Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — Investor Presentation (June 2018)
35 slides from Capital Southwest's investor presentation, June 2018
Slide 1: Capital Southwest Corporation Investor Presentation
Capital Southwest Corporation Investor Presentation June 2018 5400 Lyndon B. Johnson Freeway, Suite 1300 | Dallas, Texas 75240 | 214.238.5700 | capitalsouthwest.com
Slide 2: Forward-Looking Statements
Forward-Looking Statements • This presentation contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 relating to, among other things, the business, market conditions, financial condition and results of operations of Capital Southwest, the anti
Slide 3: CSWC Senior Management
CSWC Senior Management Bowen S. Diehl • Joined Capital Southwest in March 2014 • Former Senior Investment Professional at American Capital (2001 – 2014) • Co-Head of Sponsor Finance Group at American Capital (2007 – 2014) • 15 years of investing experience in middle market debt and equity • BE – Van
Slide 4: 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 became a BDC in 1988 • Publicly-traded on Nasdaq: Common Stock (“CSWC”) and Unsecured Notes (“CSWCL”) • I
Slide 5: 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 Asset A
Slide 6: 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) NASDAQ Ticker CSWI LP Inte
Slide 7: 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 90% • Exited 22 legacy portfolio equity investments, generating $228 MM in proceeds • Invested $375 MM in 46 middle-market cr
Slide 8: Two Pronged Investment Strategy
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 2x – 4x Debt to EBITDA through CSWC debt • Commitment size up to $25 MM with hold sizes generally $10 MM to $20 MM • Both Sponsored and Non
Slide 9: 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 19 employees, 16 joined CSWC since launching the middle market lending strategy • Invested $363 MM in 46 middle-market credit asset
Slide 10: Track Record of Dividend and NAV Growth Continues
Track Record of Dividend and NAV Growth Continues • In FY 2018, CSWC generated $1.02 per share in Pre-Tax NII and paid out $0.99 per share in regular dividends LTM dividend coverage of 103% of Pre-Tax NII Nine consecutive quarters of regular dividend per share growth • In addition, paid out a Su
Slide 11: CSWC Portfolio Asset Mix by Market
CSWC Portfolio Asset Mix by Market Maintaining appropriate portfolio leverage while receiving attractive risk adjusted returns Investment Portfolio - Statistics at 3/31/18 Lower Middle Upper Middle US$ in 000s Market (1) Market Number of Portfolio Companies 19 10 Total Cost $204,331 $66,266 Total Fa
Slide 12: Robust Lower Middle Market First Lien Portfolio
Robust Lower Middle Market First Lien Portfolio CSWC Credit Portfolio continues to migrate to LMM and First Lien Investments • LMM Investments have increased to 72% of the credit portfolio at 3/31/18 from 18% at 6/30/16 • First Lien Investments have increased to 82% of the credit portfolio at 3/31/1
Slide 13: CSWC Portfolio Mix as of 3/31/18 at Fair Value
CSWC Portfolio Mix as of 3/31/18 at Fair Value Current Investment Portfolio of $393 MM continues to be granular and diverse Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) Page 13
Slide 14: 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 target fund size of $250 MM Total Equity Commitment of $85 MM from CSWC (80%) and MAIN (20%) Total Debt Commitment of $165 MM
Slide 15: I-45 Portfolio Overview
I-45 Portfolio Overview I-45 loan portfolio of $221 MM is 94% first lien with average hold size of 2.3% Current I-45 Portfolio (By Type) Current I-45 Portfolio (By Industry) Telecommunications Healthcare & Pharmaceuticals Retail Capital Equipment Aerospace & Defense I-45 Portfolio Statistics (In Tho
Slide 16: Interest Rate Sensitivity
Interest Rate Sensitivity Debt Portfolio Exposure at 3/31/18 Well-Positioned for Rising Interest Rate Environment Fixed vs. Floating Portfolio Composition (1) Illustrative Illustrative Change in Base Interest Rates NII Change ($'s) NII Change (Per Share) 50 bps $1,221,217 $0.08 100bps $2,442,433 $0.
