管理層發言
Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management's expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see the company's publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release, except as required by law. I will now hand the call over to our President and Chief Executive Officer, Michael Sarner.
Thanks, Amy, and thank you, everyone, for joining us for our first quarter fiscal year 2026 earnings call. We are pleased to be with you today to discuss our first fiscal quarter. The June quarter was another productive quarter for the company as we continued to strengthen both sides of our balance sheet. During the quarter, we reduced the investment portfolio weighted average debt to EBITDA from 3.5x to 3.4x. The investment revenue PIK rate from 7.6% to 5.8% and our nonaccrual rate from 1.7% to 0.8% of the investment portfolio at fair value. These metrics, coupled with corporate leverage of 0.82x and a weighted average yield on debt investments of 11.8% provide shareholders with an attractive risk-return profile to support both our regular and supplemental dividend looking forward to the future. During the first fiscal quarter, we generated pretax net investment income of $0.61 per share. Additionally, as a result of harvesting $27.2 million in realized gains from 2 equity investment exits during the quarter, we were able to increase our undistributed taxable income balance to $1 per share from $0.79 per share as of the end of the prior quarter. Furthermore, as previously announced, we transitioned our regular dividend payment frequency from quarterly to monthly. We believe that transitioning to a monthly regular dividend is a shareholder-friendly initiative that will benefit all stakeholders of Capital Southwest. Our Board of Directors has declared a total of $0.58 in regular dividends for the quarter, payable monthly in each of July, August, and September 2025 and has also declared a quarterly supplemental dividend of $0.06 per share, bringing total dividends declared for the September quarter to $0.64 per share. On the capitalization front, we received final approval from the SBA for our second SBIC license during the quarter, which allows us to access up to $175 million in additional SBA debentures over time. Additionally, we increased our existing ING-led corporate credit facility by $25 million, bringing total commitments to $510 million. Finally, we raised $42 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $20.50 per share or 123% of the prevailing NAV per share. We are pleased with the progress we have made on the capitalization front, and we'll continue to take measures to further improve our balance sheet as we look ahead. From an originations perspective, we took a conservative approach to underwriting this quarter due to the noise and uncertainty related to tariffs and government policies impacting health care and government services. Despite this noise, deal flow in the lower middle market remained solid this quarter with $115 million in total new commitments to 3 new portfolio companies and 12 existing portfolio companies. Add-on financings continue to be an important source of originations for us as approximately 55% of the total capital commitments during the quarter were follow-on offerings in performing portfolio companies. Over the last 12 months, add-ons as a percentage of total new commitments have been 38%. So clearly, a strong source of origination volume in deals we know well and have experience with the management team and sponsor. Looking ahead, we have seen a distinct pickup in the volume and quality of deals in the past 6 weeks. As such, we are anticipating significant activity in terms of new platform company originations as well as add-on activity in the existing portfolio. Finally, from a BDC perspective, there's been some long-awaited progress on the AFFE rule or affiliated fund fees and expenses. On June 23, 2025, there was a unanimous house passage of the Access to Small Business Investor Capital Act, which corrects the misleading SEC disclosure requirement that overstates the actual cost of investment in BDCs. The bill will exempt funds that invest in BDCs from including the acquired fund fees and expenses calculation in the prospectus fee table, providing more accurate information for investors. If BDCs are exempt from the AFFE rule, it could significantly increase trading volumes in the sector, especially through mutual funds and ETFs. If you recall, the onset of this rule in 2014 precipitated the Russell and S&P to remove BDCs from their indices. So we believe the impact of this corrective legislation could be meaningful. I will now hand the call over to Josh to review more specifics of our investment activity and the market environment.
