Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Capital Southwest Corp (CSWC, Financial) generated pretax net investment income of $0.69 per share, covering both the regular and supplemental dividends.
- The Board of Directors declared a $0.01 per share increase to the regular dividend, bringing it to $0.58 per share for the September quarter.
- Portfolio activity included $108.1 million in new commitments, demonstrating strong deal sourcing and origination capabilities.
- The company raised over $38 million in gross equity proceeds during the quarter, enhancing balance sheet liquidity.
- Capital Southwest Corp (CSWC) maintained a conservative leverage ratio of 0.75 to 1, ensuring strong balance sheet liquidity and flexibility.
Negative Points
- Increased competition from both bank and non-bank lenders has led to tighter spreads and slightly higher leverage levels.
- The company experienced $77.2 million in debt prepayments, which could impact future income generation.
- Net Asset Value (NAV) per share decreased by $0.17 to $16.60, primarily due to net unrealized depreciation and dilution from restricted stock issuance.
- Operating expenses were higher than usual due to one-time costs, affecting overall profitability.
- The company faces potential earnings pressure from anticipated interest rate cuts over the next 18 months.
Q & A Highlights
Q: Bowen, how would you characterize your interest in non-sponsored deals in the current market to help offset spread compression in the sponsored finance segment? And how would those deals compare to the sponsor deals in terms of the size of the portfolio company and the deal structure?
A: We've always been open to non-sponsored deals and have a few in our portfolio. They tend to have higher equity cushions and slightly higher yields compared to sponsored deals. While our deal flow from the sponsor community has been strong, we are definitely open to non-sponsored deals, though it hasn't been a major focus. β Bowen Diehl, CEO
Q: Could you give me a sense of the average SOFR floors in your debt investment portfolio?
A: All of our new deals have had floors at around 2%, and across the total portfolio, the average is about 1.5%. β Michael Sarner, CFO
Q: How do you size up or handicap the portfolio as it sits right now, especially considering the recent refinancing activities?
A: The recent quarter saw a lot of prepayment activity, which may slow down in the near term. We don't have many prepayments staring us in the face right now, so we expect prepayment activity to slow down compared to last quarter. β Bowen Diehl, CEO
Q: Can you provide commentary around the elevated dividend income for the quarter? Should we consider that to be more one-time?
A: This quarter, we had about $1.4 million of dividend income from dividend recaps, which is one-time in nature. However, we also had almost $600,000 of recurring dividends from our equity portfolio, which is more consistent. β Michael Sarner, CFO
Q: Given the relative downgrades of a couple of companies to level three and four, has there been any incremental pressure among previously low-risk holdings within the portfolio?
A: The watch list as a group has improved slightly. The downgrades were idiosyncratic and backed by private equity firms, which have put meaningful capital into these companies. We had no new non-accruals this quarter. β Bowen Diehl, CEO
Q: What are your thoughts on leverage levels and the shifting interest rate environment?
A: We are maintaining a conservative approach to leverage, given the expectation of rate cuts over the next 18 months. We have significant liquidity, allowing us to pick up investments as opportunities arise, and we will leverage up modestly to improve earnings and dividends. β Michael Sarner, CFO
Q: Can you talk about what you see as the possibility of other lenders giving up in the market in terms of covenants to win deals?
A: We haven't seen any meaningful deterioration in covenants in our new deals. When we lose deals, it's often because we are not willing to meet the leverage levels or pricing that other lenders offer. The lower middle market remains consistent in maintaining strong covenants. β Bowen Diehl, CEO
Q: Can you provide guidance on the volatility in the compensation expense lines?
A: This quarter, total compensation was $4.7 million, which included some one-time expenses. The run rate should be around $4.3 million quarterly. For G&A, the run rate should be around $2.5 million, making the total SG&A run rate around $6.8 million going forward. β Michael Sarner, CFO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
