Eversheds Sutherland (US) LLP Investor Relations American Stock Transfer & Trust Company, LLC 800-937-5449 SI Capital Southwest Corporation May 23, 2023 Important Notices · These materials and the presentations of which they are a part, and the summaries contained herein, do not purport to be complete and no obligation to update or otherwise revise such information is being assumed. Nothing shall be relied upon as a promise or representation as to the future performance of Capital Southwest. Such informatio ...

Capital Southwest (NASDAQ:CSWC) Q4 2023 Earnings Conference Call May 23, 2023 11:00 AM ET Company Participants Bowen Diehl - Chief Executive Officer Michael Sarner - Chief Financial Officer Chris Rehberger - Vice President, Finance Conference Call Participants Mickey Schleien - Ladenburg Thalmann Erik Zwick - Hovde Group Robert Dodd - Raymond James Operator Thank you for joining today's Capital Southwest Fourth Quarter and Fiscal Year 2023 Earnings Call. Participating on the call today are Bowen Diehl, CEO; ...

Debt and Financing - As of March 31, 2023, the total aggregate principal amount of debt outstanding was $235.0 million under the Credit Facility, $140.0 million under the January 2026 Notes, and $150.0 million under the October 2026 Notes[71]. - The company is authorized to borrow funds and sell assets to satisfy distribution requirements, but must meet certain asset coverage tests under the 1940 Act[100]. - The company has the ability to borrow up to $175 million in SBA-guaranteed debentures, subject to SBA approval and compliance with regulations[111]. - The company is currently prohibited from incurring additional borrowings unless its asset coverage is at least 150% after such borrowings[241]. - The company had $235 million in debt outstanding as of March 31, 2023, with borrowings under the Credit Facility bearing interest at LIBOR plus 2.15%[137]. - The January 2026 Notes have a carrying amount of $139.1 million and bear interest at a rate of 4.50% per year, maturing on January 31, 2026[138]. - The October 2026 Notes have a carrying amount of $147.3 million and bear interest at a rate of 3.375% per year, maturing on October 1, 2026[139]. - The indenture for the January 2026 Notes and October 2026 Notes offers limited protection to holders, allowing the company to engage in various corporate transactions that could adversely impact these investments[240]. - The January 2026 Notes and October 2026 Notes may not provide sufficient protection for holders in the event of adverse changes in the company's financial condition[243]. - Any default on other indebtedness could hinder the company's ability to make payments on the January 2026 Notes and October 2026 Notes[249]. Regulatory Compliance and Governance - The company is regulated as a Business Development Company (BDC) under the 1940 Act, which imposes specific operational requirements[58]. - The company is required to maintain an asset coverage ratio of at least 150% for total assets to total senior securities[62]. - The company is required to certify the accuracy of its financial statements and disclose the effectiveness of its internal controls under the Sarbanes-Oxley Act[121]. - The company believes it is in compliance with NASDAQ corporate governance listing standards and intends to monitor future compliance[119]. - The company is subject to significant regulatory compliance costs as a public entity, which may divert management's focus from core business operations[184]. - The company received a license from the SBA to operate as an SBIC, which is subject to specific regulations that may limit investment opportunities[190]. - Compliance with SBA regulations may cause the SBIC to forego attractive investment opportunities or invest at less competitive rates[191]. Investment Strategy and Risks - The company may face challenges in meeting the Annual Distribution Requirement due to the nature of its investments, potentially leading to the need to sell assets at unfavorable times[96]. - The company may not have the ability to make additional investments in portfolio companies, which could negatively impact those companies and reduce expected returns[223]. - The company may face risks related to second priority liens on collateral, which could be controlled by senior creditors in the event of default[230]. - The company’s portfolio investments are generally not publicly traded, leading to uncertainty in their fair value[129]. - The potential for gain or loss on investments is magnified due to leverage, increasing the risk associated with investing in the company[136]. - Investments in privately held U.S. middle market companies involve significant risks, including reliance on key employees and unpredictable operating results[211]. - The lack of liquidity in investments may adversely affect the company's business, making it difficult to sell investments when desired[214]. - Defaults by portfolio companies could harm the company's operating results, potentially leading to non-payment of interest and other defaults[215]. - The company may not realize gains from equity investments, as these investments are subject to significant risks, including potential declines in value[216]. - The company may face adverse effects from potential downgrades of the U.S. credit rating, which could impact borrowing costs and access to capital[173]. Taxation and Distribution - The company is required to distribute at least 90% of its investment company taxable income to qualify as a Regulated Investment Company (RIC) and avoid federal income tax[87]. - The company may incur a 4% nondeductible U.S. federal excise tax on undistributed income unless it meets specific distribution requirements[90]. - The annual distribution requirement for a RIC is generally satisfied if at least 90% of net ordinary income and realized short-term capital gains are distributed to shareholders[153]. - The company intends to distribute substantially all of its income to shareholders, subject