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 1, 2021
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)) | ||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
| Common Stock, $0.25 par value per share | CSWC | The Nasdaq Global Select Market | ||||||
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 1, 2021, 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, as amended (the "Exchange Act"), nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (the "Securities Act"), 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 2, 2021. 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 Exchange Act, nor shall it be deemed incorporated by reference into any filing under the Securities Act, except as shall be expressly set forth by specific reference in such filing.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
| Exhibit No. | Description | |||||||
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 1, 2021
| 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, 2021
CSWC Reports Pre-Tax Net Investment Income of $0.45 Per Share for Quarter Ended September 30, 2021 and Affirms $0.97 Total Dividends to be paid for the Quarter Ended December 31, 2021
Dallas, Texas – November 1, 2021 – 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, 2021.
Second Quarter Fiscal Year 2022 Financial Highlights
•Total Investment Portfolio: $818.2 million
◦Credit Portfolio of $689.4 million:
▪91% 1st Lien Senior Secured Debt
▪$111.7 million in new committed credit investments
▪Weighted Average Yield on Debt Investments: 9.7%
▪Three credit investments currently on non-accrual with a fair value of $24.2 million, representing 3.0% of the total investment portfolio
◦Equity Portfolio of $69.2 million, excluding investment in I-45 Senior Loan Fund ("I-45 SLF")
▪$1.2 million in new equity co-investments
◦CSWC Investment in I-45 SLF of $59.6 million at fair value
▪I-45 SLF portfolio of $169.0 million
•Portfolio consists of 38 issuers: 95% 1st Lien Debt
▪$97.0 million of debt outstanding at I-45 SLF as of September 30, 2021
•I-45 SLF fund leverage of 1.30x debt to equity at fair value at quarter end
▪I-45 SLF paid a $1.6 million quarterly dividend to CSWC; an annualized yield of 10.5%
•Pre-Tax Net Investment Income: $10.0 million, or $0.45 per weighted average diluted share
•Dividends: Paid $0.44 per share Regular Dividend, $0.10 per share Supplemental Dividend
◦109% LTM Pre-Tax NII Regular Dividend Coverage
◦Total Dividends for the quarter ended September 30, 2021 of $0.54 per share
◦Undistributed Taxable Income at quarter end estimated at $0.69 per share
•Net Realized and Unrealized Appreciation on Investments: $2.8 million
◦$4.5 million of net appreciation related to the equity portfolio
◦$0.1 million of net depreciation related to the credit portfolio
◦$1.6 million of net depreciation related to I-45 SLF LLC
•Realized Loss on Extinguishment of Debt: $17.1 million
◦Redeemed $125 million in aggregate principal amount of the 5.375% Notes due 2024 (the "October 2024 Notes")
◦Realized loss relating to the October 2024 Notes redemption consists of "make-whole" premium of $15.2 million and the write off of related unamortized debt issuance costs of $1.9 million
•Balance Sheet:
◦Cash and Cash Equivalents: $26.8 million
◦Total Net Assets: $381.9 million
◦Net Asset Value (“NAV”) per Share: $16.36
In commenting on the Company’s results, Bowen Diehl, President and Chief Executive Officer, stated, “Our portfolio continued to perform well this quarter, producing $0.45 of Pre-Tax Net Investment Income and $2.8 million in net unrealized and realized gains. Deal activity continues to be robust, as we closed new commitments of approximately $113 million during the quarter. On the capitalization front, we continued to programmatically raise equity through our equity ATM program, raising $30.3 million in gross proceeds at 160% of the prevailing NAV per share during the quarter. Additionally, we raised $100 million in new institutional unsecured bonds with a coupon of 3.375% and utilized the net proceeds to repay existing institutional unsecured bonds with a coupon of 5.375%. Furthermore, we amended our Credit Facility, decreasing our interest rate to LIBOR + 2.15% from LIBOR + 2.50%. Our SBIC subsidiary also drew $17.5 million of our initial $40 million leverage commitment from the Small Business Administration (the "SBA") during the quarter, $15 million of which was pooled in September 2021 at an all-in 10-year fixed rate of 1.58%. As a reminder, current SBA regulations provide for the ability to borrow up to $175 million in SBA-guaranteed debentures with at least $87.5 million in regulatory capital, subject to SBA approval. These financing activities were the primary catalyst for our decision to increase the regular dividend by $0.03 this quarter from $0.44 per share to $0.47 per share. We believe this considerable increase in earnings power enhances our market capitalization on a dividend yield basis, and allows us to pass the cost of capital savings directly to our shareholders in the form of increased dividends.”
Second Quarter Fiscal Year Investment Activities
Originations
During the quarter ended September 30, 2021, the Company originated investments in six new portfolio companies and four existing portfolio companies, totaling $112.9 million in capital commitments. New portfolio company investment transactions that occurred during the quarter ended September 30, 2021 are summarized as follows:
Roof Opco, LLC, $11.0 million 1st Lien Senior Secured Debt, $12.2 million Delayed Draw Term Loan, $3.0 million Revolving Loan: Roof Opco is comprised of two re-roofing companies, a residentially-focused roofer operating across nine markets in the Midwest and a DFW-based re-roofer operating across the southern market.
Muenster Milling Company, LLC, $12.0 million 1st Lien Senior Secured Debt, $6.0 million Delayed Draw Term Loan, $5.0 million Revolving Loan: Muenster Milling is a manufacturer of pet food and animal feed.
Well-Foam Inc., $18.0 million 1st Lien Senior Secured Debt, $3.5 million Revolving Loan: Well-Foam provides well completion and production-related services for oil and gas operators in the Permian basin.
Systec Corporation (dba Inspire Automation), $9.0 million 1st Lien Senior Secured Debt, $3.0 million Delayed Draw Term Loan, $2.0 million Revolving Loan: Systec Corporation and Automatan LLC, collectively Inspire Automation, is a provider of manufacturing systems and services to the corrugated and box making industry.
Wall Street Prep, Inc., $11.0 million 1st Lien Senior Secured Debt, $1.0 million Revolving Loan, $1.0 million Preferred Equity: Wall Street Prep is a provider of financial training to investment banks, universities and other financial services companies.
LLFlex, LLC, $11.0 million 1st Lien Senior Secured Debt: LLFlex specializes in providing metal-based laminates for packaging and industrial solutions for the consumer, cable, and building and construction industries.
Prepayments and Exits
During the quarter ended September 30, 2021, the Company received proceeds on the sale of two equity investments totaling $3.7 million and full prepayments on six debt investments totaling $57.2 million.
Landpoint Holdco, Inc.: Proceeds of $18.5 million, generating an IRR of 13.0%.
Vistar Media Inc.: Debt proceeds of $11.4 million and equity proceeds of $1.4 million, generating an IRR of 16.1%.
Electronic Transaction Consultants LLC: Debt proceeds of $10.0 million and equity proceeds of $2.3 million, generating an IRR of 30.6%.
