Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — Investor Presentation (February 2020)
39 slides from Capital Southwest's investor presentation, February 2020
Slide 1: Investor Presentation February 2020
Capital Southwest Corporation Capital Southwest Corporation Investor Presentation February 2020 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 • 15 years of investing experience in middle market debt and equity • BE – Vanderbilt University. MBA – UT Austin • Lives in Dallas with wife and three childre
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”) and December
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) 1+1=3 NASDAQ Ticker CSWI M
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 $771 MM in 63 middle-market po
Slide 9: 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 2.0x – 4.0x Debt to EBITDA through CSWC debt • Commitment size up to $25 MM with hold sizes generally $10 MM to $20 MM • Both Sponsored and
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 23 employees, 21 joined CSWC since launching the middle market lending strategy • CSWC: Invested $771 MM in 63 middle-market portfo
Slide 11: Q3 2020 Highlights
Q3 2020 Highlights Financial Highlights • Q3 2020 Pre-Tax Net Investment Income (“NII”) of $7.9 MM or $0.44 per share • Paid $0.40 per share in Regular Dividends, plus $0.10 per share Supplemental Dividend and $0.75 per share Special Dividend ◦ Total Dividends for the quarter of $1.25 per share • In
Slide 12: Track Record of Strong Dividend Yield and Consistent Dividend Coverage
Track Record of Strong Dividend Yield and Consistent Dividend Coverage • In the last twelve months ending 12/31/19, CSWC generated $1.72 per share in Pre-Tax NII and paid out $1.57 per share in regular dividends • Cumulative Pre-Tax NII Regular Dividend Coverage of 108% since the 2015 spin-off • Dis
Slide 13: History of Value Creation
History of Value Creation Total Value (Net Asset Value + Cumulative Dividends Paid) Increase of $5.39 at 12/31/2019 from 9/30/2015 Spin-off of CSWI Page 13
Slide 14: CSWC Portfolio Asset Mix by Market
CSWC Portfolio Asset Mix by Market Maintaining conservative portfolio leverage while receiving attractive risk adjusted returns Investment Portfolio - Statistics Q3 2020 Lower Middle Upper Middle (In Thousands) Market (1) Market Number of Portfolio Companies 32 11 Total Cost $404,006 $100,697 Total
Slide 15: Credit Portfolio Heavily Weighted Towards First Lien and LMM Investments
Credit Portfolio Heavily Weighted Towards First Lien and LMM Investments First Lien and LMM Investments have increased to 90% and 81% of the credit portfolio, respectively, as of 12/31/19 Credit Portfolio Heavily Weighted to First Lien Robust LMM Credit Portfolio Growth $387.1 19% 90% 87% 87% 24% 24
Slide 16: CSWC Portfolio Mix as of 12/31/19 at Fair Value
CSWC Portfolio Mix as of 12/31/19 at Fair Value Current Investment Portfolio of $559 MM continues to be diverse across industries Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) Page 16
Slide 17: 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 committed fund size of $250 MM • Total Equity Commitment of $85 MM from CSWC (80%) and MAIN (20%) • Total Debt Commitment of $1
Slide 18: I-45 Portfolio Overview
I-45 Portfolio Overview I-45 loan portfolio of $206 MM is 96% first lien with average hold size of 2.2% of the I-45 portfolio Current I-45 Portfolio (By Type) Current I-45 Portfolio (By Industry) Telecommunications Telecommunications Consumer Products and Retail Retail Healthcare Services Capital Eq
Slide 19: CSWC Capitalization
CSWC Capitalization • $295 MM Credit Facility: led by ING Capital (ten banks) • Accordion up to $350 MM • $124 MM drawn as of 12/31/19 • Matures December 2023; L + 250 subject to certain conditions • $77 MM December 2022 Notes: Trades under the ticker “CSWCL” • 5.95% Fixed • Matures December 2022 •
Slide 20: Significant Unused Debt Capacity with Long-Term Duration
Significant Unused Debt Capacity with Long-Term Duration Earliest Debt Maturity occurs in December 2022 Facility Total Commitments Interest Rate Maturity Principal Drawn Undrawn Commitment L + 2.50% subject to certain Credit Facility (1) $295.0 MM conditions December 2023 $124.0 MM $167.6 MM (2) Dec
