Q4 2025 Capital Southwest Corp Earnings Call

Okay.

Yes.

Unknown Executive: Thank you for joining today's Capital Southwest 4th Quarter Fiscal Year 2025 Earnings Call.

Thank you for joining today's capital southwest fourth quarter fiscal year 2025 earnings call participating on the call today are Michael <unk>, Chief Executive Officer, Chris Rehberger, Chief Financial Officer.

Unknown Executive: Participating on the call today are Michael Sarner, Chief Executive Officer, Chris Rehberger, Chief Financial Officer, Joshua Weinstein, Chief Investment Officer, and Amy Baker, Executive Vice President, Accounting.

Josh Weinstein, Chief investment Officer, and a B Baker Executive Vice President accounting I will now turn the call over to a be Baker.

Amy Baker: I will now turn the call over to Amy Baker. 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.

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.

Publicly available filings with the SEC the company does not undertake any obligation.

Amy Baker: 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.

Or revise any forward looking statement, whether as a result of new information future events changing circumstances or any other reason after the date of this press release.

Michael Sarner: I will now hand the call over to our President and Chief Executive Officer, Michael Sarner. Thanks, Amy. Thank you, everyone, for joining us for our fourth quarter fiscal year 2025 earnings. We're pleased to be with you today to discuss our fourth fiscal quarter, the 2025 fiscal year as a whole, as well as share our observations on the market in a rapidly changing environment. Overall, 2025 was a very productive year for Capital Southwest as we were able to make significant strides in strengthening both sides of our balance. On the left side of the balance sheet, during the year, we grew our investment portfolio by approximately $300 million, or 21%, from $1.5 billion to $1.8 billion.

Michael: It required by law I will now hand, the call over to our President and Chief Executive Officer, Michael <unk>.

Michael: Thanks, Amy and thank you everyone for joining us for our fourth quarter fiscal year 2025 earnings call. We're.

Michael: We're pleased to be with you today to discuss our fourth fiscal quarter 2025 fiscal year as a whole as well as share our observations on the market in a rapidly changing environment.

Michael: Overall 2025 was a very productive year for capital southwest as we were able to make significant strides in strengthening both sides of our balance sheet.

Michael: On the left side of the balance sheet during the year, we grew our investment portfolio by approximately $300 million.

Michael: We're 21% from $1 5 billion to $1 8 billion.

Michael Sarner: The quality of our debt portfolio continued to improve as we further reduced our weighted average leverage in the investment portfolio to 3.5 times, maintaining a solid 94% cash income as a percentage of total investment income, while decreasing our non-accruals at fair value from 2.3% to 1.7%. Additionally, our equity portfolio performed exceptionally well this year as we grew unrealized appreciation from $38.5 million or $0.85 per share at the end of fiscal year 2024 to $53.2 million or $1 per share as of the end of fiscal year 2025. This is an important metric, as we anticipate that a portion of this appreciation will be harvested as real life gains in fiscal year 2026, and thus will be available in our UTI bucket to support future dividend distributions.

Michael: The quality of our portfolio continued to improve as we further reduced our weighted average leverage in the investment portfolio to three five times and maintain a solid 94% cash income as a percentage of total investment income while decreasing our non accruals at fair value from two 3% to one 7%.

Michael: Additionally, our equity portfolio performed exceptionally well this year as we grew unrealized depreciation from $38 $5 million or <unk> 85 per share at the end of fiscal year 2024 to $53 2 million or $1 per share as at the end of fiscal year 2025.

Michael: This is an important metric as we anticipate that a portion of this appreciation will be harvested as realized gains in fiscal year 2026, and thus will be available on our UGI bucket to support future dividend distributions. In fact subsequent to quarter end, we have harvested realized gains of approximately $20 million on our equity.

Michael Sarner: In fact, subsequent to quarter end, we have harvested real life gains of approximately twenty million dollars on our equity investments in two portfolio companies, which will further grow our UTI balance. On the right side of the balance sheet, we were extremely active during the year in diversifying our sources of capital. We raised over $300 million in new debt capital commitments this year in the form of a $230 million fixed 5.125% convertible bond issuance and an additional $75 million in new secure debt commitments on our two credit facilities. We utilized $140 million of the proceeds received from the convertible issuance to retire our January 2026 bond, which we felt was prudent at the time to stay well ahead of our 2026 unsecured debt maturities in an uncertain economic environment.

Michael: Investments in two portfolio companies, which will further grow our UTI balance on.

Michael: On the right side of the balance sheet, we were extremely active during the year and diversifying our sources of capital.

Michael: Raise over $300 million in new debt capital commitments. This year in the form of $230 million fixed five <unk>, 5% convertible bond issuance and an additional $75 million in new secured debt commitments on our two credit facilities.

Michael: We utilized $140 million of the proceeds received from the convertible issuance to retire a January 2026 bonds, which we felt was prudent at the time to stay well ahead of our 2026 unsecured debt maturities and uncertain economic environment.

Michael Sarner: Post-quarter end, we received approval from the SBA for our second SDIC license, which allows for an additional $175 million in debt capital to support our direct lower middle market platform. Additionally, we raised over $180 million in gross equity proceeds on our ATM program during the Having continual access to the public equity market through the ATM program is a tremendous tool which we can use in all market environments. Finally, we recently had our triple B minus corporate ratings from both Moody's and Fitch affirmed, as well as our secure debt rating from Fitch upgraded from triple B minus to triple B flat.

Michael: First quarter end, we received approval from the SBA for a second FDIC license, which allows for an additional $175 million in debt capital to support our direct lower middle market platform.

Michael: Additionally, we raised over $180 million in gross equity proceeds on our ATM program during the year having.

Michael: Having continual access to the public equity markets through the ATM program is a tremendous tool, which we can use in all market environments. Finally, we recently had our triple B minus corporate ratings from both Moody's and Fitch affirmed as well as our secured debt rating from Fitch upgraded from Triple B minus to Triple B flat.

Michael Sarner: This year, we continued our long track record of producing steady dividend growth, consistent dividend coverage, and solid value creation. Despite a year in which our base rate, SOFR, shrunk by over 1%, we grew our regular dividend from $2.24 per share in fiscal year 2024 to $2.31 per share in fiscal year 2025, while paying an additional $0.23 per share in supplemental dividends. Since the launch of our credit strategy, we have increased our quarterly regular dividend 29 times and have never cut the regular dividend, all while maintaining strong coverage for our regular dividend with pre-tax net investment.

Michael: This year, we continued our long track record of producing steady dividend growth consistent dividend coverage and solid value creation, despite a year in which our base rate sofa shrunk by over 1%. We grew our regular dividend from $2 24 per share in fiscal year 2024 to $2 31 per.

Michael: Sure in fiscal year 2025, while paying an additional 23 per share in supplemental dividends since the launch of our credit strategy. We have increased our quarterly regular dividend 29 times and have never cut the regular dividend all while maintaining strong coverage for our regular dividend with pre tax net investment income.

Michael Sarner: In addition, over the same period, we have paid or declared 28 special or supplemental dividends totaling $4.18 per share, all generated from excess earnings in real life gains from our investment portfolio. Dividend sustainability, strong credit performance, and continued access to capital from multiple capital sources are all core to our overall business strategy. Our track record in all these areas demonstrates consistent performance, as well as the absolute alignment of all of our decisions with the interest of our fellow shareholders.

Michael: In addition over the same period, we have paid or declared 28 special or supplemental dividends totaling $4 18 per share all generated from excess earnings and realized gains from our investment portfolio.

Michael: Dividends sustainability strong credit performance and continued access to capital from multiple capital sources are all core to our overall business strategy. Our track record in all these areas demonstrates consistent performance as well as the absolute alignment all of our decisions, but the interest of our fellow shareholders.

Michael Sarner: Turning to the quarterly results, during the fourth fiscal quarter, we generated pre-tax net investment income of $0.56 per share.

Michael: Turning to the quarterly results during the fourth fiscal quarter, we generated pre tax net investment income of <unk> 56 per share. However, our adjusted pre tax net investment income was <unk> 61 per share after excluding one time expenses related to the departure of our former Chief Executive Officer. Additionally, as a result of.

