Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — Investor Presentation (February 2022)
44 slides from Capital Southwest's investor presentation, February 2022
Slide 1: Capital Southwest Corporation Investor Presentation
Capital Southwest Corporation Capital Southwest Corporation Investor Presentation February 2022 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 $1.5 B in 106 middle-market po
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 $35 MM with hold sizes generally $5 MM to $30 MM ◦ Both Sponsored and Non
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 $1.5 B in 106 middle-market portfo
Slide 11: Q3 2022 Highlights
Q3 2022 Highlights Financial Highlights • Q3 2022 Pre-Tax Net Investment Income (“NII”) of $11.8 MM or $0.51 per share ◦ Paid $0.47 per share Regular Dividend ◦ Paid $0.50 per share Supplemental Dividend • Increased Regular Dividend to $0.48 per share for the quarter ending March 31, 2022, an increa
Slide 12: Track Record of Consistent Dividends Continues
Track Record of Consistent Dividends Continues • In the last twelve months ended 12/31/2021, CSWC generated $1.84 per share in Pre-Tax NII and paid out $1.76 per share in Regular Dividends • Cumulative Pre-Tax NII Regular Dividend Coverage of 107% since the 2015 Spin-Off • Total Special and Suppleme
Slide 13: History of Value Creation
History of Value Creation Total Value (Net Asset Value + Cumulative Dividends Paid) Increase of $9.44 per share at 12/31/2021 from 9/30/2015 Spin-off of CSWI Page 13
Slide 14: Q3 2022 Originations
Q3 2022 Originations $268.3 MM in total new committed investments to fourteen new portfolio companies and twelve existing portfolio companies • $213.5 MM funded at close Portfolio Originations Q3 2022 Total Debt Funded Total Equity Unfunded Debt Yield to Name Industry Type Funded at Close Commitment
Slide 15: Q3 2022 Originations
Q3 2022 Originations Portfolio Originations Q3 2022 Total Debt Total Equity Unfunded Debt Yield to Name Industry Type Funded at Close Funded at Commitments ($000s) Close ($000s) at Close ($000s) Maturity SIB Holdings, LLC Business services First Lien / Equity $7,427 $500 $2,573 7.43% Air Conditionin
Slide 16: Track Record of CSWC Exits Continues
Track Record of CSWC Exits Continues $158.4 MM in total proceeds from twelve portfolio company exits • During the quarter, CSWC exited eleven debt investments and one equity investment, generating total proceeds of $158.4 MM and an IRR of 16.2% • Cumulative IRR of 14.6% on 56 portfolio company exits
Slide 17: CSWC Investment Portfolio Composition
CSWC Investment Portfolio Composition Maintaining conservative portfolio leverage while receiving attractive risk-adjusted returns Investment Portfolio - Statistics Q3 2022 9/30/2021 12/31/2021 Total CSWC Total CSWC (In Thousands) Portfolio Portfolio Number of Portfolio Companies 63 70 Total Cost $7
Slide 18: Credit Portfolio Investment Rating Migration
Credit Portfolio Investment Rating Migration Four loans upgraded and no loans downgraded during the quarter Investment Rating 9/30/2021 Investment Rating Investment Rating 12/31/2021 Upgrades Downgrades Fair % of Fair % of Fair % of Fair % of # of # of # of # of Loans Value Portfolio Loans Value Por
Slide 19: Credit Portfolio Heavily Weighted Towards First Lien Investments
Credit Portfolio Heavily Weighted Towards First Lien Investments 91% of Credit Portfolio as of 12/31/2021 in first lien senior secured loans Credit Portfolio Heavily Weighted to First Lien 91% 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% 7% 6
Slide 20: CSWC Portfolio Mix as of 12/31/2021 at Fair Value
CSWC Portfolio Mix as of 12/31/2021 at Fair Value Current Investment Portfolio of $877 MM continues to be diverse across industries Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) (a) I-45 SLF consists of 95% first lien senior secured debt (b) Equity represents equi
Slide 21: 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 22: I-45 Portfolio Overview
I-45 Portfolio Overview I-45 loan portfolio of $180.0 MM is 95% first lien senior secured debt with average hold size of 2.4% of the I-45 portfolio Current I-45 Portfolio (By Type) Current I-45 Portfolio (By Industry) Healthcare Products Telecommunications 13% Business Services 12% 11% Consumer Prod
Slide 23: CSWC Capitalization
CSWC Capitalization • $335 MM Credit Facility: led by ING Capital (ten banks) • Accordion up to $400 MM • $190 MM drawn as of 12/31/21 • Matures August 2026; L + 215 • $40 MM Initial Leverage Commitment from SBIC • First pooled Debentures mature September 2031; $29 MM in Debentures drawn as of 12/31
Slide 24: 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 25: 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 26: 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 27: NAV per Share Bridge from Quarter Ended 9/30/2021
NAV per Share Bridge from Quarter Ended 9/30/2021 Investment Portfolio Earnings / Dividends Valuation Change Other Corporate $(0.46) per Share $0.02 per Share $0.27 per Share Page 27
Slide 28: Interest Rate Sensitivity
Interest Rate Sensitivity Fixed vs. Floating Credit Portfolio Exposure (1) Illustrative Annual Illustrative Annual NII Change in Base Interest Rates NII Change ($'s) Change (Per Share) (25 bps) 535,329 0.02 25 bps (639,947) (0.03) 50 bps (1,279,894) (0.05) 75 bps (1,824,168) (0.08) 100 bps (887,763)
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 788 deals reviewed, $548.4 million closed in LTM ending 12/31/21 CSWC Investment Portfolio Total Deals Reviewed 788 Indicative Terms Submitted 220 Initial IC Review 41 Diligence & Final IC Approval 34 34 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) 3/31/21 6/30/21 9/30/21 12/31/21 Assets Portfolio Investments $688,432 $798,647 $818,218 $876,765 Cash & Cash Equivalents 31,613 16,543 26,840 18,668 Other Assets 15,539 20,858 21,764 17,12
Slide 40: Income Statement
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 3/31/21 6/30/21 9/30/21 12/31/21 Investment Income Interest Income $12,282 $14,626 $16,100 $16,921 PIK Interest Income 2,796 975 879 814 Dividend Income 1,661 2,657 2,070 1,714 Fees and
Slide 41: Portfolio Statistics
Portfolio Statistics Continuing to build a well performing credit portfolio Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 3/31/21 6/30/21 9/30/21 12/31/21 Portfolio Statistics Fair Value of Debt Investments $572,614 $671,257 $689,421 $744,681 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) 3/31/21 6/30/21 9/30/21 12/31/21 Investment Income Breakdown Cash Interest $11,668 $13,939 $15,370 $16,164 Cash Dividends 1,660 2,657 2,06
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 3/31/21 6/30/21 9/30/21 12/31/21 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,
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