CAPITAL SOUTHWEST CORP Q4 FY2025 earnings call

• Michael Sarner noted 2025 was productive, growing investment portfolio, improving debt portfolio quality, and equity portfolio performance with unrealized appreciation. Diversified capital sources, raised over $300 million in new debt and $180 million in gross equity proceeds. Continued dividend growth with regular and supplemental dividends. • Josh Weinstein discussed deploying $150 million in new committed capital, portfolio granularity, equity co-investments, and monitoring portfolio risks due to geopolitical uncertainties. • Chris Rehberger highlighted financial performance with pre-tax net investment income, adjusted NII, dividend coverage, NAV per share growth, strong balance sheet liquidity, and approval of second SBIC license allowing access to $175 million in additional SBA debentures.

The investment portfolio grew by approximately $300 million (21%) from $1.5 billion to $1.8 billion. The credit portfolio had a weighted average leverage of 3.5 times EBITDA, a weighted average yield of 11.7%, and 95% of the portfolio at fair value rated in the top two categories. The equity co-investment portfolio consisted of 79 investments with a total fair value of $179 million (10% of total portfolio), marked at 142% of cost with $53.2 million in unrealized appreciation. The credit portfolio was 89% first lien senior secured debt, 1% second lien senior secured debt, and 10% equity co-investment.

• Anticipates run rate operating leverage to be in the 1.4%-1.5% range by the end of the next fiscal year. • Expects further realized gains from equity exits, with over $20 million realized subsequent to quarter end. • Plans to use SBIC debentures in the next three months, with the second SBIC expected to start funding deals this quarter.

• Geopolitical uncertainties impacting lower rental market, slower M&A, and potential spread compression in the lower middle market. • Tariff impacts on portfolio companies, with 7% of debt portfolio at fair value having moderate tariff risk, and 1% having both moderate risk and loan-to-value above 50%. • Policy uncertainties affecting industries like manufacturing, healthcare, and consumer discretionary products.

Q: At a very high level, how attractive do current vintage of investments in the lower middle market are relative to history?

A: Deals in service industries are attractive, while cyclical or policy-impacted deals are being pulled or delayed. Originations expected to be $125-150 million.

Q: What were main drivers of net realized loss and markdown in credit portfolio?

A: Restructurings of a few companies drove most of the depreciation.

Q: When will start to inject capital into new SBIC subsidiary and access to $175 million?

A: Likely start in next three months, with full access to $175 million subject to SBA approval.

Q: Thoughts on spread compression due to competition for non-tariff impacted industries?

A: No material spread compression expected, with still many dollars chasing fewer deals.

Q: Comfort level on UTI balance and potential distribution?

A: UTI balance supports dividends, with intent to distribute to shareholders, and supplemental dividend may increase as UTI rises.