Michael Sarner: However, our adjusted pre-tax net investment income was $0.61 per share after excluding one-time expenses related to the departure of our former chief executive officer. Additionally, as a result of gains realized in two equity investments during the quarter, we were able to increase our undistributed taxable income balance to $0.79 per share from $0.68 per share as of the end of the prior quarter. As mentioned earlier, this balance will grow meaningfully in the June quarter with our most recent exit. Deal flow in the low rental market was solid. with $150 million in total new commitments to four new portfolio companies and 15 existing portfolio.

Michael: Gains realized in two equity investments during the quarter, we were able to increase our undistributed taxable income balance to 79 per share from <unk> 68 per share as of the end of the prior quarter.

Michael: As mentioned earlier this balance will grow meaningfully in the June quarter with our most recent exits.

Michael: Deal flow in the lower middle market was solid this quarter with $150 million in total new commitments to four new portfolio companies and 15 existing portfolio companies.

Michael Sarner: Add-on financings continue to be an important source of origination. as approximately 22% of total capital commitments during the quarter were follow-on financings in performing portfolio companies. Over the last 12 months, add-ons as percentage of total new commitments has been 38%. So clearly a strong source of origination line in deals we know well and have experience with the management team and spot.

Ed on financings continued to be an important source of originations for US is approximately 22% of total capital commitments. During the quarter were follow on financings and performing portfolio companies over the last 12 months add ons as a percentage of total new commitments has been 38%. So clearly a strong source of origination volume.

Michael: In <unk>, we know well and have experienced with the management team and sponsor as.

Michael Sarner: As previously announced, our board of directors has declared a regular dividend of 58 cents per share for the quarter ending June 30th, 2025. Additionally, our board has declared supplemental dividends of 6 cents per share.

Michael: As previously announced our board of Directors has declared a regular dividend of <unk> 58 per share for the quarter ending June 32025. Additionally, our board has declared a supplemental dividend of <unk> <unk> per share, bringing total dividends declared for the June quarter to 64 cents per share.

Michael Sarner: bring total dividends declared for the June quarter to $0.64 per share.

Michael Sarner: From a market perspective, it is impossible to ignore what has transpired in the broader geopolitical arena over the past month. The recent trade policy changes, as well as government cost reductions, have created uncertainty which has impacted the lower middle market in the short term. This uncertainty has temporarily impacted the volume of underwritable Industries such as manufacturing, building products, and consumer discretionary products all are experiencing increased costs for parts and products from China, Mexico, and Canada, as well as other countries impacted by the trade. Recent budget cuts within the government sector have created uncertainty in the health care space in terms of Medicare and Medicaid reimbursement, as well as medical The net result of this uncertainty is the potential for slower M&A, and thus lower deal volume, offset by lower prepayments in 2025.

Michael: From a market perspective, it is impossible to ignore what has transpired in the broader geopolitical arena over the past month and a half.

Michael: The recent trade policy changes as well as government cost reductions have created uncertainty, which has impacted the lower middle market in the short term.

Michael: This uncertainty has temporarily impacted the volume of under writable opportunities.

Michael: Industries, such as manufacturing building products and consumer discretionary products all are experiencing increased costs for parts and products from China, Mexico, and Canada as well as other countries impacted by the trade War.

Michael: Recent budget cuts within the government sector have created uncertainty in the healthcare space in terms of Medicare and Medicaid reimbursement as well as medical research.

Michael: Net result of this uncertainty has the potential for slower M&A.

Michael: Thus lower deal volume offset by lower prepayments in 2025.

Michael Sarner: Additionally, if these conditions persist, we may experience continued spread compression in the lower middle market as lenders will compete harder for deals which fall outside the directly impacted industry.

Michael: Additionally, if these conditions persist we may experience continued spread compression in the lower middle market as lenders will compete harder for deals, which fall outside the directly impacted industries.

Michael Sarner: The recent announcement of a 90-day agreement between China and the United States, whereby tariffs on Chinese goods will come down to 30 percent and China's tariff on American goods will likewise decline to 10 percent, has created some optimism that we'll see a soft landing relative to the previous rhetoric. However, the announced agreement is temporary, and thus we will remain vigilant in our underwriting standards until such time as we have a more permanent solution in place. In terms of potential direct impacts to our existing portfolio, we have undertaken an in-depth review of our portfolio and the risks associated with these policy uncertainties.

Michael: The recent announcement of a 90 day agreement between China, and the United States, whereby tariffs unchanged goods will come down to 30% and Chinese tariff on American goods will likewise declined to 10% is created some optimism that we'll see a soft landing relative to the previous rhetoric. However, the announced agreement is 10.

Michael: And thus we will remain vigilant in our underwriting standards until such time as we have a more permanent solution in place.

Michael: In terms of potential direct impacts to our existing portfolio. We are undertaking an in depth review of our portfolio and the risks associated with these policy uncertainties.

Michael Sarner: We have identified 7% of the debt portfolio at fair value, which we would characterize as moderate risk, which means there's some exposure to tariffs, such as sourcing of components or inventory, generally from China, or customers of the portfolio company have some level of exposure to these same risks. However, only 1% of the debt portfolio at fair value has both moderate risk tariff exposure and a current loan to value above 50. In summary, our portfolio has limited direct exposure to tariffs, and those companies where the exposure is greatest are well positioned from a capital structure perspective.

Michael: We have identified 7% of the debt portfolio at fair value, which we would characterize as moderate risk, which means there is some exposure to tariffs such as sourcing of components or inventory generally from China or customers of the portfolio of companies have some level of exposure to these same risks.

Michael: However, only 1% of the debt portfolio at fair value as bolt moderate risk temperature exposure and current loan to value above 50% and.

Michael: In summary, our portfolio is limited limited direct exposure to tariffs and those companies where the exposure is greatest are well positioned from a capital structure perspective.

Michael Sarner: As a company, we will continually monitor any current or prospective policy changes as they develop, and on a real-time basis, analyze any impact on both our existing portfolio, as well as the lower middle market in general.

Michael: As a company we will continually monitor any current or prospective policy changes as they developed and on a real time basis.

Michael: Any impact on both our existing portfolio as well as the lower middle market in general.

Michael Sarner: Overall, as a predominantly first-link portfolio with a weighted average debt to EBITDA of 3.5 times and a balance sheet levered at 0.89 to 1 with significant liquidity and no maturities until October 2026, we feel confident that our balance sheet is well positioned to endure this market volatility. Further proof of our market positioning, since the onset of the tariff-related volatility in the public equity markets, we are one of only five BDCs which has continued to trade above book at all times. From a historical perspective, Capital Southwest has only traded below book once since 2018, and that was for a few weeks during the COVID outbreak.

Michael: Overall as a predominantly first lien portfolio with a weighted average debt to EBITDA of three five times and a balance sheet levered at <unk> 89 to one with significant liquidity and no maturities until October 2026, we feel confident that our balance sheet is well positioned to endure this market volatility.

Michael: Further proof of our market positioning since the onset of a tariff related volatility in the public equity markets. We are one of only five bdcs, which has continued to trade above book at all times.

Michael: Historical perspective capital southwest has only traded below book once since 2018 and that was for a few weeks during the COVID-19 outbreak.

Michael Sarner: Consistently trading above book allows us to continue to raise equity capital in uncertain times to de-leverage the balance sheet, invest in new platform companies, and provide financing for add-on acquisitions for our existing portfolio.

Distantly trading above book allows us to continue to raise equity capital in uncertain times to deleverage the balance sheet invested new platform companies and provide financing for add on acquisitions for our existing portfolio companies. Our investment strategy and performance has earned US this flexibility, which we believe is a key differentiator for many other.

Michael Sarner: Our investment strategy and performance have earned us this flexibility, which we believe is a key differentiator from any other BDM.

Michael: Bdcs.

Joshua Weinstein: I will now hand the call over to Josh to review more specifics of our investment activity and the market environment. Thanks, Michael. This quarter, we deployed a total of $150 million of new committed capital, including $113 million of first lien, senior secured debt, and $3 million of equity across four new portfolio companies. In addition, we closed add-on financings for 15 existing portfolio companies consisting of $33 million in first lien senior secured debt and $1 million in equity. Our On Balance Sheet Credit Portfolio ended the quarter at $1.6 billion, representing year-over-year growth of 19% from $1.3 billion as of March 2020.

Michael: I will now hand, the call over to Josh to review more specifics of our investment activity and the market environment. Thanks.

Josh Weinstein: Thanks, Michael this quarter, we deployed a total of $150 million of new committed capital, including $113 million of first lien senior secured debt and $3 million of equity across four new portfolio companies and.

