Capital Southwest(CSWC)2025-02-04 19:21Financial Data and Key Metrics Changes - Pre-tax net investment income was 0.64 per share, compared to 0.64 per share in the prior quarter [30] - Total investment income increased to 48.7 million in the prior quarter, driven primarily by a 0.58 per share and increased the supplemental dividend to 317.5 million in new commitments to nine new portfolio companies and 20 existing portfolio companies during the quarter [8][22] - Over 41% of total capital commitments were follow-on financings in performing companies [9] - The credit portfolio ended the quarter at 1.2 billion as of December 2023 [20] Market Data and Key Metrics Changes - The company reported a weighted average yield of 12.1% in its credit portfolio, with a weighted average leverage of 3.6x EBITDA [26] - The number of portfolio upgrades significantly exceeded downgrades, with approximately 95% of the portfolio rated in the top two categories [27] - Cash flow coverage of debt service obligations across the portfolio remained healthy at 3.5x [27] Company Strategy and Development Direction - The company focuses on lending and investing in the lower middle market, with approximately 94% of its credit portfolio backed by private equity firms [16] - The company aims to maintain a conservative posture regarding overall risk management while growing its balance sheet [21] - The company is excited about its continued participation in the SBA program, which is a key component of its capitalization strategy [11] Management's Comments on Operating Environment and Future Outlook - Management noted that the M&A market has been active and is expected to continue into 2025, with visibility on exits from the portfolio [50][51] - The company is monitoring the impact of tariffs and immigration policies on its portfolio, with preliminary analysis indicating that around 10% of the portfolio could be affected [63][64] - Management expressed confidence in the ability to continue distributing quarterly supplemental dividends based on the current UTI balance and expected realized gains [33] Other Important Information - The company issued 140 million in January 2026 notes and pay down its revolving credit facility [10][36] - The company raised approximately 22.68 per share [12] - The company expects to receive final approval for its second SBIC license imminently [41] Q&A Session Summary Question: Insights on new investment M&A activity trends - Management noted that the M&A market was active in the fourth quarter and has continued into the first quarter, with early signs of increased activity in 2025 [50][51] Question: Impact of call protection on prepayments - Management expects to see some level of prepayments in the future, estimating that 10% to 15% of the portfolio may rotate in 2025 [60] Question: Exposure to tariffs and their impact - Approximately 10% of the portfolio could see some impact from tariffs, but the first lien senior secured position is expected to mitigate risks [64] Question: Update on SBA license and funding costs - The company expects to ramp up quickly once the SBA license is received, with anticipated borrowing costs between 4% and 5% [75] Question: Competition and spread compression - The market has seen spread compression of about 50 to 100 basis points over the past nine months, but loan-to-value ratios remain consistent [84][87] Question: Changes in non-accrual relationships - One non-accrual was restructured, and the company is monitoring the performance of others for potential improvements [89][92] Question: Staffing levels and deal activity - The company is continually assessing staffing needs to accommodate growing deal activity, with plans to add professionals as necessary [100][102] Question: Future dividend distribution strategy - The company anticipates climbing UTI to the $0.80 range by next quarter and plans to distribute more than the current run rate [112]