returns are based. In many instances, Capital Southwest will not determine the timing or manner of sale of its portfolio companies. Page 2
Forward-Looking Statements • This presentation contains forward-looking statements relating to, among other things, the business, market conditions, financial condition and results of operations of Capital Southwest, the anticipated investment strategies and investments of Capital Southwest, and future market demand. Any statements that are not statements of historical fact are forward-looking statements. Forward-looking statements are often, but not always, preceded by, followed by, or include words such as "believe," "expect," "intend," "plan," "should" or similar words, phrases or expressions or the negative thereof. These statements are made on the basis of the current beliefs, expectations and assumptions of the management of Capital Southwest and speak only as of the date of this presentation. There are a number of risks and uncertainties that could cause Capital Southwest’s actual results to differ materially from the forward-looking statements included in this presentation. • For a further discussion of some of the risks and uncertainties applicable to Capital Southwest and its business, see Capital Southwest’s Annual Report on Form 10-K for the fiscal year ended March 31, 2018 and its subsequent filings with the Securities and Exchange Commission. Other unknown or unpredictable factors could also have a material adverse effect on Capital Southwest’s actual future results, performance, or financial condition. As a result of the foregoing, readers are cautioned not to place undue reliance on these forward- looking statements. Capital Southwest does not assume any obligation to revise or to update these forward- looking statements, whether as a result of new information, subsequent events or circumstances, or otherwise, except as may be required by law. Page 3
Conference Call Participants Bowen S. Diehl President and Chief Executive Officer Michael S. Sarner Chief Financial Officer Chris Rehberger VP Finance / Treasurer Page 4
CSWC Company Overview CSWC is a middle-market lending firm focused on supporting the acquisition and growth of middle-market companies across the capital structure • CSWC was formed in 1961, and elected to be regulated as a BDC in 1988 • Publicly-traded on Nasdaq: Common Stock (“CSWC”) and December 2022 Notes (“CSWCL”) • Internally Managed BDC with RIC tax treatment for U.S. federal income tax purposes • December 2014: announced intent to spin-off industrial growth company (“CSW Industrials”; Nasdaq: "CSWI") tax free • January 2015: launched credit investment strategy • September 2015: completed tax free spin off of CSWI • 21 employees based in Dallas, Texas • Total Balance Sheet Assets of $517MM as of September 30, 2018 • Manage I-45 Senior Loan Fund (“I-45 SLF”) in partnership with Main Street Capital (Nasdaq: “MAIN”) Page 5
Q2 2019 Highlights Financial Highlights • Q2 2019 Pre-Tax Net Investment Income (“NII”) of $5.8MM or $0.36 per share • Paid $0.44 per share in Total Dividends, comprised of $0.34 per share Regular Dividend and $0.10 per share Supplemental Dividend • Investment Portfolio at Fair Value increased 20% to $492MM from $411MM in prior quarter ◦ $96.7MM committed in six new portfolio companies and three add-ons • Received $2.3MM dividend from I-45 SLF, an effective yield of 13.9% at fair value • $83.0MM available on Credit Facility and $10.2MM in cash and cash equivalents as of quarter end • This quarter, sold 671,621 of our December 2022 Notes through our At-The-Market (“ATM”) Program for gross proceeds of $17.0 MM ◦ Cumulative ATM Program gross proceeds of $19.9 MM sold at an effective yield of 5.86% to date • Subsequent to quarter end, completed equity raise of 700,000 shares at a net price of $18.90 per share ◦ Gross proceeds of $13.2 MM before expenses ◦ Shares were sold at a 1.9% discount to the prior day closing price ◦ Shares were sold above then current NAV of $18.87 Page 6
