Capital Southwest(CSWC)2025-05-20 20:04Debt and Financing - As of March 31, 2025, the total aggregate principal amount of debt outstanding was $235.0 million under the Corporate Credit Facility, $108.0 million under the SPV Credit Facility, $150.0 million in October 2026 Notes, $71.9 million in August 2028 Notes, and $230.0 million in 2029 Convertible Notes[73]. - The company is authorized to borrow up to $175 million in SBA-guaranteed debentures, subject to SBA approval[112]. - The Corporate Credit Facility bears interest at the applicable Adjusted Term SOFR rate plus 2.15%, while the SPV Credit Facility bears interest at a three-month Term SOFR plus 2.50% during the revolving period[376]. - A hypothetical 200 basis point decrease in interest rates could result in a decrease of $25,009,000 in net investment income, equating to a decrease of $0.47 per share[377]. - The company may face limitations on financing terms and control periods for investments in portfolio companies[117]. Asset Coverage and Compliance - The asset coverage for borrowed amounts as of March 31, 2025, was 211%[73]. - The company is required to maintain a minimum asset coverage ratio of 150% for its senior securities, which was approved by the Board of Directors[64]. - The company has received an exemptive order from the SEC allowing it to exclude senior securities issued by SBIC Subsidiaries from the definition of senior securities in the asset coverage requirement[64]. - The company is prohibited from making distributions to shareholders while preferred stock or publicly traded debt securities are outstanding unless asset coverage ratios are met[74]. - The company is required to review its compliance policies and procedures annually to ensure they are adequate and effective[80]. Shareholder Distributions and Taxation - The company intends to distribute substantially all of its income to shareholders to avoid U.S. federal income tax on taxable income and gains[61]. - The company has satisfied the minimum distribution requirements for tax years 2023 and 2022 and intends to meet the requirements for tax year 2024[61]. - To maintain RIC status, the company must distribute at least 90% of its investment company taxable income each taxable year[90]. - The company is subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless it meets specific distribution requirements[92]. - The company has established a Taxable Subsidiary to hold assets that do not generate qualifying income under the 90% Income Test, which will be subject to U.S. federal income tax[97]. Investment Company Structure and Regulations - The company is classified as a closed-end, non-diversified investment company regulated as a Business Development Company (BDC) under the 1940 Act[58]. - The company must provide significant managerial assistance to eligible portfolio companies as part of its BDC obligations[69]. - The company has adopted a code of ethics and a code of conduct to ensure compliance with the 1940 Act, which includes procedures for personal investments and restrictions on certain transactions[78]. - The company has established proxy voting policies to ensure that votes are cast in the best interests of shareholders, reviewing each proposal on a case-by-case basis[79]. - Eligible small businesses for SBIC investments must have a tangible net worth not exceeding $24 million and average annual net income not exceeding $8 million[114]. Risk Management and Market Conditions - The company is subject to market risks including interest rate volatility, which can materially affect net investment income and the ability to acquire loans and securities[373]. - The company’s risk management systems are designed to identify and analyze risks, with ongoing assessments of interest rate exposure[375]. - As of March 31, 2025, the company was not a party to any hedging arrangements to mitigate interest rate exposure[375]. - The company’s net investment income is sensitive to fluctuations in various interest rate indices, including SOFR and Prime rates[374]. - The Federal Reserve held interest rates steady in Q1 2025 after three consecutive rate reductions in Q4 2024, with potential for future rate reductions not guaranteed[375]. Employee Compensation and Stock Plans - The 2021 Employee Restricted Stock Award Plan was approved and became effective on July 28, 2021, replacing the 2010 Plan, allowing the issuance of restricted stock as part of employee compensation[82]. - The company received an exemptive order to allow the issuance of restricted stock and to withhold shares for tax obligations under the 2021 Employee Plan[82]. Compliance with Corporate Governance - The company intends to monitor compliance with corporate governance listing standards to remain in good standing on the Nasdaq[120]. - The company is required to comply with the Sarbanes-Oxley Act, which includes certifying the accuracy of financial statements by the CEO and CFO[121].