to meeting certain minimum distribution requirements[60]. - The company can distribute taxable dividends payable in cash or shares, with a requirement that cash distributions be at least 20% of the total distribution[105]. - The company may choose to pay dividends in stock, which could result in shareholders owing taxes exceeding the cash received[254]. - If the company fails to qualify as a RIC, it will be subject to corporate tax rates on all taxable income, reducing available distributions to shareholders[101]. Economic and Market Conditions - The company is currently experiencing capital markets disruptions and economic uncertainty, which may adversely affect its business and financial condition[155]. - The COVID-19 pandemic has led to increased draws on revolving lines of credit and greater volatility in pricing and spreads in the U.S. credit markets[156]. - Past economic downturns have significantly impacted the operating performance and fair value of middle-market companies, as seen during the 2008-2009 financial crisis[157]. - Raising equity capital may be challenging during adverse market conditions, potentially affecting the company's ability to refinance existing indebtedness[158]. - Significant changes in capital markets may negatively affect the valuations of the company's investments, impacting liquidity and investment activity[159]. - Inflation and rising credit spreads may adversely impact the business and financial condition of portfolio companies, affecting overall investment returns[128]. - Political, social, and economic uncertainties can exacerbate risks and create volatility in financial markets, affecting the company's investments[165]. - Recent strain on the banking system may negatively impact the company's liquidity and financial condition, as it relies on relationships with banks, particularly small and regional ones[175]. - The U.S. federal government shutdowns could hinder the company's ability to access public markets and obtain necessary capital, affecting its operations and financial condition[174]. - Changes in federal, state, and local laws and regulations could impose additional costs on the company and its portfolio companies, negatively impacting profitability[176]. Environmental, Social, and Governance (ESG) Considerations - The company faces increasing public scrutiny related to environmental, social, and governance (ESG) activities, which could adversely affect its brand value and operational costs[172]. - The impact of global climate change poses physical and financial risks to the company's portfolio companies, potentially affecting their operations and valuations[169]. Interest Rate and Financial Market Risks - Rising interest rates could adversely affect the company's net investment income and the value of its investments, especially if borrowing costs increase faster than investment yields[218]. - The transition from LIBOR to alternative reference rates may create uncertainty that could adversely affect the company's financial condition and liquidity[224]. - The transition from LIBOR to SOFR may compress net interest income if LIBOR-linked securities yield higher rates than SOFR-linked investments[228]. - The market value and transferability of LIBOR-linked securities may be adversely impacted due to the transition to alternative reference rates[228]. Operational Risks - The company is highly dependent on information systems, and failures could significantly disrupt operations and negatively affect stock price and dividends[200]. - Cybersecurity risks, including potential breaches by third-party service providers, could lead to financial losses and operational disruptions[203]. - Terrorist attacks, acts of war, or natural disasters may disrupt operations and negatively affect the company's financial condition[206]. - The ongoing military actions and sanctions against Russia may negatively impact global economic markets, including Europe and the United States, leading to increased financial market volatility[209]. - The company is currently not subject to any securities litigation or shareholder activism, but potential future volatility could make it a target for such actions, resulting in significant costs and distractions[210].

• These materials and the presentations of which they are a part, and the summaries contained herein, do not purport to be complete and no obligation to update or otherwise revise such information is being assumed. Nothing shall be relied upon as a promise or representation as to the future performance of Capital Southwest. Such information is qualified in its entirety by reference to the more detailed discussions contained elsewhere in Capital Southwest's public filings with the Securities and Exchange Com ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents the unaudited consolidated financial statements of Capital Southwest Corporation and its subsidiaries, including statements of assets and liabilities, operations, changes in net assets, cash flows, and detailed schedules of investments, along with comprehensive notes explaining the company's organization, accounting policies, and specific financial items [Consolidated Statements of Assets and Liabilities](index=4&type=section&id=Consolidated%20Statements%20of%20Assets%20and%20Liabilities) The Consolidated Statements of Assets and Liabilities show an increase in total assets and liabilities, and a significant rise in total net assets from March 31, 2022, to December 31, 2022, primarily driven by increased investments and capital contributions Consolidated Statements of Assets and Liabilities (in thousands) | Category | December 31, 2022 | March 31, 2022 | | :--------------------------------- | :------------------ | :----------------- | | **Assets:** | | | | Total investments (at fair value) | $1,150,046 | $936,614 | | Cash and cash equivalents | $21,686 | $11,431 | | Total assets | $1,202,157 | $973,957 | | **Liabilities:** | | | | Total liabilities | $640,670 | $553,090 | | **Net Assets:** | | | | Total net assets | $561,487 | $420,867 | | Net asset value per share | $16.25 | $16.86 | - Total assets increased by **$228.2 million (23.4%)** from $973.9 million at March 31, 2022, to $1,202.1 million at December 31, 2022, primarily due to an increase in investments at fair value[11](index=11&type=chunk) - Total net assets increased by **$140.6 million (33.4%)** from $420.8 million at March 31, 2022, to $561.4 million at December 31, 2022[11](index=11&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) The Consolidated Statements of Operations show a substantial increase in net investment income for both the three and nine months ended December 31, 2022, compared to the prior year, driven by higher investment income, despite increased operating expenses. However, net realized and unrealized losses on investments significantly impacted the net increase in net assets from operations Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Nine Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2021 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total investment income | $32,766 | $22,311 | $82,108 | $61,186 | | Total operating expenses | $14,087 | $10,474 | $35,821 | $29,870 | | Net investment income | $19,425 | $11,899 | $46,307 | $30,668 | | Net realized (loss) gain on investments | $(11,086) | $2,715 | $(17,401) | $5,259 | | Net unrealized (depreciation) appreciation | $(5,390) | $(2,054) | $(13,989) | $4,306 | | Net increase (decrease) in net assets from operations | $2,949 | $12,560 | $14,917 | $23,146 | | Net investment income per share | $0.62 | $0.51 | $1.64 | $1.37 | - Total investment income increased by **46.9%** for the three months and **34.2%** for the nine months ended December 31, 2022, compared to the same periods in 2021[13](index=13&type=chunk)[302](index=302&type=chunk)[312](index=312&type=chunk) - Net investment income increased by **63.2%** for the three months and **51.0%** for the nine months ended December 31, 2022, compared to the same periods in 2021[13](index=13&type=chunk)[307](index=307&type=chunk)[316](index=316&type=chunk) - The company recognized significant net realized and unrealized losses on investments for both the three months (**$(16.5) million**) and nine months (**$(31.4) million**) ended December 31, 2022, contrasting with gains in the prior year[13](index=13&type=chunk)[308](index=308&type=chunk)[317](index=317&type=chunk) [Consolidated Statements of Changes in Net Assets](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) The Consolidated Statements of Changes in Net Assets reflect a substantial increase in net assets from March 31, 2022, to December 31, 2022, primarily driven by significant common stock issuances, despite net realized and unrealized losses from operations and dividend distributions Consolidated Statements of Changes in Net Assets (in thousands) | Metric | Nine Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net assets, March 31 | $420,867 | $336,251 | | Net investment income | $46,307 | $30,668 | | Net realized (loss) gain on investments | $(17,401) | $5,259 | | Net unrealized (depreciation) appreciation | $(13,989) | $4,306 | | Dividends to shareholders | $(50,177) | $(46,847) | | Issuance of common stock | $174,169 | $73,346 | | Net assets, December 31 | $561,487 | $387,337 | - Net assets increased from **$420.8 million** at March 31, 2022, to **$561.4 million** at December 31, 2022[15](index=15&type=chunk) - Issuance of common stock contributed **$174.1 million** in the nine months ended December 31, 2022, significantly higher than $73.3 million in the same period of 2021[15](index=15&type=chunk) - Dividends to shareholders increased to **$50.1 million** for the nine months ended December 31, 2022, from $46.8 million in the prior year[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The Consolidated Statements of Cash Flows indicate a net increase in cash and cash equivalents for the nine months ended December 31, 2022, primarily due to significant cash provided by financing activities, which offset cash used in operating activities Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2021 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(193,648) | $(139,103) | | Net cash used in investing activities | $(159) | $0 | | Net cash provided by financing activities | $204,062 | $126,158 | | Net increase (decrease) in cash and cash equivalents | $10,255 | $(12,945) | | Cash and cash equivalents at end of period | $21,686 | $18,668 | - Operating activities used **$193.6 million** in cash for the nine months ended December 31, 2022, primarily due to $343.4 million in new portfolio investments[17](index=17&type=chunk)[322](index=322&type=chunk) - Financing activities provided **$204.1 million** in cash, driven by $174.1 million from common stock offerings and $62.4 million from SBA Debentures, partially offset by $50.1 million in dividends[17](index=17&type=chunk)[322](index=322&type=chunk) - The company experienced a net increase of **$10.3 million** in cash and cash equivalents for the nine months ended December 31, 2022, a reversal from a net decrease of $12.9 million in the prior year[17](index=17&type=chunk)[322](index=322&type=chunk)[323](index=323&type=chunk) [Consolidated Schedule of Investments](index=8&type=section&id=Consolidated%20Schedule%20of%20Investments) The Consolidated Schedule of Investments provides a detailed breakdown of the company's portfolio by investment type, industry, and geographic region, showing a significant increase in total investments and a continued focus on first lien loans and diverse industries Investment Portfolio Composition by Type (Fair Value, in thousands) | Investment Type | Dec 31, 2022 | % of Total | Mar 31, 2022 | % of Total | | :------------------------ | :----------- | :--------- | :----------- | :--------- | | First lien loans | $954,000 | 83.0% | $739,872 | 79.0% | | Second lien loans | $35,446 | 3.1% | $52,645 | 5.6% | | Subordinated debt | $852 | 0.1% | $1,317 | 0.1% | | Preferred equity | $61,283 | 5.3% | $44,663 | 4.8% | | Common equity & warrants | $50,840 | 4.4% | $40,514 | 4.3% | | I-45 SLF LLC | $47,625 | 4.1% | $57,603 | 6.2% | | **Total Investments** | **$1,150,046** | **100.0%** | **$936,614** | **100.0%** | Top 5 Industries by Fair Value (in thousands) | Industry | Dec 31, 2022 | % of Total | Mar 31, 2022 | % of Total | | :-------------------------- | :----------- | :--------- | :----------- | :--------- | | Media & Marketing | $142,382 | 12.4% | $43,463 | 4.6% | | Business Services | $127,741 | 11.1% | $123,697 | 13.2% | | Healthcare Services | $108,710 | 9.5% | $88,131 | 9.4% | | Consumer Services | $90,019 | 7.8% | $71,730 | 7.7% | | Consumer Products & Retail | $86,771 | 7.5% | $90,457 | 9.7% | Investment Portfolio by Geographic Region (Fair Value, in thousands) | Region | Dec 31, 2022 | % of Total | Mar 31, 2022 | % of Total | | :------------- | :----------- | :--------- | :----------- | :--------- | | Southeast | $239,539 | 20.8% | $136,588 | 14.6% | | Northeast | $230,643 | 20.1% | $225,578 | 24.1% | | West | $228,254 | 19.8% | $163,924 | 17.5% | | Southwest | $222,872 | 19.4% | $206,057 | 22.0% | | Midwest | $155,675 | 13.6% | $132,308 | 14.1% | | I-45 SLF LLC | $47,625 | 4.1% | $57,603 | 6.1% | | International | $25,438 | 2.2% | $14,556 | 1.6% | - Total investments at fair value increased by **$213.4 million (22.8%)** from $936.6 million at March 31, 2022, to $1,150.0 million at December 31, 2022[11](index=11&type=chunk)[128](index=128&type=chunk) - First lien loans continue to be the largest component, increasing from **79.0% to 83.0%** of the total portfolio by fair value[128](index=128&type=chunk) [Notes to Consolidated Financial Statements](index=36&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide essential context and detailed explanations for the consolidated financial statements, covering the company's operational structure, significant accounting policies, investment specifics, valuation methodologies, debt obligations, tax treatment, equity activities, compensation plans, commitments, related party transactions, per share data, and subsidiary information [1. ORGANIZATION AND BASIS OF PRESENTATION](index=37&type=section&id=1.%20ORGANIZATION%20AND%20BASIS%20OF%20PRESENTATION) Capital Southwest Corporation is an internally managed Business Development Company (BDC) and Regulated Investment Company (RIC) focused on providing customized financing to lower middle market (LMM) and upper middle market (UMM) companies, with a significant portion of its assets invested in qualifying assets and managed through a wholly-owned SBIC subsidiary - Capital Southwest Corporation (CSWC) is an internally managed BDC, regulated under the 1940 Act, and has elected to be treated as a RIC for U.S. federal income tax purposes[84](index=84&type=chunk)[85](index=85&type=chunk) - The company specializes in customized financing for LMM companies (EBITDA **$3.0M-$20.0M**, investments **$5.0M-$35.0M**) and opportunistically targets UMM companies (EBITDA **>$20.0M**, investments **$5.0M-$20.0M**)[87](index=87&type=chunk) - CSWC operates a wholly-owned SBIC subsidiary (Capital Southwest SBIC I, LP) which has a similar investment strategy and is consolidated for financial reporting[88](index=88&type=chunk)[100](index=100&type=chunk) - As of December 31, 2022, **86.5%** of the company's assets were qualifying assets under the 1940 Act, meeting the BDC requirement of at least 70%[91](index=91&type=chunk) [2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=39&type=section&id=2.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) The company accounts for most financial instruments at fair value using Level 3 inputs, recognizes interest and dividend income on an accrual basis, and capitalizes PIK interest. Recent accounting standards related to reference rate reform and fair value measurement of equity securities are being evaluated for potential impact - Substantially all financial instruments are accounted for at fair value in accordance with ASC 820, primarily using **Level 3 unobservable inputs** due to the private nature of investments[95](index=95&type=chunk)[136](index=136&type=chunk) - Interest and dividend income is recorded on an accrual basis, with investments placed on non-accrual status when collectability is not expected. As of December 31, 2022, **0.3%** of the portfolio's fair value was on non-accrual status[102](index=102&type=chunk) - Payment-in-Kind (PIK) interest is added to the principal balance and recorded as interest income, representing **4.6%** and **4.4%** of total investment income for the three and nine months ended December 31, 2022, respectively[104](index=104&type=chunk)[105](index=105&type=chunk) - The company is evaluating ASU 2020-04 (Reference Rate Reform) and ASU 2022-03 (Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions) but does not anticipate a material impact on its financial statements[125](index=125&type=chunk)[126](index=126&type=chunk) [3. INVESTMENTS](index=44&type=section&id=3.%20INVESTMENTS) The investment portfolio significantly grew from March 31, 2022, to December 31, 2022, with a continued concentration in first lien loans and a diversified exposure across various industries and U.S. geographic regions Investment Portfolio Composition by Type (Fair Value, in thousands) | Investment Type | Dec 31, 2022 | % of Total | Mar 31, 2022 | % of Total | | :------------------------ | :----------- | :--------- | :----------- | :--------- | | First lien loans | $954,000 | 83.0% | $739,872 | 79.0% | | Second lien loans | $35,446 | 3.1% | $52,645 | 5.6% | | Subordinated debt | $852 | 0.1% | $1,317 | 0.1% | | Preferred equity | $61,283 | 5.3% | $44,663 | 4.8% | | Common equity & warrants | $50,840 | 4.4% | $40,514 | 4.3% | | I-45 SLF LLC | $47,625 | 4.1% | $57,603 | 6.2% | | **Total Investments** | **$1,150,046** | **100.0%** | **$936,614** | **100.0%** | Top 5 Industries by Fair Value (in