Capital Southwest(US:CSWC)2023-05-22 16:00Debt 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].