Capital Southwest(US:CSWC)2026-02-03 17:02Financial Data and Key Metrics Changes - The company generated pre-tax net investment income of $0.60 per share, with total investment income increasing to $61.4 million from $56.9 million in the prior quarter [3][16] - The undistributed taxable income (UTI) balance rose from $0.68 per share in December 2024 to $1.02 per share, reflecting strong realized gains of $44.5 million from equity exits over the last 12 months [3][16] - The company declared total dividends of $0.64 per share for the March quarter, including a regular dividend of $0.58 and a supplemental dividend of $0.06 [4][17] Business Line Data and Key Metrics Changes - The company closed $244 million in total new commitments across eight new portfolio companies and 16 existing portfolio companies, with add-on financings representing 29% of total new commitments [4] - The weighted average spread on new commitments was approximately 6.4%, which is considered attractive in the current competitive environment [5] - The on-balance sheet credit portfolio ended the quarter at $1.8 billion, reflecting a 19% year-over-year growth from $1.5 billion [10] Market Data and Key Metrics Changes - The credit portfolio generated a weighted average yield of 11.3% with a weighted average leverage of 3.6x EBITDA [12] - Approximately 93% of the credit portfolio is sponsor-backed, providing strong governance and operational support [10] - Cash flow coverage improved to 3.4x, up from 2.9x during the peak of base rates, indicating strong portfolio performance [14] Company Strategy and Development Direction - The company announced a joint venture with a private credit asset manager to enhance competitiveness in the lower middle market, allowing participation in larger, higher-quality deals [7][8] - The joint venture is expected to generate low to mid-teens equity returns for the company, reinforcing its strategy of disciplined growth and long-term value creation [7][8] - The company aims to maintain a conservative leverage cushion to mitigate capital market volatility while continuing to raise secured and unsecured debt capital [19] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the competitive position in the lower middle market, noting a reduction in competition from peers due to dividend cuts among other BDCs [25] - The company remains focused on executing its strategy and maintaining disciplined growth, with a strong emphasis on risk management and portfolio granularity [21][22] - Management highlighted the importance of maintaining strong relationships with private equity sponsors, which continue to seek opportunities despite a challenging market environment [31][32] Other Important Information - The company raised approximately $53 million in gross equity proceeds through its Equity ATM Program at a weighted average share price of $21.11, reinforcing its ability to raise capital efficiently [6][18] - The liquidity position remains robust, with approximately $438 million in cash and undrawn leverage commitments, representing more than 1.5x coverage of unfunded commitments [19] Q&A Session Summary Question: Competitive dynamics in the lower middle market - Management noted that while regional banks have become more active, the competitive landscape remains stable, with fewer BDCs currently offering dividends [24][25] Question: Outlook for spreads - The company expects spreads to remain between 7% and 7.25% over the next 12 months, with recent deals showing spreads in the mid-sixes [26] Question: Breakdown of portfolio between sponsored and non-sponsored - The portfolio consists of approximately 93% sponsored and 7% non-sponsored deals, with sponsors still actively seeking opportunities [30] Question: Activity level in deal flow - Management expressed bullishness regarding deal flow, citing strong sponsor relationships and the recent joint venture as key factors for future growth [37][39] Question: AI disruption risk evaluation - The company has established an AI committee to assess AI risks in existing and new investments, indicating a proactive approach to potential disruptions [69]