Thank you for joining today’s Capital Southwest Third Fiscal Quarter 2018 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP of 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 third fiscal 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. We are pleased to be here with you this morning to announce our quarterly results as well as share our progress on the capitalization front. As shown on slide 5 during the quarter we continued our growth, increasing pre-tax net investment income to $0.27 per share while seeing further portfolio appreciation. NAV increased $0.18 per share to $18.44 per share. During the quarter, we achieved net portfolio of growth of 14% increasing the investment portfolio to $367 million from $322 million at the end of the prior quarter. In addition, our equity five senior loan fund continued its strong performance providing a 13.5% effective yield on our capital in the fund for the quarter. We were also pleased to report that we are now three years into our credit strategy and we continue to have a portfolio with no loans on non-accrual. As mentioned last quarter, our one watch list credit, a first lien loan, does remain on our internal watch list however the company’s performance has improved, the interest rate on our loan has increased and since quarter end the company had paid down the loan by 10%, reducing our loan from $11 million to less than $10 million. While we are most optimistic about the company’s performance, this loan does remain as our only investment with an investment rating of three on our investment rating system. As we have previously stated, we are continually focused on effectively building out the right side of our balance sheet to ensure that we have a funded path to target leverage. During…

Thanks, Bowen. As seen on Slide 17, our investment portfolio produced $9 million in investment income this quarter, with a weighted average yield on all investments of 10.6%. This represents an increase of $510,000 or 6% versus $8.5 million from the previous quarter, mostly attributable to net portfolio growth. We incurred $3.4 million in operating expenses this quarter, excluding tax and interest expense, a decrease of $84,000 or 2.4% versus $3.5 million in the previous quarter. The decrease in operating expenses is attributed to non-recurring expenses in the prior quarter for recruiting and corporate matters. For the quarter, we earned pretax net investment income of $4.3 million or $0.27 per share, compared to $0.25 per share during the prior quarter, and we paid a $0.26 per share quarterly dividend compared to $0.24 per share in the prior quarter. We continue to focus on growing our quarterly dividends in a sustainable manner, demonstrated by our last 12 months dividend coverage of 107%. As seen on Slide 18, during the quarter, our NAV increased by $6 million to $298.5 million or $18.44 per share. The increase in NAV is primarily due to an increase in net realized and unrealized gains during the quarter, generated primarily from appreciation in our equity portfolio. We produced a total annualized return on equity of 13.9% during the quarter. In the fiscal year-to-date, we have increased NAV approximately $13.5 million, producing an 11.3% total return on equity. Last year, we produced a total return on equity of 8.5%. As illustrated on Slide 19, our on-balance sheet investment portfolio mix, excluding capital invested in I-45, was 75% debt and 25% equity at quarter end, and 94% of our total portfolio produced income in the form of either interest or dividends. The weighted average yield on our debt portfolio…

Thanks, Michael. And thank you to everyone for joining us today. I’m extremely proud of what our team has accomplished so far, as we are all working tirelessly to execute our investment strategy and to be good stewards of our shareholders’ capital. Everyone here at Capital Southwest is totally dedicated to our number one goal of the creation of long-term sustainable shareholder value. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

[Operator Instructions] Our first question comes from Mickey Schleien of Ladenburg.

Good morning everyone. One of the reasons I think the equity markets have been spooked the last couple of days is the potential impact of higher interest rates on companies with meaningful leverage, and we look at the last couple of years in the middle market and terms have been pretty borrower friendly and that’s the time when you launch the credit strategy. So I’m interested in understanding what assumptions you’ve made in terms of underwriting to manage this risk of climbing interest rates in terms of the impact on your borrowers?

Yes, Mick, thanks for the question. Yes, we do model going forward increase in LIBOR rates, obviously, absent a recession. And so, we are – we have been looking at that from the beginning. And then we also just – we tend to be, as you can see in the leverage statistics, we tend to be a bit more conservative than some out there on leverage in our portfolio. And so that also translates into companies that have cash flow that can handle increased interest rates.

Thank you for that. And just one housekeeping question, can you tell me when you plan to file your 10-Q?

Later this afternoon.

Okay. That’s it for me. Thanks for your time.

Thanks Mickey.

Thanks Mickey.

Our next question comes from Christopher Testa with National Securities.

Hey, good morning guys. Thank you taking my questions. Just looking at the one Upper Middle Market investment you guys had researched now, it’s second lien, has a 9.5% spread, which is still definitely good in the Upper Middle Market in this environment. I’m wondering if you could provide some color on the leverage on this investment?