Thanks, Michael. This quarter, we deployed a total of $51 million of new committed capital, including $50 million in first lien senior secured debt and $1 million of equity across 3 new portfolio companies. In addition, we closed add-on financings for 12 existing portfolio companies, consisting of $64 million in first lien senior secured debt and $1 million in equity. Our on-balance sheet credit portfolio ended the quarter at $1.6 billion, representing year-over-year growth of 21% from $1.3 billion as of June 2024. For the current quarter, 100% of our new portfolio company debt originations were first lien senior secured. And as of the end of the quarter, 99% of the credit portfolio was first lien senior secured with a weighted average exposure per company of only 0.9%. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms. Currently, approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio companies as well as the potential for junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies paired with the pursuit of the private equity firm when we believe the equity thesis is compelling. As of the end of the quarter, our equity co-investment portfolio consisted of 80 investments with a total fair value of $166 million, representing 9% of our total portfolio at fair value. Our equity portfolio was marked at 125% of our cost, representing $33.2 million in embedded unrealized appreciation or $0.60 per share. Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, often resulting from the institutionalization of the businesses by experienced private equity firms as well as the significant value accretion potential from strategic add-on acquisitions. Equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation as well as equity distributions to Capital Southwest over time. This is playing out in real time as this quarter, we harvested 2 sizable equity exits, which generated $27.2 million in realized gains. Over the past 2 quarters, our equity portfolio has produced $41.3 million in total realized gains. As noted earlier, these realized gains grow our undistributed taxable income balance and thus support both regular and supplemental dividends going forward. Consistent with previous quarters, the lower middle market continues to be quite competitive as this segment of the market is highly attractive to both bank and non-bank lenders. While this has resulted in tight loan pricing for high-quality opportunities that are not exposed to macroeconomic uncertainty, the depth and strength of the relationships our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk-return profiles. As a point of reference, currently, there are 80 unique private equity firms represented across our investment portfolio. Additionally, in the last 12 months, we closed 13 new platforms with financial sponsors with which we had not previously closed the deal, demonstrating our continued penetration in the market. Since the launch of our credit strategy, we have completed transactions with over 119 different private equity firms across the country, including over 20% with which we have completed multiple transactions. Our portfolio currently consists of 122 different companies weighted 89.6% to first lien senior secured debt, 1% to second lien senior secured debt and 9.3% to equity co-investments. The credit portfolio had a weighted average yield of 11.8% and a weighted average leverage through our security of 3.4x EBITDA. We continue to be pleased with the operating performance across our loan portfolio. We have recently changed our loan grade structure from a 4-point scale to a 5-point scale. We have made this change in order to provide additional transparency for our shareholders. All of our loans upon origination are initially assigned an investment rating of 2 on a 5-point scale, with 1 being the highest and 5 being the lowest rating. Overall, the portfolio remains healthy with approximately 92% of the portfolio at fair value rated in 1 of the top 2 categories, a 1 or a 2. Cash flow coverage of debt service obligations across the portfolio remains robust at 3.5x with our loans across the portfolio averaging approximately 42% of portfolio company enterprise value. We believe these performance metrics are indicative of a well-performing and conservatively structured portfolio. Our portfolio continues to be broadly diversified across industries, and our average exposure per company is less than 1% of investment assets, which gives us great comfort in the overall risk profile of our portfolio. For the deals we are currently underwriting, they continue to have tight covenant packages, loan-to-value levels ranging from 35% to 50%, resulting in significant equity capital cushion below our debt and reasonable leverage levels of 2.5x to 4x debt to EBITDA. As Michael mentioned earlier, we believe our balance sheet is well-positioned with low leverage and significant liquidity, which should allow us to be opportunistic should the market become less competitive. I will now hand the call over to Chris to review the specifics of our financial performance for the quarter.
