Capital Southwest(CSWC) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents unaudited consolidated financial statements, detailing the investment portfolio, net assets, and operational results for the quarter Item 1. Consolidated Financial Statements Unaudited consolidated financial statements detail the $1.01 billion investment portfolio, $453.0 million net assets, and $2.5 million net increase from operations Financial Statements Overview Total assets grew to $1.05 billion, net investment income increased to $12.4 million, resulting in a $2.5 million net increase in net assets from operations | Indicator | June 30, 2022 (Unaudited) | March 31, 2022 | | :--- | :--- | :--- | | Total Investments (Fair Value, in thousands) | $1,006,640 | $936,614 | | Total Assets (in thousands) | $1,053,959 | $973,957 | | Total Liabilities (in thousands) | $600,974 | $553,090 | | Total Net Assets (in thousands) | $452,985 | $420,867 | | Net Asset Value Per Share ($) | $16.54 | $16.86 | | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total Investment Income (in thousands) | $22,543 | $18,579 | | Net Investment Income (in thousands) | $12,438 | $9,043 | | Net Increase in Net Assets from Operations (in thousands) | $2,510 | $15,142 | | Net Investment Income Per Share ($) | $0.49 | $0.43 | | Net Increase in Net Assets from Operations Per Share ($) | $0.10 | $0.71 | - For the three months ended June 30, 2022, net cash used in operating activities was $69.8 million, primarily due to $135.0 million in purchases and originations of investments[16] - Net cash provided by financing activities was $77.3 million, driven by $46.1 million from common stock offerings and $39.0 million from the issuance of SBA Debentures[16] Consolidated Schedule of Investments The $1.01 billion investment portfolio is 81.0% first lien loans, concentrated in Media, Marketing & Entertainment (11.3%) and the Northeast (21.0%) | Investment Type | Fair Value (in thousands) | % of Total Portfolio | | :--- | :--- | :--- | | First lien loans | $815,437 | 81.0% | | Second lien loans | $48,630 | 4.8% | | Subordinated debt | $1,365 | 0.1% | | Preferred equity | $45,994 | 4.6% | | Common equity & warrants | $43,513 | 4.3% | | I-45 SLF LLC | $51,701 | 5.2% | | Total | $1,006,640 | 100.0% | | Industry | Fair Value (in thousands) | % of Total Portfolio | | :--- | :--- | :--- | | Media, Marketing & Entertainment | $114,013 | 11.3% | | Business Services | $108,465 | 10.8% | | Consumer Products & Retail | $89,546 | 8.9% | | Consumer Services | $77,518 | 7.7% | | Healthcare Services | $72,743 | 7.2% | | Other | $544,855 | 54.1% | | Geographic Region | Fair Value (in thousands) | % of Total Portfolio | | :--- | :--- | :--- | | Northeast | $211,876 | 21.0% | | West | $209,291 | 20.8% | | Southeast | $195,293 | 19.4% | | Southwest | $190,065 | 18.9% | | Midwest | $133,325 | 13.3% | | Other | $66,790 | 6.6% | Notes to Consolidated Financial Statements Notes detail the company's BDC/RIC status, accounting policies, investment valuation, and $585 million in borrowings - The company operates as an internally managed Business Development Company (BDC) and has elected to be treated as a Regulated Investment Company (RIC) for tax purposes, specializing in financing middle-market companies in the U.S[119][120] - As of June 30, 2022, 100% of the investment portfolio consisted of privately held securities valued using significant unobservable Level 3 inputs, as determined by the Board of Directors[191] | Borrowing Type | Outstanding Balance (in thousands) | Recorded Value (in thousands) | | :--- | :--- | :--- | | SBA Debentures | $80,000 | $77,461 | | Credit Facility | $215,000 | $215,000 | | January 2026 Notes | $140,000 | $138,798 | | October 2026 Notes | $150,000 | $146,708 | | Total | $585,000 | $577,967 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the $1.01 billion investment portfolio, a 37.5% increase in net investment income to $12.4 million, and $9.9 million in net unrealized losses - The company's investment strategy focuses on providing customized debt and equity financing to Lower Middle Market (LMM) companies (EBITDA $3M-$20M) and debt capital to Upper Middle Market (UMM) companies (EBITDA >$20M)[332][333] | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total investment income (M$) | $22.5 | $18.6 | | Net investment income (M$) | $12.4 | $9.0 | | Net realized/unrealized (loss) gain (M$) | ($9.9) | $6.1 | | Net increase in net assets from operations (M$) | $2.5 | $15.1 | - During the quarter ended June 30, 2022, the company sold 2,262,852 shares under its Equity ATM Program, raising $46.1 million in net proceeds[268][269] - Cumulatively, the program has raised $226.3 million in net proceeds[410] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate sensitivity, with 97.7% floating-rate debt, potentially increasing annual net investment income by $6.8 million with a 100 basis point rate hike - The company is primarily subject to interest rate risk, which affects net interest income, the ability to originate loans, and the value of the investment portfolio[421] - As of June 30, 2022, 97.7% of the debt investment portfolio at fair value had floating interest rates[423] - A hypothetical 100 basis point increase in interest rates could increase annual net investment income by a maximum of $6.8 million ($0.25 per share), while a 100 basis point decrease could reduce it by a maximum of $6.4 million ($0.23 per share)[423] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2022, with no material changes to internal control over financial reporting - Based on an evaluation as of the end of the period, management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[428] - No material changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[429] PART II OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, and other disclosures, confirming no material changes or events Item 1. Legal Proceedings The company reports no currently pending material legal proceedings to which it or its assets are subject - The company is not currently involved in any pending material legal proceedings[432] Item 1A. Risk Factors No material changes to risk factors have occurred since the Annual Report on Form 10-K filing - No material changes to risk factors have occurred since the filing of the Annual Report on Form 10-K for the fiscal year ended March 31, 2022[433] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales or share repurchases occurred under the $20 million program during the quarter - The company did not sell any unregistered securities during the reporting period[435] - Under the share repurchase program approved in July 2021, which authorizes up to $20 million program in repurchases, the company did not repurchase any shares during the three months ended June 30, 2022[437] Other Items (3, 4, 5, 6) This section confirms no defaults on senior securities, no mine safety disclosures, and no other material information - The company reported no defaults upon senior securities, no mine safety disclosures, and no other information requiring disclosure under Item 5[439][441][443]