Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — Q3 2024 Earnings Presentation
42 slides from Capital Southwest's earnings presentation, January 2024
Slide 1: Capital Southwest Corporation Investor Presentation
Capital Southwest Corporation Capital Southwest Corporation Investor Presentation January 2024 8333 Douglas Avenue, Suite 1100 | Dallas, Texas 75225 | 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”) and 7.75% Not
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 transformed its investment portfolio from 1% in income earning assets to 89% as of December 2023 • Exited 24 pre-spin-off legacy portfolio equity investments, generating $288 MM in proceeds • Originated $2.5 B in 145 middle-market portfol
Slide 9: Credit Investment Strategy
Credit Investment Strategy CORE: Lower Middle Market (“LMM”): CSWC led 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 $50 MM with hold sizes generally $5 MM to $35 MM ◦ Both sponsored and non-
Slide 10: Strong Investment & Capitalization Track Record
Strong Investment & Capitalization Track Record • Built investment and finance teams made up of people with long track records of investing in the middle market Of the 27 employees, 25 joined CSWC since launching the middle market lending strategy • CSWC: Invested $2.5 B in 145 middle-market portf
Slide 11: Q3 2024 Highlights
Q3 2024 Highlights Financial Highlights • Q3 2024 Pre-Tax Net Investment Income (“NII”) of $29.8 MM or $0.72 per share • Declared Regular Dividend of $0.57 per share for the quarter ending March 31, 2024 ◦ Declared Supplemental Dividend of $0.06 per share for the quarter ending March 31, 2024 • Inve
Slide 12: Track Record of Consistent Dividends Continues
Track Record of Consistent Dividends Continues • In the last twelve months ended 12/31/2023, CSWC generated $2.71 per share in Pre-Tax NII and paid out $2.20 per share in Regular Dividends ◦ LTM Pre-Tax NII Regular Dividend Coverage of 123% • Cumulative Pre-Tax NII Regular Dividend Coverage of 110%
Slide 13: History of Value Creation
History of Value Creation Total Value (Net Asset Value + Cumulative Dividends Paid) Increase from Credit Strategy of $14.62 per share through 12/31/2023 Page 13
Slide 14: Q3 2024 Originations
Q3 2024 Originations $116.3 MM in total new committed investments to four new portfolio companies and twelve existing portfolio companies • $93.3 MM funded at close Portfolio Originations Q3 2024 Total Debt Total Equity Unfunded Debt Yield to Name Industry Type Funded at Close Funded at Close Commit
Slide 15: Track Record of CSWC Exits Continues
Track Record of CSWC Exits Continues $79.0 MM in total proceeds from five debt prepayments and one equity exit • During the quarter, CSWC exited five debt investments and one equity investment, generating proceeds of $79.0 MM and a weighted average IRR of 12.2% • Cumulative weighted average IRR of 1
Slide 16: CSWC Investment Portfolio Composition
CSWC Investment Portfolio Composition Maintaining appropriate portfolio leverage while receiving attractive risk-adjusted returns Investment Portfolio - Statistics (in $000's) 9/30/2023 12/31/2023 Total CSWC Total CSWC Portfolio Portfolio Number of Portfolio Companies 94 95 Total Cost $1,280,155 $1,
Slide 17: Quarter-over-Quarter Investment Rating Migration
Quarter-over-Quarter Investment Rating Migration Approximately 95% of all debt investments are currently rated a "1" or "2" as credit portfolio continues to demonstrate strong performance Investment Rating 9/30/2023 Investment Rating Investment Rating 12/31/2023 Upgrades Downgrades Fair % of Fair %
Slide 18: Granular Credit Portfolio Heavily Weighted Towards First Lien Investments
Granular Credit Portfolio Heavily Weighted Towards First Lien Investments 97% of credit portfolio in first lien senior secured loans with an average investment hold size of 1.2% as of 12/31/23 Credit Portfolio Heavily Weighted to First Lien 97% 97% 97% 96% 93% 92% 90% 86% 82% 64% 43% 41% 28% 10% 10%
Slide 19: CSWC Portfolio Mix as of December 31, 2023 at Fair Value
CSWC Portfolio Mix as of December 31, 2023 at Fair Value Current Investment Portfolio of $1.4 B continues to be diverse across industries Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) (Note 1) I-45 Senior Loan Fund ("I-45 SLF") consists of 95% first lien senior se
Slide 20: I-45 Senior Loan Fund Portfolio Overview
I-45 Senior Loan Fund Portfolio Overview I-45 SLF loan portfolio of $118 MM is 95% first lien senior secured debt Current I-45 Portfolio (By Type) Current I-45 Portfolio (By Industry) Healthcare & Pharmaceuticals Telecommunications 17% 17% Business Services 7% 15% Banking, Finance, 11% Insurance and
Slide 21: CSWC Capitalization
CSWC Capitalization • $460 MM Credit Facility: led by ING Capital (ten banks) • $195 MM drawn as of 12/31/23 • Matures August 2028; Adjusted Term SOFR + 215 • SBIC I: $175 MM Leverage Commitment • $130 MM in Debentures drawn as of 12/31/23 • Current regulations permit SBIC I to borrow up to $175 MM
Slide 22: Significant Unused Debt Capacity with Long-Term Duration
Significant Unused Debt Capacity with Long-Term Duration Subsequent to quarter end, the I-45 Credit Facility was terminated and repaid in full at the option of the Joint Venture Partners Facility Total Commitments Interest Rate Maturity Principal Drawn Undrawn Commitment January 2026 Notes (1) $140.