Slide 17: CSWC Capitalization
CSWC Capitalization • $210 MM Credit Facility: led by ING (nine banks) Includes accordion up to $250 MM $40 MM drawn as of 3/31/2018 Matures November 2021; L + 300 with step-down to L + 275 • $57.5 MM December 2022 Notes: Trades under the ticker “CSWCL” Matures December 2022 5.95% Fixed Notes •
Slide 18: Significant Unused Debt Capacity with Long-Term Duration
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 $40.0 MM (1) December 2022 Notes $57.5 MM 5.95% December 2022
Slide 19: Advantages of the Internally Managed BDC Structure
Advantages of the Internally Managed BDC Structure • Management interests are directly aligned with all Stakeholders Both the asset manager and the managed investment assets are consolidated and therefore all stakeholders have an interest in both entities Management owns equity directly in the BDC
Slide 20: 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 Auditor Independent Directors Michael S. Sarner RSM US David R. Brooks Chief Financial Officer, Secretary & Treasurer Chi
Slide 21: Appendix A: Investment and Finance Teams
Appendix A: Investment and Finance Teams Page 21
Slide 22: Investment Team with Strong Credit Experience
Investment Team with Strong Credit Experience • CSWC has assembled an investment team made up of individuals with extensive track records in middle market lending Years Year Joined Name Title Experience CSWC Relevant Experience Bowen Diehl Chief Executive 23 2014 - Managing Director and Co-Head of S
Slide 23: Appendix B: Underwriting & Portfolio Management
Appendix B: Underwriting & Portfolio Management Page 23
Slide 24: Disciplined Investment Process: Investment Criteria
Disciplined Investment Process: Investment Criteria Experienced Management • Relevant experience and track record of success Team with Meaningful Equity • Significant economic interest in the future success of the Ownership company • Differentiated product and/or service that gives company a Sustain
Slide 25: Disciplined Process: Focus on Capital Preservation
Disciplined Process: Focus on Capital Preservation Documentation Initial Due Diligence & Portfolio Sourcing & Evaluation Underwriting Management Closing • Extensive network • Review deal tear- • Continuous testing • Emphasis on • Monthly meeting of long standing sheets outlining of investment covena
Slide 26: Maintaining Investment Discipline as Pipeline Grows
Maintaining Investment Discipline as Pipeline Grows 583 Deals Reviewed, 18 deals or $169 million closed in FY 2018 Lower Middle Market Upper Middle Market (Syndicated) Total Deals Reviewed Total Deals Reviewed 562 21 Indicative Terms Submitted Preliminary Due Diligence 228 10 Initial IC Review IC Re
Slide 27: 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 27
Slide 28: 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 29: Valuation Process Overview
Valuation Process Overview • 3rd Party Valuation Consultants are an integral part of our valuation process • Our 3rd Party Valuation Consultants value our portfolio based on the following guidelines: • All Lower Middle Market investments are valued at least 2x per year • Underperforming investments
Slide 30: Appendix C: Financial Statements
Appendix C: Financial Statements Page 30
Slide 31: Balance Sheet
Balance Sheet Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 6/30/2017 9/30/2017 12/31/2017 3/31/2018 Assets Portfolio Investments $306,582 $321,860 $367,120 $393,095 Cash & Cash Equivalents $12,359 $33,329 $20,527 $7,907 Deferred Tax Asset $1,858 $1
Slide 32: Income Statement
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 6/30/17 9/30/17 12/31/17 3/31/18 Investment Income Interest Income $4,520 $5,282 $5,566 $6,575 Dividend Income $3,004 $3,088 $3,149 $3,069 Fees and Other Income $200 $139 $304 $230 Total
Slide 33: Portfolio Statistics
Portfolio Statistics Continuing to build a well performing credit portfolio with no non-accruals Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 6/30/2017 9/30/2017 12/31/2017 3/31/2018 Portfolio Statistics Fair Value of Debt Investments $181,725 $187,316 $226,441 $239,122 Ave
Slide 34: Investment Income Detail
Investment Income Detail Constructing a portfolio of investments with recurring cash yield • PIK and OID income remain a minor portion of Investment Income • Lower non-recurring prepayment fees in Q4 2018 versus previous quarter Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands)
Slide 35: Financial Highlights
Financial Highlights Strong Earnings ROE as Portfolio continues to appreciate Quarter Ended Quarter Ended Quarter Ended Quarter Ended 6/30/2017 9/30/2017 12/31/2017 3/31/2018 Financial Highlights Pre-Tax Net Investment Income Per Wtd Avg Diluted Share $0.22 $0.25 $0.27 $0.28 Annualized Pre-Tax Net I
Capital Southwest — Investor Presentation (June 2018) on 6ix