Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — Q4 2021 Earnings Presentation
43 slides from Capital Southwest's earnings presentation, May 2021
Slide 1: Capital Southwest Corporation Investor Presentation
Capital Southwest Corporation Capital Southwest Corporation Investor Presentation May 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 $987 MM in 75 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 $20 MM ◦ Typical leverage of 2.0x – 4.0x Debt to EBITDA through CSWC debt position ◦ Commitment size up to $25 MM with hold sizes generally $10 MM to $20 MM ◦ Both Spon
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 21 employees, 19 joined CSWC since launching the middle market lending strategy • CSWC: Invested $987 MM in 75 middle-market portfo
Slide 11: Q4 2021 Highlights
Q4 2021 Highlights Financial Highlights • Q4 2021 Pre-Tax Net Investment Income (“NII”) of $8.9 MM or $0.44 Per Share • Paid $0.42 per share in Regular Dividends and $0.10 per share Supplemental Dividend for the quarter ended March 31, 2021 ◦ Increased Regular Dividend to $0.43 per share and declare
Slide 12: Track Record of Increasing Dividends Continues
Track Record of Increasing Dividends Continues • In the Last Twelve Months Ending 3/31/21, CSWC Generated $1.79 Per Share in Pre-Tax NII and Paid Out $1.65 Per Share in Regular Dividends • Cumulative Pre-Tax NII Regular Dividend Coverage of 107% since the 2015 spin-off • Announced Supplemental Divid
Slide 13: History of Value Creation
History of Value Creation Total Value (Net Asset Value + Cumulative Dividends Paid) Increase of $7.22 at 3/31/21 from 9/30/15 Spin-off of CSWI Page 13
Slide 14: Q4 2021 Originations
Q4 2021 Originations $77.3 MM in total new committed investments, consisting of $77.0 MM committed to six new portfolio companies and $0.3 MM committed to one existing portfolio company Portfolio Originations Q4 2021 Total Debt Total Equity Unfunded Funded at Close Funded at Close Commitments at Deb
Slide 15: Track Record of CSWC Exits Continues
Track Record of CSWC Exits Continues $23.1 MM in total proceeds from two portfolio company exits • During the quarter, CSWC received two prepayments generating total proceeds of $23.1 MM and weighted average IRR of 8.2% • Cumulative IRR of 15.5% on 38 portfolio company exits generating $383.5 MM in
Slide 16: 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 Q4 2021 Lower Middle Upper Middle (In Thousands) Market (1) Market Number of Portfolio Companies 44 10 Total Cost $551,144 $79,613 Total Fa
Slide 17: Quarter-over-Quarter Investment Rating Migration
Quarter-over-Quarter Investment Rating Migration One loan upgraded and one loan downgraded during the quarter as credit portfolio continues to demonstrate strong performance Investment Rating Investment Rating Investment Rating 12/31/2020 3/31/2021 Upgrades Downgrades Fair % of Fair % of Fair % of F
Slide 18: Credit Portfolio Heavily Weighted Towards LMM and First Lien
CSWC Credit Portfolio Heavily Weighted Towards LMM and First Lien Investments LMM and First Lien Investments have increased to 88% and 92% of the credit portfolio as of 3/31/21, respectively Robust LMM Credit Portfolio Growth Credit Portfolio Heavily Weighted to First Lien 12% 14% 18% 15% 16% 19% 24
Slide 19: CSWC Portfolio Mix as of March 31, 2021 at Fair Value
CSWC Portfolio Mix as of March 31, 2021 at Fair Value Current investment portfolio of $688.4 MM continues to be diverse across industries Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) 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 $101 MM from CSWC (80%) and MAIN (20%) • Total Debt Commitment of $1
Slide 21: I-45 Portfolio Overview
I-45 Portfolio Overview I-45 loan portfolio of $164.4 MM is 95% first lien with average hold size of 2.8% of the I-45 portfolio Current I-45 Portfolio (By Type) Current I-45 Portfolio (By Industry) Consumer Products & Retail Telecommunications High Tech Industries Healthcare Services Retail Capital
Slide 22: CSWC Capitalization
CSWC Capitalization • $340 MM Credit Facility: led by ING Capital (eleven banks) • Accordion up to $400 MM • $120 MM drawn as of 3/31/21 • Matures December 2023; L + 250 subject to certain conditions • $125 MM October 2024 Notes • Matures October 2024, 5.375% Fixed • $140 MM January 2026 Notes • Mat
Slide 23: Significant Unused Debt Capacity with Long-Term Duration
Significant Unused Debt Capacity with Long-Term Duration Earliest debt maturity occurs in December 2023 Facility Total Commitments Interest Rate Maturity Principal Drawn Undrawn Commitment L + 2.50% subject to certain Credit Facility(1) $340.0 MM conditions December 2023 $120.0 MM $216.9 MM(2) Octob
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 Continues to Improve
Operating Leverage Continues to Improve 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 aver
Slide 26: NAV per Share Bridge since Quarter Ended 3/31/2021
NAV per Share Bridge since Quarter Ended 3/31/2021 Earnings / Dividends Investment Portfolio Corporate $(0.08) per Share $0.13 per Share $0.22 per Share (1) Other consists primarily of income taxes of $(0.04), realized losses on extinguishment of debt of $(0.02), and share based compensation expense
Slide 27: Interest Rate Sensitivity
Interest Rate Sensitivity Fixed vs. Floating Portfolio Exposure (1) Change in Base Interest Illustrative Annual Illustrative Annual NII Rates NII Change ($'s) Change (Per Share) (25 bps) $328,699 $0.02 25 bps $(423,036) $(0.02) 50 bps $(846,071) $(0.04) 75 bps $(1,233,834) $(0.06) 100 bps $(791,861)
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 Christine S. Battist Chief Financial Officer, Secr
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 Years Year Joined Name Title Experience CSWC Relevant Experience Bowen Diehl Chief Executive 25 2014 - Managing Director and Co-Head of Sponsor Finance at American Officer / CIO 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 719 deals reviewed, $201.9 million closed in LTM ending 3/31/21 Lower Middle Market Upper Middle Market (Syndicated) (1) Total Deals Reviewed Total Deals Reviewed 712 7 Indicative Terms Submitted Preliminary Due Diligence 224 3 Initial IC Review IC
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) 6/30/20 9/30/20 12/31/20 3/31/21 Assets Portfolio Investments $587,178 $631,197 $648,773 $688,432 Cash & Cash Equivalents 14,986 16,011 43,724 31,613 Other Assets 16,932 17,057 16,337 15,53
Slide 40: Income Statement
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 6/30/20 9/30/20 12/31/20 3/31/21 Investment Income Interest Income $12,645 $13,882 $14,687 $15,078 Dividend Income 1,957 1,860 2,916 1,661 Fees and Other Income 562 943 1,437 434 Total I
Slide 41: Portfolio Statistics
Portfolio Statistics Continuing to build a well performing credit portfolio Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 6/30/20 9/30/20 12/31/20 3/31/21 Portfolio Statistics Fair Value of Debt Investments $487,195 $520,651 $531,103 $572,614 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) 6/30/20 9/30/20 12/31/20 3/31/21 Investment Income Breakdown Cash Interest $11,008 $11,581 $12,413 $11,668 Cash Dividends 1,957 1,860 2,91
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 6/30/20 9/30/20 12/31/20 3/31/21 Key Financial Metrics Pre-Tax Net Investment Income Per Wtd Avg Diluted Sha