Track Record of Dividend and NAV Growth Continues • In the last twelve months ending 9/30/18, CSWC generated $1.22 per share in Pre-Tax NII and paid out $1.17 per share in regular dividends ◦ Eleven consecutive quarters of regular dividend per share growth • Cumulative Regular Dividend Coverage of 102% since the 2015 spin-off • Announced Supplemental Dividend Program in June 2018 ◦ Expect to pay $0.10 per share Supplemental Dividend per quarter going forward, subject to Board approval • Adjusted NAV (excluding Supplemental Dividends) increased to $19.80 per share at 9/30/18 from $19.73 per share at 6/30/18 9.3% 19.7% 6.6% 6.3% 5.6% 5.2% 10.6% 4.2% 3.0% 1.8% 1.2% Dividend Yield – Quarterly Annualized Total Dividend / CSWC Share Price at Qtr. End Note: Adjusted NAV per Share calculation adds back all Supplemental Dividends paid Page 7
Two Pronged Investment Strategy CORE: Lower Middle Market (“LMM”): CSWC led or Club Deals • Companies with EBITDA between $3 MM and $15 MM • Typical leverage of 2.0x – 4.0x Debt to EBITDA through CSWC debt position • Commitment size up to $25 MM with hold sizes generally $10 MM to $20 MM • Both Sponsored and Non-sponsored deals • Securities include first lien, unitranche, second lien and subordinated debt • Frequently make equity co-investments alongside CSWC debt OPPORTUNISTIC: Upper Middle Market (“UMM”): Syndicated or Club, First and Second Lien • Companies typically have in excess of $50 MM in EBITDA • Typical leverage of 3.0x – 5.5x Debt to EBITDA through CSWC debt position • Hold sizes generally $5 MM to $15 MM • Floating rate first and second lien debt securities • More liquid assets relative to Lower Middle Market investments • Provides flexibility to invest/divest opportunistically based on market conditions and liquidity position Page 8
Strong Quarter of CSWC Originations $96.7MM in new committed investments during the quarter ($89.9MM funded at close) at a weighted average debt YTM of 11.9% Portfolio Origination Q2 2019 Total Debt Total Equity Unfunded Funded at Close Funded at Close Commitments at Debt Spread Debt Yield to Name Industry Type Market ($000s) ($000s) Close ($000s) over LIBOR Maturity SIMR, LLC Healthcare services 1st Lien / Equity LMM $11,688 $5,724 $0 9.00% 12.41% Media, marketing & Adams Publishing Group, LLC entertainment DDTL / 1st Lien UMM $15,000 $0 $1,731 7.50% 10.30% Prism Spectrum Holdings, RLOC / 1st Lien / LLC Environmental services Equity LMM $9,136 $4,847 $2,000 9.50% 13.01% ASC Ortho Management RLOC / 1st Lien / 2nd 7.50% / Company, LLC Healthcare services Lien / Equity LMM $12,426 $750 $1,500 13.25% (1) 11.80% RLOC / 1st Lien / Dynamic Communities, LLC Business services Equity LMM $11,200 $2,000 $500 8.00% 11.35% RLOC / 1st Lien / Danforth Advisors, LLC Business services Equity LMM $7,250 $875 $1,000 7.25% 10.50% Blaschak Coal Corp. Commodities & mining Split Lien LMM $8,500 $0 $0 11.00% 14.62% Other Portfolio Companies (Add-Ons) Various Equity LMM $0 $546 $0 N/A N/A Total $75,201 $14,741 $6,731 8.6% 11.9% Note: Market refers to Upper Middle Market (“UMM”) and Lower Middle Market (“LMM”) (1) ASC Ortho Management Company, LLC 2nd Lien is a 13.25% fixed rate loan Page 9
CSWC Portfolio Asset Mix by Market Maintaining appropriate portfolio leverage while receiving attractive risk adjusted returns Investment Portfolio - Statistics Q2 2019 Lower Middle Upper Middle (1) (In Thousands) Market Market Number of Portfolio Companies 24 11 Total Cost $293,306 $87,013 Total Fair Value $337,776 $87,499 Average Hold Size (at Cost) $12,221 $7,910 % First Lien Investments (at Cost) 74.1% 79.1% % Second Lien Investments (at Cost) 3.9% 20.9% % Subordinated Debt Investments (at Cost) 6.5% 0.0% % Equity (at Cost) 15.5% 0.0% Wtd. Avg. Yield (2)(3) 11.9% 10.8% Wtd. Avg. EBITDA of Issuer ($MM's) (3) $9.0 $66.7 Wtd. Avg. Leverage through CSWC Security (3) (4) 3.4X 3.8X Note: All metrics above exclude the I-45 Senior Loan Fund (1) At September 30, 2018, we had equity