CAPITAL SOUTHWEST CORP Q3 FY2025 earnings call

• Generated pre-tax net investment income of $0.64 per share, which covered regular and supplemental dividends. - Issued $230 million in convertible notes, using net proceeds to redeem notes and pay down debt. - Received SBA green light for second SBIC license, expected to receive final approval soon. - Raised approximately $54 million in gross equity proceeds through Equity ATM Program. - Two equity investments in final sale processes expected to provide realized gains in March 2025 quarter. - Portfolio upgrades多于 downgrades, with 9 loans in 5 portfolio companies upgraded and 3 loans in 3 portfolio companies downgraded, portfolio remains healthy with ~95% in top two rating categories.

The on-balance sheet credit portfolio ended the quarter at $1.5 billion, representing a year-over-year growth of 31% from $1.2 billion in December 2023. The credit portfolio had a weighted average yield of 12.1% and weighted average leverage through the security of 3.6x EBITDA. The equity co-investment portfolio consisted of 77 investments with a total fair value of $159 million, 9% of the total portfolio at fair value, marked at 143% of cost with $47.9 million in embedded unrealized appreciation or $0.96 per share.

• Board declared regular dividend of $0.58 per share for March 2025 quarter and increased supplemental dividend to $0.06 per share. - Expect equity investments in sale processes to provide realized gains in March 2025 quarter. - Anticipate portfolio originations in current quarter to be higher than previous, around $150 million to $200 million.

• Competition in the market driving spread compression. - Tariffs and immigration posing potential impacts on portfolio companies, but diversified portfolio with first lien position helps mitigate risk. - Potential prepayments in the portfolio, with expected 10%-15% of portfolio to rotate in 2025.

Q: Could you give insight into trends in new investment M&A activity considering election and interest rate certainty?

A: M&A activity active in fourth quarter and continuing into first quarter, with visibility on exits in portfolio for 2025.

Q: To what extent did call protection keep prepayments low and refinancing risk?

A: Expect some prepayments, call protection had one repayment generating fees, expecting 10%-15% portfolio rotation in 2025.

Q: How do tariffs impact portfolio companies?

A: ~10% of portfolio could be impacted, but first lien position and diversified portfolio help mitigate risk.

Q: How long to fill SBA license and funding costs?

A: SBA license expected soon, expecting to ramp quickly, anticipate borrowing between 4%-5%.

Q: Thoughts on option cost of convertible?

A: Convertible holders unlikely to convert soon, low risk, provides interest expense savings and accretive potential.

Q: Quantify spread compression and structure bending?

A: Market moved ~9 months ago, flex 50-100 basis points, competition focused on pricing, not structure.

Q: Update on non-accrual relationships?

A: Some non-accruals restructured, depreciation from non-accruals is NAV effect.

Q: Staffing levels and impact on expense ratio?

A: Continually adding staff, asset base growing slightly quicker than employee base, operating leverage decreasing.

Q: Portfolio exposure to federal contractors?

A: Very small, mostly subcontracts.

Q: UTI distribution and plan?

A: At $0.68, anticipating climbing to $0.80 range, plan to distribute more and continue paying shareholders quarterly.

Q: Drivers of fee income increase?

A: Prepayment penalty, cash held for 30 days on bond redemption, member amendment and arranger fees.

Q: Drivers of realized loss?

A: Restructured deal.

Q: Trends in portfolio company performance upgrades and downgrades?

A: Idiosyncratic, including shipping spot rates, weather, and struggling non-accrual.

Q: Economic leverage target?

A: Currently between 1.0-1.1, regulatory leverage at 0.9, monitoring macro economy and geopolitics.