Thanks, Josh. Specific to our performance for the quarter, pretax net investment income was $32.7 million or $0.61 per share. For the quarter, total investment income increased to $55.9 million from $52.4 million in the prior quarter. The increase was driven by a $5.2 million increase in cash interest and dividend income, offset by a decrease of $900,000 in fees and a decrease of $700,000 in PIK income compared to the prior quarter. Importantly, PIK as a percentage of our total investment revenue decreased to 5.8% compared to 7.6% in the prior quarter. Additionally, as of the end of the quarter, our loans on nonaccrual represented 0.8% of our investment portfolio at fair value, a decrease from 1.7% as of the end of the prior quarter. During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend. As mentioned earlier, we have transitioned the frequency of our regular dividend payment to monthly with our Board declaring a total of $0.58 per share in regular dividends for the quarter, payable monthly in each of July, August, and September 2025, while also maintaining a quarterly supplemental dividend at $0.06 per share, bringing total dividend to $0.64 per share for the September 2025 quarter. We continued our strong track record of regular dividend coverage with 106% coverage for the 12 months ended June 30, 2025, and 110% cumulative coverage since the launch of our credit strategy. We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current undistributed taxable income balance of $1 per share and the expectation that we will continue to harvest gains over time from our sizable unrealized appreciation balance on the equity portfolio. Last-twelve-month operating leverage ended the quarter at 1.7%. Looking ahead, we anticipate our run rate operating leverage to be in the 1.4% to 1.5% range by the end of our current fiscal year. Our operating leverage is significantly better than the BDC industry average of approximately 2.7%, and we believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage a best-in-class BDC. The company's NAV per share at the end of the quarter was $16.59 per share, a decrease from $16.70 per share in the prior quarter. The primary driver of the NAV per share decline was the annual issuance of restricted stock compensation to employees during the quarter. We are pleased to report that our balance sheet liquidity is robust with approximately $444 million in cash and undrawn leverage commitments on our 2 credit facilities, which represents 2x the $223 million of unfunded commitments we had across our portfolio as of the end of the quarter. During the June quarter, we increased our corporate credit facility by $25 million, bringing total commitments on the facility to $510 million. Additionally, as of the end of the June quarter, 48% of our capital structure liabilities were in unsecured covenant-free bonds with our earliest debt maturity in October 2026. As previously mentioned, during the June quarter, we received final approval from the SBA for our second SBIC license. This license allows us to access up to $175 million in additional SBA debentures over time, which is a cost-effective way to finance our lower middle market investment strategy. Our regulatory leverage ended the quarter at a debt-to-equity ratio of 0.82:1, down from 0.89:1 as of the prior quarter. While our optimal target leverage continues to be in the 0.8 to 0.95 range, we are weighing the impact of the current macroeconomic landscape and intend to maintain a regulatory leverage cushion, which will mitigate capital markets volatility. We will continue to methodically and opportunistically raise secured and unsecured debt capital as well as equity capital through our ATM program to ensure we maintain significant liquidity and conservative balance sheet construction with adequate covenant cushions. I will now hand the call back to Michael for some final comments.
Thank you, Chris, Josh, and Amy, and all the employees who help us tell the story on a quarterly basis. And thank you, everyone, for joining us today. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.
分析師問答
Can you just talk a little bit more about the competitive landscape right now? And kind of how do you see that sort of playing out over the coming quarters?
Yes. I mean, look, there's a bit of a supply-demand dynamic here. And if you think about the supply, private equity sponsors have turned their attention away from consumer discretionary businesses a little bit as well as companies with international supply chains. So there's a little bit of a scarcity of quality assets out there. So there's a bit of a pullback in the supply. And then on the demand side, you have banks and non-bank lenders continuing to be aggressive and incentivized to deploy capital. So we've seen spread compression over the last 6 months or so. While we have seen that spread compression, the structures, which is something we focus on heavily on loan-to-value leverage quality credit agreements, those kinds of things have we stayed prudent on structuring. So we've been able to continue to deploy capital and leverage the relationships to continue to find opportunities. So yes, it's continued to be competitive. It always has been competitive, but we've been able to compete candidly. And so we've got a lot of good traction in this upcoming quarter as well.
Our overall weighted average spread was 8.50% two years ago and is currently around 7.50%. The deals we observed in the previous quarter were about 7%, and for the upcoming September quarter, we are looking at deals around 7%, slightly above that as well. To Josh's point, despite the compression, we are still able to reach our targets.
Got it. How do you think about whether there is actually a floor on that? Do you believe it's possible to maintain 7% if the supply-demand imbalance continues? What are your thoughts on any potential floor for the spreads?
It feels like it has settled to some degree. What we've seen is lower middle market credits that are extremely tight have been as low as 5.25%, which is 125 to 150 basis points tighter than what we're used to. But there still are plenty of deals that are somewhere between the 5.25% and 7.50% to 8%. We have a pretty wide group of sponsors that we work with. We're also willing to be originating deals on the smaller side. So $3 million to $6 million EBITDA companies that are probably garnering closer to 6.50% over. So again, still being able to find our marks. And I do think that as SOFR comes down, history would tell us that the spreads will probably widen out. And so we might be at that kind of at the trough right now.