thousands) | Industry | Dec 31, 2022 | % of Total | Mar 31, 2022 | % of Total | | :-------------------------- | :----------- | :--------- | :----------- | :--------- | | Media & Marketing | $142,382 | 12.4% | $43,463 | 4.6% | | Business Services | $127,741 | 11.1% | $123,697 | 13.2% | | Healthcare Services | $108,710 | 9.5% | $88,131 | 9.4% | | Consumer Services | $90,019 | 7.8% | $71,730 | 7.7% | | Consumer Products & Retail | $86,771 | 7.5% | $90,457 | 9.7% | Investment Portfolio by Geographic Region (Fair Value, in thousands) | Region | Dec 31, 2022 | % of Total | Mar 31, 2022 | % of Total | | :------------- | :----------- | :--------- | :----------- | :--------- | | Southeast | $239,539 | 20.8% | $136,588 | 14.6% | | Northeast | $230,643 | 20.1% | $225,578 | 24.1% | | West | $228,254 | 19.8% | $163,924 | 17.5% | | Southwest | $222,872 | 19.4% | $206,057 | 22.0% | | Midwest | $155,675 | 13.6% | $132,308 | 14.1% | | I-45 SLF LLC | $47,625 | 4.1% | $57,603 | 6.1% | | International | $25,438 | 2.2% | $14,556 | 1.6% | - Total investment portfolio increased from **$936.6 million** at March 31, 2022, to **$1,150.0 million** at December 31, 2022[128](index=128&type=chunk) - First lien loans constitute the largest portion of the portfolio, increasing from **79.0% to 83.0%** of total fair value[128](index=128&type=chunk) [4. FAIR VALUE MEASUREMENTS](index=48&type=section&id=4.%20FAIR%20VALUE%20MEASUREMENTS) The company's investment valuation process relies heavily on Level 3 unobservable inputs for its privately held debt and equity instruments, utilizing various valuation techniques such as the Income Approach and Enterprise Value Waterfall Approach, with no transfers between fair value levels during the reported periods - **100%** of the investment portfolio consisted of privately held debt and equity instruments valued using **Level 3 inputs** as of December 31, 2022, and March 31, 2022[136](index=136&type=chunk) - Valuation techniques include the Market Approach, Income Approach (using Required Market Yield), Enterprise Value Waterfall Approach (using EBITDA multiples and discount rates), and NAV Valuation Method[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk)[144](index=144&type=chunk)[147](index=147&type=chunk) Significant Level 3 Inputs (Weighted Average) for Debt and Equity Securities (Dec 31, 2022) | Type | Valuation Technique | Significant Unobservable Inputs | Weighted Average | | :---------------- | :------------------------ | :------------------------------ | :--------------- | | First lien loans | Income Approach | Discount Rate | 13.2% | | | Market Approach | Cost | 98.2 | | Second lien loans | Income Approach | Discount Rate | 21.9% | | Preferred equity | Enterprise Value Waterfall Approach | EBITDA Multiple | 10.1x | | | | Discount Rate | 18.6% | | Common equity & warrants | Enterprise Value Waterfall Approach | EBITDA Multiple | 9.3x | | | | Discount Rate | 16.8% | - No transfers between fair value levels occurred during the three and nine months ended December 31, 2022 and 2021[153](index=153&type=chunk) [5. BORROWINGS](index=55&type=section&id=5.%20BORROWINGS) The company's borrowings increased significantly from March 31, 2022, to December 31, 2022, primarily through the Credit Facility and SBA Debentures, while maintaining a strong asset coverage ratio of 229% and complying with all financial covenants - As of December 31, 2022, the company's asset coverage ratio was **229%**, exceeding the 150% regulatory requirement[157](index=157&type=chunk) Outstanding Borrowings (in thousands) | Borrowing Type | Dec 31, 2022 Outstanding Balance | Mar 31, 2022 Outstanding Balance | | :--------------- | :------------------------------- | :------------------------------- | | SBA Debentures | $104,000 | $40,000 | | Credit Facility | $225,000 | $205,000 | | January 2026 Notes | $140,000 | $140,000 | | October 2026 Notes | $150,000 | $150,000 | | **Total** | **$619,000** | **$535,000** | - The Credit Facility's total commitments increased to **$400 million** as of November 16, 2022, with **$225 million** outstanding at December 31, 2022, and a weighted average interest rate of **6.02%** for the three months ended December 31, 2022[164](index=164&type=chunk)[168](index=168&type=chunk) - SBA Debentures increased to **$104.0 million** outstanding at December 31, 2022, with a weighted average interest rate of **3.70%** for the three months ended December 31, 2022[185](index=185&type=chunk)[186](index=186&type=chunk) [6. INCOME TAXES](index=59&type=section&id=6.%20INCOME%20TAXES) The company maintains its RIC tax treatment by distributing at least 90% of its taxable income, utilizes a Taxable Subsidiary to manage certain portfolio investments, and recorded a net income tax benefit for the three and nine months ended December 31, 2022 - CSWC qualifies for RIC tax treatment by distributing at least **90%** of its investment company taxable income annually[188](index=188&type=chunk)[189](index=189&type=chunk) - The Taxable Subsidiary, a wholly-owned subsidiary, helps CSWC satisfy RIC requirements by holding certain pass-through entity interests and is taxed at corporate rates[196](index=196&type=chunk)[198](index=198&type=chunk) Tax Character of Distributions Paid (in thousands) | Category | Twelve Months Ended Dec 31, 2022 | Twelve Months Ended Dec 31, 2021 | | :--------------- | :------------------------------- | :------------------------------- | | Ordinary income | $60,960 | $56,633 | | Capital gains | $0 | $0 | Total Net Deferred Tax (Liabilities) Assets (in thousands) | Category | Dec 31, 2022 | Mar 31, 2022 | | :--------------------------------- | :----------- | :----------- | | Total net deferred tax (liabilities) assets | $(11,427) | $(5,747) | - The company recognized a net income tax benefit of **$0.7 million** for the three months and **$20.6 thousand** for the nine months ended December 31, 2022[202](index=202&type=chunk) [7. SHAREHOLDERS' EQUITY](index=63&type=section&id=7.