Ian, Evan, & Alexander Corporation (dba EverWatch): Proceeds of $9.2 million, generating an IRR of 13.8%.
Driven, Inc.: Proceeds of $5.8 million, generating an IRR of 13.5%.
California Pizza Kitchen, Inc.: Proceeds of $2.3 million, generating an IRR of 15.0%.
Second Fiscal Quarter 2022 Operating Results
For the quarter ended September 30, 2021, Capital Southwest reported total investment income of $20.3 million, compared to $18.6 million in the prior quarter. The increase in investment income was primarily attributable to an increase in average debt investments outstanding, offset by a decrease in dividend income due to a non-recurring distribution received from a portfolio company during the prior quarter.
For the quarter ended September 30, 2021, total operating expenses (excluding interest expense) were $4.9 million, compared to $4.2 million in the prior quarter. The increase in expenses was primarily attributable to an increase in bonus accrual based on the Company's anticipated year end performance.
For the quarter ended September 30, 2021, interest expense was $5.4 million as compared to $5.0 million in the prior quarter. The increase was primarily due to an increase in average debt outstanding.
For the quarter ended September 30, 2021, total pre-tax net investment income was $10.0 million, compared to $9.4 million in the prior quarter.
For the quarter ended September 30, 2021, Capital Southwest had tax expense of $0.3 million as compared to $0.4 million in the previous quarter.
During the quarter ended September 30, 2021, Capital Southwest recorded total net realized and unrealized gains on investments of $2.8 million, compared to $6.1 million in the prior quarter. For the quarter ended September 30, 2021, this included net realized and unrealized gains on equity investments of $4.5 million, net realized and unrealized losses on debt investments of $0.1 million and net unrealized losses on I-45 SLF LLC of $1.6 million. For the quarter ended September 30, 2021, Capital Southwest recorded a realized loss on the extinguishment of debt of $17.1 million. The net decrease in net assets resulting from operations was $4.6 million for the quarter, compared to a net increase in net assets of $15.1 million in the prior quarter.
The Company’s NAV at September 30, 2021 was $16.36 per share, as compared to $16.58 at June 30, 2021. The decrease in NAV per share from the prior quarter is primarily due to a realized loss on extinguishment of debt, offset by net realized and unrealized appreciation on investments and the issuance of common stock at a premium to NAV per share under the Equity ATM Program (as described below).
Liquidity and Capital Resources
At September 30, 2021, Capital Southwest had approximately $26.8 million in unrestricted cash and money market balances, $215.0 million of total debt outstanding on the Credit Facility, $138.5 million, net of unamortized debt issuance costs, of the January 2026 Notes (as defined below) outstanding, $97.3 million, net of unamortized debt issuance costs, of the October 2026 Notes (as defined below) and $17.5 million of SBA Debentures (as defined below) outstanding. As of September 30, 2021, Capital Southwest had $116.7 million in available borrowings under the Credit Facility and $22.5 million in undrawn SBA Debenture commitments. The regulatory debt to equity ratio at the end of the quarter was 1.18 to 1.
The Company has an "at-the-market" offering (the "Equity ATM Program") which the Company may offer and sell, from time to time through sales agents, shares of its common stock having an aggregate offering price of up to $100,000,000. On May 26, 2021, the Company (i) increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $250,000,000 from $100,000,000 and (ii) reduced the commission paid to the sales agents for the Equity ATM Program to 1.5% from 2.0% of the gross sales price of shares of the Company's common stock sold through the sales agents pursuant to the Equity ATM Program on and after May 26, 2021.
During the quarter ended September 30, 2021, the Company sold 1,141,269 shares of its common stock under the Equity ATM Program at a weighted-average price of $26.59 per share, raising $30.3 million of gross proceeds. Net proceeds were $29.9 million after commissions to the sales agents on shares sold. Cumulative to date, the Company has sold 6,524,207 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.81, raising $142.3 million of gross proceeds. Net proceeds were $139.7 million after commissions to the sales agents on shares sold. As of September 30, 2021, the Company has $107.7 million available under the Equity ATM Program.
On September 24, 2021, the Company redeemed $125,000,000 in aggregate principal amount of the issued and outstanding October 2024 Notes. The October 2024 Notes were redeemed at 100% of their principal amount, plus (i) the accrued and unpaid interest thereon, through, but excluding the redemption date, and (ii) a "make-whole" premium. Accordingly, the Company recognized a realized loss on extinguishment of debt, equal to the write-off of the related unamortized debt issuance costs of $1.8 million and the "make-whole" premium of $15.2 million during the three months ended September 30, 2021.
In December 2020, the Company issued $75.0 million in aggregate principal amount of 4.50% Notes due 2026 (the “Existing January 2026 Notes”). In February 2021, the Company issued an additional $65.0 million in aggregate principal amount of the January 2026 Notes (the "Additional January 2026 Notes" together with the Existing January 2026 Notes, the "January 2026 Notes"). The Additional January 2026 Notes were issued at a price of 102.11% of the aggregate principal amount of the Additional January 2026 Notes, resulting in a yield-to-maturity of approximately 4.0% at issuance. The total net proceeds from the offering of the January 2026 Notes was $138.6 million, before offering expenses payable by us. The January 2026 Notes mature on January 31, 2026 and may be redeemed in whole or in part at any time prior to October 31, 2025, at par plus a “make-whole” premium, and thereafter at par. The January 2026 Notes bear interest at a rate of 4.50% per year, payable semi-annually on January 31 and July 31 of each year, beginning on July 31, 2021. The January 2026 Notes are the direct unsecured obligations of the Company and rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively or structurally subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility and the SBA Debentures.
In August 2021, the Company issued $100.0 million in aggregate principal amount of 3.375% Notes due 2026 (the "October 2026 Notes"). The October 2026 Notes were issued at a price of 99.418% of the aggregate principal amount of the October 2026 Notes, resulting in a yield-to-maturity of approximately 3.5% at issuance. The October 2026 Notes mature on October 1, 2026 and may be redeemed in whole or in part at any time prior to July 1, 2026, at par plus a "make-whole" premium, and thereafter at par. The October 2026 Notes bear interest at a rate of 3.375% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The October 2026 Notes are the direct unsecured obligations of the Company and rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively or structurally subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility and the SBA Debentures.
In August 2016, CSWC entered into a senior secured credit facility (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Facility”) to provide additional liquidity to support its investment and operational activities. The Credit Facility contains an accordion feature that allows CSWC to increase the total commitments under the Credit Facility up to $400 million from new and existing lenders on the same terms and conditions as the existing commitments. On August 9, 2021, CSWC entered into the Second Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit Agreement"). Prior to the Credit Agreement, (1) borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicable LIBOR rate plus 2.50% with no LIBOR floor, and (2) the total borrowing capacity was $340 million with commitments from a diversified group of eleven lenders. The Credit Agreement (1) decreased the total borrowing capacity under the Credit Facility to $335 million with commitments from a diversified group of ten lenders, (2) reduced the interest rate on borrowings to LIBOR plus 2.15% with no LIBOR floor and removed conditions related thereto as previously set forth in the Amended and Restated Senior Secured Revolving Credit Agreement, and (3) extended the end of the Credit Facility's revolver period from December 21, 2022 to August 9, 2025 and extended the final maturity from December 21, 2023 to August 9, 2026. The Credit Agreement also modified certain covenants in the Credit Facility, including, among other things, to increase
the minimum obligors’ net worth test from $180 million to $200 million. CSWC pays unused commitment fees of 0.50% to 1.00% per annum, based on utilization, on the unused lender commitments under the Credit Facility.
