On January 29, 2024, Capital Southwest Corp (CSWC, Financial) released its 8-K filing, announcing financial results for the third fiscal quarter ended December 31, 2023. CSWC, a Dallas-based investment company, specializes in providing customized financing to middle market companies. The company's investment objective is to produce attractive risk-adjusted returns through current income from debt investments and capital appreciation from equity and equity-related investments.
CSWC's total investment portfolio reached $1.4 billion, with a credit portfolio comprising 97% 1st Lien Senior Secured Debt. The company reported a weighted average yield on debt investments of 13.5% and made $110.2 million in new committed credit investments. The equity portfolio, excluding investment in I-45 Senior Loan Fund (I-45 SLF), stood at $129.1 million with $6.1 million in new equity co-investments.
For the quarter, CSWC reported pre-tax net investment income of $29.8 million, or $0.72 per weighted average share outstanding. The company paid a regular dividend of $0.57 per share and a supplemental dividend of $0.06 per share, with 123% LTM Pre-Tax NII Regular Dividend Coverage. Net realized and unrealized depreciation was $5.4 million, or 0.4% of total investments at fair value.
Financial Performance and Challenges
CSWC's NAV per share increased to $16.77 from $16.46, marking a 1.9% increase compared to the prior quarter. This growth in NAV is significant as it reflects the company's ability to generate income and manage its investment portfolio effectively. However, the company did face challenges, including net realized and unrealized losses on investments totaling $5.4 million. Such losses can impact the company's earnings and NAV, posing potential risks for future performance.
Income Statement and Balance Sheet Highlights
The company's total investment income for the quarter was $48.6 million, an increase from the prior quarter's $42.8 million, primarily due to an increase in average debt investments outstanding and an increase in dividend income. Total operating expenses, excluding interest expense, were $7.3 million, up from $5.9 million in the prior quarter, mainly due to an increase in accrued bonus compensation. Interest expense also increased to $11.5 million from $10.5 million in the prior quarter, attributable to an increase in average debt outstanding and the weighted average interest rate on total debt.
On the balance sheet, CSWC had cash and cash equivalents of $23.6 million and total net assets of $721.0 million. The company's liquidity position was strengthened with $264.4 million in available borrowings under the Credit Facility and a regulatory debt to equity ratio of 0.77 to 1.
"The December quarter was another strong quarter for Capital Southwest, with $116 million of originations in four new and 12 existing portfolio companies. Our portfolio continued to perform well, producing $0.72 of pre-tax net investment income for the quarter, which more than earned both our $0.57 per share regular dividend and our $0.06 per share supplemental dividend paid for the quarter," said Bowen Diehl, President and Chief Executive Officer of CSWC.
For a more detailed discussion of the financial and other information included in this press release, please refer to Capital Southwest's Form 10-Q for the period ended December 31, 2023, to be filed with the Securities and Exchange Commission and Capital Southwest’s Third Fiscal Quarter 2024 Earnings Presentation to be posted on the Investor Relations section of Capital Southwest’s website at www.capitalsouthwest.com.
Capital Southwest's solid financial performance, including its increased NAV and strong investment activity, positions the company well for future growth. The company's ability to maintain a robust dividend payout is particularly appealing to value investors looking for steady income streams. As CSWC continues to navigate market challenges, its strategic approach to investment and capital management will be crucial in sustaining its financial health and delivering value to shareholders.
Explore the complete 8-K earnings release (here) from Capital Southwest Corp for further details.