%20SHAREHOLDERS%27%20EQUITY) The company raised significant capital through a public equity offering and its expanded Equity ATM Program, while also conducting share repurchases related to restricted stock vesting - A public equity offering on November 17, 2022, raised **$44.1 million** in net proceeds from 2,534,436 shares[206](index=206&type=chunk) - The Equity ATM Program's maximum offering price was increased to **$650 million** on August 2, 2022[207](index=207&type=chunk)[355](index=355&type=chunk) Equity ATM Program Sales (in thousands, except shares) | Metric | Three Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2022 | | :------------------------ | :------------------------------ | :----------------------------- | | Number of shares sold | 3,264,878 | 6,909,446 | | Net proceeds received | $57,449 | $130,010 | | Weighted average price per share | $17.86 | $19.10 | - Cumulative to date, **$310.3 million** in net proceeds have been raised through the Equity ATM Program, with **$334.5 million** remaining available[208](index=208&type=chunk)[357](index=357&type=chunk) - Share repurchases were conducted in connection with restricted stock vesting, with **19,917 shares** repurchased for **$380 thousand** in the three months ended December 31, 2022[211](index=211&type=chunk) [8. STOCK BASED COMPENSATION PLANS](index=64&type=section&id=8.%20STOCK%20BASED%20COMPENSATION%20PLANS) The company operates restricted stock award plans for employees and non-employee directors, with awards vesting over four-year and one-year periods, respectively, and recognized $1.0 million in share-based compensation expense for the three months ended December 31, 2022 - The 2021 Employee Plan and Non-Employee Director Plan grant restricted stock awards with full voting and dividend rights, subject to forfeiture if employment/service terminates early[212](index=212&type=chunk)[215](index=215&type=chunk) - Employee awards generally vest in equal annual installments over four years, while non-employee director awards vest one year from the grant date[212](index=212&type=chunk)[215](index=215&type=chunk) - Total share-based compensation expense recognized was **$1.0 million** for the three months and **$2.9 million** for the nine months ended December 31, 2022[217](index=217&type=chunk) - As of December 31, 2022, **$8.0 million** in unrecognized compensation expense remains, to be amortized over a weighted-average vesting period of approximately **2.6 years**[219](index=219&type=chunk) [9. OTHER EMPLOYEE COMPENSATION](index=66&type=section&id=9.%20OTHER%20EMPLOYEE%20COMPENSATION) The company maintains a 401(k) plan for its full-time employees, making matching contributions that are immediately fully vested - The company made matching contributions to its 401(k) plan of approximately **$28.6 thousand** for the three months and **$158.1 thousand** for the nine months ended December 31, 2022[220](index=220&type=chunk) - All matching contributions to the 401(k) plan are fully vested immediately[220](index=220&type=chunk) [10. COMMITMENTS AND CONTINGENCIES](index=67&type=section&id=10.%20COMMITMENTS%20AND%20CONTINGENCIES) The company has significant unused commitments to extend financing to portfolio companies, including revolving and delayed draw term loans, and has operating lease obligations for its office space, while reporting no material legal proceedings - Total unused commitments to extend financing were **$159.7 million** as of December 31, 2022, up from $134.3 million at March 31, 2022[225](index=225&type=chunk)[365](index=365&type=chunk) - As of December 31, 2022, **$0.9 million** in letters of credit were issued and outstanding on behalf of portfolio companies[225](index=225&type=chunk)[365](index=365&type=chunk) - The company has an operating lease for new office space expiring September 30, 2032, with a ROU asset of **$1.9 million** and a lease liability of **$2.9 million** as of December 31, 2022[226](index=226&type=chunk)[228](index=228&type=chunk) Future Minimum Operating Lease Payments (in thousands) | Year ending March 31, | Rent Commitment | | :---------------------- | :-------------- | | 2023 | $92 | | 2024 | $406 | | 2025 | $416 | | 2026 | $426 | | 2027 | $436 | | Thereafter | $2,578 | | **Total** | **$4,354** | - There are no currently pending material legal proceedings to which the company is a party[231](index=231&type=chunk)[382](index=382&type=chunk) [11. RELATED PARTY TRANSACTIONS](index=70&type=section&id=11.%20RELATED%20PARTY%20TRANSACTIONS) The company provides significant managerial assistance to its portfolio companies and engages in financial transactions with its joint venture, I-45 SLF LLC, including receiving dividends and administrative fees - The company provides significant managerial assistance to its portfolio companies as required by the 1940 Act[232](index=232&type=chunk) - As of December 31, 2022, the company had **$1.9 million** in dividends receivable from I-45 SLF LLC[233](index=233&type=chunk) - Administrative fee income from I-45 SLF LLC was **$25.0 thousand** for the three months and **$75.0 thousand** for the nine months ended December 31, 2022[233](index=233&type=chunk) [12. SUMMARY OF PER SHARE INFORMATION](index=71&type=section&id=12.%20SUMMARY%20OF%20PER%20SHARE%20INFORMATION) Per share data shows an increase in net investment income per share for both the three and nine months ended December 31, 2022, compared to the prior year, despite a decrease in net asset value per share over the nine-month period Per Share Data Summary | Metric | Three Months Ended Dec 31, 2022 | Three Months Ended Dec 31, 2021 | Nine Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2021 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Investment income | $1.04 | $0.95 | $2.90 | $2.73 | | Net investment income | $0.62 | $0.51 | $1.64 | $1.37 | | Net realized (loss) gain, net of tax | $(0.36) | $0.12 | $(0.62) | $0.23 | | Net unrealized appreciation (depreciation), net of tax | $(0.17) | $(0.09) | $(0.49) | $0.19 | | Net asset value, end of period | $16.25 | $16.19 | $16.25 | $16.19 | | Weighted-average basic and diluted shares outstanding | 31,381 | 23,433 | 28,304 | 22,394 | - Net investment income per share increased to **$0.62** (Q3 2022) and **$1.64** (9M 2022) from $0.51 and $1.37 in the respective prior periods[236](index=236&type=chunk) - Net asset value per share decreased from **$16.86** at the beginning of the nine-month period to **$16.25** at December 31, 2022[11](index=11&type=chunk)[236](index=236&type=chunk) - Total investment return was **4.31%** for the three months ended December 31, 2022, but **(20.95)%** for the nine months ended December 31, 2022[236](index=236&type=chunk) [13. SIGNIFICANT SUBSIDIARIES](index=72&type=section&id=13.