Capital Southwest(US:CSWC)2024-10-29 18:27Financial Data and Key Metrics Changes - Pre-tax net investment income for the quarter was $30 million or $0.64 per share, a decrease from $31.3 million or $0.69 per share in the prior quarter [34] - Total investment income decreased to $48.7 million from $51.4 million in the prior quarter, primarily due to a reduction in one-time cash dividends and fee revenue [35] - The company's NAV per share decreased slightly by $0.01 to $16.59 per share, driven by net realized and unrealized depreciation on the investment portfolio [41] Business Line Data and Key Metrics Changes - Portfolio activity included $89.8 million in new commitments to four new portfolio companies and 11 existing companies, with $45.2 million in proceeds from debt prepayments generating a weighted average realized IRR of 14.5% [13][28] - The on-balance sheet credit portfolio ended the quarter at $1.4 billion, representing year-over-year growth of 17% from $1.2 billion [23] - The credit portfolio had a weighted average yield of 12.9% and a weighted average leverage of 3.8 times EBITDA [29] Market Data and Key Metrics Changes - Deal flow in the lower middle market remains healthy, but competition for quality deals has resulted in tighter spreads and slower net portfolio growth [9] - The current backlog of deals indicates strong net portfolio growth expected in the December quarter, with loan-to-value levels ranging from 35% to 50% [10] - The company has seen increased competition from banks, affecting pricing dynamics in the market [60] Company Strategy and Development Direction - The company maintains a conservative approach to BDC leverage and balance sheet liquidity, allowing for continued investment in new platform companies and financing for existing portfolio companies [16] - The investment strategy focuses on lending and investing in the lower middle market, with approximately 93% of the credit portfolio backed by private equity firms [19] - The company aims to continue distributing excess quarterly pretax NII as supplemental dividends, supported by a current UTI balance of $0.64 per share [39] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to generate attractive returns despite competitive pressures and a challenging market environment [12] - The overall health of the portfolio is strong, with 93.5% of the portfolio rated in the top two categories and cash flow coverage of debt service obligations at 3.4 times [31] - Management noted that while there are idiosyncratic challenges, the overall portfolio remains resilient with significant upgrades outpacing downgrades [30][87] Other Important Information - The company raised approximately $21 million in gross equity proceeds through its equity ATM program at a weighted average share price of $24.49 per share [14] - The company has robust balance sheet liquidity with approximately $475 million in cash and undrawn leverage commitments [42] - The company is actively working towards obtaining a second SBIC license, with optimism about completing the process by the end of the calendar year [44] Q&A Session Summary Question: Can you quantify the deals pushed into calendar Q4 and the expected net portfolio growth? - Management indicated significant net portfolio growth expected in Q4, estimating $150 million to $200 million of net portfolio growth for the quarter [52][53] Question: What is the current state of new deal activity in the lower middle market? - Management noted that while deal flow has been relatively flat, there is increased competition from larger private equity firms moving down market, which could impact pricing [58][59] Question: What is the appetite for raising capital given the premium to book value? - Management confirmed a proactive approach to raising capital, with expectations of increasing secured capacity and engaging in unsecured activity over the next six to nine months [66] Question: Can you provide details on the non-accruals and expectations for those assets? - Management mentioned two new non-accruals, with expectations for restructuring by the end of December, indicating ongoing discussions with management teams [72][74] Question: Are there any emerging signs of weakness in the portfolio? - Management identified lower-end consumer businesses and B2B sectors as areas of caution, but overall, the portfolio remains strong with significant upgrades [85][86]