Josh Weinstein: In addition, we could add on financings for 15 existing portfolio companies consisting of $33 million in first lien senior secured debt and $1 million in equity.

Josh Weinstein: Our on balance sheet credit portfolio ended the quarter at $1 6 billion, representing a year over year growth of 19% from $1 3 billion as of March 2024.

Joshua Weinstein: For the current quarter, 100% of our new portfolio company debt originations were first lien senior secured. And as of the end of the quarter, 99% of the credit portfolio was first lien senior secured with a weighted average exposure per company of only 0.9%. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance. The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity. Currently approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio.

Josh Weinstein: For the current quarter, a 100% of our new portfolio company that originations were first lien senior secured and as of the end of the quarter, 99% of the credit portfolio was first lien senior secured with a weighted average exposure per company of only <unk>, 9%.

Josh Weinstein: We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet.

Josh Weinstein: The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms currently approximately 93% of our credit portfolio is backed by private equity firms, which provide important guidance and leadership to the portfolio of companies as well as the potential for junior capital support.

Joshua Weinstein: as well as the potential for junior capital support if needed. In the lower-middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies, paired with the private equity firm, when we believe the equity thesis is compelling. As of the end of the quarter, our equity co-investment portfolio consisted of 79 investments with a total fair value of $179 million, representing 10% of our total portfolio at fair value. Our equity portfolio was marked at 142% of our cost, representing $53.2 million in embedded unrealized appreciation, or $1 per share.

Josh Weinstein: Needed.

Josh Weinstein: In the lower middle market, we often have the opportunity to invest on a minority basis and the equity of our portfolio companies Parry pursue with the private equity firm when we believe the equity thesis as compelling.

Josh Weinstein: As of the end of the quarter, our equity co investment portfolio consisted of 79 investments with a total fair value of $179 million, representing 10% of our total portfolio at fair value.

Josh Weinstein: Our equity portfolio with market of 142% of our cost representing $53 2 million in embedded unrealized depreciation or $1 per share.

Joshua Weinstein: Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses, often resulting from the institutionalization of the businesses by experienced private equity firms, as well as a significant value accretion potential from strategic add-on acquisitions. Equity co-investments across our portfolio provide our shareholders with the potential for asset value appreciation, as well as equity distributions to Capital Southwest over time. This is playing out in real time as we have harvested four sizable exits in the past four months that produce significant UTI, which is now available for distribution to our shareholders.

Josh Weinstein: Our equity portfolio continues to provide our shareholders participation in the attractive upside potential of these growing lower middle market businesses.

Josh Weinstein: Resulting from the institutionalization of the businesses by experienced private equity firms as well as the significant value accretion potential from strategic add on acquisitions.

Josh Weinstein: Equity co investments across our portfolio provide our shareholders with the potential for asset value appreciation as well as equity distributions to capital southwest overtime.

Josh Weinstein: This is playing out in real time, and we have harvested four sizable exits in the past four months that produce significant UTI, which is now available for distribution to our shareholders.

Joshua Weinstein: Consistent with previous quarters, the lower middle market continues to be quite competitive, as this segment of the market is highly attracted to both bank and non-bank lenders. While this has resulted in tight loan pricing for high-quality opportunities that are not exposed to the macroeconomic uncertainty, the depth and strength of our relationships our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk-return programs. As a point of reference, currently there are 79 unique private equity firms represented across our investment portfolio. Additionally, in the last year, we closed 14 new platforms with financial sponsors, with which we had not previously closed a deal, demonstrating our continued penetration in the market.

Josh Weinstein: Consistent with previous quarters, the lower middle market continues to be quite competitive.

Josh Weinstein: This segment of the market is highly attractive to both bank and nonbank lenders.

Josh Weinstein: While this has resulted in tight loan pricing for high quality opportunities that are not exposed to the macroeconomic uncertainty the depth and strength of our relationships. Our team has cultivated over the years has continued to result in our sourcing and winning opportunities with attractive risk return profiles.

Josh Weinstein: A point of reference currently there are 79 unique private equity firms represented across our investment portfolio. Additionally.

Josh Weinstein: Additionally, in the last year, we closed 14, new platforms with financial sponsors with which we had not previously closed the deal demonstrating our continued penetration in the market.

Joshua Weinstein: Since the launch of our credit strategy, we have completed transactions with over 117 different private equity firms across the country, including over 20% with which we have completed multiple transactions. Our portfolio currently consists of 121 different companies, weighted 89% to first lien senior secure debt, 1% to second lien senior secure debt, and 10% to equity covenant. The credit portfolio had a weighted average yield of 11.7% and a weighted average leverage through our security of 3.5 times We continue to be pleased with the operating performance across our loan portfolio. All our loans upon origination are initially assigned an investment rating of two on a four point scale with one being the highest rating and four being the lowest.

Josh Weinstein: Since the launch of our credit strategy, we have completed transactions with over 117 different private equity firms across the country, including over 20% with which we have completed multiple transactions.

Josh Weinstein: Our portfolio currently consists of 121 different companies weighted 89% to first lien senior secured debt, 1% second lien senior secured debt and 10% to equity co investments.

Josh Weinstein: The credit portfolio had a weighted average yield of 11, 7% and a weighted average leverage through our security of three five times EBITDA.

Josh Weinstein: We continue to be pleased with the operating performance across our loan portfolio.

Josh Weinstein: All our loans upon origination are initially assigned an investment rating of two on a four point scale with one being the highest rating and four being the lowest rating.

Joshua Weinstein: Overall, the portfolio remains exceedingly healthy with approximately 95% of the portfolio at fair value rated in one of the top two categories, a one or a two, and approximately 5% of the portfolio in the three or four categories. cash flow coverage of debt service obligations across the portfolio remains robust at 3.4 times with our loans across the portfolio averaging approximately 43 percent of portfolio company enterprise value. We believe these performance metrics are indicative of a well-performing and conservatively structured portfolio. Our portfolio continues to be broadly diversified across industries. And our average exposure per company is less than 1% of investment assets, which gives us great comfort in the overall risk profile of our portfolio.

Josh Weinstein: Overall, the portfolio remains exceedingly healthy with approximately 95% of the portfolio at fair value right in one of the top two categories of one or two and approximately 5% of the portfolio and thats three or four categories cash.

Josh Weinstein: Cash flow coverage of debt service obligations across the portfolio remains robust at three four times with our loans across the portfolio, averaging approximately 43% of portfolio company enterprise value.

Josh Weinstein: We believe these performance metrics are indicative of a well performing and conservatively structured portfolio.

Josh Weinstein: Our portfolio continues to be broadly diversified across industries, and our average exposure per company is less than 1% of investment assets, which gives us great comfort in the overall risk profile of our portfolio.

Joshua Weinstein: As Michael discussed earlier, there is currently heightened macroeconomic volatility, which has impacted our lower middle market shambles. We began assessing these impacts on our portfolio late last year and continue to monitor the portfolio on an ongoing basis. Our monitoring process includes constant communication with our sponsors and portfolio companies to proactively assess any anticipated effects of recent and future policies on tariffs, immigration, health care reimbursement, and any other policies which impact the cash flow or long-term value of our investment portfolio. To date, we have not seen an increase in revolver draws or amendment requests, which would serve as an early warning of portfolio company stress.

Speaker Change: As Michael discussed earlier, Theres currently heightened macroeconomic volatility, which has impacted our lower middle market sandbox.

Speaker Change: We began assessing these impacts on our portfolio late last year and continue to monitor the portfolio on an ongoing basis.

Speaker Change: Our monitoring process includes constant communication with our sponsors and portfolio companies to proactively assess any anticipated effects of recent and future policies on tariffs immigration health care reimbursement and any other policies, which impacted cash flow or long term value of our investment portfolio.

Speaker Change: We have not seen an increase in revolver draws or amendment request, which would serve as an early warning of portfolio company stress.

Joshua Weinstein: While certain credits may experience an impact from these policies in the future, conversations with management teams and sponsors for the companies most at risk believe there are mitigants to navigate the tariff environment, including pivoting to countries with less exposure, price increases to customers, sharing the tariff burden with the suppliers and the potential for cheaper freight costs on imported items, assuming freight volume slows meaningfully, which we have observed in the past few weeks. Additionally, many of our companies have maintained elevated inventory levels heading into this uncertain time, thus enabling them to defer purchasing goods in the hopes of an improved outcome between the U.S.

