Capital Southwest, an internally managed business development company focused on providing financing to support the acquisition and growth of middle market businesses, reported a total investment portfolio of $587.2 million in fiscal Q1/21, including a credit portfolio of $487.2 million.
Of Capital Souwthest’s credit portfolio in the quarter, 90% was made up of first lien senior secured debt. Capital Southwest also reported $28.8 million in new committed credit investments, weighted average yield on debt investments of 10.1% and no new credit investments placed on nonaccrual during the quarter. The company further reported three upper middle market first lien senior secured debt investments currently on nonaccrual with a fair value of $11.3 million, representing 1.9% of the total investment portfolio.
The remainder of Capital Southwest’s total investment portfolio was made up of a $43.2 million equity portfolio, excluding an investment in the I-45 senior loan fund, which made up the remaining $56.8 million at fair value.
Capital Southwest reported $1.3 million in new committed equity co-investments in its equity portfolio. The company also reported the 1-45 senior loan fund portfolio was $172.6 million and consists of 42 issues, including 96% first lien debt and 4% second lien debt. In addition, Capital Southwest said there was $107 million of debt outstanding at the I-45 senior loan fund as of June 30, 2020 and the I-45 senior loan fund’s fund leverage was 1.51x debt to equity at fair value at quarter end. The I-45 senior loan fund paid a $1.8 million quarterly dividend to Capital Southwest, an annualized yield of 12.5%
Capital Southwest also reported pre-tax net investment income of $7.2 million (or $0.40 per weighted average diluted share) and $2.1 million in net realized and unrealized portfolio appreciation, as well as $4.7 million of net appreciation related to the upper middle market portfolio, including the I-45 senior loan fund, and $2.6 million of net depreciation related to the lower middle market portfolio.
In terms of balance sheet, Capital Southwest reported cash and cash equivalents of $15 million, total net assets of $277.9 million and net asset value per share of $14.95.
“This quarter we started to see some stabilization in both the upper and lower middle market portfolios,” Bowen Diehl, president and CEO of Capital Southwest, said. “We saw very few draws on revolver commitments to our portfolio companies, several repayments of previous revolver draws associated with the shelter in place directives, limited amendments and waivers in the portfolio and recorded net appreciation of $2.1 million this quarter. From an investment rating perspective, our portfolio experienced two upgrades and zero downgrades, as well as no new non-accruing loans recorded during the quarter. We recently announced a $0.51 per share dividend for the quarter ended September 30, 2020, which was flat from the prior quarter. We continued to be active in the capital markets, having raised $5.7 million in equity capital under our existing at-the-market program in June. We were also able to significantly broaden our sources of capital and strengthen our balance sheet over the long term, having received a ‘green light’ letter from the U.S. Small Business Administration. We are hopeful to have our formal license application reviewed and approved by the end of this calendar year, which will allow us to access $175 million in cost effective debt capital to deploy in our lower middle market strategy. This is clearly a major milestone for Capital Southwest and one that we are very proud to have been able to accomplish.”
Fiscal Q1/21 Investment Activities
During the quarter ended June 30, 2020, Capital Southwest originated investments in two new portfolio companies and five follow-on investments in existing portfolio companies, all totaling $30 million in capital commitments. New portfolio company investment transactions that occurred during the quarter included:
Central Medical Supply
- $7.5 million first lien senior secured debt
- $1.5 million revolving loan
- $1.5 million delayed draw capex term loan
- $0.9 million preferred equity
Central Medical Supply Group is a provider of outsourced equipment management services for the hospice market and other healthcare providers.
Coastal Television Broadcasting Holdings
- $8.9 million first lien senior secured debt
- $0.5 million revolving loan
Coastal Television Broadcasting Company is a television broadcasting company that operates broadcasting stations in duopoly or triopoly small- to mid-size markets, primarily in Alaska and Wyoming.
Fiscal Q1/21 Operating Results
For the quarter ended June 30, 2020, Capital Southwest reported total investment income of $15.2 million compared with $15 million in the prior quarter. The increase in investment income was primarily attributable to amendment fees received from portfolio companies, partially offset by a decrease in dividend income from the I-45 senior loan fund.
For the quarter ended June 30, 2020, total operating expenses (excluding interest expense) were $3.7 million compared with $3.5 million in the prior quarter. The increase in expenses was primarily due to an increase in the cash compensation accrual in the current quarter.
For the quarter ended June 30, 2020, interest expense was $4.3 million compared with $4.2 million in the prior quarter. The increase was due to an increase in the average debt outstanding on Capital Southwest’s senior secured revolving credit facility offset by a drop in LIBOR.
For the quarter ended June 30, 2020, total pre-tax net investment income was $7.2 million compared with $7.4 million in the prior quarter.
For the quarter ended June 30, 2020, tax expense remained flat at $0.4 million.
During the quarter ended June 30, 2020, Capital Southwest recorded total net realized and unrealized gains on investments of $2.1 million compared with total net realized and unrealized losses on investments of $31.9 million in the prior quarter. For the quarter ended June 30, 2020, this included total net realized losses on investments of $5.5 million and net unrealized appreciation on investments of $7.6 million, of which $5.4 million was the reversal of net unrealized depreciation recognized in prior periods due to realized losses noted above. The net increase in net assets resulting from operations was $8.9 million for the quarter compared with a net decrease of $25 million in the prior quarter.
The company’s NAV at June 30, 2020 was $14.95 per share compared with a mark of $15.13 at March 31, 2020. The decrease in NAV per share from the prior quarter is due to the issuance of restricted stock awards.
Liquidity and Capital Resources
At June 30, 2020, Capital Southwest had approximately $15 million in unrestricted cash and money market balances, $182 million of total debt outstanding on its credit facility, $75.9 million (net of unamortized debt issuance costs) of its December 2022 notes outstanding and $73.6 million (net of unamortized debt issuance costs) of its October 2024 notes outstanding. As of June 30, 2020, Capital Southwest had $139.6 million in available borrowings under its credit facility. The debt to equity ratio at the end of the quarter was 1.19 to 1.
Additionally, the I-45 senior loan fund has total commitments outstanding of $150 million from a group of four bank lenders in its Deutsche Bank-led credit facility, which is scheduled to mature in July 2022. As of June 30, 2020, the I-45 senior loan fund had $107 million in borrowings outstanding under its credit facility.