Earnings Labs

Capital Southwest Corporation (CSWC)

Q2 2017 Earnings Call· Tue, Nov 8, 2016

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Transcript

Operator

Operator

Thank you for joining today's Capital Southwest Second Fiscal Quarter Earnings Call. Participating on the call today is Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP of Finance. I will now turn the call over to Chris Rehberger.

Chris Rehberger

Management

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 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 Diehl.

Bowen Diehl

Chief Executive Officer

Thanks, Chris. And thanks, everyone for joining us for our second quarter fiscal year 2017 earnings call. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com. This quarter, we continued executing on our strategy of building a premier middle-market lending firm. As seen on slide six, the evolution of our investment portfolio continues as 75% of our investible assets are now in securities generating recurring cash income compared to 1% when we started the transformation in mid-2014. Our two-pronged strategy as seen on slide seven with investing capability in both the upper middle-market and lower middle-market continues to play out as designed, allowing us two markets in which to evaluate investments for our portfolio. We grew our investment portfolio by 35% during the quarter to $238 million from a $176 million at the end of the prior quarter, including our investment I-45 senior loan fund. We also experienced $5.6 million in an unrealized depreciation in the portfolio during the quarter, driven by strong financial performance in our equity investments, as well as appreciation in our supplemental market loan portfolio at I-45 and at Capital Southwest. During the quarter, we experienced robust origination volume in both the upper and lower middle markets as seen on slide 10. We closed on $55 million in nine loans during the quarter to six new and three existing portfolio companies and $8 million in one lower middle market portfolio company where closing slipped past quarter end. All but one of the loans we funded this quarter were first-lien senior secured and together they had a weighted average yield to maturity of approximately 10%. We continue to close on approximately 2% of the opportunities we review, as we remain vigilant in our…

Michael Sarner

CFO

Thanks. As Bowen mentioned, during the quarter, we finalized and closed the company's first on balance sheet revolving credit facility. The facility is with our preeminent lender to the middle market space in ING capital and we sized that close at a $100 million with an accordion up to $150. We are extremely with the bank participation and the syndicate, which includes five banks in total. The facility has a four-year maturity and is priced at LIBOR plus 325. This facility has been structure to grow with our business in regards to both upper and lower middle market origination. This credit facility will provide capitalization flexibly, as we execute our business plan. As of the end of the quarter, we have yet to draw on the facility. Additionally, as Bowen mentioned during the quarter, we increased our commitments to the Deutsche Bank-led credit facility within the I-45 senior loan fund, increasing commitments from $100 million to $145 million. As of September 30th, we had $88 million outstanding on the credit facility and are currently in the process of raising additional commitments to support the funds growth. The facility includes an accordion feature allowing for up to two times debt to equity at a cost of funding of LIBOR plus 250. For the quarter, our NAV increased by $5.6 million to $279 million, which was mainly due to net portfolio appreciation. At quarter end, we had $58 million in cash available for investment activity and no debt outstanding. As of September, 30 2016, excluding our equity investment in I-45, our investment portfolio mix was 73% debt and 27% equity. Our current mix of debt investment assets at September 30, 2016, was 63% first-lien, 26% second-lien, and 11% secured subordinated debt. The weighted average yield on our debt investments for the quarter…

Bowen Diehl

Chief Executive Officer

Thanks, Michael and thank you to our shareholders for giving us the opportunity to be stewards of your capital, a responsibility that we take very seriously. We continue to thoughtfully and carefully execute our investment strategy with the creation of long-term sustainable shareholder value as our most important goal. This concludes our prepared remarks. I would like to turn the call over to the operator to open up the lines for Q&A.

Q -

Management

Operator

Operator

[Operator Instructions]. And I am not showing any questions at this time. And ladies and gentlemen, so this concludes today’s presentation. You may now disconnect and have a wonderful day.