Speaker Change: While certain credits May experience, an impact from the policies in the future conversations with management teams and sponsors for the Companys. Most at risk believe there are millions to navigate the tariff environment, including pivoting to countries with less exposure price increases to customers sharing the tariff burden with the suppliers and the potential for cheap.

Speaker Change: Our freight costs on imported items, assuming freight volumes slowed meaningfully, which we have observed in the past few weeks.

Speaker Change: Additionally, many of our companies have maintained elevated inventory levels heading into this uncertain time, thus, enabling them to defer purchasing goods in the hopes of an improved outcome between the U S and China.

Joshua Weinstein: and China. With the recent news of a temporary agreement, these actions seem to have been prudent. For the deals we are currently underwriting, they continue to have loan-to-value levels ranging from 35% to 50%, resulting in significant equity capital cushioned below our debt and reasonable leverage levels of three to four times debt-to-earnings. However, with the market volatility, we and the entire lower middle market are in the process of pricing and leverage discovery for prospective deals. There has been a flight to industries where the tariff risk is less direct, and thus the spreads for these deals have continued to remain tight.

Speaker Change: With the recent news of a temporary agreement these actions seem to have been prudent.

Speaker Change: For the deals we are currently underwriting they continue to have loan to value levels, ranging from 35% to 50%, resulting in significant equity capital cushion below our debt and reasonable leverage levels of three to four times debt to EBITDA.

Speaker Change: However, with the market volatility, we and the entire lower middle market are in the process of pricing and leverage discovery for prospective deals.

Speaker Change: There has been a flight to industries, where the tariff risk is less direct and thus the spreads for these deals have continued to remain tight.

Joshua Weinstein: We have begun to see sale and financing processes for companies with direct exposure to tariffs being delayed or pulled, as well as leverage levels tightening for the companies that do come to market. We would anticipate deal volume to continue to slow down for companies with direct or indirect exposure until the market perceives more certainty in the economic policy. We have recently read that banks are beginning to take a risk-off stance in the middle market, but this has yet to filter down to the lower middle market as we continue to see them competing for deals, especially those in the service industry.

Speaker Change: We have begun to see sale and financing processes for companies with direct exposure to tariffs being delayed or pooled as well as leverage levels tightening for the companies that do come to market.

Speaker Change: We would anticipate deal volume to continue to slow down for companies with direct or indirect exposure until the market perceives more certainty in the economic policy.

Speaker Change: We have recently read that banks are beginning to take a risk off stance in the middle market, but this has yet to filter down to lower middle market as we continue to see them competing for deals, especially those in the service industries.

Joshua Weinstein: If banks do in fact pull back, this may enhance our competitive position specific to our Unitron. As Michael mentioned earlier, we believe our balance sheet is well positioned with low leverage and significant liquidity, which should allow us to be opportunistic should the market become less competitive, resulting in more attractive risk return profile deals.

Speaker Change: Do it back pullback this may enhance our competitive position specific to our unit tranche product.

Speaker Change: As Michael mentioned earlier, we believe our balance sheet is well positioned with low leverage and significant liquidity, which should allow us to be opportunistic should the market become less competitive resulting in more attractive risk return profile deals.

Chris Rehberger: I will now hand the call over to Chris to review the specifics of our financial performance for the quarter. Thanks, Josh. Specific to our performance for the quarter, pre-tax net investment income was $28.5 million or $0.56 per share. Adjusted pre-tax NII, which excludes one-time expenses related to the departure of a former president and CEO, was $31.3 million, or $0.61 per share. For the quarter, total investment income increased to $52.4 million from $52 million in the prior quarter. The increase was driven by a $2.8 million increase in interest and dividend income, offset by a decrease of $2.4 million in fees and other income compared to the prior quarter.

Speaker Change: I will now hand, the call over to Chris to review the specifics of our financial performance for the quarter.

Chris: Thanks, Josh specific to our performance for the quarter pre tax net investment income was $28 5 million.

Speaker Change: Or <unk> 56 per share adjust.

Speaker Change: Adjusted pre tax NII, which excludes onetime expenses related to the departure of our former President and CEO was $31 3 million or 61 per share.

Speaker Change: For the quarter total investment income increased to $52 4 million from $52 million in the prior quarter the increase.

Speaker Change: It was driven by a $2 $8 million increase in interest and dividend income offset by a decrease of $2 4 million in fees and other income compared to the prior quarter.

Chris Rehberger: As of the end of the quarter, our loans on not accrual represented 1.7% of our investment portfolio at fair value, a decrease from 2.7% as of the end of the prior quarter. The reduction this quarter was a result of two portfolio companies being restructured and one portfolio company being sold. We placed one new company on not accrual, which post quarter and completed a bankruptcy process and will likely be removed from not accrual in the June 30. During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend. As mentioned earlier, our board has declared a regular dividend of $0.58 per share, while also maintaining the supplemental dividend at $0.06 per share for the June 2025 quarter.

Speaker Change: As of the end of the quarter our loans on non accrual represented one 7% of our investment portfolio at fair value a decrease from two 7% as of the end of the prior quarter.

Speaker Change: The reduction this quarter was the result of two portfolio companies being restructured at one portfolio company being sold.

Speaker Change: One new company on nonaccrual, which post quarter end completed a bankruptcy process and will likely be removed from non accrual in the June 30 quarter.

Speaker Change: During the quarter, we paid out a 58 per share regular dividend and a <unk> <unk> per share supplemental dividend as mentioned earlier, our board has declared a regular dividend of <unk> 58 per share while also maintaining a supplemental dividend of <unk> <unk> per share for the June 2025 quarter.

Chris Rehberger: We continued our strong track record of regular dividend coverage, with 110% coverage for the 12 months ended March 31st, 2025, and 110% cumulative coverage since the launch of our credit. We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of $0.79 per share, the recent exits in the June quarter, which will further increase this balance, and the expectation that we will continue to harvest gains over time from our sizable unrealized appreciation balance on the equity market. LTM operating leverage ended the quarter at 1.7%. Excluding the one-time expenses discussed earlier, our adjusted LCM operating leverage entered the quarter at $1.6 billion.

Speaker Change: We continued our strong track record of regular dividend coverage with a 110% coverage for the 12 months ended March 31, 2025, and 110% cumulative coverage that the launch of our credit strategy.

Speaker Change: We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of <unk> 79 per share.

Speaker Change: The recent exits in the June quarter, which will further increase this balance.

Speaker Change: And the expectation that we will continue to harvest gains over time from our sizeable unrealized depreciation balanced on the equity portfolio.

Speaker Change: LTM operating leverage ended the quarter at one 7%.

Speaker Change: Excluding the one time expenses discussed earlier, our adjusted LTM operating leverage ended the quarter at one 6%.

Chris Rehberger: Looking ahead, we anticipate our run rate operating leverage to be in the 1.4 to 1.5% range by the end of our next fiscal year. Our operating leverage is significantly better than the BDC industry average of approximately 2.8%. We believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with Shinra. The internally managed model has, and will continue to, produce real fixed cost leverage, while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage a best-in-class B2B. The company's NAV per share at the end of the quarter was $16.70 per share, an increase from $16.59 per share in the prior quarter.

Speaker Change: Looking ahead, we anticipate our run rate operating leverage to be in the one four to one 5% range by the end of our next fiscal year.

Speaker Change: Our operating leverage is significantly better than the BDC industry average of approximately two 8% we.

Speaker Change: We believe this metric speaks to the benefits of the internally managed BDC model and our absolute alignment with shareholders. The internally managed model has and will continue to produce real fixed cost leverage while also allowing for significant resources to be invested in people and infrastructure as we continue to grow and manage their best in class BDC.

Speaker Change: The company's NAV per share at the end of the quarter was $16 70 per share an increase from $16 59 per share in the prior quarter.

Chris Rehberger: The primary drivers of NAV per share growth for the quarter were accretion from the issuance of common stock at a premium to NAV per share, offset by net realized and unrealized depreciation on our investment. We are pleased to report that our balance sheet liquidity is robust, with approximately $384 million in cash and undrawn leverage commitments on our two credit which represents 1.9 times the $197 million of unfunded commitments we had across our portfolio as of the end of the year. Subsequent to Quarter End, we increased our corporate credit facility by $25 million, bringing the total debt commitments on the facility to $510 million.

