Thank you for joining today’s Capital Southwest First Fiscal Quarter 2018 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP, Finance. I will now turn the call over to Chris Rehberger.

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.

Thanks, Chris and thanks to everyone for joining us for our first quarter 2018 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 year, we continue to concentrate on leveraging the robust middle-market lending platform we have built to carefully build an investment portfolio that is positioned appropriately for the late innings of the economic cycle. As you likely recall, we re-launched Capital Southwest in January 2015 as a middle-market lending firm, beginning a transformation of our company from an all equity-focused BDC paying a negligible dividend that was trading at a significant discount to NAV to a credit focused BDC paying a market dividend that as an internally managed BDC where the interest of management and the shareholders are closely aligned, should trade at a premium to NAV. Each quarter, as seen on Slide 6, we continue to make progress in this evolution, increasing both our investment portfolio and investment income, which has driven our increased dividends, all while growing NAV per share. As of the end of the quarter, Capital Southwest dividend had grown to an annualized yield of over 5%. Over the past 4 quarters, Capital Southwest has paid $0.94 per share in dividends and increased NAV per share from $17.39 to $17.96. Today, we have significant availability under our credit facilities, balance sheet cash and a regulatory leverage ratio of only 0.1 to 1, giving us the ability to continue to build our portfolio value and earning potential as we move to a more efficiently levered and fully invested state. I am very pleased with the team we have built and their performance to-date and I am more excited than ever about the potential of this organization. Our investment…

Thanks Bowen. As seen on Slides 15 and 16, our investment portfolio produced $7.7 million in investment income this quarter, with a weighted average yield on all investments of 10.4%. Investment income was flat to last quarter’s figure, attributable to an increase in recurring interest income of $400,000, offset by a decrease in prepayment fees from prior quarter exits of $400,000. We incurred $3.4 million in operating expenses, excluding tax and interest expense this quarter, a decrease of $200,000 or 6% versus $3.6 million in the previous quarter. The decrease in operating expenses was due primarily to decreases in incentive compensation and legal fees incurred in the prior quarter. For the quarter, we earned pretax net investment income of $3.6 million or $0.22 per share compared to $0.22 per share during the prior quarter. Recurring interest income grew $0.03 per share this quarter, offset by $0.03 per share less in prepayment fees on exits. We paid a $0.21 per share quarterly dividend. We continue to focus on growing our quarterly dividends in a sustainable manner, illustrated by our last 12 months dividend coverage of 112%. As shown on Slide 17, during the quarter, our NAV increased by $2.4 million to $287.4 million or $17.96 per share. The increase in NAV from the prior quarter is primarily due to an increase in net realized and unrealized gains in the current quarter. Over the past 12 months, we have increased NAV over $14 million while producing a 9.4% return on equity for our shareholders. As illustrated on Slide 18, our on balance sheet investment portfolio mix, excluding capital invested in I-45, was 76% debt and 24% equity at quarter end and 95% of our total portfolio earned a cash yield. The weighted average yield on our debt portfolio was 10.5% for the quarter, up from 10.3% the previous quarter. At the end of the quarter, there were no assets on non-accrual. At quarter end, we had $12 million in balance sheet cash, $75 million available on our balance sheet credit facility and $33 million in additional capacity on the I-45 credit facility. At quarter end, we had a leverage ratio of 0.1 to 1, leaving us substantial running room to increase our balance sheet leverage and drive dividend growth for our shareholders. With that in mind, we are currently working with several banks to further expand our borrowing capacity within our balance sheet credit facility and look forward to communicating our progress in the near future. I will now hand the call back to Bowen for some final comments.

Thanks, Michael and thank you to our shareholders for giving us the opportunity to be stewards of your capital, a responsibility we take very seriously. We will 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 now like to turn the call over to the operator to open up the lines for Q&A.

[Operator Instructions] Our first question comes from Christopher Testa with National Securities.

Hi, good morning guys. Thanks for taking my questions. Just with the overall weighted average yield on the lower middle market obviously being very resilient and somewhat insulated from the broader market trends, just curious how much of the opportunities you are seeing are still good for the JV, I know it grew this quarter, but maybe not as fast – as that fast of a pace, so just wondering if you are passing on a lot more opportunities in the upper middle market, if you are seeing any kind of broadly syndicated type characteristics, such as covenant light kind of creeping into that sector there?

Yes. Thanks Chris. Thanks for the question. Yes definitely, the upper middle market has been harder to find value. The companies that we like do have tighter yields than they would have had 1 year, 1.5 years ago. The leverage structure in I-45 works for the tighter yields to still generate ROEs to us fit well within our business plan. So we have been able to find deals, as you can see. The originations in I-45 were obviously – the velocity is also very high. We have a lot of prepayments as well. So the velocity of those dollars has certainly been high. But we have – most of the deals that we see in the market are covenant light. We see a lot of dividend recaps as well. We have – we do have some covenant light deals in the I-45 portfolio. I would say that if it’s covenant light and, certainly if it’s dividend recap, we are much more sensitive as to the quality of the business model and sustainability of that business through the cycles. So it’s – the whole tightening of the upper middle market just makes our job trickier and more difficult. But the growth in I-45, we are pretty happy with the growth in I-45. I think it would have been – obviously, it would have been – it would have grown faster if the prepayments hadn’t been so pronounced, but we are pretty pleased with the kind of steady Eddie growth that we have seen.

Got it, okay, that’s good color. And just during the quarter, how much were there in prepayment fees and accelerated OID?