%20SIGNIFICANT%20SUBSIDIARIES) I-45 SLF LLC, a joint venture with Main Street Capital Corporation, primarily invests in UMM syndicated senior secured loans, with CSWC holding an 80% ownership and 78.25% current profits interest. The subsidiary's financial performance showed a net decrease in members' equity from operations for the nine months ended December 31, 2022 - CSWC owns **80%** of I-45 SLF LLC and has a current profits interest of **78.25%**[240](index=240&type=chunk) - I-45 SLF LLC had total assets of **$166.2 million** and total investments at fair value of **$161.0 million** as of December 31, 2022[241](index=241&type=chunk)[244](index=244&type=chunk) - I-45 SLF LLC had **$104.0 million** drawn under its senior secured credit facility as of December 31, 2022[242](index=242&type=chunk)[244](index=244&type=chunk) I-45 SLF LLC Selected Statement of Operations Information (in thousands) | Metric | Three Months Ended Dec 31, 2022 | Nine Months Ended Dec 31, 2022 | | :--------------------------------------- | :------------------------------ | :----------------------------- | | Total revenues | $4,648 | $12,217 | | Net investment income | $2,453 | $6,964 | | Net (decrease) increase in members' equity resulting from operations | $(1,607) | $(5,516) | [14. SUBSEQUENT EVENTS](index=80&type=section&id=14.%20SUBSEQUENT%20EVENTS) The Board of Directors declared a total dividend of $0.58 per share for the quarter ending March 31, 2023, comprising a regular dividend of $0.53 and a supplemental dividend of $0.05 - On January 25, 2023, the Board declared a total dividend of **$0.58 per share** for the quarter ending March 31, 2023[256](index=256&type=chunk)[367](index=367&type=chunk) - The dividend consists of a regular dividend of **$0.53** and a supplemental dividend of **$0.05**[256](index=256&type=chunk)[367](index=367&type=chunk) [Consolidated Schedule of Investments in and Advances to Affiliates](index=81&type=section&id=Consolidated%20Schedule%20of%20Investments%20in%20and%20Advances%20to%20Affiliates) This schedule details the company's investments in control and affiliate entities, showing the principal amounts, interest/dividends credited, fair value changes, and realized/unrealized gains or losses for the nine months ended December 31, 2022 Control and Affiliate Investments Summary (in thousands) | Category | Fair Value at Mar 31, 2022 | Gross Additions | Gross Reductions | Realized Gain/(Loss) | Unrealized Gain/(Loss) | Fair Value at Dec 31, 2022 | | :-------------------------- | :------------------------- | :-------------- | :--------------- | :------------------- | :--------------------- | :------------------------- | | Control Investments | $57,603 | $0 | $0 | $0 | $(9,978) | $47,625 | | Affiliate Investments | $131,879 | $83,675 | $(37,784) | $(10,625) | $6,187 | $173,332 | | **Total** | **$189,482** | **$83,675** | **$(37,784)** | **$(10,625)** | **$(3,791)** | **$220,957** | - Fair value of Control Investments (I-45 SLF LLC) decreased by **$9.9 million** due to unrealized depreciation[259](index=259&type=chunk) - Affiliate Investments saw significant gross additions of **$83.7 million** and gross reductions of **$37.8 million**, resulting in a net increase in fair value[263](index=263&type=chunk) - Total Control & Affiliate Investments increased in fair value from **$189.5 million** to **$221.0 million** over the nine months[263](index=263&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=85&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides an overview of the company's business as an internally managed BDC focusing on LMM and UMM financing, discusses critical accounting policies for investment valuation and revenue recognition, details the growth and composition of its investment portfolio, and analyzes the financial results for the three and nine months ended December 31, 2022, highlighting increased investment income and net realized/unrealized losses - CSWC is an internally managed BDC specializing in customized debt and equity financing for LMM companies (EBITDA **$3.0M-$20.0M**) and UMM companies (EBITDA **>$20.0M**)[270](index=270&type=chunk)[271](index=271&type=chunk) - The total value of the investment portfolio increased to **$1,150.0 million** as of December 31, 2022, from $936.6 million as of March 31, 2022, across 82 portfolio companies[283](index=283&type=chunk) - Approximately **96.7%** of the debt investment portfolio bore interest at floating rates (**100%** with contractual minimums) as of December 31, 2022[285](index=285&type=chunk) Investment Portfolio Metrics (excluding I-45 SLF LLC) | Metric | Dec 31, 2022 | Mar 31, 2022 | | :--------------------------------------- | :----------- | :----------- | | Number of portfolio companies | 81 | 72 | | Fair value | $1,102,421 | $879,011 | | % of portfolio at fair value - debt | 89.8% | 90.3% | | % of investments at fair value secured by first lien | 86.5% | 84.2% | | Weighted average annual effective yield on debt investments | 12.0% | 9.3% | | Weighted average leverage through CSWC security | 3.6x | 4.0x | - The company's internal investment rating system shows **83.2%** of debt investments rated 2 (performing as expected) and **4.8%** rated 3 (performing below expectations) as of