Speaker Change: The primary drivers of <unk> per share growth for the quarter were accretion from the issuance of common stock at a premium to NAV per share offset by net realized and unrealized depreciation on our investment portfolio.

Speaker Change: We are pleased to report that our balance sheet liquidity is robust with approximately $384 million in cash and undrawn leverage commitments on our two credit facilities, which represents one nine times the $197 million of unfunded commitments, we had across our portfolio as of the end of the quarter.

Speaker Change: Subsequent to quarter end, we increased our corporate credit facility by $25 million, bringing the total debt commitments on the facility to $510 million.

Chris Rehberger: Additionally, as of the end of the March quarter, 47% of our capital structure liabilities were in unsecured covenant-free bonds with our earliest debt maturity in October 2026.

Speaker Change: Additionally, as of the end of the March quarter, 47% of our capital structure liabilities, where an unsecured covenant free bonds with our earliest debt maturity in October 2026.

Chris Rehberger: Turning to our SBIC program, subsequent to quarter end, we received final approval from the SBA for a second SBIC license. This license allows us to access up to $175 million in additional SBA debentures over time, which is a cost-effective way to finance our lower-middle market investments. Our regulatory leverage ended the quarter at a debt to equity ratio of 0.89 to 1, down slightly from 0.9 to 1 as of the prior While our optimal target leverage continues to be in the 0.8 to 0.95 range, we are weighing the impacts of the current macroeconomic landscape and intend to maintain a regulatory leverage cushion, which will mitigate capital markets volatility.

Speaker Change: Turning to our <unk> program subsequent to quarter end, we received final approval from the SBA for a second Spic's license. This license allows us to access up to $175 million in additional SBA debentures over time, which is a cost effective way to finance, our lower middle market investment strategy.

Speaker Change: Our regulatory leverage ended the quarter at a debt to equity ratio of eight 9% to one down slightly from <unk> nine to one as of the prior quarter.

Speaker Change: While our optimal target leverage continues to be in the eight to <unk> 95 range. We are weighing the impacts of the current macroeconomic landscape and intend to maintain our regulatory leverage cushion, which will mitigate capital markets volatility well.

Chris Rehberger: We will continue to methodically and opportunistically raise secured and unsecured debt capital, as well as equity capital through our ATM. to ensure we maintain significant liquidity and conservative balance sheet construction with adequate covenant.

Speaker Change: We will continue to methodically and opportunistically raise secured and unsecured debt capital as well as equity capital through our ATM program to ensure we maintain significant liquidity and conservative balance sheet construction with adequate covenant cushion.

Michael Sarner: I will now hand the call back to Michael for some final. Thank you, Chris, Josh and Amy, and all the employees who help us tell the story on a quarterly and thank you everyone for joining.

Speaker Change: I will now hand, the call back to Michael for some final comments. Thank.

Michael: Thank you, Chris Josh and Amy and all the employees, who help US tell the story on a quarterly basis and thank you everyone for joining US today. This concludes our prepared remarks, operator, we are ready to open the lines up for Q&A.

Unknown Executive: This concludes our prepared remarks.

Michael Sarner: Operator, we are ready to open the lines up for Q&A. Michael, at a very high level, notwithstanding your great insight into the backdrop for the market, how attractive do you think the current vintage of investments is in the lower middle of the market relative to the history of Capital Southwest? Well, it feels at the moment that somewhat binary, the deals that are coming to market today are Deals in spaces and industries that we're actually interested in being in, you know, service industries like accounting and finance, HVAC plumbing type of industries, marketing services and data centers.

Speaker Change: Certainly and our first question for today comes from the line of Mickey <unk> from Ladenburg. Your question. Please.

Speaker Change: Yes, good morning, everyone.

Michael: Michael.

Michael: High level notwithstanding your pure great.

Michael: Insight into the backdrop for the market.

Michael: Attractive do you think the current vintage of investments is in the lower middle market relative to the history of <unk>.

Speaker Change: Capital Southwest.

Speaker Change: Well it feels at the moment.

Speaker Change: It's somewhat binary.

Speaker Change: Deals that are coming to market today are.

Speaker Change: Deals in spaces in the industry that we're actually interested in being in <unk>.

Speaker Change: Industries like accounting financed.

Speaker Change: Plumbing type of industries marketing services and data center those are quality deals that don't have a lot of the issues that are from the policy changes that were.

Michael Sarner: Those are quality deals that don't have a lot of the issues that are, you know, from the policy changes that were, you know, that are kind of uncertain. Deals that are more cyclical or have the issues that we've noted earlier, really are either being pulled from the market or they're, you know, they're being delayed. And so I think the deals that we are going to underwrite here, we still feel very good about. Our originations this quarter, we're probably still going to see somewhere between 125 and 150 million in originations, you know, add on acquisitions for quality companies, our existing portfolio and new platform companies.

Speaker Change: Kind of uncertain.

Speaker Change: Deals that are more cyclical or have issues that we've noted earlier.

Speaker Change: Really are being pulled from the market or either they are being delayed and so I think the deals that we are going to underwrite here, we still feel very good about our.

Speaker Change: Our originations this quarter were probably still going to see somewhere between $125 $150 million in originations.

Speaker Change: Add on acquisitions for quality companies, our existing portfolio and new platform company. So I think yes.

Joshua Weinstein: So I think, you know, there's going to be less of them is what I would say to you right now, but the quality of the ones we're going to underwrite and close are going to be consistent with nonpartisan, historically.

Speaker Change: There's going to be less of them. This is what I would say to you right now, but the quality of the ones, we're going to underwrite.

Speaker Change: And clothes are going to be consistent.

Speaker Change: Part of what we've done historically, Josh and I know you have a different opinion or a thought.

Joshua Weinstein: Josh, I don't know if you have a different opinion or a thought. No, I mean, we continue to, you know, tackle the private equity market and, you know, cultivate the relationship so that we don't have to be the best term sheet to win the deal because relationship lending at the end of the day. And so we, you know, we're trying our best to find good risk return profile deals and continue to find them in opportunities that are not exposed to the macroeconomic kind of environment right now. Okay, noted. Thanks for that.

Speaker Change: We continue to.

Speaker Change: Tackle the private equity market and.

Speaker Change: Cultivate the relationships that we don't have to be the best term sheet to win the deal.

Speaker Change: Relationship lending.

Speaker Change: And so we're.

Speaker Change: Trying our best to find good risk return profile deals and continue to continue to find them and oxygen oxygen is theyre not.

Speaker Change: Exposed to the macroeconomics.

Speaker Change: Got it got it.

Speaker Change: Environment right now.

Speaker Change: Okay noted.

Michael Sarner: At a high level, again, could you just break out what were the main drivers of the net realized loss and the markdown in the credit portfolio? Yeah, so the couple companies that really drove the realized and unrealized losses this quarter were related to the restructurings. And we noted in our remarks, two of those were on non-accrual that were restructured during the quarter. And so it's really those two companies that drove most of the depreciation, net depreciation for the quarter. It wasn't really across the broad credit portfolio. Yeah, I would tell you, so the appreciation in the quarter was very granular.

Speaker Change: Thanks for that.

Speaker Change: At a high level again could you just break out what were the main drivers of the net realized loss and.

Speaker Change: The markdown in the credit portfolio.

Speaker Change: Yes, so a couple of companies that really drove the realized and unrealized losses. This quarter were related to the restructurings and we noted in our remarks two of those were on non accrual that was restructured during the quarter and so it's really those two companies that drove most of the depreciation net depreciation for the quarter.

Speaker Change: <unk> it.

Speaker Change: It wasn't really across the broad credit portfolio.

Speaker Change: So the appreciation in the quarter.

Speaker Change: It was very granular.

Michael Sarner: You can see it in the strength of our weighted average get to even a drop in the 3.5. We saw solid performance. To Chris's point, there were a few companies that were on our watch list that had restructurings where we had to take write downs that from an accounting perspective are realized losses. And so that's the net impact of the quarter.

Speaker Change: You can see it in the strength of our weighted average debt to EBITDA dropping to three five we saw solid performance to Chris's point. There were a few companies that sort of that were on our watch list that had restructuring where we had to take write downs that from an accounting perspective, our realized losses and so that's the net impact of the quarter.

Unknown Executive: Terrific. I'm glad to hear that.

Speaker Change: Terrific Im glad to hear that.