Slide 23: 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 24: Operating Leverage Trend
Operating Leverage Trend Continuing to improve Operating Leverage through benefits 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 ave
Slide 25: NAV per Share Bridge for Quarter Ended 12/31/2023
NAV per Share Bridge for Quarter Ended 12/31/2023 Earnings / Dividends Investment Portfolio Other Corporate $0.09 per Share Valuation Change $0.35 per Share $(0.13) per Share Page 25
Slide 26: Interest Rate Sensitivity
Interest Rate Sensitivity Fixed vs. Floating Credit Portfolio Exposure Illustrative Annual Illustrative Annual NII Change in Base Interest Rates NII Change ($'s) Change ($ Per Share) (200 bps) (20,146,765) (0.47) (150 bps) (15,110,074) (0.35) (100 bps) (10,073,382) (0.23) (50 bps) (5,036,691) (0.12)
Slide 27: Appendix A: Investment Team
Appendix A: Investment Team Page 27
Slide 28: 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 Officer 28 2014 - Managing Director and Co-Head of Sponsor Finance at / CIO American Capital - Merrill Lynch Investment Banking - Chase Securities Investment Ban
Slide 29: Appendix B: Underwriting & Portfolio Management
Appendix B: Underwriting & Portfolio Management Page 29
Slide 30: 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 31: 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 32: LTM Deal Pipeline as of 12/31/23
LTM Deal Pipeline as of 12/31/23 914 deals reviewed, $405.5 million closed in LTM ending 12/31/23 Lower Middle Market Total Deals Reviewed 914 Indicative Terms Submitted 247 Initial IC Review 34 Diligence & Final IC Approval 20 20 Portfolio Investments & 40 Add-Ons / Upsizes $405.5mm Invested Page 3
Slide 33: 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 33
Slide 34: 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 35: Valuation Process Overview
Valuation Process Overview Final Valuation Audit Update Models Begin Valuing Valuation Review 1 3rd Party Review Valuation Meeting Committee Committee/ Sign-offs Board of Directors Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Portfolio Valuation Team Valuation Team 3rd Party Valuation Final Revi
Slide 36: Appendix C: Financial Statements
Appendix C: Financial Statements Page 36
Slide 37: Balance Sheet
Balance Sheet Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 3/31/23 6/30/23 9/30/23 12/31/23 Assets Portfolio Investments $1,206,388 $1,285,318 $1,353,566 $1,365,037 Cash & Cash Equivalents 21,585 21,278 23,020 23,605 Other Assets 29,711 30,407 40,3
Slide 38: Income Statement
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 3/31/23 6/30/23 9/30/23 12/31/23 Investment Income Interest Income $31,622 $34,819 $37,955 $37,841 PIK Interest Income 1,870 1,656 1,526 4,073 Dividend Income 2,207 2,703 2,484 4,672 Fee
Slide 39: Portfolio Statistics
Portfolio Statistics Continuing to build a well performing credit portfolio Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 3/31/23 6/30/23 9/30/23 12/31/23 Portfolio Statistics Fair Value of Debt Investments $1,037,595 $1,110,915 $1,179,074 $1,181,737 Average Debt Investment
Slide 40: 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) 3/31/23 6/30/23 9/30/23 12/31/23 Investment Income Breakdown Cash Interest $30,712 $33,703 $36,588 $36,743 Cash Dividends 2,208 2,703 2,48
Slide 41: 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 3/31/23 6/30/23 9/30/23 12/31/23 Key Financial Metrics Pre-Tax Net Investment Income Per Wtd Avg Diluted Sha
Slide 42: Corporate Information
Corporate Information Board of Directors Senior Management Fiscal Year End Inside Director 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, S