Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — Q2 2022 Earnings Presentation
44 slides from Capital Southwest's earnings presentation, November 2021
Slide 1: Capital Southwest Corporation Investor Presentation
Capital Southwest Corporation Capital Southwest Corporation Investor Presentation November 2021 5400 Lyndon B. Johnson Freeway, Suite 1300 | Dallas, Texas 75240 | 214.238.5700 | capitalsouthwest.com
Slide 2: Important Notices
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 n
Slide 3: Forward-Looking Statements
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 fut
Slide 4: CSWC Senior Management
CSWC Senior Management Bowen S. Diehl • Joined Capital Southwest in March 2014 • Former Co-Head of Sponsor Finance Group at American Capital • 20+ years of investing experience in middle market debt and equity • BE – Vanderbilt University. MBA – UT Austin • Lives in Dallas with wife and three childr
Slide 5: CSWC Company Overview
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”) • Internally
Slide 6: Pre-2015 Challenges
Pre-2015 Challenges • Until spin off announcement, CSWC traded at a significant discount to NAV • Virtually 100% of CSWC’s portfolio was invested in equity • There was significant concentration in two industrial companies, with very large embedded capital gains • Did not pay meaningful dividend Asse
Slide 7: Solution: 2015 Tax Free Spin of Industrial Assets
Solution: 2015 Tax Free Spin of Industrial Assets CSWC Pre-Spinoff - 6/30/14 ($ in millions) LP Interest $9 Debt $3 Other Equity Cash $67 CSWC $88 Assets Publicly- CSWI Assets Traded $397 Equities $219 CSWC Portfolio - 6/30/2014 (1) CSW Industrials, Inc.(2) ($ in millions) LP Interest NASDAQ Ticker
Slide 8: Portfolio Rotation to Income Generation
Portfolio Rotation to Income Generation Since June 2014, CSWC has transformed its investment portfolio increasing income earning assets from 1% of the investable portfolio to 92% • Exited 24 legacy portfolio equity investments, generating $288 MM in proceeds • Invested $1.3 B in 92 middle-market por
Slide 9: Investment Strategy
Investment Strategy 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 No
Slide 10: Key Highlights since launch of Credit Strategy
Key Highlights since launch of Credit Strategy • Built investment and finance teams made up of people with long track records of investing in the middle market • Of the 24 employees, 22 joined CSWC since launching the middle market lending strategy • CSWC: Invested $1.3 B in 92 middle-market portfol
Slide 11: Q2 2022 Highlights
Q2 2022 Highlights Financial Highlights • 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 declar
Slide 12: Track Record of Consistent Dividends Continues
Track Record of Consistent Dividends Continues • 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 Supplemen
Slide 13: History of Value Creation
History of Value Creation 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 13
Slide 14: Q2 2022 Originations
Q2 2022 Originations $112.9 MM in total new committed investments to six new portfolio companies and four existing portfolio companies • $77.2 MM funded at close Portfolio Originations Q2 2022 Total Debt Total Equity Unfunded Debt Yield to Name Industry Type Funded at Close Funded at Close Commitmen
Slide 15: Track Record of CSWC Exits Continues
Track Record of CSWC Exits Continues $60.9 MM in total proceeds from six portfolio company exits • 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 genera
Slide 16: CSWC Investment Portfolio Composition
CSWC Investment Portfolio Composition Maintaining conservative portfolio leverage while receiving attractive risk-adjusted returns Investment Portfolio - Statistics Q2 2022 6/30/2021 9/30/2021 Total CSWC Total CSWC (In Thousands) Portfolio Portfolio Number of Portfolio Companies 61 63 Total Cost $73
Slide 17: Credit Portfolio Investment Rating Migration
Credit Portfolio Investment Rating Migration Two loans upgraded and two loans downgraded during the quarter Investment Rating 6/30/2021 Investment Rating Investment Rating 9/30/2021 Upgrades Downgrades Fair % of Fair % of Fair % of Fair % of # of # of # of # of Loans Value Portfolio Loans Value Port
Slide 18: Credit Portfolio Heavily Weighted Towards First Lien Investments
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 90% 91% 91% 92% 91% 90% 90% 90% 87% 87% 86% 86% 86% 85% 7% 9% 10% 10% 9% 9% 8% 8% 8% 7% 7% 6% 8% 7% 7% 6% 4% 4%
Slide 19: CSWC Portfolio Mix as of 9/30/2021 at Fair Value
CSWC Portfolio Mix as of 9/30/2021 at Fair Value Current Investment Portfolio of $818 MM continues to be diverse across industries Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) Note: I-45 SLF consists of 95% first lien senior secured debt Page 19
Slide 20: Senior Loan Fund ("I-45")
Senior Loan Fund (“I-45”) • Joint Venture with Main Street Capital Corporation (NASDAQ: “MAIN”) • Fund invests in predominately Upper Middle Market first lien loans • Total maximum fund size of ~$250 MM • Total Equity Commitment of $95 MM from CSWC (80%) and MAIN (20%) • Total Debt Commitment of $15
Slide 21: I-45 Portfolio Overview
I-45 Portfolio Overview 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 Current I-45 Portfolio (By Type) Current I-45 Portfolio (By Industry) Consumer Products and Retail Telecommunications 14% Healthcare Products 14% 12% Bu
Slide 22: CSWC Capitalization
