Capital Southwest(US:CSWC)2025-08-07 18:00Financial Data and Key Metrics Changes - The company reduced the investment portfolio weighted average debt to EBITDA from 3.5 times to 3.4 times [4] - The investment revenue pick rate decreased from 7.6% to 5.8% [4] - The non-accrual rate improved from 1.7% to 0.8% of the investment portfolio at fair value [4] - Pre-tax net investment income was reported at $0.61 per share, with total investment income increasing to $55.9 million from $52.4 million in the prior quarter [18] - The company's NAV per share decreased from $16.70 to $16.59 [21] Business Line Data and Key Metrics Changes - The company generated $27.2 million in realized gains from two equity investment exits during the quarter [5] - The on-balance sheet credit portfolio grew year-over-year by 21% to $1.6 billion [10] - 100% of new portfolio company debt originations were first lien senior secured [10] - The equity co-investment portfolio consisted of 80 investments with a total fair value of $166 million, representing 9% of the total portfolio [12] Market Data and Key Metrics Changes - The company reported $115 million in total new commitments to three new portfolio companies and 12 existing portfolio companies [6] - Approximately 55% of total capital commitments during the quarter were follow-on offerings in performing portfolio companies [7] - The company noted a distinct pickup in the volume and quality of deals in the past six weeks [8] Company Strategy and Development Direction - The company transitioned its regular dividend payment frequency from quarterly to monthly, declaring a total of $0.58 in regular dividends for the quarter [5] - The company received final approval from the SBA for its second SBIC license, allowing access to $175 million in additional SBA debentures [6] - The company aims to maintain a conservative leverage approach while being opportunistic in raising secured and unsecured debt capital [23] Management's Comments on Operating Environment and Future Outlook - Management noted a competitive landscape in the lower middle market, with banks and non-bank lenders being aggressive in deploying capital [26] - The company anticipates significant activity in terms of new platform company originations and add-on activity in the existing portfolio [8] - Management expressed confidence in maintaining dividends based on the current UTI balance of $1 per share and expectations of continued gains from the equity portfolio [20] Other Important Information - The company reported a robust balance sheet liquidity with approximately $444 million in cash and undrawn leverage commitments [21] - The regulatory leverage ended the quarter at a debt to equity ratio of 0.82 to 1, down from 0.89 to 1 in the prior quarter [23] Q&A Session Summary Question: Can you talk about the competitive landscape right now? - Management noted a supply-demand dynamic with a scarcity of quality assets and aggressive competition from banks and non-bank lenders [26][27] Question: What underpins your optimism in the M&A market? - Management highlighted a strong pipeline with $110 million of originations already closed and additional deals pending [36][37] Question: What is the outlook on operating leverage? - Management indicated that operating leverage is expected to trend down to 1.4% to 1.5% by the end of the fiscal year [40][41] Question: How do you view the competitive pressure from banks? - Management acknowledged that banks are currently competitive, which is driving lower spreads, but noted that this could change [52][53] Question: Any updates on adding an asset manager vehicle within the BDC? - Management confirmed ongoing efforts to enhance earnings and origination capabilities, potentially through strategic initiatives [56] Question: Can you provide a breakout between new versus add-on opportunities? - Management indicated a robust quarter with approximately 75% of originations being new opportunities [62]