On April 20, 2021, our wholly owned subsidiary, Capital Southwest SBIC I, LP (“SBIC I”), received a license from the SBA to operate as a Small Business Investment Company ("SBIC") under Section 301(c) of the Small Business Investment Act of 1958, as amended. The SBIC license allows SBIC I to obtain leverage by issuing SBA-guaranteed debentures ("SBA Debentures"), subject to the issuance of a leverage commitment by the SBA. SBA debentures are loans issued to an SBIC which have interest payable semi-annually and a ten-year maturity. The interest rate is fixed shortly after issuance at a market-driven spread over U.S. Treasury Notes with ten-year maturities. Current statutes and regulations permit SBIC I to borrow up to $175 million in SBA Debentures with at least $87.5 million in regulatory capital, subject to SBA approval. On May 25, 2021, SBIC I received a leverage commitment from the SBA in the amount of $40.0 million to be issued on or prior to September 30, 2025.
In November 2015, I-45 SLF entered into a senior secured credit facility led by Deutsche Bank. The I-45 credit facility has total commitments outstanding of $150 million from a group of four bank lenders, which is scheduled to mature in March 2026. Borrowings under the I-45 credit facility bear interest at a rate equal to LIBOR plus 2.15%. As of September 30, 2021, I-45 SLF had $97 million in borrowings outstanding under its credit facility.
Share Repurchase Program
On July 28, 2021, the Company's board of directors (the "Board") approved a share repurchase program authorizing the Company to repurchase up to $20 million of its outstanding shares of common stock in the open market at certain thresholds below its NAV per share, in accordance with guidelines specified in Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the Securities Exchange Act of 1934. On August 31, 2021, the Company entered into a share repurchase agreement, which became effective immediately, and the Company shall cease purchasing its common stock under the share repurchase program upon the earlier of, among other things: (1) the date on which the aggregate purchase price for all shares equals $20 million including, without limitation, all applicable fees, costs and expenses; or (2) upon written notice by the Company to the broker that the share repurchase agreement is terminated. During the quarter ended September 30, 2021, the Company did not repurchase any shares of the Company’s common stock under the share repurchase program.
Previously Declared Dividend of $0.97 Per Share for Quarter Ended December 31, 2021
On September 2, 2021, the Board declared total dividends of $0.97 per share for the quarter ended December 31, 2021, comprised of a Regular Dividend of $0.47 per share and a Final Supplemental Dividend of $0.50 per share.
The Company's dividend will be payable as follows:
Regular Quarterly Dividend
Amount Per Share: $0.47
Ex-Dividend Date: December 14, 2021
Record Date: December 15, 2021
Payment Date: December 31, 2021
Final Supplemental Dividend
Amount Per Share: $0.50
Ex-Dividend Date: December 14, 2021
Record Date: December 15, 2021
Payment Date: December 31, 2021
When declaring dividends, the Board reviews estimates of taxable income available for distribution, which may differ from net investment income under generally accepted accounting principles. The final determination of taxable income for each year, as well as the tax attributes for dividends in such year, will be made after the close of the tax year.
Capital Southwest maintains a dividend reinvestment plan ("DRIP") that provides for the reinvestment of dividends on behalf of its registered stockholders who hold their shares with Capital Southwest’s transfer agent and registrar, American Stock Transfer and Trust Company. Under the DRIP, if the Company declares a dividend, registered
stockholders who have opted into the DRIP by the dividend record date will have their dividend automatically reinvested into additional shares of Capital Southwest common stock.
Second Quarter 2022 Earnings Results Conference Call and Webcast
Capital Southwest has scheduled a conference call on Tuesday, November 2, 2021, at 11:00 a.m. Eastern Time to discuss the second quarter 2022 financial results. You may access the call by dialing (866) 502-8274 and using the Conference ID 7789087 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/mmc/p/4mokwr6i.
A telephonic replay will be available through November 9, 2021 by dialing (855) 859-2056 and using the Conference ID 7789087. 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, 2021 to be filed with the Securities and Exchange Commission and Capital Southwest’s Second Fiscal Quarter 2022 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 $818 million in investments at fair value as of September 30, 2021. 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, second lien 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, capital, and lending markets; regulatory changes; tax treatment and general economic and business conditions; our ability to operate our wholly owned subsidiary, SBIC I, as an SBIC; and uncertainties associated with the continued impact from the COVID-19 pandemic, including its impact on the global and U.S. capital markets and the global and U.S. economy, the length and duration of the COVID-19 outbreak in the United States as well as worldwide and the magnitude of the economic impact of that outbreak; the effect of the COVID-19 pandemic on our business prospects and the operational and financial performance of our portfolio companies, including our ability and their ability to achieve their respective objectives, and the effects of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business.
