Capital Southwest NASDAQ: CSWC reported second-quarter fiscal 2027 pre-tax net investment income of $37.2 million, or $0.58 per share, supported by higher cash interest income and fee income as the business development company expanded its investment portfolio.
The company declared a regular dividend of $0.58 per share for the December quarter, payable monthly across October, November and December 2026, along with a supplemental dividend of $0.06 per share payable in December. Total dividends declared for the third fiscal quarter were $0.64 per share.
Chief Executive Officer Michael Sarner said the company’s undistributed taxable income balance rose to $0.92 per share and that management remains confident it can cover both its regular and supplemental dividends through portfolio earnings.
Record Originations Drive Portfolio Growth
Capital Southwest committed a record $391 million across 14 new portfolio companies and 16 existing portfolio companies during the September quarter. New investments included $314 million of first-lien senior secured debt and $13 million of equity across new portfolio companies, while investments in existing companies included $63 million of first-lien debt and $1 million of equity.
The company also generated $74 million of proceeds from portfolio exits at a weighted average internal rate of return of 14.5%. Its credit portfolio ended the quarter at $2.2 billion, up 28% from $1.7 billion a year earlier.
Chief Investment Officer Josh Weinstein said all new portfolio-company debt originations were first-lien senior secured loans. At quarter-end, 99% of the credit portfolio was first-lien senior secured, and the weighted average exposure per company was 0.8%.
New deals completed during the quarter had weighted average senior leverage of 3.4 times debt to EBITDA and a weighted average loan-to-value ratio of 33%, according to Sarner. The overall credit portfolio had weighted average leverage through Capital Southwest’s security of 3.7 times EBITDA and a weighted average yield of 10.9%.
The company’s portfolio comprised 153 companies and was allocated among 89.4% first-lien senior secured debt, 1% second-lien senior secured debt, 8% equity co-investments and 1.5% joint ventures. About 92% of the credit portfolio was backed by private-equity sponsors.
Capital Southwest said 89% of its portfolio at fair value was rated either one or two on its five-point internal investment-rating scale. Cash-flow coverage rose to 3.5 times from a low of 2.9 times during the prior period of elevated base rates.
Income Rises, While Non-Accruals Increase Modestly
Total investment income increased to $67.2 million from $61 million in the preceding quarter. Chief Financial Officer Chris Rehberger said the increase primarily reflected a $4.6 million rise in cash interest income and a $1 million increase in fees and other income, including arranger fees tied to greater origination volumes.
Payment-in-kind income represented 7.4% of total investment income, down from 8% in the prior quarter. General and administrative expense increased by about $400,000, entirely due to non-recurring proxy solicitation expenses related to a shareholder vote on authorized shares, Rehberger said.
Loans on non-accrual represented 1.4% of the investment portfolio at fair value at quarter-end, compared with 1.1% in the prior quarter. During the question-and-answer session, Sarner said three companies on the watch list accounted for roughly $10 million of the quarter’s approximately $15 million of unrealized depreciation on debt investments.
- A car-wash business that emerged from bankruptcy but continues to face cyclicality tied to inflation and what Sarner described as an over-leveraged balance sheet.
- A roofing business pursuing a roll-up strategy that experienced execution issues.
- A post-production CGI company for the entertainment industry that has been on non-accrual and was affected by elevated EBITDA following COVID-related conditions.
Weinstein said weakness in the car-wash investment also reflected an overbuild of car-wash centers in the company’s specific geographies. For roofing investments, he cited poor storm years and execution issues with roll-up strategies, rather than broad consumer-spending pressure alone.
Capital Structure Changes Extend Maturity Profile
Capital Southwest amended, extended and upsized its corporate credit facility during the quarter. Total commitments rose to $595 million from $510 million, while the applicable borrowing margin declined to 2% from 2.15%. The company also removed an incremental 10-to-15-basis-point SOFR adjustment and extended the facility’s maturity to September 2031 from August 2028.
The company raised $350 million of unsecured notes carrying a 6.75% fixed interest rate and maturing in September 2031. It also entered into its first interest-rate hedge, effectively swapping the notes to SOFR plus a 2.16% spread. Following the transactions, Capital Southwest has no debt maturities until 2029.
Capital Southwest raised about $67 million in gross equity proceeds through its at-the-market program at a weighted average price of $24.50 per share, or 148% of prevailing net asset value per share. NAV per share increased to $16.64 from $16.61 in the prior quarter, driven mainly by ATM-program accretion and partially offset by realized and unrealized portfolio depreciation.
Liquidity totaled approximately $647 million in cash and undrawn commitments across two credit facilities, representing more than 1.6 times coverage of $394 million in unfunded portfolio commitments. Regulatory leverage ended the quarter at one-to-one debt-to-equity, and management said it intends to operate within a target range of 0.9 to 1 times regulatory leverage.
Joint Ventures and Hiring Support Growth Plans
The company expanded its investment team to 46 employees from 27 over the past 18 months, increasing sourcing and underwriting capacity. Capital Southwest screened about 1,600 opportunities over the last 12 months, compared with 1,200 in fiscal 2026 and 1,000 in fiscal 2025, while maintaining a close rate below 2%.
Sarner said management expects quarterly originations to move closer to $250 million from a historical level of roughly $150 million, although the company expects a larger repayment cycle during the December quarter. Management cited two expected repayments of roughly $30 million to $40 million and anticipated a third repayment of a similar size late in the quarter.
Capital Southwest also formed Desert Star, its second joint venture with Trinity Capital, committing $25 million of equity to access technology lending opportunities. Sarner said the investment is expected to be funded over roughly three years and is not intended to represent a broad shift in the company’s strategy toward technology and software lending.
Desert Star will invest only in debt, management said, with Capital Southwest and Trinity holding equal voting rights. The company expects returns of roughly 14% to 16% once the facility is fully ramped. The venture will focus on cash-flow-positive, direct-originated software and technology loans, generally to businesses with EBITDA between $5 million and $25 million, Weinstein said.
Separately, the CapTrin Partners joint venture held about $127 million of first-lien securities across 14 portfolio companies at quarter-end. Management expects the joint venture to continue originating low-leverage investments and said it targets a mid-teens return as manager of the structure.
About Capital Southwest (NASDAQ:CSWC)
Capital Southwest Corporation NASDAQ: CSWC is a business development company that provides financing to middle-market and lower-middle-market businesses in the United States. The company primarily invests in privately held companies that may require capital to support growth, acquisitions, recapitalizations, ownership transitions, or other strategic initiatives.
Its investment portfolio generally consists of senior secured loans, including first-lien and second-lien debt, as well as subordinated debt and equity investments.
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