Michael, we received sort of mixed signals on the M&A market. Most folks are claiming it's still pretty muted relative to where it was a couple of years ago. But you're pretty optimistic it sounds like on your third calendar quarter, and the fourth calendar quarter tends to be the busiest. So I'm assuming the second half looks pretty good. Well, what's underpinning that optimism in a market that seems to be sort of trudging along?
So I would say some of the deals that were in the June quarter bled over into the September quarter. I mean I can tell you right now, we've closed $110 million of originations through this morning. And we have another $40 million in deals that are signed up and that would be pending close later this month. So we already know we're probably at $150 million, and then there's a number of deals that we're in the mix for. So I think where we live in the lower middle market, we've seen plenty of deal activity. And I'd let Josh chime in as well; it feels like quality deals.
Yes. I think when I talk to other lower middle market lenders, they are very surprised at how full our pipeline is. And I really do think that speaks to the efforts we put forth in the last 3 years, 4 years, 5 years in cultivating private equity relationships to put us in a position to see all their deal flow and/or the majority of their deal flow. And so I do think that that's paying dividends now and will continue to in the future.
And on the flip side, do you have any insight into prepayment or repayment activity in the third and fourth quarter?
We had over $80 million in repayments this quarter, making it a significant period for us. There are a few companies preparing to pursue larger transactions, which we expect to happen closer to the December quarter. Other than that, we don’t have much planned for the September quarter at this time.
Well, that's good news. My last question relates to your operating leverage. I looked at the page in the presentation, and it looks like it's sort of bottomed out at 1.7%. Is that where we can expect it to stay? Or do you think there's some more leverage there that can be extracted as you continue to grow?
This is definitely decreasing. For the quarter, the metric based on actuals for the last twelve months was 1.7%. The current run rate was 1.6% and is trending down to 1.5%. We sometimes accrue additional bonuses throughout the year before making a final decision at year-end when the Board makes its determination on bonuses, so there may be an over accrual. However, we anticipate that the run rate, once everything is finalized for this year, should be around 1.4% to 1.5%, and we still believe there will be opportunities to reduce this further over time. While we are increasing our staff and compensating our employees, we feel that our internally managed structure offers significant advantages, and we expect this to remain a strength for us, particularly as rates improve. This will be a key differentiator for our business model compared to external factors as rates stabilize.
Yes, I agree with that. And I just want to make sure I understood what you said: 1.4% to 1.5% run rate in the fourth calendar quarter. So that's the fourth quarter annualized rate?
So for the March 31 quarter, the LTM number, we believe, will be 1.4% or 1.5%.
So, Mickey, to give you an overview of the current quarter ending June 30, the quarterly rate was 1.5%. We are experiencing some effects from one-time expenses from the previous quarter. We are currently running at about 1.5%, and we expect this to gradually decrease on a last twelve months basis, as Michael mentioned.
Okay. And in terms of leverage, Michael, you've tapped into the ATM, but the balance sheet leverage is not particularly high. Can we expect you to continue to issue common equity at sort of the pace that you've been at? Or do you prefer to lever up the balance sheet a little bit and maybe optimize your returns?
Yes, leverage decreased this quarter, mainly due to the significant repayments we had. Chris mentioned before that we're raising around $40 million to $60 million each quarter, and you can expect that trend to continue. We aim to reach a leverage ratio closer to 0.85, but if our portfolio remains strong as it is now, particularly regarding our debt-to-EBITDA and fixed charge covenants, we might even approach 0.9. Currently, we are at a low point for leverage.
Yes. And part of it, we try to be consistent, Mickey, and as Michael said, we're raising, if you look at the last kind of 5 or 6 quarters, it's about exactly an average of $40 million a quarter. So we try to be consistently in the market. Some of the deals, as Michael described, pushed into July, which optically made the June leverage a little bit low. I would expect we'll be in the 0.85 to 0.9 range sort of in the September and December quarters. That seems about right.
And philosophically, most BDCs or many BDCs sort of run at more like 1.1. Obviously, you're in the lower middle market and maybe that causes you to be a little bit more conservative. But conceptually, why not run the balance sheet with a little bit more leverage than you've been doing recently?