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, 2021 and subsequent filings, including the "Risk Factors" sections therein, 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, | ||||||||||
| 2021 | 2021 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Investments at fair value: | |||||||||||
| Non-control/Non-affiliate investments (Cost: $658,003 and $540,556, respectively) | $ | 672,869 | $ | 546,028 | |||||||
| Affiliate investments (Cost: $91,518 and $90,201, respectively) | 85,711 | 85,246 | |||||||||
| Control investments (Cost: $76,000 and $72,800, respectively) | 59,638 | 57,158 | |||||||||
| Total investments (Cost: $825,521 and $703,557, respectively) | 818,218 | 688,432 | |||||||||
| Cash and cash equivalents | 26,840 | 31,613 | |||||||||
| Receivables: | |||||||||||
| Dividends and interest | 12,212 | 10,533 | |||||||||
| Escrow | 975 | 1,150 | |||||||||
| Other | 2,327 | 171 | |||||||||
| Income tax receivable | 149 | 155 | |||||||||
| Debt issuance costs (net of accumulated amortization of $4,108 and $3,582, respectively) | 4,500 | 2,246 | |||||||||
| Other assets | 1,601 | 1,284 | |||||||||
| Total assets | $ | 866,822 | $ | 735,584 | |||||||
| Liabilities | |||||||||||
| SBA Debentures (Par value: $17,500 and $0, respectively) | $ | 16,709 | $ | — | |||||||
| October 2024 Notes (Par value: $0 and $125,000, respectively) | — | 122,879 | |||||||||
| January 2026 Notes (Par value: $140,000 and $140,000, respectively) | 138,545 | 138,425 | |||||||||
| October 2026 Notes (Par value: $100,000 and $0, respectively) | 97,264 | — | |||||||||
| Credit facility | 215,000 | 120,000 | |||||||||
| Other liabilities | 9,045 | 11,655 | |||||||||
| Accrued restoration plan liability | 2,895 | 2,979 | |||||||||
| Income tax payable | 117 | 50 | |||||||||
| Deferred tax liability | 5,302 | 3,345 | |||||||||
| Total liabilities | 484,877 | 399,333 | |||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Net Assets | |||||||||||
| Common stock, $0.25 par value: authorized, 40,000,000 shares; issued, 25,680,551 shares at September 30, 2021 and 23,344,836 shares at March 31, 2021 | 6,420 | 5,836 | |||||||||
| Additional paid-in capital | 414,901 | 356,447 | |||||||||
| Total distributable (loss) earnings | (15,439) | (2,095) | |||||||||
| Treasury stock - at cost, 2,339,512 shares | (23,937) | (23,937) | |||||||||
| Total net assets | 381,945 | 336,251 | |||||||||
| Total liabilities and net assets | $ | 866,822 | $ | 735,584 | |||||||
| Net asset value per share (23,341,039 shares outstanding at September 30, 2021 and 21,005,324 shares outstanding at March 31, 2021) | $ | 16.36 | $ | 16.01 | |||||||
| 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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Investment income: | |||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||
| Non-control/Non-affiliate investments | $ | 14,752 | $ | 10,401 | $ | 28,068 | $ | 19,704 | |||||||||||||||
| Affiliate investments | 1,348 | 1,720 | 2,658 | 3,941 | |||||||||||||||||||
| Control investments | — | — | — | — | |||||||||||||||||||
| Payment-in-kind interest income: | |||||||||||||||||||||||
| Non-control/Non-affiliate investments | 466 | 1,478 | 1,103 | 2,244 | |||||||||||||||||||
| Affiliate investments | 413 | 283 | 751 | 638 | |||||||||||||||||||
| Control investments | — | — | — | — | |||||||||||||||||||
| Dividend income: | |||||||||||||||||||||||
| Non-control/Non-affiliate investments | 510 | 171 | 1,570 | 354 | |||||||||||||||||||
| Affiliate investments | — | — | — | — | |||||||||||||||||||
| Control investments | 1,560 | 1,689 | 3,157 | 3,463 | |||||||||||||||||||
| Interest income from cash and cash equivalents | 1 | 4 | 2 | 7 | |||||||||||||||||||
| Fees and other income | 1,246 | 939 | 1,566 | 1,498 | |||||||||||||||||||
| Total investment income | 20,296 | 16,685 | 38,875 | 31,849 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Compensation | 2,298 | 1,961 | 3,730 | 3,681 | |||||||||||||||||||
| Share-based compensation | 923 | 853 | 1,999 | 1,465 | |||||||||||||||||||
| Interest | 5,405 | 4,397 | 10,360 | 8,725 | |||||||||||||||||||
| Professional fees | 648 | 583 | 1,349 | 1,153 | |||||||||||||||||||
| General and administrative | 982 | 787 | 1,958 | 1,552 | |||||||||||||||||||
| Total operating expenses | 10,256 | 8,581 | 19,396 | 16,576 | |||||||||||||||||||
| Income before taxes | 10,040 | 8,104 | 19,479 | 15,273 | |||||||||||||||||||
| Federal income, excise and other taxes | 15 | 169 | 215 | 378 | |||||||||||||||||||
| Deferred taxes | 299 | (384) | 495 | (243) | |||||||||||||||||||
| Total income tax expense (benefit) | 314 | (215) | 710 | 135 | |||||||||||||||||||
| Net investment income | $ | 9,726 | $ | 8,319 | $ | 18,769 | $ | 15,138 | |||||||||||||||
| Realized gain (loss) | |||||||||||||||||||||||
| Non-control/Non-affiliate investments | $ | 3,496 | $ | 349 | $ | 2,544 | $ | (5,198) | |||||||||||||||
| Affiliate investments | — | (1,628) | — | (1,628) | |||||||||||||||||||
| Control investments | — | — | — | — | |||||||||||||||||||
| Total net realized gain (loss) on investments, net of tax | 3,496 | (1,279) | 2,544 | (6,826) | |||||||||||||||||||
| Net unrealized appreciation (depreciation) on investments | |||||||||||||||||||||||
| Non-control/Non-affiliate investments | 2,363 | 3,919 | 9,393 | 10,824 | |||||||||||||||||||
| Affiliate investments | (393) | 1,710 | (851) | (1,257) | |||||||||||||||||||
| Control investments | (1,634) | 4,732 | (720) | 8,923 | |||||||||||||||||||
| Income tax (provision) benefit | (1,027) | (725) | (1,462) | (1,249) | |||||||||||||||||||
| Total net unrealized appreciation (depreciation) on investments, net of tax | (691) | 9,636 | 6,360 | 17,241 | |||||||||||||||||||
| Net realized and unrealized gains on investments | 2,805 | 8,357 | 8,904 | 10,415 | |||||||||||||||||||
| Realized loss on extinguishment of debt | (17,087) | (286) | (17,087) | (286) | |||||||||||||||||||
| Net (decrease) increase in net assets from operations | $ | (4,556) | $ | 16,390 | $ | 10,586 | $ | 25,267 | |||||||||||||||
| Pre-tax net investment income per share - basic and diluted | $ | 0.45 | $ | 0.44 | $ | 0.89 | $ | 0.83 | |||||||||||||||
| Net investment income per share – basic and diluted | $ | 0.43 | $ | 0.45 | $ | 0.86 | $ | 0.82 | |||||||||||||||
| Net (decrease) increase in net assets from operations – basic and diluted | $ | (0.20) | $ | 0.88 | $ | 0.48 | $ | 1.37 | |||||||||||||||
| Weighted average shares outstanding – basic | 22,534,443 | 18,600,443 | 21,871,805 | 18,375,402 | |||||||||||||||||||
| Weighted average shares outstanding – diluted | 22,534,443 | 18,600,443 | 21,871,805 | 18,375,402 | |||||||||||||||||||
Q2 2022 Earnings Presentation 5400 Lyndon B. Johnson Freeway, Suite 1300 | Dallas, Texas 75240 | 214.238.5700 | capitalsouthwest.com November 2, 2021 Capital Southwest Corporation
Page 2 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 (the "SEC"). • 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. • Capital Southwest has filed a registration statement (which contains the prospectus) with the SEC for any offering to which this communication may relate and may file one or more prospectus supplements to the prospectus in the future. Before you invest in any of Capital Southwest's securities, you should read the registration statement and the applicable prospectus and prospectus supplement(s), including the information incorporated by reference therein, in order to fully understand all of the implications and risks of an offering of Capital Southwest's securities. You should also read other documents Capital Southwest has filed with the SEC for more complete information about Capital Southwest and any offering of its securities. You may get these documents for free by visiting EDGAR on the SEC's website at www.sec.gov. Alternatively, Capital Southwest will arrange to send you any applicable prospectus and prospectus supplement(s) if you request such materials by calling us at (214) 238-5700. These materials are also made available, free of charge, on our website at www.capitalsouthwest.com. Information contained on our website is not incorporated by reference into this communication.