Slide 21: Internally Managed BDC Advantages
Internally Managed BDC Advantages • We operate under a shareholder friendly Internally Managed structure which: • Aligns management incentives with long term sustainable shareholder value creation • Historically has rewarded performing Internally Managed BDCs with price to book premiums of 0.5x vers
Slide 22: Operating Leverage Trend
Operating Leverage Trend Continue to realize operating efficiencies of internally-managed structure migrating to a target operating leverage of sub-2.5% Total Assets Operating Expenses(1) as % of Average Total Assets Note: FY16 includes only the quarters after the 2015 spin-off. Q1 FY20, Q2 FY20, an
Slide 23: Interest Rate Sensitivity
Interest Rate Sensitivity Fixed vs. Floating Portfolio Exposure (1) Illustrative Annual Illustrative Annual NII Change in Base Interest Rates NII Change ($'s) Change (Per Share) (100 bps) $(1,921,287) $(0.11) (75 bps) (1,723,716) (0.10) (50 bps) (1,195,064) (0.07) (25 bps) (612,652) (0.03) 25 bps 80
Slide 24: 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 Christine S. Battist Chief Financial Officer, Secretary &
Slide 25: Appendix A: Investment and Finance Teams
Appendix A: Investment and Finance Teams Page 25
Slide 26: Investment Team with Strong Credit Experience
Investment Team with Strong Credit Experience Years Year Joined Name Title Experience CSWC Relevant Experience Bowen Diehl Chief Executive 24 2014 - Managing Director and Co-Head of Sponsor Finance at Officer / CIO American Capital - Merrill Lynch Investment Banking - Chase Securities Investment Ban
Slide 27: Appendix B: Underwriting & Portfolio Management
Appendix B: Underwriting & Portfolio Management Page 27
Slide 28: 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 29: 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 30: Maintaining Investment Discipline as Pipeline Grows
Maintaining Investment Discipline as Pipeline Grows 826 deals reviewed, $168 million closed in LTM ending 12/31/19 Lower Middle Market Upper Middle Market (Syndicated) (1) Total Deals Reviewed Total Deals Reviewed 823 3 Indicative Terms Submitted Preliminary Due Diligence 246 1 Initial IC Review IC
Slide 31: 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 31
Slide 32: 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 33: 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 34: Appendix C: Financial Statements
Appendix C: Financial Statements Page 34
Slide 35: Balance Sheet
Balance Sheet Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 3/31/19 6/30/19 9/30/19 12/31/19 Assets Portfolio Investments $524,071 $533,491 $538,876 $558,552 Cash & Cash Equivalents 9,924 11,969 30,019 22,966 Deferred Tax Asset 1,807 1,672 1,628 1,3
Slide 36: Income Statement
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 3/31/19 6/30/19 9/30/19 12/31/19 Investment Income Interest Income $10,320 $11,346 $11,237 $11,685 Dividend Income 3,342 4,019 3,587 2,688 Fees and Other Income(1) 646 434 394 1,611 Tota
Slide 37: Portfolio Statistics
Portfolio Statistics Continuing to build a well performing credit portfolio Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 3/31/19 6/30/19 9/30/19 12/31/19 Portfolio Statistics Fair Value of Debt Investments $367,727 $381,704 $387,168 $456,095 Average Debt Investment Hold Siz
Slide 38: Investment Income Detail
Investment Income Detail Constructing a portfolio of investments with recurring cash yield • Non-Cash and Non-Recurring investment income remain a minor portion of Total Investment Income Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 3/31/19 6/30/19 9/30/19 12/31/19 Investme
Slide 39: Key Financial Metrics
Key Financial Metrics Strong Pre-Tax Net Investment Income and Regular Dividend growth driven by net portfolio growth and investment performance Quarter Ended Quarter Ended Quarter Ended Quarter Ended 3/31/19 6/30/19 9/30/19 12/31/19 Key Financial Metrics Pre-Tax Net Investment Income Per Wtd Avg Di
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