Capital Southwest(US:CSWC)2022-05-24 16:47Financial Data and Key Metrics Changes - Total return to shareholders for the fiscal year was 18%, consisting of share price appreciation of 7% and total dividends paid of $2.52 [7] - NAV per share grew 5% to $16.86 from $16.01 in the prior year, driven by over $17 million in net realized and unrealized gains [8] - Pre-tax net investment income increased by 6% to $1.90 per share from $1.79 per share in the prior year [8] - The company generated pre-tax net investment income of $12 million or $0.50 per share for the quarter, covering the regular dividend of $0.48 per share [11][30] - The estimated UTI balance was $0.47 per share as of March 31, 2022 [33] Business Line Data and Key Metrics Changes - The investment portfolio grew by approximately $60 million or 6.8% to $937 million during the quarter, driven by $103 million in new commitments [13] - The on-balance sheet credit portfolio grew 7% to $794 million compared to $745 million in the prior quarter [18] - The equity co-investment portfolio consisted of 41 investments with a fair value of $85.2 million, including $25.1 million in embedded unrealized appreciation [17] Market Data and Key Metrics Changes - The company maintained a strong balance sheet liquidity with approximately $178 million in cash and undrawn leverage commitments [37] - The weighted average yield on all investments was 9%, with the credit portfolio yielding 9.3% for the quarter [34] Company Strategy and Development Direction - The company continues to focus on its core lower middle market lending strategy while opportunistically investing in the upper middle market [16] - The investment pipeline remains robust, with expectations for strong originations in the June quarter [21][22] - The company aims to maintain and grow both NAV per share and shareholder dividends as part of its long-term investment objective [15] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the portfolio's ability to withstand potential economic downturns, citing a conservative underwriting approach [47] - The company is well-positioned for a rising interest rate environment, with 98% of debt assets in floating rate securities [7] - Management noted that the market for acquisition and refinancing capital remains strong, with a healthy pipeline of investment opportunities [21][22] Other Important Information - The company raised $25.2 million of equity through its ATM program at an average price of $24.27 per share [14] - A special dividend of $0.15 per share was declared for the June quarter, in addition to the regular dividend of $0.48 per share [12][30] Q&A Session Summary Question: Concerns about defaults and non-accruals in the current macro environment - Management acknowledged the difficulty in predicting defaults but emphasized their conservative underwriting approach, which has prepared the portfolio for potential economic downturns [47][48] Question: Impact of rising LIBOR on borrowers' appetite for capital - Management indicated that while rising rates could affect borrowers, the portfolio's weighted average fixed charge coverage remains solid, providing confidence in borrowers' ability to service debt [50][51] Question: Drivers of realized and unrealized gains in the quarter - Management noted that gains were primarily driven by strong performance in the equity portfolio, with several companies showing significant increases despite broader market challenges [54][55] Question: Future access to SBA draws and leverage commitments - Management confirmed that they have access to $80 million in SBA commitments and expect to seek additional leverage in the near future [75] Question: Observations on margin compression across the portfolio - Management highlighted that labor and material costs have increased, impacting margins, but noted that many companies have successfully passed on costs to customers [81][82]