ownership in approximately 75.0% of our LMM investments (2) The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of September 30, 2018, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status. As of September 30, 2018, there were no investments on non-accrual status. Weighted-average annual effective yield is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor (3) Weighted average metrics are calculated using investment cost basis weighting (4) Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Management uses this metric as a guide to evaluate relative risk of its position in each portfolio debt investment Page 10
Strong Track Record and Growing First Lien Credit Portfolio CSWC Credit Portfolio continues to migrate to First Lien and LMM Investments • First Lien and LMM Investments have increased to 85% and 74% of the credit portfolio, respectively, as of 9/30/18 • Since launch of credit strategy in January 2015, CSWC has made $521 MM in cumulative credit investments and realized $128 MM of proceeds, generating a weighted average IRR of 17.0% Credit Portfolio Heavily Weighted to First Lien Robust LMM Credit Portfolio Growth 400.0 400.0 $336.7 $336.7 300.0 $272.1 300.0 $272.2 26% $239.1 ) $239.2 85% ) s $226.5 s $226.5 n 27% n o o i i l 86% l 28% l $187.2 l i 200.0 $181.7 $187.3 i $181.7 $167.5 82% 200.0 31% M $167.5 M ( 74% $151.4 79% ( $151.4 $ $137.6 73% $ 45% 69% $137.6 51% 60% 64% 62% 58% 73% 100.0 $83.6 100.0 $83.8 78% 72% 42% 80% 69% 82% 27% 32% 28% 22% 49% 55% 40% 17% 13% 10% 7% 9% 42% 18% 11% 8% 8% 9% 10% 8% 8% 7% 6% 18% 20% 22% 0.0 0.0 016 016 016 017 017 017 017 018 018 018 16 16 16 17 17 17 17 18 18 18 30/2 30/2 31/2 31/2 30/2 30/2 31/2 31/2 30/2 30/2 0/20 0/20 1/20 1/20 0/20 0/20 1/20 1/20 0/20 0/20 6/ 9/ 12/ 3/ 6/ 9/ 12/ 3/ 6/ 9/ 6/3 9/3 12/3 3/3 6/3 9/3 12/3 3/3 6/3 9/3 Sub-Debt Second Lien First Lien LMM UMM Page 11
CSWC Portfolio Mix as of 9/30/18 at Fair Value Current Investment Portfolio of $492MM continues to be granular and diverse across industries Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) Paper & Forest Products: 1% Software & IT Services: 1% Telecommunications: 2% Commodities & Mining: 2% Energy Services (Upstream): 2% Non-Yielding Transportation & Logistics: Financial Services: 3% Yielding Equity:Equity: 8% 3% Multi-Sector 10% Healthcare Products: 3% Holdings (I-45): Senior Subordinated Debt: 14% 4% Consumer Services: 3% Media, Marketing, & Entertainment: 12% Second Lien: Consumer Products and Retail: 5% 6% Distribution: First Lien: 5% 59% I-45 SLF LLC Food, Business Services: (94% first lien): Agriculture & 11% 13% Beverage: 6% Environmental Services: 7% Healthcare Industrial Services: 11% Products: 9% Page 12
Interest Rate Sensitivity Debt Portfolio Exposure at 9/30/18 Well-Positioned for Rising Interest Rate Environment Fixed vs. Floating Portfolio Exposure (1) 4% 96% Fixed Floating Change in Base Interest Illustrative Illustrative NII Rates NII Change ($'s) Change (Per Share) (50bps) $(1,240,291) $(0.08) 50 bps $1,312,950 $0.08 100bps $2,625,901 $0.16 150bps $3,938,851 $0.24 200bps $5,251,801 $0.32 (1) Portfolio Exposure includes I-45 assets pro rata as a % of CSWC’s equity investment in the fund Note: Illustrative change in NII is based on a projection of CSWC’s existing debt investments as of 9/30/18, adjusted only for changes in Base Interest Rate Base Interest Rate used in this analysis is 3-Month LIBOR of 2.4% at 9/30/18. The results of this analysis include the I-45 Senior Loan Fund, which is comprised of 100% floating rate assets and liabilities Page 13