Yes, so the leverage was typical second lien leverage and kind of the 5.5% EBITDA basis. This is a credit that we have been in from the – I think, it was maybe our first loan we made back in early 2015. So we followed it for quite a while. And it has performed well from a credit perspective. Probably so, so from an equity perspective. And then the new deal included dividend to the sponsor, which essentially replaced the senior debt that had been paid down over the period of time. So the deal – that 9.5% spread of LIBOR was probably a function of that dividend, if anything else. So as a credit, we followed it for a long time and know this really well, and so we decided to participate in the refinancing.

Okay, great. And just sticking with that topic, Bowen, the Upper Middle Market leverage crept up a bit quarter-over-quarter. Is that primarily because of Redbox repaying?

Exactly. Very well leverage and then the rest of the portfolio is kind of the same and so the average increased.

Got it. And how much – how are you thinking about potentially monetizing Media Recovery? I mean, I know it’s kind of a million-dollar question here, but it’s obviously a good time to be a seller in today’s market. But I know that this is one of your favorite assets and it keeps performing well. And to the extent you do seek to monetize it, is that something that you would only monetize in the whole? Or would you be open to potentially selling them parts of it?

Well, the good news is, it’s performing well. The company has no debt. It’s equity, all equity, we own 98% of the business. So we have options, right? And so, it’s not a business that we’re going to fall in love with and hold 10 years kind of thing. But at the same time, we have the flexibility to make the right decision for our shareholders and our shareholders’ capital. So we have some flexibility to do a number of different things. So that could involve an outright sale, it could involve a partial sale and rollover in the credit. It could involve different things. And so we are evaluating those things. There is, as I said on prior calls, a lot of interest in that asset from potential buyers. We’ve also got a number of new products that have been launched. An investor would want and owner like us would want to see those things season somewhat, so we can get value for those products. And so, you have to really map that, the growth against the fact that you’re absolutely right. The market is white-hot to sell businesses. And so you don’t want to hold it necessarily too long, but you also – I mean, the company’s performing very well. And so, I would just tell you that it’s an asset that we would look to monetize over the coming several quarters to a year or so and at the right time. And so, that's really how that kind of color I can give you at this point. But we do have – with our ownership percentage, the unlevered balance sheet, and the company's growth prospects and cash flow, we have some optionality there.

Okay. That's good. And do you think that there is going to be in any increased challenges to grow in the SLF, given roughly 65% of the syndicated market is now par plus and the leverage multiples just continue to remain stubbornly high. Do you foresee this presents any challenge to potentially growing the I-45 more?

Well, clearly, the hot market, as I said in my comments, I mean, it's a tricky market in the Upper Middle Market. It's radically different than the Lower Middle Market. And so, you need to take small debts and put them in an efficiently levered vehicle like a senior loan fund so you can get equity return – ROE returns to our shareholders on it. But I think, as I've I said before, our senior loan fund is kind of the right size. We're not itching to really grow it from an absolute dollars committed to the fund. So it's a nice vehicle that's making nice returns for us, making nice returns for Main Street, that relationship is going very well. And so there will be quarters where, you know what, originations offset prepayments. And so the growth stagnates, maybe even contracts. But we're not really looking to greatly increase the size of the senior loan fund, certainly not in this Upper Middle Market environment.

Okay, great. And last one for me, and I'll hop back in the queue. Michael, just on the credit facility, could you provide some detail on what the advance rate increased to? And what would trigger a step down to L plus 2.75% from $300 million?

Sure. So the first lien advanced rates went up by 5% in the Upper and the Lower Middle markets. And the step down to L plus 2.75% is when we hit $325 million in NAV.

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

Thanks Chris.

Thank you.

Our next question comes from Greg Mason with Ares Management.

Great. Good morning guys. I wanted to talk a little bit about the operating leverage in the business. Obviously, putting to work $145 million to get your target leverage, the math on income is pretty straightforward and the interest expense. But given that you guys are internally managed, just looking to see as you build out your portfolio and get your target leverage, are there any expectations of increased operating expenses, higher cash compensation, other G&A? Just how do we think about the operating leverage in the business?

Yes, I think – thanks for the question Greg. Really where we are right now, we have been between $3.4 million to $3.5 million in operating expenses over the last two or five quarters. I tell you, things going to be right around the same levels. This quarter, you saw an uptick in cash comp but our G&A came down. Going forward, our spinoff comp is going to be coming out of the – our income statement as well. So we're right around 3% of our target operating leverage right now, going down to hopefully, 2.5% and eventually 2%. So I think Bowen has said in previous calls, we just hired two additional professionals on the previous quarter. You see that in the cash comp. We're pretty much fully staffed at this point. So you shouldn't see a whole lot of additional G&A or cash comp.

All right, great. Thanks guys.

And I'm not showing any further questions at this time. I'll turn the call back over to Bowen.

Thank you, all. Thanks, everybody, for joining the call today. We appreciate your time, and we look forward to giving you further updates as we move forward. Have a great week.