Capital Southwest Corporation · NASDAQ:CSWC
Capital Southwest — Q1 2025 Earnings Presentation
38 slides from Capital Southwest's earnings presentation, August 2024
Slide 1: Capital Southwest Corporation Investor Presentation
Capital Southwest Corporation Capital Southwest Corporation Investor Presentation August 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: Lower Middle Market Credit Strategy
Lower Middle Market Credit Strategy CSWC leads financing transactions, primarily backing private equity firms that generally fit the following parameters • Flexible financing solutions to fund growth, changes of control, or other corporate events • Investments are diverse among industries, geographi
Slide 7: Strong Investment & Capitalization Track Record
Strong Investment & Capitalization Track Record • CSWC: Invested $2.7 B in 154 middle-market portfolio companies 82 portfolio company exits generating proceeds of $1.0 B and a weighted average IRR of 13.9% • I-45 SLF: Invested $645 MM in 133 middle-market credits 100 exits generating proceeds of
Slide 8: Q1 2025 Highlights
Q1 2025 Highlights Financial Highlights • Q1 2025 Pre-Tax Net Investment Income (“NII”) of $31.3 MM or $0.69 per share • Declared Regular Dividend of $0.58 per share for the quarter ending September 30, 2024, an increase of 1.8% compared to the $0.57 per share Regular Dividend paid for the quarter e
Slide 9: Track Record of Consistent Dividends Continues
Track Record of Consistent Dividends Continues • In the last twelve months ended 6/30/2024, CSWC generated $2.76 per share in Pre-Tax NII and paid out $2.27 per share in Regular Dividends ◦ LTM Pre-Tax NII Regular Dividend Coverage of 122% • Cumulative Pre-Tax NII Regular Dividend Coverage of 111% s
Slide 10: History of Value Creation
History of Value Creation Total Value (Net Asset Value + Cumulative Dividends Paid) Increase from Credit Strategy of $15.71 per share through 6/30/2024 Page 10
Slide 11: Q1 2025 Originations
Q1 2025 Originations $108.1 MM in total new committed investments to three new portfolio companies and eleven existing portfolio companies • $75.6 MM funded at close Portfolio Originations Q1 2025 Total Debt Total Equity Unfunded Funded at Close Funded at Close Commitments at Debt Yield to Name Indu
Slide 12: Track Record of CSWC Exits Continues
Track Record of CSWC Exits Continues Refinancing activity in the portfolio increased this quarter as the lending market continues to be competitive • During the quarter, CSWC exited eight debt investments generating proceeds of $77.2 MM and a weighted average IRR of 12.6% • Cumulative weighted avera
Slide 13: CSWC Investment Portfolio Composition
CSWC Investment Portfolio Composition Maintaining appropriate portfolio leverage while receiving attractive risk- adjusted returns Investment Portfolio - Statistics (in $000's) 3/31/2024 6/30/2024 Total CSWC Total CSWC Portfolio Portfolio Number of Portfolio Companies 116 117 Total Cost $1,476,703 $
Slide 14: Quarter-over-Quarter Investment Rating Migration
Quarter-over-Quarter Investment Rating Migration Approximately 92% of all debt investments are currently rated a "1" or "2" as credit portfolio continues to demonstrate solid performance Investment Rating 3/31/2024 Investment Rating Investment Rating 6/30/2024 Upgrades Downgrades Fair % of Fair % of
Slide 15: Granular Credit Portfolio Heavily Weighted Towards First Lien Investments
Granular Credit Portfolio Heavily Weighted Towards First Lien Investments 98% of credit portfolio in first lien senior secured loans with an average investment hold size of 1.0% as of 6/30/24 Credit Portfolio Heavily Weighted to First Lien 98% 97% 96% 93% 92% 90% 86% 82% 64% 43% 41% 28% 10% 10% 8% 6
Slide 16: CSWC Portfolio Mix as of June 30, 2024 at Fair Value
CSWC Portfolio Mix as of June 30, 2024 at Fair Value Current Investment Portfolio of $1.5 B continues to be heavily weighted towards first lien investments and diverse across industries Current Investment Portfolio (By Type) Current Investment Portfolio (By Industry) Note: Equity represents equity c
Slide 17: CSWC Capitalization