I-45 Portfolio Overview I-45 loan portfolio of $230MM is 94% first lien with average hold size of 2.2% of the I-45 portfolio Current I-45 Portfolio (By Type) Current I-45 Portfolio (By Industry) 1% 6% 2% Telecommunications 2% 15% Telecommunications 5% 5% Healthcare & Pharmaceuticals 5% 12% 5% Retail 6% 94% 11% Retail 6% 6% 9% Capital Equipment 7% Capital Equipment First Lien Second Lien Services: Consumer I-45 Portfolio Statistics (In Thousands) 12/31/2017 3/31/2018 6/30/2018 9/30/2018 Total Debt Investments at Fair Value $217,964 $220,807 $228,468 $229,711 Number of Issuers 44 43 45 46 Wtd. Avg. Issuer EBITDA $73,392 $73,995 $72,607 $72,253 Avg. Investment Size as a % of Portfolio 2.3% 2.3% 2.2% 2.2% Wtd. Avg. Net Leverage on Investments (1) 3.3x 3.6x 3.7x 3.8x Wtd. Avg. Spread to LIBOR 6.1% 6.1% 6.3% 6.3% Wtd. Avg. Duration (Yrs) 4.7 4.6 4.5 4.4 (1) Through I-45 Security Page 14
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 12/31/2017 3/31/2018 6/30/2018 9/30/18 Investment Income Interest Income $5,566 $6,575 $7,643 $9,232 Dividend Income $3,149 $3,069 $3,075 $3,158 Fees and Other Income $304 $230 $389 $205 Total Investment Income $9,019 $9,874 $11,107 $12,595 Expenses Cash Compensation $1,885 $1,884 $1,910 $1,963 Share Based Compensation $479 $477 $475 $482 General & Administrative $907 $1,086 $1,353 $1,239 Spin-off Related Expenses $172 $0 $0 $0 Total Expenses (excluding Interest) $3,443 $3,447 $3,738 $3,684 Interest Expense $1,275 $1,951 $2,373 $3,109 Pre-Tax Net Investment Income $4,301 $4,476 $4,996 $5,802 Taxes and Gain / (Loss) Income Tax Benefit (Expense) $362 $(279) $(379) $(256) Net realized gain (loss) on investments $617 $131 $18,819 $94 Net increase (decrease) in unrealized appreciation of investments $4,963 $10,649 $(11,783) $948 Net increase (decrease) in net assets resulting from operations $10,243 $14,977 $11,653 $6,588 Weighted Average Diluted Shares Outstanding 16,176 16,139 16,201 16,323 Pre-Tax Net Investment Income Per Dil. Wtd. Average Share $0.27 $0.28 $0.31 $0.36 Page 15
Operating Leverage Continues to Improve Continue to realize operating efficiencies of internally-managed structure with a target operating leverage of sub-2.5% $1,000 6% s t e s $800 s 5% A g v A ) 4.9% f M o M $600 % $ ( $517 s s a t e 4.2% $451 4% s s e s $417 s A n l e a $400 p t 3.7% $326 x o E T $284 3.4% g n i 3% t a 3.0% r $200 e p O $0 2% FY 16 FY 17 FY 18 Q1FY19 Q2 FY19 Period Ending Total Assets Operating Expenses(1) as % of Average Total Assets Note: FY16 includes only the quarters after the 2015 spin-off. Q1 2019 and Q2 2019 are quarterly annualized (1) Operating expenses exclude interest expense Page 16
Balance Sheet Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 12/31/2017 3/31/2018 6/30/2018 9/30/18 Assets Portfolio Investments $367,120 $393,095 $411,330 $491,601 Cash & Cash Equivalents $20,527 $7,907 $12,532 $10,193 Deferred Tax Asset $2,080 $2,050 $2,116 $2,060 Other Assets $13,123 $14,438 $24,948 $12,653 Total Assets $402,850 $417,490 $450,926 $516,507 Liabilities December 2022 Notes $55,236 $55,305 $56,646 $73,407 Credit Facility $35,000 $40,000 $65,000 $127,000 Other Liabilities $14,084 $13,897 $21,899 $8,252 Total Liabilities $104,320 $109,202 $143,545 $208,659 Shareholders Equity Net Asset Value $298,530 $308,288 $307,381 $307,848 NAV per Share $18.44 $19.08 $18.87 $18.84 Debt to Equity 0.30X 0.31X 0.40X 0.65X Page 17
Portfolio Statistics Continuing to build a well performing credit portfolio with no non- accruals Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 12/31/2017 3/31/2018 6/30/2018 9/30/18 Portfolio Statistics Fair Value of Debt Investments $226,441 $239,122 $272,133 $336,717 Average Debt Investment Hold Size $8,709 $9,197 $9,719 $10,204 Fair Value of Debt Investments as a % of Par 99% 99% 99% 99% % of Debt Portfolio on Non-Accrual (at Fair Value) 0.0% 0.0% 0.0% 0.0% Weighted Average Investment Rating (1) 2.0 2.0 2.0 2.0 Weighted Average Yield on Debt Investments 10.95% 11.46% 11.73% 11.61% Total Fair Value of Portfolio Investments $367,120 $393,095 $411,330 $491,601 Weighted Average Yield on all Portfolio Investments (2) 10.55% 10.48% 10.60% 11.02% Investment Mix (Debt vs. Equity) (3) (4) 75% / 25% 73% / 27% 79% / 21% 79% / 21% Investment Mix (Yielding vs. Non-Yielding) (4) 94% / 6% 92% / 8% 94% / 6% 92% / 8% (1) CSWC utilizes an internal 1 - 4 investment rating system in which 1 represents material outperformance and 4 represents material underperformance. All new investments are initially set to 2 (2) Includes dividends from Media Recovery, Inc. and I-45 Senior Loan Fund (3) Excludes CSWC equity investment in I-45 Senior Loan Fund (4) At Fair Value Page 18
