Core Viewpoint - Clear Street upgraded Capital Southwest Corporation (CSWC) from Hold to Buy, maintaining a price target of $22, following strong Q3 results that highlight the company's resilient earnings capacity and disciplined underwriting approach [1][2]. Financial Performance - In Q3 2025, Capital Southwest reported $44.8 million in gains from equity exits, leading to an increase in undistributed taxable income per share from $0.64 in September 2024 to $1.13 [3]. - The board approved regular monthly dividends totaling $0.58 per share for the October–December period, along with a supplemental dividend of $0.06 per share, resulting in total dividends for the quarter of $0.64 [3]. Capital Raising - During the quarter, Capital Southwest raised approximately $40 million in equity through its at-the-market program at an average share price of $22.81 [4]. Business Model - Capital Southwest is an internally managed business development company that provides tailored debt and equity financing solutions to U.S. middle-market firms [4].

Group 1 - Business Development Companies (BDCs) are often overlooked by investors despite being considered solid long-term investments, particularly for income-focused investors [1] - BDCs are perceived as riskier due to their sensitivity to interest rates, yet they can provide substantial income opportunities [1] Group 2 - The article emphasizes the importance of due diligence for investors and encourages building portfolios of high-quality, dividend-paying companies [2] - The author aims to assist lower and middle-class workers in achieving financial independence through investment strategies focused on dividends [2]

Core Viewpoint - Business Development Companies (BDCs) are often overlooked by investors despite their potential as solid long-term investments, particularly for income-focused investors [1]. Group 1: Investment Perspective - BDCs are perceived as riskier due to their sensitivity to interest rates, yet they can provide substantial returns for long-term investors [1]. - The article emphasizes the importance of BDCs for income-focused investors, suggesting they can be a valuable addition to investment portfolios [1]. Group 2: Author's Background - The author is a Navy veteran with a focus on dividend investing in quality blue-chip stocks, BDCs, and REITs, aiming to supplement retirement income through dividends in the next 5-7 years [2]. - The author aspires to assist lower and middle-class workers in building high-quality, dividend-paying investment portfolios [2].

Core Insights - The current market environment is favorable for high yield income investors, as the overall market remains expensive despite recent volatility [2] - The focus is on income-producing asset classes that provide sustainable portfolio income, diversification, and inflation hedging [1][2] Investment Strategy - The investment group iREIT®+HOYA Capital specializes in high-yield, dividend growth investment ideas, targeting dividend yields up to 10% [2] - The group provides research on various asset classes including REITs, ETFs, closed-end funds, preferreds, and dividend champions [2] Market Context - Dividends are emphasized as a reliable source of income that cannot be clawed back, contrasting with unrealized capital gains [2] - The service aims to help investors achieve dependable monthly income and portfolio diversification [2]

Core Insights - Capital Southwest Corporation (CSWC) is a business development company focused on providing capital to middle-market companies, with a current trading price of $19.97 and a price target set at $22 by Capital One Financial, indicating a potential upside of approximately 10.17% [1][6] Financial Performance - In Q2 2026, CSWC reported earnings of $0.57 per share, which was below the Zacks Consensus Estimate of $0.58, resulting in a negative surprise of 1.72% [2][6] - The company achieved revenues of $56.95 million, exceeding the Zacks Consensus Estimate by 2.17% and showing an increase from $48.71 million in the same period last year [2] Investment Portfolio - CSWC's total investment portfolio is valued at $1.9 billion, with a credit portfolio of $1.7 billion, primarily consisting of 99% first lien senior secured debt [3][6] - The company committed $241.5 million in new credit investments during the quarter, achieving a weighted average yield on debt investments of 11.5% [3] Income and Dividends - The pre-tax net investment income for the company was recorded at $34 million, equating to $0.61 per weighted average common share [4] - CSWC paid regular monthly dividends of $0.19 per share for July, August, and September 2025, along with a supplemental dividend of $0.06 per share in September, totaling $0.64 per share for the quarter [4] Market Performance - The stock price of CSWC has fluctuated between a low of $19.91 and a high of $20.55 today, with a market capitalization of approximately $1.11 billion and a trading volume of 993,991 shares [5] - Over the past year, the stock reached a high of $23.86 and a low of $17.46, indicating volatility despite the recent earnings miss [5]

