Capital Southwest Corporation

Thank you for joining today's Capital Southwest third quarter fiscal year 2024 earnings call. Participating on the call today are Bowen Deal, CEO, Michael Sarner, CFO, and Chris Reberger, VP Finance. I will now turn the call over to Chris Reberger.

Thank you. I'd 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 Capital Southwest'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 off to our President and Chief Executive Officer, Bowen Neal.

Thanks, Chris. And thank you to everyone for joining us for our third quarter fiscal year 2024 earnings call. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our investment strategy as stewards of your capital. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found in the investor relations section of our website at www.capitalsouthwest.com. You will also find our quarterly earnings press release issued last evening on our website. We'll begin on slide six of the earnings presentation, where we have summarized some of the key performance highlights for the quarter. During the quarter, we generated pre-tax net investment income of 72 cents per share, which represented 20 percent growth over the 60 cents per share generated a year ago in the December quarter. The 72 cents per share more than covered both our regular dividend of 57 cents per share and our supplemental dividend of 6 cents per share paid during the quarter. Portfolio earnings continue to be strong as of the end of the quarter. As of the end of the quarter, we estimate that our undistributable taxable income was $0.52 per share. Additionally, net asset value per share increased 1.9% for the quarter to $16.77 per share from the $16.46 per share as of the end of the prior quarter. This increase represented the fourth consecutive quarterly NAD per share increase for Capital Southwest. We are also pleased to announce today that our Board of Directors has declared a regular dividend of $0.57 per share for the March 24 quarter. This represents 7.5% growth over the $0.53 per share paid a year ago in the March quarter. In addition, due to the excess earnings being generated by our floating debt investment portfolio in this high interest rate environment, Our board has again declared a supplemental dividend of 6 cents per share for the March 24 quarter, bringing total dividends declared for the March 24 quarter to 63 cents per share, which in total represents 9% growth over total dividends paid out in the year-ago quarter. While future dividend declarations are at the discretion of our board of directors, it is our intent and expectation that Capital Southwest will continue to distribute quarterly supplemental dividends for the foreseeable future, while base rates are above historical averages, and we have meaningful UTI, which is generated by earnings in excess of our dividends and realized gains from our equity co-investment portfolio. During the quarter, deal quality and activity in the lower middle market continued at a healthy pace, and we continued to be able to source attractive investment opportunities. Private equity firms and business owners continued to transact while non-bank lenders like Capital Southwest continue to provide more certainty to closing than traditional bank financing structures. That said, competition from other non-bank lenders for quality lower middle market opportunities has largely returned to the more normal level seen 12 to 18 months ago, resulting in tighter pricing spreads as well as slightly higher leverage and loan-to-value in the closing capital structure. In the larger end of the lower middle market, which is typically where we exit our investments, M&A activity picked up during the quarter as well, resulting in increased prepayments across our portfolio. Portfolio growth during the quarter was driven by 116.3 million in new commitments, consisting of 70.7 million in commitments to four new portfolio companies and 45.6 million in commitments to 12 existing portfolio companies. This was offset by $79 million in proceeds from five debt prepayments and one equity exit during the quarter, generating a weighted average IRR of 12.2%. On the capitalization front, we are pleased to announce that during the quarter, we successfully upsized our corporate revolving credit facility to $460 million from $435 million with the addition of one new lender to the bank syndicate. We also raised $66.5 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average price of $21.92 per share, or 133% of the prevailing NAB per share. In addition, subsequent to quarter end, the I-45 credit facility was repaid in full, and we are currently in the process of winding down the I-45 Senior Loan Fund. As most of you know, I-45 was initially created to invest in small pieces of large syndicated loans. Though I-45 has been a success through the years, the market for syndicated loans has evolved, and we no longer view this market as a favorable place to generate attractive risk-adjusted returns for our shareholders. Michael will discuss the timing and mechanics of the dissolution of I-45 in further detail in a moment. We have remained diligent in ensuring we have strong balance sheet liquidity while also funding a meaningful portion of our investment activity with accretive equity issuances. We continue to maintain a conservative mindset to both balance sheet liquidity and BDC leverage, managing the company with a full economic cycle mentality. While this starts with our underwriting of new investment opportunities, it also applies to how we manage the BDC's capitalization and liquidity. Managing leverage to the lower end of our target range while ensuring strong balance sheet liquidity affords us the ability to invest in new platform companies, even