Page 3 • 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. • These risks include risks related to: changes in the markets in which Capital Southwest invests; changes in the financial, capital, and lending markets; regulatory changes; tax treatment and general economic and business conditions; our ability to operate our wholly owned subsidiary, Capital Southwest SBIC I, LP, as a small business investment company ("SBIC"); and uncertainties associated with the continued impact from the COVID-19 pandemic, including its impact on the global and U.S. capital markets and the global and U.S. economy, the length and duration of the COVID-19 outbreak in the United States as well as worldwide and the magnitude of the economic impact of that outbreak, the effect of the COVID-19 pandemic on our business prospects and the operational and financial performance of our portfolio companies, including our and their ability to achieve their respective objectives, and the effects of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business. • 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, 2021 and its subsequent filings with the SEC. 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. Forward-Looking Statements
Page 4 Bowen S. Diehl President and Chief Executive Officer Michael S. Sarner Chief Financial Officer Chris Rehberger VP Finance / Treasurer Conference Call Participants
Page 5 • CSWC was formed in 1961, and elected to be regulated as a BDC in 1988 • Publicly-traded on Nasdaq: Common Stock (“CSWC”) • Internally Managed BDC with RIC tax treatment for U.S. federal income tax purposes • September 2015: completed tax free spin off of CSW Industrials ("Spin Off") (NASDAQ: "CSWI") • April 2021: received SBIC license from the U.S. Small Business Administration • 24 employees based in Dallas, Texas • Total Balance Sheet Assets of $867 MM as of September 30, 2021 • Manage I-45 Senior Loan Fund (“I-45 SLF”) in partnership with Main Street Capital (NYSE: “MAIN”) 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
Page 6 • Q2 2022 Pre-Tax Net Investment Income (“NII”) of $10.0 MM or $0.45 per share • Paid $0.44 per share Regular Dividend and $0.10 per share Supplemental Dividend for the quarter ended September 30, 2021 ◦ Increased Regular Dividend to $0.47 per share and declared $0.50 per share Supplemental Dividend for the quarter ending December 31, 2021 • Investment Portfolio at Fair Value increased to $818 MM from $799 MM in prior quarter ◦ $112.9 MM in total new committed investments, of which $77.2 MM was funded at close ◦ $60.9 MM in total proceeds from six debt prepayments and two equity exits ◦ $2.8 MM net realized and unrealized appreciation on the portfolio • Completed amendment to our Credit Facility, extending maturity to August 2026 and decreasing interest rate to LIBOR + 2.15% from LIBOR + 2.50% • Issued $100 MM in aggregate principal of 3.375% Notes due October ("October 2026 Notes") ◦ 5.375% Notes due 2024 ("October 2024 Notes") paid off in full ($125 MM aggregate principal) in conjunction with issuance of October 2026 Notes • Raised $30.3 MM in gross proceeds through Equity ATM Program during the quarter ◦ Sold shares at weighted-average price of $26.59 per share, or 160% of the prevailing NAV per share • $116.7 MM available on Credit Facility, $22.5 MM available on SBA leverage commitment to SBIC I, and $26.8 MM in cash and cash equivalents as of quarter end Q2 2022 Highlights Financial Highlights
Page 7 • In the last twelve months ended 9/30/2021, CSWC generated $1.85 per share in Pre-Tax NII and paid out $1.70 per share in regular dividends • Cumulative Pre-Tax NII Regular Dividend Coverage of 107% since the 2015 Spin-Off • Total Special and Supplemental Dividends of $3.41 per share since the 2015 Spin-Off • Undistributed Taxable Income ("UTI") of $0.69 per share as of September 30, 2021 Track Record of Consistent Dividends Continues Dividend Yield – Quarterly Annualized Total Dividend / CSWC Share Price at Qtr. End D iv id en d Pe r Sh ar e $0.45 $0.21 $0.24 $0.26 $0.28 $0.89 $0.44 $0.46 $0.48 $0.49 $0.50 $1.25 $0.51 $0.51 $0.51 $0.51 $0.52 $0.53 $0.54 $0.97 $0.19 $0.21 $0.24 $0.26 $0.28 $0.29 $0.34 $0.36 $0.38 $0.39 $0.40 $0.40 $0.41 $0.41 $0.41 $0.41 $0.42 $0.43 $0.44 $0.47 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.10 $0.50 $0.26 $0.50 $0.75 Regular Dividend Per Share Supplemental Dividend Per Share Special Dividend Per Share 3/31/17 6/30/17 9/30/17 12/31/17 03/31/18 6/30/2018 9/30/2018 12/31/2018 3/31/2019 6/30/2019 9/30/2019 12/31/2019 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 6/30/2021 9/30/2021 12/31/2021 $0.00 $0.25 $0.50 $0.75 $1.00 $1.25 $1.50 10.6% 5.2% 5.6% 6.3% 6.6% 19.7% 9.3% 9.6% 9.1% 9.4% 9.2% 24.0% 17.9% 15.1% 14.5% 11.5% 9.4% 9.1% 8.6%
Page 8 History of Value Creation $17.68$17.22$17.38$17.49$17.95$18.26$18.63$19.00$19.54$19.98 $20.90 $21.58$21.99$22.04$22.71$23.16$23.38$23.07 $21.97$22.30 $23.22 $24.11 $24.90 $26.00$26.32 $17.68$17.22$17.34$17.39$17.74$17.88 $17.8 $17.96$18.26$18.44$19.08$18.87$18.84$18.43$18.62$18.58$18.30 $16.74 $15.13$14.95$15.36$15.74$16.01$16.58 16.36 $0.00 $0.00 $0.04 $0.10 $0.21 $0.38 $0.83 $1.04 $1.28 $1.54 $1.82 $2.71 $3.15 $3.61 $4.09 $4.58 $5.08 $6.33 $6.84 $7.35 $7.86 $8.37 $8.89 $9.42 9.96 Net Asset Value Per Share Cumulative Dividends Paid Per Share 9/30/2015 12/31/2015 3/31/2016 6/30/2016 9/30/2016 12/31/2016 3/31/2017 6/30/2017 9/30/2017 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 3/31/2019 6/30/2019 9/30/2019 12/31/2019 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 6/30/2021 9/30/2021 $0.00 $3.00 $6.00 $9.00 $12.00 $15.00 $18.00 $21.00 $24.00 $27.00 Total Value (Net Asset Value + Cumulative Dividends Paid) Increase of $8.64 per share at 9/30/2021 from 9/30/2015 Spin-off of CSWI