Yes. I think the fact of the matter is that we're able to find yield kind of the way Josh described earlier and meet or exceed analyst expectations, have operating leverage where it needs to be. We don't really feel like the need to reach additional leverage necessarily. All of these metrics can move around over time. But generally speaking, we're going to take a more conservative bend. Especially, we're a smaller BDC, right? I think we earned our credibility in the market, but we still believe having a conservative infrastructure, having conservative leverage communicates to the market sort of the way we do business here, and we think that could probably help our price to book in the end.
If I may address the competitive environment for a moment. Regarding your observation on leveraging 2.5 to 4, banks can participate in that market and retain those loans on their balance sheets, which, as you noted, can be appealing to them. Banks tend to fluctuate based on market conditions, so where do you see the current competitive pressure from banks as it relates to the cycle? Are they being particularly aggressive at the moment, contributing to the narrowing spreads, or is their approach more moderate in terms of their level of competition?
Yes, you're absolutely right about it being a boom or bust situation. Currently, it's a boom period, and banks are taking on more risk. From what I can observe, they are actively competing with us, and generally, the leverage profile we see allows banks to be competitive. We certainly have other strategies to compete with banks, but honestly, it's challenging for sponsors to ignore pricing that's 150 to 200 basis points lower when it’s available. Right now, banks are being aggressive, which is definitely contributing to the lower spreads. However, as you've pointed out, they will eventually decrease their risk exposure. It's difficult for me to say when that will happen, but it will occur, and that could lead to spreads widening a bit.
Got it. Yes, one of the advantages of being an internally managed BDC, as seen with some of your internally managed peers, is that you can operate as an asset manager. You've discussed this before, and the fees from the asset manager benefit shareholders instead of an external manager. Are there any updates regarding efforts to introduce an asset manager within the BDC to improve return on equity and reduce your effective efficiency ratio? Any updates on that?
Yes, we are continuing to explore those types of options. We are also considering a strategic initiative to enhance our earnings and origination capabilities on larger deals. While I don’t want to make any formal announcements at this time, this initiative could help us capture additional yield while securing deals within our area of expertise. Specifically, we are targeting lower middle market deals in the range of $8 million to $15 million. Typically, we have to share these companies without any economic benefits, so we are looking for ways to structure those assets with other partners to maintain control and possibly involve the management team.
You might not want to say it outright, but that works for me. Thank you for that. Regarding your point about deployments, it sounded like you were suggesting that you could exceed $150 million in September with moderate repayments. The indication from leverage not increasing much, staying around 0.8 to 0.9, implies that you may be operating at the high end of the range this quarter instead of the average, which tends to be on the low end. Am I calculating that correctly?
Yes, I think that's right. I think this quarter, if we say $40 million to $60 million and we've sort of been running at $40 million, you're probably looking at more like 50%. But obviously, we'll make that judgment as the knock on wood as some of these deals look like they're going to close. But yes, it's probably more in the $50 million range this quarter, that's right.
Just curious, you mentioned the strong pace of originations so far this quarter. I'm curious if you could maybe provide a little color in terms of the breakout between that from new versus add-on opportunities?
This quarter feels like it's fairly robust on the new. So the last quarter, it was like, what, 65-35. This quarter, again, the 9/30 numbers look like what, 75% new versus 25% add-ons?
On nonaccrual, it seemed that the nonaccruals decreased quarter-over-quarter, though on the investment rating schedule, it seemed that it was pretty much flat with risk rating of 5 at $3.8 million fair value. Generally, there was a general improvement in the risk rating. So there was a slight convergence towards the 2 to 3 mark. Was there a specific reason towards some of that change? And where are we at with the remaining nonaccrual runoff?
This quarter, we saw Zips come back on accrual, which was a significant position, around $25 million. Additionally, there was a small second lien piece of about $3 million that moved to nonaccrual. Overall, we gained $22 million, even though the numbers remained flat. What was your second question?
Correct. The migration towards the 2 from the top rating of 1, was there any general degradation in the top credit quality portfolio? And was there any idiosyncratic or just thematic themes towards that?
I don't believe so. There may have been a situation where a credit that typically gets upgraded to a rating of 1 when a company is considering an exit did not proceed as expected and has since been downgraded to 2%. However, it was performing well in either scenario, which might be what you are referencing.