CSWC Capitalization • $335 MM Credit Facility: led by ING Capital (ten banks) • Accordion up to $400 MM • $215 MM drawn as of 9/30/21 • Matures August 2026; L + 215 • $40 MM Initial Commitment from SBIC • First pooled Debentures mature September 2031; $17.5 MM in Debentures drawn as of 9/30/21 • $14
Slide 23: Significant Unused Debt Capacity with Long-Term Duration
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) $150.0 MM L + 2.15% M
Slide 24: Internally Managed BDC Advantages
Internally Managed BDC Advantages • We operate under a shareholder friendly Internally Managed structure which: • Aligns management incentives with long term sustainable shareholder value creation • Historically has rewarded performing Internally Managed BDCs with price to book premiums of 0.5x vers
Slide 25: Operating Leverage Trend
Operating Leverage Trend Continue to realize operating efficiencies of internally managed structure Total Assets Operating Expenses(1) as % of Average Total Assets Note: Operating Leverage calculated as last twelve months operating expenses (excluding interest expense) divided by average annual asse
Slide 26: NAV per Share Bridge from Quarter Ended 6/30/2021
NAV per Share Bridge from Quarter Ended 6/30/2021 Page 26
Slide 27: Interest Rate Sensitivity
Interest Rate Sensitivity Fixed vs. Floating Credit Portfolio Exposure (1) Illustrative Annual Illustrative Annual NII Change in Base Interest Rates NII Change ($'s) 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 (1,856,09
Slide 28: Corporate Information
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 Christine S. Battist Chief Financial Officer,
Slide 29: Appendix A: Investment Team
Appendix A: Investment Team Page 29
Slide 30: Investment Team with Strong Credit Experience
Investment Team with Strong Credit Experience Year Years Joined Name Title Experience CSWC Relevant Experience Bowen Diehl Chief Executive 25 2014 - Managing Director and Co-Head of Sponsor Finance at Officer / CIO American Capital - Merrill Lynch Investment Banking - Chase Securities Investment Ban
Slide 31: Appendix B: Underwriting & Portfolio Management
Appendix B: Underwriting & Portfolio Management Page 31
Slide 32: Disciplined Investment Process: Investment Criteria
Disciplined Investment Process: Investment Criteria Experienced Management • Relevant experience and track record of success Team with Meaningful • Significant economic interest in the future success of the company Equity Ownership • Differentiated product and/or service that gives company a sustain
Slide 33: Disciplined Process: Focus on Capital Preservation
Disciplined Process: Focus on Capital Preservation Due Diligence Documentation Initial Portfolio Sourcing & & Evaluation Management Underwriting Closing • Extensive network • Review deal tear- • Continuous testing • Emphasis on • Monthly meeting of long standing sheets outlining of investment covena
Slide 34: Maintaining Investment Discipline as Pipeline Grows
Maintaining Investment Discipline as Pipeline Grows 738 deals reviewed, $390.1 million closed in LTM ending 9/30/21 CSWC Investment Portfolio Total Deals Reviewed 738 Indicative Terms Submitted 242 Initial IC Review 40 Diligence & Final IC Approval 28 24 Portfolio Investments & 3 Add-Ons / Upsizes $
Slide 35: CSWC Taps Into a Broad Network of Deal Sources
CSWC Taps Into a Broad Network of Deal Sources Private Equity Intermediaries and Lending Partners Page 35
Slide 36: Portfolio Monitoring Process
Portfolio Monitoring Process • Team-based approach with objectives to: Example Monthly Portfolio Tracker • Continually evaluate portfolio • Identify potential problems early • Prompt deal teams to proactively address issues • Monitoring mechanisms • Monthly/quarterly financials • Regular communicati
Slide 37: Valuation Process Overview
Valuation Process Overview Final Valuation Audit Update Models Begin Valuing Valuation Meeting And Committee/ Valuation Review 1 3rd Party Review Sr. Mgmt. Board of Directors Sign-offs Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Portfolio Finance CFO and 3rd Party Internal Final Review Board of
Slide 38: Appendix C: Financial Statements
Appendix C: Financial Statements Page 38
Slide 39: Balance Sheet
Balance Sheet Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 12/31/20 3/31/21 6/30/21 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 21,76
Slide 40: Income Statement
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 12/31/20 3/31/21 6/30/21 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 an
Slide 41: Portfolio Statistics
Portfolio Statistics Continuing to build a well performing credit portfolio Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 12/31/20 3/31/21 6/30/21 9/30/21 Portfolio Statistics Fair Value of Debt Investments $531,103 $572,614 $671,257 $689,421 Average Debt Investment Hold Siz
Slide 42: Investment Income Detail
Investment Income Detail Constructing a portfolio of investments with recurring cash yield Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 12/31/20 3/31/21 6/30/21 9/30/21 Investment Income Breakdown Cash Interest $12,413 $11,668 $13,939 $15,370 Cash Dividends 2,916 1,660 2,65
Slide 43: Key Financial Metrics
Key Financial Metrics Strong Pre-Tax Net Investment Income and Dividend Yield driven by net portfolio growth and investment performance Quarter Ended Quarter Ended Quarter Ended Quarter Ended 12/31/20 3/31/21 6/30/21 9/30/21 Key Financial Metrics Pre-Tax Net Investment Income Per Wtd Avg Diluted Sha
Slide 44: Corporate Information
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 Christine S. Battist Chief Financial Officer,