Page 9 CORE: Lower Middle Market (“LMM”): CSWC led or Club Deals ◦ Companies with EBITDA between $3 MM and $20 MM ◦ Typical leverage of 2.0x – 4.0x Debt to EBITDA through CSWC debt position ◦ Commitment size up to $30 MM with hold sizes generally $10 MM to $25 MM ◦ Both Sponsored and Non-sponsored deals ◦ Securities include first lien, unitranche, and second lien ◦ 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 $20 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 LMM investments ▪ Provides flexibility to invest/divest opportunistically based on market conditions and liquidity position Investment Strategy
Page 10 Credit Portfolio Heavily Weighted Towards First Lien Investments 91% of Credit Portfolio as of 9/30/2021 in first lien senior secured loans Credit Portfolio Heavily Weighted to First Lien $ (M ill io ns ) $272 $337 $351 $368 $382 $387 $456 $474 $487 $521 $531 $573 $671 $689 6/30/2018 9/30/2018 12/31/2018 3/31/2019 6/30/2019 9/30/2019 12/31/2019 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/2021 6/30/2021 9/30/2021 $0.0 $200.0 $400.0 $600.0 $800.0 Sub-DebtSecond LienFirst Lien 6% 85% 9% 7% 86% 7% 4% 86% 10% 86% 10% 4% 87% 9% 4% 87% 9% 4% 90% 8% 2% 90% 8% 2% 90% 8% 2% 91% 7% 2% 91% 7% 2% 92% 6% 2% 90% 8% 2% 91% 7% 2%
Page 11 $112.9 MM in total new committed investments to six new portfolio companies and four existing portfolio companies Q2 2022 Originations (1) Unfunded Commitments consist of $14.6 MM in revolving loans and $21.2 in delayed draw term loans Portfolio Originations Q2 2022 Name Industry Type Total Debt Funded at Close ($000s) Total Equity Funded at Close ($000s) Unfunded Commitments at Close ($000s) Debt Spread Debt Yield to Maturity Roof Opco, LLC Consumer services First Lien $11,000 $— $15,278 6.00% 7.50% Muenster Milling Company, LLC Food, agriculture & beverage First Lien $12,000 $— $11,000 7.25% 9.15% Well Foam, Inc. Energy services (upstream) First Lien $18,000 $— $3,500 8.50% 10.40% Systec Corporation (DBA Inspire Automation) Business services First Lien $9,000 $— $5,000 7.50% 9.42% Wall Street Prep, Inc Education First Lien $11,000 $1,000 $1,000 7.00% 8.88% LLFlex, LLC Containers & packaging First Lien $11,000 $— $— 9.00% 11.05% USA Debusk, LLC Industrial services First Lien $3,793 $— $— 5.75% 7.78% Dynamic Communities, LLC Business services Senior Subordinated Debt $149 $— $— 25.00% 25.00% Broad Sky Networks, LLC Telecommunications Equity $— $132 $— N/A N/A Central Medical Supply LLC Healthcare services Equity $— $101 $— N/A N/A Total / Weighted Average $75,942 $1,233 $35,778 (1) 7.57% 9.44% • $77.2 MM funded at close
Page 12 Portfolio Exits Q2 2022 Name Industry Type Net Proceeds ($000s) Realized Gain ($000s) IRR Landpoint, LLC Business Services First Lien $18,510 $272 13.00% Vistar Media Inc. Media, marketing & entertainment First Lien / Equity $12,833 $1,329 16.14% Electronic Transaction Consultants, LLC Software & IT services First Lien / Equity $12,278 $1,471 30.60% Ian, Evan and Alexander (DBA EverWatch) Aerospace & defense First Lien $9,229 $186 13.80% Driven, Inc. Business Services First Lien $5,760 $72 13.47% California Pizza Kitchen, Inc. Restaurants First Lien $2,332 $17 14.97% Total / Weighted Average $60,942 $3,347 17.45% Track Record of CSWC Exits Continues • During the quarter, CSWC exited six debt investments and two equity investments, generating total proceeds of $60.9 MM and an IRR of 17.5% • Cumulative IRR of 15.2% on 45 portfolio company exits generating $461.6 MM in proceeds since launch of credit strategy in January 2015 $60.9 MM in total proceeds from six portfolio company exits
Page 13 CSWC Investment Portfolio Composition Maintaining conservative portfolio leverage while receiving attractive risk-adjusted returns Note: All metrics above exclude the I-45 Senior Loan Fund (1) At September 30, 2021 and June 30, 2021, we had equity ownership in approximately 49% and 51%, respectively, of our investments (2) The weighted-average annual effective yields were computed using the effective interest rates during the quarter for all debt investments at cost as of September 30, 2021, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments. As of September 30, 2021, there were three investments on non-accrual status. As of June 30, 2021, there were two investments on non-accrual status. Weighted-average annual effective yield is not a return to shareholders and 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 EBITDA metric is calculated using investment cost basis weighting. For the quarter ended September 30, 2021, three portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the quarter ended June 30, 2021, four portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful (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. Weighted average leverage is calculated using investment cost basis weighting. Management uses this metric as a guide to evaluate relative risk of its position in each portfolio debt investment. For the quarter ended September 30, 2021, three portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the quarter ended June 30, 2021, four portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful Investment Portfolio - Statistics Q2 2022 6/30/2021 9/30/2021 (In Thousands) Total CSWC Portfolio Total CSWC Portfolio Number of Portfolio Companies 61 63 Total Cost $730,286 $749,521 Total Fair Value $737,375 $758,580 Average Hold Size (at Fair Value) $12,088 $12,041 % First Lien Investments (at Fair Value) 82.2% 82.4% % Second Lien Investments (at Fair Value) 7.2% 6.8% % Subordinated Debt Investments (at Fair Value) 1.6% 1.6% % Equity (at Fair Value) 9.0% 9.1% Wtd. Avg. Yield (2) 10.0% 9.7% Wtd. Avg. EBITDA of Issuer ($MM's) (3) $17.1 $17.4 Wtd. Avg. Leverage through CSWC Security (4) 4.2x 4.1x
