Capital Southwest Corp (CSWC) - 10-Q Summary
Business Context and Reporting Period
Company: Capital Southwest Corporation (CSWC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2019
Business Overview: CSWC is an internally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940. It specializes in providing customized debt and equity financing to lower middle-market (LMM) and upper middle-market (UMM) companies in the United States. The company has elected to be taxed as a Regulated Investment Company (RIC).
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2019 | Dec 31, 2019 Balance Sheet |
|---|---|---|---|
| Total Investment Income | $15.98 million | $47.00 million | N/A |
| Net Investment Income | $7.11 million | $21.29 million | N/A |
| Net Realized Gain (Net of Tax) | $40.82 million | $42.32 million | N/A |
| Net Unrealized Depreciation (Net of Tax) | ($54.77 million) | ($61.00 million) | N/A |
| Net Increase in Net Assets from Operations | ($6.83 million) | $2.61 million | N/A |
| Total Assets | N/A | N/A | $599.35 million |
| Total Investments (Fair Value) | N/A | N/A | $558.55 million |
| Total Liabilities | N/A | N/A | $287.49 million |
| Net Assets | N/A | N/A | $311.86 million |
| Net Asset Value (NAV) per Share | N/A | N/A | $16.74 |
| Cash and Cash Equivalents | N/A | N/A | $22.97 million |
| Dividends Declared (9 Months) | N/A | $40.85 million | N/A |
Material Changes vs. Prior Period
- Investment Portfolio Growth: Total investments at fair value increased to $558.6 million as of December 31, 2019, from $524.1 million as of March 31, 2019. The portfolio now consists of 44 portfolio companies.
- Realized Gains: Net realized gains for the nine months ended December 31, 2019, were $42.3 million, a significant increase from $20.8 million in the prior year period. This was driven by the sale of Media Recovery, Inc. and repayments from other portfolio companies.
- Unrealized Depreciation: The company recorded net unrealized depreciation of $61.0 million for the nine-month period, compared to $15.1 million in the prior year. This was largely due to the reversal of prior unrealized appreciation upon the realization of gains and specific valuation decreases in investments such as I-45 SLF LLC and Delphi Intermediate Healthco.
- Debt Issuance: In September and October 2019, the company issued $75.0 million in aggregate principal amount of 5.375% Notes due 2024. This increased total borrowings to $273.1 million as of December 31, 2019, up from $216.1 million at March 31, 2019.
- Operating Expenses: Total operating expenses for the nine months ended December 31, 2019, were $24.1 million, an increase of $4.1 million (20.3%) compared to the prior year, primarily due to higher interest expense from new debt issuances and increased compensation costs.
Guidance, Outlook, and Risks
- Dividend Policy: The company intends to distribute substantially all of its taxable income to maintain RIC status. For the quarter ended March 31, 2020, a dividend of $0.51 per share was declared (record date March 16, 2020).
- Capital Resources: Management believes cash, cash equivalents, and available borrowings under the Credit Facility ($167.6 million available) are adequate for the next 12 months. The company continues to utilize its Equity ATM Program, raising $22.5 million in net proceeds during the nine-month period.
- Asset Coverage: As of December 31, 2019, the company's asset coverage ratio was 213%, well above the 150% minimum required by the 1940 Act and the 166% internal limit.
- Portfolio Quality: Three debt investments were on non-accrual status as of December 31, 2019, representing approximately 3.3% of the total investment portfolio's fair value. This is an increase from one investment on non-accrual status at March 31, 2019.
- Market Risk: The company is exposed to interest rate risk, with approximately 96.6% of its debt portfolio bearing floating interest rates. A hypothetical 100 basis point increase in rates could increase net investment income by up to $3.5 million annually.
Key Facts for Investor Verification
- NAV Decline: Verify the impact of the $61.0 million net unrealized depreciation on the decline in NAV per share from $18.62 (March 31, 2019) to $16.74 (December 31, 2019).
- Debt Maturity Profile: Review the maturity schedule of the new October 2024 Notes ($75.0 million) and the December 2022 Notes ($77.1 million) to assess refinancing risks.
- Non-Accrual Status: Investigate the specific portfolio companies placed on non-accrual status (AAC Holdings, AG Kings Holdings, and Delphi Intermediate Healthco) and the potential for future write-downs.
- Deemed Distributions: Confirm the tax implications of the $16.5 million of net long-term capital gains retained and designated as a "deemed distribution," which incurred a $3.5 million federal tax liability.
- Equity ATM Activity: Monitor the remaining capacity under the Equity ATM Program ($50 million aggregate offering price) and the weighted average price of shares sold ($21.90) relative to current market prices.