CSWC Capitalization • $460 MM Credit Facility: led by ING Capital (ten banks) • $165 MM drawn as of 6/30/24 • Matures August 2028; Adjusted Term SOFR + 215 • $200 MM SPV Credit Facility: led by Deutsche Bank • Matures March 2029; Term SOFR + 250 • SBIC I: $175 MM Leverage Commitment • $153 MM in Deb
Slide 18: Significant Unused Debt Capacity with Long-Term Duration
Significant Unused Debt Capacity with Long-Term Duration Increased SPV Credit Facility to $200 MM in total commitments during the quarter 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 October 202
Slide 19: 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 20: Operating Leverage Trend
Operating Leverage Trend Continuing to improve Operating Leverage through benefits of internally- managed structure Total Assets Operating Expenses as % of Average Total Assets Note: Operating Leverage calculated as last twelve months operating expenses (excluding interest expense) divided by averag
Slide 21: NAV per Share Bridge for Quarter Ended 6/30/24
NAV per Share Bridge for Quarter Ended 6/30/24 Investment Portfolio Earnings / Dividends Valuation Change Other Corporate $0.06 per Share $(0.32) per Share $0.09 per Share Note: "Other Corporate" consists primarily of ($0.13) per share dilution from annual issuance of RSUs Page 21
Slide 22: Interest Rate Sensitivity
Interest Rate Sensitivity Fixed vs. Floating Credit Portfolio Exposure Illustrative Annual Illustrative Annual NII Change in Base Interest Rates NII Change ($'s) Change ($ Per Share) (200 bps) (21,957,039) (0.47) (150 bps) (16,467,779) (0.35) (100 bps) (10,978,520) (0.23) (50 bps) (5,489,260) (0.12)
Slide 23: Appendix A: Investment Team
Appendix A: Investment Team Page 23
Slide 24: Investment Team with Strong Credit Experience
Investment Team with Strong Credit Experience Years Year Joined Name Title Experience CSWC Relevant Experience Bowen Diehl President / Chief 29 2014 - Managing Director and Co-Head of Sponsor Finance at Executive Officer American Capital - Merrill Lynch Investment Banking - Chase Securities Investme
Slide 25: Appendix B: Underwriting & Portfolio Management
Appendix B: Underwriting & Portfolio Management Page 25
Slide 26: 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 27: 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 28: LTM Deal Pipeline as of 6/30/24
LTM Deal Pipeline as of 6/30/24 987 deals reviewed, $491.9 million closed in LTM ending 6/30/24 Lower Middle Market Total Deals Reviewed 987 Indicative Terms Submitted 305 Initial IC Review 44 Diligence & Final IC Approval 23 18 Portfolio Investments & 40 Add-Ons / Upsizes $491.9mm Invested Page 28
Slide 29: 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 29
Slide 30: 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 31: 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 32: Appendix C: Financial Statements
Appendix C: Financial Statements Page 32
Slide 33: Balance Sheet
Balance Sheet Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 9/30/23 12/31/23 3/31/24 6/30/24 Assets Portfolio Investments $1,353,566 $1,365,037 $1,476,561 $1,468,126 Cash & Cash Equivalents 23,020 23,605 32,273 33,299 Other Assets 40,327 40,845 47,9
Slide 34: Income Statement
Income Statement Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands, except per share amounts) 9/30/23 12/31/23 3/31/24 6/30/24 Investment Income Interest Income $37,955 $37,841 $39,923 $42,987 PIK Interest Income 1,526 4,073 2,953 3,051 Dividend Income 2,484 4,672 1,887 2,418 Fee
Slide 35: Portfolio Statistics
Portfolio Statistics Continuing to build a well performing credit portfolio Quarter Ended Quarter Ended Quarter Ended Quarter Ended (In Thousands) 9/30/23 12/31/23 3/31/24 6/30/24 Portfolio Statistics Fair Value of Debt Investments $1,179,074 $1,181,737 $1,344,559 $1,335,279 Average Debt Investment
Slide 36: 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) 9/30/23 12/31/23 3/31/24 6/30/24 Investment Income Breakdown Cash Interest $36,588 $36,743 $38,881 $41,998 Cash Dividends 2,484 4,672 1,88
Slide 37: 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 9/30/23 12/31/23 3/31/24 6/30/24 Key Financial Metrics Pre-Tax Net Investment Income Per Wtd Avg Diluted Sha
Slide 38: 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