December 31, 2022[292](index=292&type=chunk) - Net investment income increased by **63.2%** to **$19.4 million** for the three months and **51.0%** to **$46.3 million** for the nine months ended December 31, 2022, compared to the prior year periods[307](index=307&type=chunk)[316](index=316&type=chunk) - Net realized and unrealized losses totaled **$16.5 million** for the three months and **$31.4 million** for the nine months ended December 31, 2022, primarily from debt and I-45 SLF LLC investments[308](index=308&type=chunk)[317](index=317&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=104&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risk, particularly interest rate risk, due to its portfolio of floating-rate investments and borrowings. Rising interest rates could increase the cost of funds, potentially reducing net investment income, although a hypothetical 100 basis point increase is estimated to increase net investment income by $8.2 million annually - The company is subject to market risk, including interest rate risk, which affects net interest income and investment portfolio value[369](index=369&type=chunk)[370](index=370&type=chunk) - Approximately **96.7%** of the debt investment portfolio (at fair value) bore interest at floating rates as of December 31, 2022, with **100%** subject to contractual minimum interest rates[373](index=373&type=chunk) - A hypothetical **100 basis point increase** in interest rates could increase net investment income by a maximum of **$8.2 million**, or **$0.22 per share**, on an annual basis[373](index=373&type=chunk) - The company was not a party to any hedging arrangements as of December 31, 2022[372](index=372&type=chunk) [Item 4. Controls and Procedures](index=106&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, and reported no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of December 31, 2022[378](index=378&type=chunk) - No material changes in internal control over financial reporting occurred during the three months ended December 31, 2022[379](index=379&type=chunk) [PART II. OTHER INFORMATION](index=107&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=107&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any pending material legal proceedings - The company has no currently pending material legal proceedings[382](index=382&type=chunk) [Item 1A. Risk Factors](index=107&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2022 - No material changes to risk factors since the Annual Report on Form 10-K filed on May 24, 2022[383](index=383&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=107&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities and no repurchases under its share repurchase program during the three months ended December 31, 2022 - No unregistered sales of equity securities occurred during the period[384](index=384&type=chunk) - No shares were repurchased under the $20 million share repurchase program during the three months ended December 31, 2022[385](index=385&type=chunk) [Item 3. Defaults Upon Senior Securities](index=107&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[386](index=386&type=chunk) [Item 4. Mine Safety Disclosures](index=107&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable[388](index=388&type=chunk) [Item 5. Other Information](index=107&type=section&id=Item%205.%20Other%20Information) The company reported no other information for this period - No other information to report[389](index=389&type=chunk) [Item 6. Exhibits](index=108&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, debt indentures, and certifications - Exhibits include Articles of Incorporation, Bylaws, Indentures for various notes (4.50% Notes due 2026, 3.375% Notes due 2026), and certifications by the President/CEO and CFO[391](index=391&type=chunk) [Signatures](index=109&type=section&id=Signatures) The report is duly signed by the President and Chief Executive Officer, and the Chief Financial Officer, Secretary and Treasurer, certifying its submission - The report was signed by Bowen S. Diehl, President and Chief Executive Officer, and Michael S. Sarner, Chief Financial Officer, Secretary and Treasurer, on January 31, 2023[395](index=395&type=chunk)

Capital Southwest Corp (NASDAQ:CSWC) Q2 2023 Earnings Conference Call November 1, 2022 11:00 AM ET Company Participants Chris Rehberger - VP, Finance & Treasurer Bowen Diehl - President, CEO & Director Michael Sarner - CFO Conference Call Participants Kevin Fultz - JMP Securities Mickey Schleien - Ladenburg Thalmann & Co. Kyle Joseph - Jefferies Robert Dodd - Raymond James & Associates Operator Thank you for joining today's Capital Southwest Second Quarter Fiscal Year 2023 Earnings Call. Participating on th ...

Capital Southwest Corporation Q2 2023 Earnings Presentation November 1, 2022 8333 Douglas Avenue, Suite 1100 | Dallas, Texas 75225 | 214.238.5700 | capitalsouthwest.com 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 not purport to be complete and no obligation ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ……………..to …………….. Commission File Number: 814-00061 | --- | --- | |--------------------------------------------------------------------------------------- ...

SI capital southwest Capital Southwest Corporation Q1 2023 Earnings Presentation August 2, 2022 8333 Douglas Avenue, Suite 1100 Dallas, Texas 75225 214.238.5700 capitalsouthwest.com 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 not purport to be complete and no o ...

Capital Southwest (NASDAQ:CSWC) Q1 2023 Earnings Conference Call August 2, 2022 11:00 AM ET Company Participants Chris Rehberger - Vice President, Finance Bowen Diehl - Chief Executive Officer Michael Sarner - Chief Financial Officer Conference Call Participants Kevin Fultz - JMP Securities Mickey Schleien - Ladenburg Kyle Joseph - Jefferies Robert Dodd - Raymond James Operator Thank you for joining today's Capital Southwest First Quarter Fiscal Year 2023 Earnings Call. Participating on the call today are B ...