Financial Data and Key Metrics Changes - Pre-tax net investment income was $34 million, or $0.61 per share, for the quarter, with total investment income increasing to $56.9 million from $55.9 million in the prior quarter [15][16] - The company increased its undistributed taxable income (UTI) balance to $1.13 per share from $1 per share at the end of the prior quarter [3] - The company's NAV per share at the end of the quarter was $16.62, up from $16.59 in the prior quarter [17] Business Line Data and Key Metrics Changes - The company deployed a total of $166 million in new committed capital, including $162 million in first-lien senior secured debt and $3 million in equity across seven new portfolio companies [7] - The on-balance sheet credit portfolio ended the quarter at $1.7 billion, representing year-over-year growth of 24% from $1.4 billion as of September 2024 [8] - Approximately 93% of the credit portfolio is backed by private equity firms, with 100% of new portfolio company debt originations being first-lien senior secured [9][10] Market Data and Key Metrics Changes - The weighted average spread on new commitments this quarter was approximately 6.5%, which is considered strong in a tight spread deal environment [6] - The credit portfolio had a weighted average yield of 11.5% and a weighted average leverage of 3.5 times EBITDA [11] Company Strategy and Development Direction - The company is focused on monetizing its investment platform to enhance its competitive position and potentially bring in additional fees [25] - There is a strong emphasis on building for growth, with plans to add more originators and support staff to manage increased deal volume [26] - The company aims to maintain a conservative balance sheet with adequate liquidity and covenant cushions [20] Management's Comments on Operating Environment and Future Outlook - Management noted a significant uptick in the size of the pipeline, with expectations for continued strong origination activity [24] - The growth in dividend revenue from existing portfolio companies has been about 10% annually, indicating healthy performance despite some slowing compared to previous periods [28] - Management expressed confidence in the credit quality of the portfolio, with no significant issues observed across industries [30] Other Important Information - The company raised approximately $40 million in gross equity proceeds during the quarter through its equity ATM program [5] - The company has a robust liquidity position with approximately $719 million in cash and undrawn leverage commitments [18] Q&A Session Summary Question: What does the pipeline look like heading into year-end? - Management observed a significant uptick in the pipeline size, expecting continued strong origination activity similar to the previous quarter [24] Question: Can you discuss credit quality and outlook for portfolio companies? - Management reported a 10% annual growth in dividend revenue from existing portfolio companies, indicating healthy performance despite some slowing [28] Question: What are the trends affecting underperforming companies on the watch list? - Management noted that while some companies are facing issues, they are not in dire situations due to support from private equity sponsors [33] Question: How does the company view the risk of prepayments in the portfolio? - Management indicated that the portfolio's granularity mitigates the impact of any single credit, and historical prepayment rates have been around 10%-12% [39] Question: Are there any industries the company is more cautious about now? - Management expressed caution regarding healthcare due to uncertainties in reimbursement, but remains open to opportunities with experienced private equity partners [49]