Michael Sarner: And lastly, tapping into the SBA debentures is a process. It's great that you got the second license. When do you actually expect to start to inject capital into the new SBIC subsidiary? And when will you be allowed to start to issue some debentures? Yeah, so I think that will probably start over the next three months or so. So certainly in the 930 quarter, probably not in the June quarter.

Speaker Change: Lastly.

Speaker Change: Tapping into the SBA debentures as a process.

Speaker Change: It's great that you've got the second license.

Speaker Change: Do you actually expect to start to inject.

Speaker Change: Capital into the the new Spic's subsidiary and when will you be allowed to start tissue some debentures.

Speaker Change: Yes, so I think that will probably start over the next three months or so so certainly in the 930 quarter probably not in the June quarter. The way that works is you've got a bad second spic's too with some equity capital with new deals, which we expect to be doing shortly thereafter, we will start to draw on the debentures. So I'd say the first.

Michael Sarner: The way that works is you've got to bed the second SBIC 2 with some equity capital with new deals, which we expected, you know, to be doing shortly. And thereafter, we'll start to draw on the debentures. So I'd say the first draws will be sort of three months now or so.

Speaker Change: Draws will be sort of three months or so.

Michael Sarner: For more information, visit www.fema.gov And that new SBIC will ultimately have access to another $175 million. Is that right? That's right. So, you know, the family of funds for SBIC is going to have up to $350 million. So we do have full access to that. Obviously, you know, subject to SBA approval along the way, but yes, we would expect that we'll be able to draw the full $175 million on the second. Sounds good.

Speaker Change: Okay.

Speaker Change: New Spic's will ultimately have access to another $175 million is that right that's right.

Speaker Change: The family of funds for Spic's can have up to $350 million. So we do have full access to that obviously subject to SBA approval, along the way, but yes, we would expect that we'll be able to draw the full $175 million in the second license.

Unknown Executive: Those are all my questions. Thanks for your time this morning. Thank you.

Speaker Change: Sounds good but those are all my questions. Thanks for your time this morning.

Unknown Executive: And our next question comes from a line of Doug Harder from UBS. Your question, please.

Speaker Change: Thank you and our next question comes from the line of Doug Harter from UBS. Your question. Please.

Cory Johnson: This is actually Cory Johnson on for Doug. So I just wanted to make sure that I'm understanding this correctly. So, you know, we've heard from some companies about how, you know, the lack of exit opportunities for companies, you know, just less capital markets activity in general has sort of led to companies running to, you know, being able to get lending, direct lending. So if I understand correctly, you guys are actually seeing, and in context, they talked about that as a possibility of some spread, you know, spread widening. I think in the comments you mentioned possibility of some spread compression, and that's just because you're seeing, even though there might be more deals out there, the quality ones are ones that, you know, they're being competitively bid.

Speaker Change: Alright, this is actually Cory Johnson on for Doug.

Speaker Change: So I just wanted to make sure that I'm understanding this correctly so.

Speaker Change: We've heard from some companies about how.

Speaker Change: Yes.

Lack of.

Speaker Change: Hey, good opportunities for companies.

Speaker Change: Just less capital markets activity in general sort of led to company running too.

Speaker Change: Being be able to get lending.

Speaker Change: Direct lending.

Speaker Change: So if I understand correctly, you guys are actually seeing.

Speaker Change: And in contact they talked about that as a possibility of some spread spread widening.

Speaker Change: I think in your comments, you mentioned possibility of some spread compression and Thats what youre seeing.

Speaker Change: Even though there might be more deals out there the quality ones are ones that they are being competitively bid and that you're seeing.

Michael Sarner: And that's just seeing, you know, some possible thinking there might be some possible spread compression from that. Yeah, I mean, I think what we're trying to say is that because there's so many deals that are deemed sort of under non underwritable at the moment, because of what we've seen, I mean, some of those industries, you know, health care services with Medicaid reimbursement, you're manufacturing companies with, you know, that get their supplier inventory from China, some government services from from Doge, any company is tied onto the farming industry.

Speaker Change: Some possible thinking it might be impossible spread compression from that.

Speaker Change: Yes, I mean, I think what we're trying to say is that because theres. So many deals that are deemed sort of under.

Speaker Change: Non under writable at the moment because of what we've seen I mean, some of those industries health care services with Medicaid reimbursement manufacturing companies, but.

Speaker Change: That get their supply of inventory from China.

Speaker Change: Government services from from dose.

Speaker Change: Any company is honestly the farming industry.

Speaker Change: Recessionary industry, which would be the byproduct of some of the policy all of those deals are sort of risk off for a lot of companies and so now youre narrowing the amount of industries that you can focus on and Theres still a deep bench of capital chasing deals and from that perspective, though we expect.

Speaker Change: Hopefully we'll be proven wrong.

Speaker Change: <unk> on those are going to tighten.

Speaker Change: Because people are going to wanted to play capital and those are the deals that they can feel safe it to invest in.

Cory Johnson: Got it.

Cory Johnson: And then, um, you, I think you mentioned, um, you know, the possibility of, of, uh, there being some exits in realizations of this upcoming quarter. Um, can, can you maybe just like size that or, um, or, you know, let us kind of know, are there other, any other, um, opportunities that you see in the, within the coming quarters?

Speaker Change: Got it and then.

Speaker Change: I think you mentioned.

Speaker Change: The possibility.

Speaker Change: There've been some exits.

Speaker Change: Realization this upcoming quarter.

Speaker Change: Can you maybe just like size that order.

Speaker Change: Let us kind of know or the.

Speaker Change: Are there any other opt.

Michael Sarner: You have a lot of side effects of that. Yeah, I think we said in the prepared remarks, we have two exits already, subsequent to quarter end for proceeds a little more than $20 million in real life gains. And so, obviously, that's a sizable amount for a potential for a UTI bucket. There are some other portfolio companies with size that are starting to enter the market, but that's a little bit further down the road. I think we provide updates in the next few quarters. So I think that those two are sort of what we might have been hinting at in previous quarters.

Speaker Change: Opportunities that you see in that within the coming quarters do you have line of sight to that.

Speaker Change: Okay.

Speaker Change: Yes, I think we said in the Premier prepared remarks, we have two exits already subsequent to quarter end for proceeds of little more than $20 million in realized gains.

Speaker Change: And so obviously, that's a sizable amount for potential for our.

Speaker Change: UTI bucket.

Speaker Change: There are some other portfolio companies with size.

Speaker Change: That are starting to enter the market, but thats a little bit further further down the road I think we provide updates in the next few quarters.

Speaker Change: I think those two are sort of what we might've been hinting at in previous quarter. So we're pleased that execution on bulk.

Michael Sarner: So we're pleased at execution on both.

Cory Johnson: Got it. Thanks.

Speaker Change: Got it and just my last question.

Cory Johnson: And just my last question. I've seen that the PIC income has increased a bit over the last few quarters. Is there any trends that you're seeing there? Any particular type of companies? Or what are your thoughts in regards to how that may trend in regards to credit quality over the next few quarters? Sure, sure. So we saw a few companies that had a PIC toggle that elected in this quarter that they hadn't in previous quarters. And those honestly, those are like short lived in nature. So they'll come back off in time. We do know that for the June quarter that we expect to see a few companies that their PIC toggle expired and they are able to pay cash pay.

Speaker Change: I've seen that.

Speaker Change: Pik income has increased a bit over the last.

Speaker Change: Quarters.

Speaker Change: Any trends that you're seeing there.

Speaker Change: Their hard work like companies.

Speaker Change: What are your thoughts with regards to like how that may trend.

Speaker Change: In regards to the credit quality over the next few quarters sure sure. So we saw a few companies that had a pik toggle that elected in this quarter that they hadn't in previous quarters and dose honestly those are like short lived in nature. So they'll come back off in time we.

Speaker Change: We do know that the June quarter that we expect to see a few companies that pik toggle expired and they are able to pay cash pay so.

Michael Sarner: So, you know, at the moment, I can probably say we expect the PIC percentage to come down in the five to six percent range for reoccurring PIC. That is appreciated.

Speaker Change: The moment I can probably say we expect that.

Speaker Change: <unk> percentage to come down in the 5% to 6% range for reoccurring.

Speaker Change: Okay.

Eric Zwick: Thank Thank you and our next question comes from the line of Eric Zwick from Lucid Capital Markets.

Speaker Change: Got it appreciate it thank you.

