Capital Southwest(US:CSWC)2022-05-23 16:00Financial Position and Debt - As of March 31, 2022, the company had $205.0 million, $140.0 million, and $150.0 million in total aggregate principal amount of debt outstanding under its Credit Facility, the January 2026 Notes, and the October 2026 Notes, respectively[99]. - The company's asset coverage for borrowed amounts was 193% as of March 31, 2022[99]. - 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[88]. - The company received an exemptive order from the SEC to exclude certain senior securities from the definition of senior securities in the asset coverage requirement[88]. - The Credit Facility provides a revolving credit line of up to $335.0 million, with $205.0 million drawn as of March 31, 2022[181]. - The January 2026 Notes have a carrying amount of $138.7 million and bear interest at a rate of 4.50% per year, maturing on January 31, 2026[187]. - The October 2026 Notes have a carrying amount of $146.5 million and bear interest at a rate of 3.375% per year, maturing on October 1, 2026[191]. - The company had $205.0 million in debt outstanding under the Credit Facility, which bears interest at LIBOR plus 2.15%[186]. - Non-compliance with covenants in the Credit Facility could accelerate repayment obligations, adversely affecting liquidity and financial condition[180]. - The asset coverage requirement for the company was reduced from 200% to 150%, increasing the risk associated with investments[243]. Investment and Regulatory Compliance - The company is regulated as a Business Development Company (BDC) under the 1940 Act, which imposes specific operational requirements and restrictions[90]. - The company must provide significant managerial assistance to portfolio companies to count their securities as qualifying assets[96]. - The company may not make investments in non-qualifying assets unless at least 70% of the value of its total assets consists of qualifying assets[95]. - The company must invest 25% of its investment capital in "smaller enterprises," defined as businesses with a tangible net worth not exceeding $6.0 million and average net income not exceeding $2.0 million[145]. - The company is subject to oversight by the SBA, including maintaining minimum financial ratios and undergoing periodic examinations[150]. - The company is subject to SBA regulations due to its SBIC I subsidiary, which could limit investment opportunities and affect operations[254]. - Compliance with SBA regulations may hinder the ability to take advantage of SBIC I's access to SBA-guaranteed debentures[256]. - The company must adhere to the reporting and disclosure requirements of the Exchange Act, including certifications by the CEO and CFO regarding financial statement accuracy[152]. - The company is required to comply with NASDAQ corporate governance listing standards to remain listed[151]. Dividend and Income Distribution - The company has adopted a dividend reinvestment plan (DRIP) that allows registered shareholders to reinvest dividends into additional shares of common stock[82]. - The company intends to distribute substantially all of its income to shareholders, which may include deemed distributions of retained net long-term capital gains[86]. - The company must distribute at least 90% of its investment company taxable income to qualify as a Regulated Investment Company (RIC) and avoid federal income tax[117]. - The company may distribute taxable dividends payable in cash or shares, with a temporary reduction of the cash distribution limit from 20% to 10% for certain periods[136]. - If the company fails to meet the RIC requirements for more than two consecutive years, it may face U.S. federal income tax on built-in gains recognized during the following five-year period[139]. - The company intends to qualify as a Regulated Investment Company (RIC) and must distribute at least 90% of its net ordinary income and realized short-term capital gains annually to maintain this status[200]. - To meet the income source requirement, at least 90% of the company's gross income must come from dividends, interest, and other specified sources[203]. - Failure to maintain RIC status could lead to significant corporate-level taxes, reducing net assets and available income for distribution[205]. Market and Economic Conditions - The company operates in a highly competitive market for investment opportunities, impacting its ability to attract and retain qualified personnel[162]. - Economic disruptions and capital market conditions may materially affect the company's financial condition and results of operations[161]. - The company is currently facing capital market disruptions and economic uncertainty, which may adversely affect its financial condition and results of operations[211]. - The COVID-19 pandemic has caused significant disruptions in the capital markets, leading to increased volatility and potential economic downturns[212]. - Portfolio companies may experience financial distress due to the pandemic, impacting their ability to meet financial obligations and potentially leading to defaults[221]. - Inflation may adversely affect the business and financial condition of portfolio companies, impacting their ability to pay interest and principal on loans[222]. - The Federal Reserve raised interest rates by 0.25% in March 2022 and by 0.50% in May 2022, indicating further increases in 2022, which may affect the cost of capital and net investment income[224]. - Political, social, and economic uncertainties, including the COVID-19 pandemic, create significant risks that could adversely impact issuers and financial markets[225]. - The COVID-19 pandemic has disrupted U.S. credit markets, particularly for middle market loans, potentially affecting the ability of borrowers to meet loan covenants[228]. - Changes in U.S. federal policy and regulations following elections could lead to increased oversight and changes in tax rates affecting the financial services industry[227]. - The U.S. debt ceiling and budget deficit concerns have raised the possibility of credit-rating downgrades, which could negatively impact liquidity and borrowing costs[235]. - The company may need to access alternative markets for capital if current market conditions persist, which could have a material adverse effect on its operations[215]. - The valuation of the company's investments may be negatively impacted by significant changes in capital markets, leading to potential discrepancies in net asset value (NAV)[216]. - The company faces competition for investment opportunities from larger financial institutions, which may limit access to attractive investments[240]. - Attracting and retaining qualified personnel is critical for the company's success, and competitive pressures may necessitate changes in compensation packages[241]. - Compliance with public company requirements diverts management's time and resources, potentially impacting business operations[248]. Risk Factors - The potential for gain or loss on investments is magnified due to the company's use of leverage, increasing investment risk[184]. - The company may face challenges in meeting the Annual Distribution Requirement due to original issue discount or other non-cash income[125]. - The company may need to restructure investments in portfolio companies facing financial difficulties, which could result in non-qualifying income[126]. - Investments in non-U.S. securities may be subject to non-U.S. taxes, potentially reducing yield on such investments[128]. - The company is exposed to risks associated with global economic instability[277]. - The impact of military or security operations on the economy remains uncertain[277]. - The overall financial condition may be affected by external disruptive events[277]. - Cybersecurity risks and system failures could significantly disrupt business operations and negatively impact financial results and stock price[264]. - The company relies heavily on information systems, and any failure could lead to operational delays and financial losses[265]. - Legislative changes regarding taxes could adversely affect the company's ability to qualify for tax treatment as a RIC and impact shareholders[263]. - Environmental, social, and governance (ESG) factors may adversely affect the company's business and require changes to business practices[233]. - The company is restricted from entering into transactions with affiliates without prior approval from independent directors and, in some cases, the SEC[249]. - Future terrorist activities or natural disasters could weaken the domestic or global economy[277]. - Losses from terrorist attacks and natural disasters are generally uninsurable[277]. - These events could negatively affect the businesses in which the company invests directly or indirectly[277].