Significant Unused Debt Capacity with Long-Term Duration Earliest Debt Maturity occurs in November 2021 Facility Total Commitments Interest Rate Maturity Principal Drawn Credit Facility(1) $210.0 MM L + 3.00% with Step-Down November 2021 $127.0MM December 2022 Notes $75.7MM 5.95% December 2022 $75.7MM (NASDAQ: "CSWCL") (2) Long-Term Debt Obligations ) M $150.0 M $127.0 $ ( $125.0 s t n e $100.0 m $75.7 y a $75.0 P l a $50.0 p i c n $25.0 i r P $0.0 2019 2020 2021 2022 2023 2024 Credit Facility December 2022 Notes (1) The facility has an accordion feature that allows for an increase in total commitments up to $250 MM. Principal Drawn is based upon outstanding balances as of 9/30/18 (2) Redeemable at CSWC’s option beginning December 2019. Principal drawn is based upon outstanding balances as of 9/30/18 Page 19
Investment Income Detail Constructing a portfolio of investments with recurring cash yield • Non-Cash and Non-Recurring investment income remain a minor portion of Total Investment Income Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 12/31/2017 3/31/2018 6/30/2018 9/30/18 Investment Income Breakdown Cash Interest $5,357 $6,300 $7,324 $8,815 Cash Dividends $3,076 $2,990 $3,008 $3,112 PIK Income $72 $91 $79 $93 Amortization of purchase discounts and fees $209 $264 $312 $375 Management/Admin Fees $146 $184 $181 $191 Prepayment Fees & Other Income $159 $45 $203 $9 Total Investment Income $9,019 $9,874 $11,107 $12,595 Key Metrics Cash Income as a % of Investment Income 97% 96% 96% 96% % of Total Investment Income that is Recurring (1) 95% 98% 97% 99% (1) Non-Recurring income principally made up of loan prepayment fees Page 20
Key Financial Metrics Strong Pre-Tax Net Investment Income and Regular Dividend growth as Investment Portfolio continues to perform Quarter Ended Quarter Ended Quarter Ended Quarter Ended 12/31/2017 3/31/2018 6/30/2018 9/30/18 Key Financial Metrics Pre-Tax Net Investment Income Per Wtd Avg Diluted Share $0.27 $0.28 $0.31 $0.36 Annualized Pre-Tax Net Investment Income Return on Equity (ROE) 5.82% 6.02% 6.46% 7.53% Realized Earnings Per Wtd Avg Diluted Share $0.33 $0.27 $1.45 $0.35 Annualized Realized Earnings ROE 7.15% 5.82% 30.32% 7.32% Earnings Per Wtd Avg Diluted Share $0.63 $0.93 $0.72 $0.40 Annualized Earnings Return on Equity (ROE) 13.87% 20.13% 15.08% 8.56% Regular Dividends per Share $0.26 $0.28 $0.29 $0.34 Supplemental Dividends per Share $0.00 $0.00 $0.60 $0.10 Total Dividends per Share $0.26 $0.28 $0.89 $0.44 Dividend Yield (1) 6.28% 6.58% 19.66% 9.27% (1) Dividend Yield is calculated as Quarterly Annualized Total Dividend / CSWC Share Price at Qtr. End Page 21
Corporate Information Board of Directors Senior Management Fiscal Year End Inside Directors Bowen S. Diehl March 31 Bowen S. Diehl President & Chief Executive Officer Independent Directors Independent Auditor David R. Brooks Michael S. Sarner RSM US Christine S. Battist Chief Financial Officer, Secretary & Treasurer Chicago, IL T. Duane Morgan Jack D. Furst William R. Thomas Investor Relations Corporate Counsel John H. Wilson Michael S. Sarner Capital Southwest Eversheds Sutherland (US) LLP 214-884-3829 Corporate Offices & Website msarner@capitalsouthwest.com 5400 LBJ Freeway Transfer Agent 13th Floor Securities Listing American Stock Transfer & Trust Company, LLC Dallas, TX 75240 Nasdaq: "CSWC" (Common Stock) 800-937-5449 http://www.capitalsouthwest.com Nasdaq: "CSWCL" (Notes) www.amstock.com Industry Analyst Coverage Firm Analyst Contact Information National Securities Corporation Christopher R. Testa Direct: 212-417-7447 Ladenburg Thalmann Mickey M. Schleien, CFA Direct: 305-572-4131 Janney Montgomery Scott, LLC Mitchel Penn, CFA Direct: 410-583-5976 JMP Securities Christopher York Direct: 415-835-8965 Page 22