Page 14 Two loans upgraded and two loans downgraded during the quarter Investment Rating 6/30/2021 Investment Rating Upgrades Investment Rating Downgrades 9/30/2021 # of Loans Fair Value ($MM) % of Portfolio (FV) # of Loans Fair Value ($MM) % of Portfolio (FV) # of Loans Fair Value ($MM) % of Portfolio (FV) # of Loans Fair Value ($MM) % of Portfolio (FV) 1 7 $90.7 13.5% 2 $27.9 4.0% 0 $0.0 —% 8 $112.5 15.8% 2 57 $528.0 78.7% 0 $0.0 —% 0 $0.0 —% 53 $515.8 73.7% 3 6 $52.5 7.8% 0 $0.0 —% 1 $10.6 1.5% 6 $58.9 9.7% 4 0 $0.0 —% 0 $0.0 —% 1 $2.3 0.3% 1 $2.3 0.8% Wtd. Avg. Investment Rating (at Cost) 1.96 1.96 Credit Portfolio Investment Rating Migration
Page 15 CSWC Portfolio Mix as of 9/30/2021 at Fair Value Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) Current Investment Portfolio of $818 MM continues to be diverse across industries First Lien 77% I-45 SLF LLC 7% Second Lien 6% Subordinated Debt 2% Equity 8% Healthcare Services 11% Business Services 10% Media, Marketing, & Entertainment 9% Consumer Products & Retail 8% I-45 SLF LLC 7% Distribution 6% Software & IT Services 6% Industrial Services 5% Food, Agriculture & Beverage 5% Financial Services 4% Note: I-45 SLF consists of 95% first lien senior secured debt
Page 16 I-45 Portfolio Overview Current I-45 Portfolio (By Industry) I-45 loan portfolio of $169.0 MM is 95% first lien senior secured debt with average hold size of 2.6% of the I-45 portfolio (1) Through I-45 security Telecommunications Services: Consumer Current I-45 Portfolio (By Type) I-45 Portfolio Statistics (In Thousands) 12/31/2020 3/31/2021 6/30/2021 9/30/2021 Total Investments at Fair Value $159,598 $164,351 $169,610 $169,042 Fund Leverage (Debt to Equity) at Fair Value 1.07x 1.27x 1.40x 1.30x Number of Issuers 38 36 38 38 Wtd. Avg. Issuer EBITDA $73,384 $77,649 $77,851 $75,025 Avg. Investment Size as a % of Portfolio 2.6% 2.8% 2.6% 2.6% Wtd. Avg. Net Leverage on Investments (1) 4.7x 4.4x 4.8x 4.7x Wtd. Avg. Spread to LIBOR 6.1% 6.0% 6.0% 5.9% Wtd. Avg. Duration (Yrs) 3.1 3.0 3.0 3.7 95% 5% First Lien Non-First Lien Telecommunications Business Services Consumer Products and Retail Healthcare Products 14% 14% 12% 10%8% Capital Equipment
Page 17 Income Statement (In Thousands, except per share amounts) Quarter Ended 12/31/20 Quarter Ended 3/31/21 Quarter Ended 6/30/21 Quarter Ended 9/30/21 Investment Income Interest Income $13,079 $12,282 $14,626 $16,100 PIK Interest Income 1,608 2,796 975 879 Dividend Income 2,916 1,661 2,657 2,070 Fees and Other Income 1,437 434 321 1,247 Total Investment Income $19,040 $17,173 $18,579 $20,296 Expenses Cash Compensation $2,444 $1,631 $1,432 $2,298 Share Based Compensation 771 708 1,076 923 General & Administrative 1,325 1,278 1,677 1,630 Total Expenses (excluding Interest) $4,540 $3,617 $4,185 $4,851 Interest Expense $4,528 $4,688 $4,955 $5,405 Pre-Tax Net Investment Income $9,972 $8,868 $9,439 $10,040 Gains / Losses and Taxes Net Realized and Unrealized Gains on Investments $7,144 $2,660 $6,099 $2,805 Realized Losses on Extinguishment of Debt (262) (459) — (17,087) Income Tax Expense (1,455) (852) (396) (314) Net increase (decrease) in Net Assets Resulting from Operations $15,399 $10,217 $15,142 $(4,556) Weighted Average Diluted Shares Outstanding 19,135 20,376 21,202 22,534 Pre-Tax NII Per Diluted Weighted Average Share $0.52 $0.44 $0.45 $0.45
Page 18 Operating Leverage Trend Continue to realize operating efficiencies of internally managed structure Period Ending To ta l A ss et s ( $M M ) O perating Expenses as % of A vg A ssets $284 $326 $417 $552 $585 $736 $836 $867 4.9% 4.2% 3.7% 3.0% 2.8% 2.4% 2.3% 2.3% FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 Q1 FY 22 Q2 FY22 $0 $200 $400 $600 $800 $1,000 1% 2% 3% 4% 5% 6% Total Assets Operating Expenses(1) as % of Average Total Assets Note: Operating Leverage calculated as last twelve months operating expenses (excluding interest expense) divided by average annual assets (1) Operating expenses exclude interest expense
Page 19 $16.58 $0.45 $(0.44) $(0.10) $0.00 $0.20 $(0.07) $0.47 $(0.76) $0.03 $16.36 6/30/2021 NAV/Share Pre- Tax Net I nvest ment In come Regular Dividend Supplem ental Dividend Net C hange in Debt P ortfo lio Net C hange in Equity Portfo lio Net C hange in I-4 5 Portfo lio Accr etio n fro m Equity Iss uance Real ize d Losse s o n Extin guish ment o f D ebt Other Corporat e 9/30/2021 NAV/Share $14 $14.5 $15 $15.5 $16 $16.5 $17 $17.5 NAV per Share Bridge from Quarter Ended 6/30/2021 Earnings / Dividends $(0.09) per Share Investment Portfolio $0.13 per Share Other Corporate $(0.26) per Share
Page 20 Significant Unused Debt Capacity with Long-Term Duration Earliest debt maturity occurs in January 2026 Facility Total Commitments Interest Rate Maturity Principal Drawn Undrawn Commitment January 2026 Notes (1) $140.0 MM 4.50% January 2026 $140.0 MM N/A I-45 Credit Facility (2) $150.0 MM L + 2.15% March 2026 $97.0 MM $53.0 MM Credit Facility (3) $335.0 MM L + 2.15% August 2026 $215.0 MM $116.7 MM (4) October 2026 Notes (5) $100.0 MM 3.375% October 2026 $100.0 MM N/A SBA Debentures $40.0 MM 0.85% (6) September 2031 (7) $17.5 MM $22.5 MM (8) P rin ci pa l P ay m en ts ($ M M ) Long-Term Debt Obligations (Calendar Year) $552.0 $17.5140.0 97.0 215.0 100.0 January 2026 Notes I-45 Credit Facility Credit Facility October 2026 Notes SBIC I CY2021- CY2025 CY 2026 CY 2027 CY 2028 CY 2029 CY 2030 CY 2031 $0 $100 $200 $300 $400 $500 $600 (1) Redeemable in whole or in part at any time prior to October 31, 2025, at par plus a "make whole" premium, and thereafter at par (2) CSWC owns 80% of the equity and 50% of the voting rights of I-45 SLF LLC with a joint venture partner (3) The Credit Facility has an accordion feature that allows for an increase in total commitments up to $400 MM (4) Net of $3.3 MM in letters of credit outstanding (5) Redeemable in whole or in part at any time prior to July 1, 2026, at par plus a "make whole" premium, and thereafter at par (6) Weighted average interest rate of all pooled and non-pooled SBA Debentures for the three months ended September 30, 2021 (7) First pooled SBA Debentures mature on September 1, 2031 (8) Current statutes and regulations permit SBIC I to borrow up to $175 million in SBA Debentures with at least $87.5 million in regulatory capital, subject to SBA approval
