Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — Investor Presentation (August 2019)
38 slides from Capital Southwest's investor presentation, August 2019
Slide 1: Capital Southwest Corporation Investor Presentation
Capital Southwest Corporation Capital Southwest Corporation Investor Presentation August 2019 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) NASDAQ Ticker CSWI LP Inte
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 93% • Exited 23 legacy portfolio equity investments, generating $237 MM in proceeds • Invested $641 MM in 57 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 21 employees, 19 joined CSWC since launching the middle market lending strategy • CSWC: Invested $641 MM in 57 middle-market portfo
Slide 11: Q1 2020 Highlights
Q1 2020 Highlights Financial Highlights • Q1 2020 Pre-Tax Net Investment Income (“NII”) of $7.7 MM or $0.44 per share • Paid $0.39 per share in Regular Dividends, plus $0.10 per share Supplemental Dividend ◦ Total Dividends for the quarter of $0.49 per share • Investment Portfolio at Fair Value incr
Slide 12: Track Record of Increasing Dividends Continues
Track Record of Increasing Dividends Continues • In the last twelve months ending 6/30/19, CSWC generated $1.62 per share in Pre-Tax NII and paid out $1.47 per share in regular dividends ◦ Fifteen consecutive quarters of regular dividend per share growth • Cumulative Regular Dividend Coverage of 105
Slide 13: History of Value Creation
History of Value Creation Total Value (Net Asset Value + Cumulative Dividends Paid) Increase of $5.48 at 6/30/19 from 9/30/15 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 Q1 2020 Lower Middle Upper Middle (In Thousands) Market (1) Market Number of Portfolio Companies 26 11 Total Cost $324,025 $96,849 Total F
Slide 15: Credit Portfolio Heavily Weighted Towards First Lien and LMM Investments
CSWC Credit Portfolio Heavily Weighted Towards First Lien and LMM Investments First Lien and LMM Investments have Increased to 87% and 76% of the Credit Portfolio, respectively, as of 6/30/19 Credit Portfolio Heavily Weighted to First Lien Robust LMM Credit Portfolio Growth 87% 24% 22% 86% $272.1 26
Slide 16: CSWC Portfolio Mix as of 6/30/19 at Fair Value
CSWC Portfolio Mix as of 6/30/19 at Fair Value Current Investment Portfolio of $533MM 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 $235 MM is 95% First Lien with Average Hold Size of 2.0% of the I-45 Portfolio Current I-45 Portfolio (By Type) Current I-45 Portfolio (By Industry) Telecommunications Telecommunications Retail Retail Healthcare & Pharmaceuticals Capital Equipment Capit
Slide 19: CSWC Capitalization
CSWC Capitalization • $295 MM Credit Facility: led by ING Capital (ten banks) • Accordion up to $350 MM • $151 MM drawn as of 6/30/19 • Matures December 2023; L + 250 subject to certain conditions • $77 MM December 2022 Notes: Trades under the ticker “CSWCL” • Matures December 2022 • 5.95% Fixed • B
Slide 20: Significant Unused Debt Capacity with Long-Term Duration
Significant Unused Debt Capacity with Long-Term Duration Earliest Debt Maturity Occurs in July 2022 Facility Total Commitments Interest Rate Maturity Principal Drawn Undrawn Commitment L + 2.50% subject to Credit Facility(1) $295.0 MM certain conditions December 2023 $151.0 MM $140.6 MM(3) December
Slide 21: Internally Managed BDC Advantages
Internally Managed BDC Advantages • We operate under a shareholder friendly Internally Managed structure which: • Aligns management incentives with long term sustainable shareholder value creation • Historically has rewarded performing Internally Managed BDCs with price to book premiums of 0.5x vers
Slide 22: Interest Rate Sensitivity
Interest Rate Sensitivity Fixed vs. Floating Portfolio Exposure (1) Illustrative Annual Illustrative Annual NII Change in Base Interest Rates NII Change ($'s) Change (Per Share) (100 bps) $(2,310,579) $(0.13) (75 bps) (1,787,054) (0.10) (50 bps) (1,263,529) (0.07) (25 bps) (692,713) (0.04) 25 bps 69
Slide 23: 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 24: Appendix A: Investment and Finance Teams
Appendix A: Investment and Finance Teams Page 24
Slide 25: 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 26: Appendix B: Underwriting & Portfolio Management
Appendix B: Underwriting & Portfolio Management Page 26
Slide 27: 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 28: Disciplined Process: Focus on Capital Preservation
Disciplined Process: Focus on Capital Preservation Due Diligence Documentatio Initial Portfolio Sourcing & n& Evaluation Management Underwriting Closing • Extensive network • Review deal tear- • Continuous testing • Emphasis on • Monthly meeting of long standing sheets outlining of investment covena
Slide 29: Maintaining Investment Discipline as Pipeline Grows
Maintaining Investment Discipline as Pipeline Grows 815 deals reviewed, $181 million closed in LTM ending 6/30/19 Lower Middle Market Upper Middle Market (Syndicated)1 Total Deals Reviewed Total Deals Reviewed 813 2 Indicative Terms Submitted Preliminary Due Diligence 246 1 Initial IC Review IC Revi
Slide 30: 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 30
Slide 31: 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 32: 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 33: Appendix C: Financial Statements
Appendix C: Financial Statements Page 33
Slide 34: Balance Sheet
Balance Sheet Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 9/30/18 12/31/18 3/31/19 6/30/19 Assets Portfolio Investments $491,601 $496,740 $524,071 $533,491 Cash & Cash Equivalents 10,193 10,774 9,924 11,969 Deferred Tax Asset 2,060 2,294 1,807 1,6
Slide 35: Income Statement
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 9/30/18 12/31/18 3/31/19 6/30/19 Investment Income Interest Income $9,232 $10,070 $10,320 $11,346 Dividend Income 3,158 3,352 3,342 4,019 Fees and Other Income 205 449 646 434 Total Inve
Slide 36: Portfolio Statistics
Portfolio Statistics Continuing to Build a Well Performing Credit Portfolio Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 9/30/18 12/31/18 3/31/19 6/30/19 Portfolio Statistics Fair Value of Debt Investments $336,717 $350,685 $367,727 $381,704 Average Debt Investment Hold Siz
Slide 37: 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) 9/30/18 12/31/18 3/31/19 6/30/19 Investme
Slide 38: 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 9/30/18 12/31/18 3/31/19 6/30/19 Key Financial Metrics Pre-Tax Net Investment Income Per Wtd Avg Di
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