Speaker Change: Thank you and our next question comes from the line of Erik Zwick from Lucid capital markets. Your question. Please.

Eric Zwick: Your question please. Thanks. Good morning, everyone. Wanted to start with a question on the pipeline, just given you had, you know, pretty nice funding activity in the most recent quarter. So curious if you could, one, maybe kind of size up what the pipeline looks like today. Also curious about, you know, what that mix looks like in terms of new and add-ons, and also potentially what might be eligible to be funded by SBIC2. And I know you said, you know, you may not kind of be active on that more until the 930 quarter. So if you're referring to the June quarter, is that correct?

Thanks, Good morning, everyone I wanted to start with a question on the pipeline just given you had some pretty nice funding activity.

Speaker Change: In the most recent quarter. So curious if you could one maybe kind of size up what the pipeline looks like today I'm also curious about what that mix looks like in terms of new and add on and also potentially what might be eligible.

Speaker Change: Good to be funded by FDIC too and I know you said may not be active on that more than 930 quarter.

Speaker Change: So if you're referring to the June quarter or is that correct.

Michael Sarner: Yes, yes. Kind of curious to know how pipeline is working so far. Yeah. I mean, honestly, it's still a little early, obviously, but I think we would tell you that we're looking at somewhere between probably in the running three to five new platform companies that, let's say somewhere in the 75 to 100 million in new capital. And then we expect to see around 50 million on add-on activity because it's already been pretty active through today's date. Yeah. And I would just add to your second question, some of these new prospective deals will certainly be eligible for the SBIC.

Speaker Change: Yes kind of curious how pipeline.

Speaker Change: Yeah, I mean honestly, it's still a little early obviously, but I think we would tell you that we're looking at somewhere between probably in the running three to five new platform companies that let's say somewhere in the $75 million to $100 million in new capital and then we expect to see around $50 million on add on activity because it's already been pretty active through.

Speaker Change: Today's date, yes.

Speaker Change: Yes, and I would just add to your second question.

Speaker Change: Some of these new prospective deals will certainly be eligible for the FDIC.

Joshua Weinstein: One thing I would remind everyone of is we're still reinvesting out of SBIC-1 as well to the extent that we have repayments there. So these deals are generally maybe 50% are eligible for the SBIC. We're funding SBIC-1 and we're going to begin to fund SBIC-2 certainly this quarter, but the debentures probably come.

Speaker Change: One thing I would remind everyone is that we're still reinvesting spic's, one as well to the extent that we have repayments. There. So these deals are.

Speaker Change: Generally maybe 50% are eligible for the Spic's, where funding FDIC, one and we're going to begin to fund spic's too certainly this quarter, but the debentures probably come in the next quarter.

Speaker Change: Okay. Okay. That's helpful.

Speaker Change: And then two just kind of looking at the industry diversification of your portfolio. Your second largest concentration based on your Pie chart is 9% and consumer products and given that there is some concern in the market today regarding the lower end consumer wondering if you could just kind of reminds me.

Speaker Change: Kind of.

Speaker Change: The companies that you have in there that you qualify or characterize as consumer.

Speaker Change: What segment of the consumer market are they delivering their product.

Joshua Weinstein: I mean, honestly, it's kind of a tough question to ask because it's very granular and diversified. I don't think there's any one industry within consumer products. You know, we we just did a deep dive, you know, as part of the tariff exposure. We also did a deep dive just on the whole portfolio. And we really identified very few, if any, sub industries that we feel like we're overweighted towards and which we were have a concern on from a recessionary perspective. Now, you know, doesn't say that in a recession, in a deep recession, that all companies will struggle to some point.

Speaker Change: I mean honestly, it's kind of a tough question to ask because its very granular and diversified I don't think theres any one industry within consumer products.

Speaker Change: We just did a deep dive as part of the tariff exposure. We also didn't deep dive just on the whole portfolio.

Speaker Change: We really identify Barrett SKU if any.

Speaker Change: Sub industries that we feel like we're overweighted towards and which have a concern on a from a recessionary perspective now.

Speaker Change: Does it say in a recession in a deep recession that all companies will struggle to some point, but I don't believe it's anything that will be lumpy and therefore, you'll kind of be moving in the same direction. One of the things we've done since the inception of our credit platform is downside case modeling on all of our deals.

Joshua Weinstein: But I don't believe it's anything that will be lumpy and therefore kind of be moving in the same direction. One of the things we've done since the inception of our credit platform is is downside case modeling on all of our deals as it relates to the Great Recession. So, you know. We've taken the posturing of being a little bit less aggressive on deals that cycled really hard or industries that cycled really hard in the Great Recession. So, generally speaking, at a very high level, I think a lot of our consumer products businesses would be focused more on the lower end, you know, with more value end of the spectrum.

Speaker Change: As it relates to the great recession so.

Speaker Change: We've taken the posturing of.

Speaker Change: Being a little bit less aggressive on deals it cycled.

Speaker Change: Cycled really harder industry cycle is really hard.

Speaker Change: Great recession, so <unk>.

Speaker Change: Generally speaking at a very high level I think a lot of our consumer products businesses would be focused more on the lower end.

Speaker Change: Whats more value value out of this.

Joshua Weinstein: So, give us some insulation to that. Thanks.

Speaker Change: Spectrum, so give us some insulation to that.

Michael Sarner: And last one for me, just curious if there's any kind of new updates to communicate on the potential fried car fund. No, I don't think there's anything explicit to communicate there. And I would, you know, say more so that there's a little delay there based on what's happened. I think, you know, a lot of the plans we've been looking at are, you know, some are domestic and some are international. And there's definitely a pause from our perspective on the international end as to. Capital is being deployed in the U.S. market. So it's still something that we feel very confident and aggressive towards achieving.

Speaker Change: Thanks, and last one from me just curious if theres any kind of new updates to communicate on the potential fried carpark.

Speaker Change: No I don't think theres anything explicit to communicate there.

Speaker Change: I'd say, even more so there's a little delay there.

Speaker Change: On what's happened I think.

Speaker Change: But we've been looking at are some.

Speaker Change: Domestic and some are international.

Speaker Change: And there is definitely a pause from our perspective on the international and.

Speaker Change: Capital is being deployed in the U S market. So.

Speaker Change: So it's still something that we feel very confident and aggressive towards achieving.

Michael Sarner: But I would say from the last time we've spoken to today, I don't think there's much more progress and just a little bit more of a pause. makes sense.

But I would just say from the last time, we've spoken to today I don't think theres much more progress than just a little bit more of a pause.

Unknown Executive: Thanks for taking my question today. Appreciate it. Thank you.

Speaker Change: Makes sense, thanks for taking my questions I appreciate it.

Robert Dodd: And our next question for today comes from the line of Robert Dodd from Raymond James. Your question, please. Hi, guys, and congrats.

Speaker Change: Thank you and our next question for today comes from the line of Robert Dodd from Raymond James Your question. Please.

Robert Dodd: Hi, guys and congrats on the quarter.

Robert Dodd: Oh, two questions for me. First, going back to your prepared remarks, I think you said there could be some spread impact, given increased competition for the non-tax impacted industries. I mean, how would you, what potential scale do you think you could see there in terms of incremental spread compression? And then also like tied to that, how much of that is also what we might see in like weighted average spreads on originations? Because obviously, I'd expect non-tariff impacted businesses to be lower spreads already. And if you do a more share of those kinds of businesses, I mean, you see how much of it's like for like with competition, and you're seeing, you know, bigger players move down market versus how much of it is just is potentially a mixed.

Robert Dodd: Two questions from me first going back to your prepared remarks, I think you said that could be some spread impact.

Robert Dodd: Given.

Robert Dodd: Increased competition for the norm Taffe impacted industries.

Robert Dodd: How would you.

Speaker Change: What potential scale do you think you could see there in terms of incremental spread compression on that and then also like tied to that.

Robert Dodd: How much is that.

Robert Dodd: This is also.

Robert Dodd: What we might see in like weighted average spreads on originations because obviously I would expect non non tariff impacted businesses to be lowest spreads already and if you do have more share of those kind of businesses you see how much of it is like like for like with.

Robert Dodd: <unk> are you seeing bigger players move down market versus how much of it is.

Robert Dodd: Is.

Robert Dodd: It's just it is potentially a mix thing.