Investment Portfolio - As of September 30, 2025, the total fair value of the investment portfolio was $1,877.9 million, an increase from $1,785.3 million as of March 31, 2025[313]. - The company had investments in 126 portfolio companies with an aggregate cost of $1,896.5 million as of September 30, 2025, compared to 121 companies with a cost of $1,779.4 million as of March 31, 2025[313]. - Debt investments at fair value bearing a floating rate were $1,648.4 million, representing 96.6% of total debt investments as of September 30, 2025[313]. - The percentage of portfolio at fair value secured by first lien was 89.9% as of September 30, 2025, up from 88.9% as of March 31, 2025[313]. - Investments on non-accrual status represented approximately 1.0% of the total investment portfolio's fair value and 2.6% of its cost as of September 30, 2025[310]. - Investments on non-accrual status represented approximately 1.0% of the total investment portfolio's fair value as of September 30, 2025, down from 1.7% as of March 31, 2025[320]. Financial Performance - Total investment income for the three months ended September 30, 2025 was approximately $56.9 million, a 16.9% increase compared to $48.7 million for the same period in 2024[326]. - Interest income for the three months ended September 30, 2025 totaled $46.2 million, up from $42.1 million in 2024, driven by a 22.2% increase in the average monthly cost basis of debt investments[327]. - Net investment income for the three months ended September 30, 2025 was $32.0 million, a slight increase of 2.6% from $31.2 million in 2024[325]. - Total investment income for the six months ended September 30, 2025, was approximately $112.9 million, a $12.8 million increase, or 12.8%, compared to the same period in 2024[337]. - Net investment income for the six months ended September 30, 2025, increased by $3.8 million, or 6.4%, to $63.9 million, due to a $12.8 million rise in total investment income[342]. - Total net realized gain on investments for the six months ended September 30, 2025, was $10.8 million, compared to a net loss of $9.6 million in the same period of 2024, reflecting a significant turnaround[343][344]. Debt and Interest Expenses - For the three months ended September 30, 2025, total interest expense increased by $3.4 million to $16.0 million, attributed to a $239.3 million increase in average borrowings, despite a decrease in the weighted average interest rate from 5.61% to 5.49%[330]. - For the six months ended September 30, 2025, interest expense increased by $6.3 million to $31.3 million, primarily due to a $217.2 million rise in average borrowings, despite a decrease in the weighted average interest rate from 5.60% to 5.47%[340]. - The weighted average yield on debt investments decreased from 12.9% to 11.5% year-over-year[327]. - Approximately 96.6% of the company's debt investment portfolio bore interest at floating rates as of September 30, 2025[372]. Operational Efficiency - The company’s internally managed structure resulted in a last twelve months (LTM) operating expense ratio of 1.64% as of September 30, 2025, down from 1.74% as of September 30, 2024[305]. - Employee compensation expense for the three months ended September 30, 2025, rose by $0.4 million, or 10.6%, totaling $4.2 million, driven by increased accrued bonuses[331]. - Total general and administrative expenses for the six months ended September 30, 2025, increased by $0.4 million, or 6.6%, totaling $5.9 million, driven by higher legal fees and additional office space costs[341]. Cash and Liquidity - The company experienced a net increase in cash and cash equivalents of $44.2 million for the six months ended September 30, 2025, compared to $15.0 million for the same period in 2024[348][349]. - As of September 30, 2025, the company had $87.4 million in unrestricted cash and cash equivalents and $632.2 million of unused capacity under its Credit Facilities[350]. - The company's asset coverage ratio was 208% as of September 30, 2025, exceeding the required minimum of 150%[347]. - The company raised $82.0 million in gross proceeds from the Equity ATM Program for the six months ended September 30, 2025, compared to $58.9 million for the same period in 2024[361]. - The company had $208.0 million available under the Equity ATM Program as of September 30, 2025[361]. Market and Economic Conditions - The company is closely monitoring the impact of geopolitical instability and economic conditions on its portfolio companies and investment activities[316]. - The company is subject to market risks including interest rate volatility, which could materially affect net investment income[369]. - The company’s interest expenses are affected by changes in the published SOFR rate in connection with its Credit Facilities[370]. - A hypothetical 200 basis point decrease in interest rates could result in a decrease of $31.9 million in net investment income[373]. - The Federal Reserve decreased interest rates by 0.25% in September and October 2025, lowering the benchmark lending rate to a range between 3.75% and 4.00%[371]. Investment Commitments and Obligations - As of September 30, 2025, the company had approximately $334.1 million in currently unfunded commitments, up from $197.4 million as of March 31, 2025[364]. - The company had total contractual obligations of $1,298.2 million, with $271.9 million due in less than one year and $732.8 million due in 3-5 years[366]. - On October 13, 2025, the company redeemed $150.0 million in October 2026 Notes and $71.9 million in August 2028 Notes, recognizing a realized loss of approximately $2.2 million[368].