Do you want to talk, this quarter, so…

We had $70,000 of prepayment fees this period and we had – I think last year, we had $497,000.

Got it, okay. And just looking at the right hand side of the balance sheet, I know you have the commentary on increasing the credit facility, I know the SBA has been in disarray, to put it politely, should we expect maybe any fixed rate issuance, maybe a baby bond or something as you continue to draw down the cash?

We said that we are going to build out the revolver for the time being, probably look to take out some of this debt in 2018. And then obviously, as our – as we see ourselves price to book a little above NAV, hopefully we see an equity offering as well.

Yes. I mean from my perspective Chris, I mean there is value to our shareholders to terming out our liability structure, right. So the baby bond market is interesting. We want to get more fully borrowed on our credit facilities ideally. Since quarter end, we have closed three new transactions. So we are borrowed almost $60 million in the credit facility now. So we are progressing nicely there. But ultimately obviously, if we do a baby bond this year, we are going to pay down the credit facility and then re-borrow. So the baby bond market is something we are looking at very closely, because again, there is value to our shareholders to terming out that liability structure. And then also as we move to – we do have in our sights the desire to be investment grade at some point. And so one – and we have met with rating agencies to start to have that discussion so that we have – are crisp in our mind of what the game plan is to get there. And one of the items, as you know, that they like to see is the diversity amongst capital sources. And so that’s an additional advantage and value, if we – if you will, that we get out of tapping the baby bond market, so.

Got it. Now, it makes sense. And just curious, for the NAV increase during the quarter, how much of the increase was due to technicals of credit spreads remaining tight versus specific markups that might have been more pronounced for some companies?

Yes. So it was – the up-tick was primarily in the equity portfolio. So it wasn’t the credit market primarily. We had some – I think we had net appreciation in the debt portfolio. But as you would expect, as the market has been tight for a few quarters now, that quarter-over-quarter increase in write-ups on, primarily quoted loans certainly flattens out. But on the equity portfolio, we have had a couple of our equity portfolios grow and do well and so it’s – and that’s what drove it.

Yes. It was two-third lower middle market and about a third upper middle market.

Got it. And on the equity position of unrealized gains, was a lot that driven by the portfolio companies, just sort of the regular amortization and de-leveraging of the debt ahead of that equity?

Well, it’s – it primarily was driven by EBITDA growth in the portfolio. And specifically, as you will see in our Q when it comes out, we have one of our oilfield service companies that’s been turning around dramatically and so you will see some appreciation on that company.

Got it. Those were all the questions for me. Thanks for taking my questions.

Thanks Chris.

Our next question comes from Dan Nicholas with Baird.

Great. Thanks guys. Good morning. I think you all noted about the 55%, 45% mix now as the portfolio sits between the lower middle market and the upper middle market, I was just hoping you could kind of remind us or give us your thoughts on where you might want that mix to shake out as the balance sheet continues to ramp and as we look a year out or so, if the balance sheet is more fully levered, how do you think about that mix looking if that’s a fair question?

Yes. No, Dan, thanks for the question. That’s a good question. I kind of start with kind of why we are in both markets, I think the lower middle market, we view that as our core market and that is a market that we will be focused on throughout the cycle. We think there is a lot of consistent value to be found in that market. The companies that we see and we partner with private equity firms, if you think – any time you do a deal, you kind of list your thesis, right, kind of what the private equity firm and you are going to do with the business once it’s bought. And if you think about what those items are on a lower middle market company, they are typically much more tangible. You can get your finger – your hands around them. A lot of those companies are less sophisticated. So the basic low hanging fruit, blocking and tackling that can be done in those companies generally is pretty tangible versus the upper middle market, where the companies are much more established. And so the things you might do to increase market share or what have you tend to be less tangible. So over long-term, we think that lower middle market is the – our core market, where we can find the most value for our shareholders over time. The downs I think we have talked about before the negative on the lower middle market is the deals take a long time to close. When you look at a transaction – from when you first hear about a company to when you actually fund the deal, it could be 90, 120 days. And so it’s a little bit – as a public company that has tons of excess liquidity, less liquidity, more liquidity, you tend to – having the upper middle market, which is a more liquid market to invest those dollars in, to deal with the clumsiness of your core market is helpful from a strategic perspective. So, we look at the lower middle market first. I think if you looked at – just asked me about my expectations, I think that it’s probably 60% to 70% lower middle market – probably closer to 70% lower middle market and 30% upper middle market. So as we move forward – I mean, I will tell you that our deal flow in the lower middle market is pretty solid at the moment and it has been for a couple of quarters now, and we are finding some pretty interesting opportunities. And again, it’s somewhat insulated to the frothiness that we are seeing in the upper middle market and that everybody reads in the paper. And so it’s still competitive, that type of thing, but we think it’s definitely our core market over many, many years to really find value for our shareholders. So, I think the mix, 70-30ish is probably about right.

Okay, great. That’s helpful. And if we look at the lower middle market investments for the quarter, I think three new ones. If we think about the sourcing of those or how they came to the portfolio, were those all sponsored or non-sponsored? How did the mix shake out for those?

So, they were – I am just looking at them on the sheet here. They were – two of them were sponsored and one of them was a sponsor/family office.

Got it. Okay, that’s all for me. Thanks, guys.

And I am not showing any further questions at this time. I’d like to turn the conference back over to our host.

Thanks, everyone. We really appreciate you getting on the call with us today and we look forward to continuing to give you updates on a quarterly basis. Thanks a lot.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.