Michael Sarner: I mean, yeah, like, I wouldn't think that it'd be a material spread compression. I think the point would be more, we certainly wouldn't see widening. And we got a lot of, we've got a lot of questions, or had a lot of conversations as to whether or not we'd see widening in spreads, given the macro environment. And I think that the counter to that is, you know, still a lot of dollars chasing potentially fewer deals. So, you know, wouldn't expect widening for sure. But, you know, I wouldn't, if there was some spread compression, I wouldn't expect it to be, to be material.

Robert Dodd: Got it.

Robert Dodd: Yes.

Robert Dodd: I wouldn't think there'd be a material spread compression.

Robert Dodd: At that point, we'd be more we certainly wouldn't see widening and we got a lot of we've got a lot of questions.

Robert Dodd: A lot of conversation as to whether or not we see widening in spreads given the macro environment and I think that would be the counter to that is.

Robert Dodd: There's still a lot of dollars chasing potentially fewer deals so.

Robert Dodd: Wouldn't expect widening for sure, but I wouldnt, if there was some spread compression I wouldn't expect it to be.

Robert Dodd: To be material.

Michael Sarner: And we've seen, I think everyone's seen that the BSL market, you know, blew out in the last two months. The lower middle market, you know, it's slower to react. And it's just a little more insular than the BSL. And so, you know, we haven't seen that. I mean, what we would tell you specific to Capital Southwest is, you know, we're averaging around, you know, 675 to 7% on the new deals we're seeing. But having said that, the ranges are as low as, you know, 5.5%, and as high as 7.5%. And we tell you some of those 5.5%, I think Josh and I would say that was probably 100 basis points wider, certainly in 2023.

Robert Dodd: We've seen I think everyone has seen that the BSL market.

Robert Dodd: Blue out in the last two months.

Robert Dodd: The lower middle market is slower to react and it's just a little more insular then the DSL and so we haven't seen that what we would tell you specific to capital southwest is we're averaging around 675% to 7% on the new deals we are seeing but having said that the ranges are as low as $5.

Robert Dodd: 5% and as high as seven 5%.

Robert Dodd: And we would tell you some of those five 5%.

Speaker Change: Josh I would say that was probably 100 basis points wider certainly in 2023.

Michael Sarner: And the other part of our aspect of it is we're also seeing, you know, the DDTLs that get funded are from older vintages, generally speaking, you know, prior to 2025. And those are usually 7% plus. So, you know, we've seen only limited amount of compression in our portfolio. I think this quarter we had 10 basis points of spread compression. And then, you know, the other reduction had to do with SOFR coming down by 25 basis points. So, I think that kind of frames what Josh's, you know, comments and then us on a specific basis, I think that kind of frames where we think we are, kind of around that 7% range.

Speaker Change: And the other part of our aspects of it is we're also seeing the DD Tls they get funded.

Speaker Change: From older vintages generally speaking.

Speaker Change: Prior to 2025, and those are usually seven 7% plus.

Speaker Change: We've seen only limited amount of compression in our portfolio I think this quarter, we had 10 basis points of spread compression and then the other.

Reduction had to do so for coming down by 25 basis points.

Josh Weinstein: I think that kind of frames what Josh.

Speaker Change: <unk>.

Speaker Change: A comment and then us on a specific basis I think that kind of frames, where we think we are kind of around that 7% range.

Michael Sarner: Got it. No, I appreciate that. Thank you. Then on your ETI, your spillover balance, I mean, $0.80 at the end of this quarter, $20 million, I mean, that's adding in the ballpark of $0.50. So you could be coming out of Q2 with almost two full quarters at the increased dividend, including the supplementals, almost two quarters of dividend and spillover and potentially growing further. I mean, what's your comfort level on how high you would want that balance to potentially go? I mean, in the past, you have distributed specials sometimes to work it down when you've had a period of material gains.

Speaker Change: Got it got it no I appreciate that thank you all.

Speaker Change: UTI do your spillover balance I mean.

Speaker Change: <unk>.

Speaker Change: At the end of this quarter.

Speaker Change: <unk> million.

Speaker Change: That's adding.

Speaker Change: In the ballpark of 50, so you could be coming out of Q2 with almost two full quarters.

Speaker Change: Increased dividend, including the supplemental so you're almost two quarters.

Speaker Change: Dividend spillover and potentially growing further I mean, what's your comfort level on.

Speaker Change: On how high.

Speaker Change: You would want that balance.

Speaker Change: Potentially go I mean in the past you have.

Speaker Change: Distributed specials, sometimes to work it down when you wouldn't have had a period of material gains I mean can you give us your thoughts on how much that could go up before you would want to deal to deal with it with maybe.

Michael Sarner: I mean, kind of, can you give us your thoughts on how much that could go up before you'd want to deal with it with maybe some kind of one-time? Yeah, I mean, that's a great question. That's what we think about a lot around here. I would tell you, I don't know if our approach might be different, somewhat different than others. I mean, our intent here is to create realized gains, as well as having stocked away some pennies when SOFR was extremely high, and we knew that was coming back to build up a UTI balance, but we want to distribute to our shareholders.

Speaker Change: Some kind of one time distributions yes.

Speaker Change: My question is what do we think about a lot around here.

Speaker Change: I would tell you I don't know if our approach might be different somewhat different than others. I mean, our intent here is to create realized gains as well as having stopped away. Some pennies when sofa was extremely high and we knew that was coming back to buildup of UTI balance, but we want to distribute to our shareholders. So you're right.

Michael Sarner: So you rightfully identified the fact that, you know, we'll likely have a dollar balance-ish coming out of the June 30 quarter, and we do have some anticipation of that balance going sizably higher. I don't believe that unless that we exceed our UTI maximum, that we'll do a special dividend. What I would say is that UTI balance is there to support our regular dividend. It's also there to support that supplemental. If we do play out a scenario where we're pushing, you know, $1.52, we would see that $0.06 supplemental dividend increase. And, you know, I don't think that we have a I don't think we have a number in mind on how big we want it.

Speaker Change: <unk> identified the fact that we will likely have a dollar balance ish come.

Speaker Change: Coming out of the June 30 quarter end, we do have some.

Speaker Change: Anticipation of that balance going higher.

Speaker Change: I don't believe that unless that we exceed our UTI maximum debt will do a special dividend what I would say is that UTI balance is there to support our regular dividend. It is also there to support that supplemental if we do play out a scenario, where we're pushing a $1 $52 we would see.

Speaker Change: <unk> supplemental dividend increase.

Speaker Change: And I don't think that we have a.

Speaker Change: I don't think we have a number in mind on how big we want it I think I can tell you, we probably don't want any less than 50.

Michael Sarner: I think I could tell you we probably don't want it any less than 50 cents. But, you know, our intent at the end of the day is to return capital to shareholders. And we believe the most the most beneficial beneficial way from a shareholder value is to do it in a programmatic basis, which is to pay it out in the supplemental. I don't think we've seen the value for shareholders in doing specials. You know, it quickly reduces liquidity. It quickly increases leverage by reducing NAV. And it doesn't have a long term impact from a trading perspective of distributing 50 cents at a time.

Speaker Change: But.

Speaker Change: Our intent at the end of the day is to return capital to shareholders and we believe that most of the most beautiful beneficial way from a shareholder value is to do it in a programmatic basis, which is to pay it out in the supplemental.

Speaker Change: I think we've seen the value for our shareholders in doing specials.

Speaker Change: Quickly reduces liquidity, a quick quickly increases leverage by reducing <unk>.

Speaker Change: And it doesn't have a long term impact from a trading perspective of distributing at 50 cents at a time. So I think you should expect to see the supplemental being where it is or.

Robert Dodd: So I think you should expect to see the supplemental be where it is or stronger in the coming quarter. Got it, thank you.

Speaker Change: Stronger in the coming quarters.

Speaker Change: Got it thank you.

Unknown Executive: Thank you.

Unknown Executive: This does conclude the question and answer session of today's program.

Speaker Change: Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Michael Turner for any further remarks. Thanks.

Michael Sarner: I'd like to hand the program back to Michael Sarner for any further remarks. Thanks again to everyone for joining today. We look forward to speaking to you guys next quarter. Take care. Goodbye.

Speaker Change: Thanks, again to everyone for joining today, we look forward to speaking to you guys next quarter take care Goodbye.

Unknown Executive: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. Thank you for watching!

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

Speaker Change: Okay.

[music].

Speaker Change: Okay.

Speaker Change: Yes.