in periods of volatile capital markets when risk-adjusted returns can be particularly attractive. Additionally, it allows us to support our portfolio companies while also opportunistically repurchasing our stock if it were to trade meaningfully below NAV. On slide seven and eight, we illustrate our continued track record of producing strong dividend growth, consistent dividend coverage, and solid value creation since the launch of our credit strategy back in January 2015. Since that time, we have increased our quarterly regular dividend 28 times and have never cut the regular dividend, all while maintaining strong coverage of our regular dividend with pre-tax net investment income. Additionally, over the same period, we have paid or declared 23 special or supplemental dividends totaling $3.89 per share, including the $0.06 per share the Board has declared for the March 24 quarter, all generated from excess earnings and realized gains from our investment portfolio. We believe our track record of thoughtfully growing our dividend, a consistently solid performance in our portfolio, as well as our company's sustained access to multiple capital sources, has demonstrated the strength of our investment and capitalization management strategies, as well as the absolute alignment of all our decisions with the interests of our shareholders. Starting with slide nine, we lay out the core tenets of our investment strategy. Our core strategy is lending and investing in the low-orbital market, the vast majority of which is in first lien senior secured loans to companies backed by private equity firms In fact, approximately 92% 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 new junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity carry pursued with 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 62 investments with a total fair value of $129.1 million, which was marked at 143% of cost, representing $38.5 million in embedded unrealized appreciation, or $0.90 per share. Our equity portfolio, which represented approximately 9% of our total portfolio at fair value as of the end of the quarter, continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, which will come in the form of NAV per share growth and supplemental dividends over time. As illustrated on slide 10, our on-balance sheet credit portfolio ended the quarter at $1.2 billion, representing year-over-year growth of 19% from $990 million as of the December 2022 quarter. 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, 97% of our credit portfolio was first lien senior secured. The weighted average credit exposure per company remains granular at 1.2%. 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. We fully expect that this metric will continue to improve as our asset base grows. On slide 11, we detail the $116.3 million of capital invested in and committed to portfolio companies during the quarter. Capital committed this quarter included $66.7 million in first lien senior secured debt committed to four new portfolio companies, in which we also invested a total of $4 million in equity. We also committed a total of $43.5 million in first lien senior secured debt and $2.1 million in equity to 12 existing portfolio companies. We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital provider, as evidenced by the broad array of relationships across the country from which our team is sourcing quality opportunities, as well as the consistency of our origination activity In fact, deal activity post-quarter end has continued at a healthy pace, and we expect solid net portfolio growth in the coming quarter. Starting with slide 12, as I mentioned earlier, increased M&A and refinancing activity during the quarter resulted in greater than average prepayment activity. We continued our track record of strong returns on our exits with five debt prepayments and one equity exit during the quarter. In total, these exits generated approximately $79 million in total proceeds, generating a weighted average IRR of 12.2%. Since the launch of our credit strategy nine years ago, we have realized 73 portfolio company exits, representing $885 million in proceeds that have generated a cumulative weighted average IRR of 13.9%. On slide 13, we detail some key steps for our unbalanced sheet portfolio as of the end of the quarter, excluding our I-45 joint venture. As of the end of the quarter, the total portfolio at fair value was weighted 87.5% to first-lane senior secured debt, 2.6% to second-lane senior secured debt, 0.1% to subordinated debt, and 9.8% to equity co-investments. The credit portfolio had a weighted average yield of 13.5%, and weighted average leverage through our security of 3.6 times. Cash flow coverage of debt obligations across our portfolio continued to be strong, despite the high base rate environment, with weighted average interest coverage of three times and weighted average fixed charge coverage of 2.5 times. As seen on slide 14, our total investment portfolio continues to be well diversified across industries with an asset mix which provides strong security for our shareholders' capital. Turning to slide 15, we have laid out the rating migration within our portfolio during the quarter. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four-point scale, with one being the highest rating and four being the lowest rating. We feel very good about the performance of our portfolio with 95% of the portfolio at fair value rated in one of the top two categories, a one or a two. In fact, the portfolio generated weighted average revenue growth of 3% and weighted average EBITDA growth of 7% during the quarter. I will now hand the call over to Michael to review more specifics of our financial performance for the quarter.