Capital Southwest Corporation
Q1 2017 Earnings Call Transcript

Published: 10 Aug 2016

[Operator:]

Thank you for joining today's Capital Southwest First 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:]

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:]

Thanks, Chris. And thanks to everyone for joining us for our first quarter fiscal year 2017 earnings call. Throughout my prepared remarks, I will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com. During the quarter and during the weeks subsequent to quarter end, we have continued executing on the investment strategy we set forth last year. Our two-pronged strategy as seen on Slide 6 with investing capability in both the upper-middle market and lower-middle market is playing out as planned. During the quarter, we saw spreads in the upper-middle market tighten significantly. We have seen leverage levels on average increase, and we have seen the re-emergence of covenant life deals. We remain vigilant in our credit discipline, passing on deals where we believe the leverage levels are not appropriate for business model that have proven in the past to be cyclical or volatile for various other reasons. With that said, our I-45 senior loan fund as seen on Slide 7 with its 2

[Michael Sarner:]

Thanks, Bowen. For the quarter, our NAV increased by $600,000 to $273.3 million, which was primarily due to $2.3 million of net portfolio appreciation in gain offset by $500,000 of income tax expense and $1.2 million of expense related to the acceleration of spinoff compensation paid to the company's former CFO of up on her separation from CSW industrials. At quarter end, we had $97 million in cash available for investment activity and no debt outstanding. As of June 30, 2016, excluding our equity investment in I-45, our investment portfolio mix was 62% debt and 38% equity. Our current mix of debt investment assets at June 30, 2016, was 42% first lien, 40% second lien, and 18% subordinated debt. The weighted average yield on our debt investments for the quarter was 10.1% versus 10.7% for the previous quarter. Overall, 90% of our portfolio currently generates a recurring cash yield and 98% of our investment income is paid in cash. Our investment portfolio produced $4.2 million in investment income with a weighted average yield on all investments of 9.4%. This represented an increase of $400,000 or 11% from the previous quarter's investment income of $3.8 million. We incurred $3.2 million in operating expenses this quarter, an increase of $100,000 versus $3.1 million in the previous quarter. This increase was primarily due to an increase in legal and accounting fees incurred in connection with the 2016 fiscal year audit. For the quarter, we earned pretax net investment income of $900,000 or $0.06 per share, compared to $700,000 or $0.04 per share in the previous period. We paid $0.06 per share dividend on July 1 for the quarter ended June 30. From a financing perspective, as Bowen mentioned, we continue to make progress toward our overall capitalization strategy. We increased our commitments to the Deutsche Bank-led credit facility within the I-45 senior loan fund, growing commitments from $75 million to $120 million. As of June 30, we had $73 million outstanding on the credit facility and are currently in the process of raising additional commitments to support the fund's 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. We are currently in negotiations toward originating an on balance sheet revolving credit facility, led by a well-known and respected lender to BDC in the middle market. We are extremely pleased with the interests we have received thus far from our potential bank syndicate and fully expect to close and announced the details of the facility in the coming weeks. Additionally, we continue to work toward the goal of receiving approval from the SBA for a new SBIC license with participation in the SBIC debenture program. We continue our dialog with the SBA and the preparation and submittal of materials required for them to consider our participation in the program. As a reminder, Capital Southwest has held an SBIC license for the past 50-plus years. This quarter, as part of the plan, put in place in conjunction with the SBA, we formally surrendered our legacy SBIC license with the SBA. The license we surrendered did not participate in the SBIC debenture program and was originally approved based on the legacy equity investment strategy. Given our new middle-market lending strategy and the newness of the investment team to Capital Southwest, we and the SBA determined that the most appropriate and efficient path for us to achieve our goal of participation in the SBIC debenture program was to apply for a new SBIC license. Finally, in regards to the share repurchase program currently in place, we did not repurchase any shares during the quarter ended June 30, 2016. I will now hand the call back to Bowen for some final comments.

[Bowen Diehl:]

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.

[Bowen Diehl:]

Thank you, operator and thank you for all participating, who participated on today's call. We look forward to keeping you apprised of our progress on future quarterly calls. Again, shareholder value creation is our absolute first priority and we tend to work hard to make that happen. Thank you very much. We hope everyone has a great week.

[Operator:]

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.