Page 21 Balance Sheet (In Thousands, except per share amounts) Quarter Ended 12/31/20 Quarter Ended 3/31/21 Quarter Ended 6/30/21 Quarter Ended 9/30/21 Assets Portfolio Investments $648,773 $688,432 $798,647 $818,218 Cash & Cash Equivalents 43,724 31,613 16,543 26,840 Other Assets 16,337 15,539 20,858 21,764 Total Assets $708,834 $735,584 $836,048 $866,822 Liabilities SBA Debentures $— $— $— $16,709 December 2022 Notes 36,689 — — — October 2024 Notes 122,775 122,879 123,041 — January 2026 Notes 73,410 138,425 138,504 138,545 October 2026 Notes — — — 97,264 Credit Facility 150,000 120,000 190,000 215,000 Other Liabilities 13,310 18,029 16,408 17,359 Total Liabilities $396,184 $399,333 $467,953 $484,877 Shareholders Equity Net Asset Value $312,650 $336,251 $368,095 $381,945 Net Asset Value per Share $15.74 $16.01 $16.58 $16.36 Regulatory Debt to Equity 1.22x 1.13x 1.23x 1.18x
Page 22 Portfolio Statistics (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. Weighted average investment rating calculated at cost (2) Excludes CSWC equity investment in I-45 Senior Loan Fund (3) At Fair Value Continuing to build a well performing credit portfolio (In Thousands) Quarter Ended 12/31/20 Quarter Ended 3/31/21 Quarter Ended 6/30/21 Quarter Ended 9/30/21 Portfolio Statistics Fair Value of Debt Investments $531,103 $572,614 $671,257 $689,421 Average Debt Investment Hold Size $11,300 $11,228 $11,377 $11,490 Fair Value of Debt Investments as a % of Par 96% 97% 97% 97% % of Investment Portfolio on Non-Accrual (at Fair Value) 0.1% 0.0% 1.8% 3.0% Weighted Average Investment Rating (1) 2.01 2.00 1.96 1.96 Weighted Average Yield on Debt Investments 10.64% 10.76% 10.04% 9.66% Total Fair Value of Portfolio Investments $648,773 $688,432 $798,647 $818,218 Weighted Average Yield on all Portfolio Investments 11.20% 10.22% 10.12% 9.60% Investment Mix (Debt vs. Equity) (2)(3) 91% / 9% 92% / 8% 91% / 9% 91% / 9%
Page 23 Investment Income Detail Constructing a portfolio of investments with recurring cash yield (In Thousands) Quarter Ended 12/31/20 Quarter Ended 3/31/21 Quarter Ended 6/30/21 Quarter Ended 9/30/21 Investment Income Breakdown Cash Interest $12,413 $11,668 $13,939 $15,370 Cash Dividends 2,916 1,660 2,657 2,069 PIK Income 1,608 2,796 975 879 Amortization of purchase discounts and fees 667 616 688 731 Management/Admin Fees 199 234 227 327 Prepayment Fees & Other Income 1,237 199 93 920 Total Investment Income $19,040 $17,173 $18,579 $20,296 Key Metrics Cash Income as a % of Investment Income 88% 80% 91% 92% % of Total Investment Income that is Recurring 92% 99% 96% 95%
Page 24 Key Financial Metrics Strong Pre-Tax Net Investment Income and Dividend Yield driven by net portfolio growth and investment performance (1) Return on Equity is calculated as the quarterly annualized Pre-Tax NII, Realized Earnings, or Total Earnings, respectively, divided by equity at the end of the prior quarter (2) Realized Earnings and Earnings include ($17.1) MM or ($0.76) per weighted average diluted share for realized losses on extinguishment of debt Quarter Ended 12/31/20 Quarter Ended 3/31/21 Quarter Ended 6/30/21 Quarter Ended 9/30/21 Key Financial Metrics Pre-Tax Net Investment Income Per Wtd Avg Diluted Share $0.52 $0.44 $0.45 $0.45 Pre-Tax Net Investment Income Return on Equity (ROE)(1) 13.57% 11.06% 11.12% 10.75% Realized Earnings Per Wtd Avg Diluted Share $0.42 $0.29 $0.38 $(0.17) Realized Earnings Return on Equity (ROE)(1)(2) 11.06% 7.45% 9.53% (4.14)% Earnings Per Wtd Avg Diluted Share $0.80 $0.50 $0.71 $(0.20) Earnings Return on Equity (ROE)(1)(2) 20.96% 12.74% 17.84% (4.88)% Regular Dividends per Share $0.41 $0.42 $0.43 $0.44 Supplemental/Special Dividends per Share $0.10 $0.10 $0.10 $0.10 Total Dividends per Share $0.51 $0.52 $0.53 $0.54
Page 25 Interest Rate Sensitivity Fixed vs. Floating Credit Portfolio Exposure (1) Note: Illustrative change in annual NII is based on a projection of CSWC’s existing debt investments as of 9/30/2021, adjusted only for changes in Base Interest Rate. Base Interest Rate used in this analysis is 3-Month LIBOR of 0.13% at 9/30/2021. The results of this analysis include the I-45 Senior Loan Fund, which is comprised of 98% floating rate debt assets and 100% floating rate liabilities (1) Portfolio Exposure includes I-45 assets pro rata as a % of CSWC’s equity investment in the fund Change in Base Interest Rates Illustrative Annual NII Change ($'s) Illustrative Annual NII Change (Per Share) (25 bps) 354,564 0.02 25 bps (681,172) (0.03) 50 bps (1,362,344) (0.06) 75 bps (2,000,089) (0.09) 100 bps (1,856,097) (0.08) 125 bps (1,019,327) (0.04) 150 bps (139,669) (0.01) 4% 96% Fixed Floating
Page 26 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 LLP Chicago, ILChristine S. Battist Chief Financial Officer, Secretary & Treasurer T. Duane Morgan Jack D. Furst Joshua S. Weinstein William R. Thomas Senior Managing Director Corporate Counsel Ramona Rogers-Windsor Eversheds Sutherland (US) LLP Investor Relations Michael S. Sarner Capital Southwest Corporate Offices & Website 214-884-3829 5400 Lyndon B. Johnson Freeway msarner@capitalsouthwest.com Transfer Agent 13th Floor American Stock Transfer & Trust Company, LLC Dallas, TX 75240 Securities Listing 800-937-5449 http://www.capitalsouthwest.com Nasdaq: "CSWC" (Common Stock) www.amstock.com Industry Analyst Coverage Firm Analyst Contact Information Ladenburg Thalmann & Co., Inc. Mickey M. Schleien, CFA Direct: 305-572-4131 JMP Securities, LLC Devin Ryan Direct: 415-835-8900 B. Riley Securities Sarkis Sherbetchyan Direct: 310-689-5221 Hovde Group Bryce Rowe Direct: 804-318-0969 Jefferies, LLC Kyle Joseph Direct: 510-418-0754 Raymond James & Associates Robert Dodd Direct: 901-579-4560 Oppenheimer & Co., Inc. Mitchel Penn Direct: 212-667-7136