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Core Insights - Capital Southwest Corporation reported strong financial results for the second fiscal quarter ended September 30, 2025, with significant origination activity and a solid increase in undistributable taxable income [3][4]. Financial Highlights - The company originated approximately $245 million in new commitments, including $165.8 million in seven new portfolio companies and $79.7 million in ten existing portfolio companies [3][4]. - The Board declared a regular monthly dividend of $0.1934 for October, November, and December 2025, along with a quarterly supplemental dividend of $0.06 to be paid in December 2025 [3][23]. - Capital Southwest successfully raised $350 million at a 5.950% interest rate through its inaugural index-eligible unsecured bond transaction [3][17]. - The total investment portfolio reached $1.9 billion, with a credit portfolio of $1.7 billion, primarily consisting of 99% first lien senior secured debt [6][29]. Investment Activities - The company generated net realized gains of $3.5 million from the exit of one equity investment, contributing to an estimated undistributed taxable income of $1.13 per share [5][6]. - The weighted average yield on debt investments was reported at 11.5% [6]. Operating Results - Total investment income for the quarter was $56.9 million, an increase from $55.9 million in the prior quarter, driven by higher cash interest income and fees [7]. - Total operating expenses (excluding interest) decreased to $6.9 million from $8.0 million in the previous quarter, mainly due to reduced employee compensation [8]. - Pre-tax net investment income was $34.0 million, compared to $32.7 million in the prior quarter [9]. Balance Sheet and Liquidity - As of September 30, 2025, the company had $87.4 million in cash and cash equivalents and $632.2 million of unused capacity under its credit facilities [13]. - The regulatory debt to equity ratio was 0.91 to 1, indicating a strong capital structure [13]. Shareholder Returns - Total dividends for the quarter ended September 30, 2025, amounted to $0.6402 per share, with a regular monthly dividend coverage of 104% based on pre-tax net investment income [6][24]. - The company did not repurchase any shares under its share repurchase program during the quarter [22]. Future Outlook - Capital Southwest has scheduled a conference call to discuss the second quarter 2026 financial results, indicating ongoing transparency and engagement with investors [26].

Core Viewpoint - Wall Street anticipates a year-over-year decline in earnings for Capital Southwest (CSWC) despite higher revenues, with a focus on how actual results compare to estimates impacting stock price [1][2]. Earnings Expectations - CSWC is expected to report quarterly earnings of $0.58 per share, reflecting a year-over-year decrease of 12.1%, while revenues are projected to be $55.74 million, an increase of 14.4% from the previous year [3]. - The consensus EPS estimate has been revised down by 0.84% over the last 30 days, indicating a reassessment by analysts [4]. Earnings Surprise Prediction - The Zacks Earnings ESP model indicates that CSWC has a negative Earnings ESP of -5.71%, suggesting a bearish outlook from analysts [12]. - The stock currently holds a Zacks Rank of 4, making it challenging to predict an earnings beat [12]. Historical Performance - In the last reported quarter, CSWC met the expected earnings of $0.59 per share, resulting in no surprise [13]. - Over the past four quarters, CSWC has only surpassed consensus EPS estimates once [14]. Industry Comparison - In the Zacks Financial - Investment Management industry, T. Rowe Price (TROW) is expected to report earnings of $2.49 per share, a year-over-year decline of 3.1%, with revenues anticipated at $1.86 billion, up 3.9% [18]. - T. Rowe's consensus EPS estimate has been revised up by 3.4% in the last 30 days, but it currently has an Earnings ESP of 0% [19].