CSWC - Earnings call transcript Q2 2019 | Capital Southwest Corporation

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Operator

Thank you for joining today's Capital Southwest Second Fiscal Quarter 2019 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; Chris Rehberger, VP 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. on and currently beliefs. based management's information are assumptions expectations, statements current available conditions, and These that results They and statements. numerous assumptions are not subject cause are guarantees to risks, of uncertainties from differ materially to future results could such actual and

or information circumstances obligation uncertainties, this as Capital to whether by revise hand changing forward-looking available risks future Officer, update Southwest's reason Company does as and SEC. statements, of of law. with our or other now Bowen events, the date to Executive the The any press after these will new and off release, required a not Chief the concerning publicly For Diehl. see President filings undertake information, except call result any any I

Bowen Diehl

thanks our everyone Second our found which our prepared on us for and Year Earnings to Chris, refer earnings www.capitalsouthwest.com. website in will at joining to various Call. our XXXX for slides presentation, remarks, Throughout Fiscal Quarter be Thanks, can we

We quarter quarters, announce In have a the particularly few our over had this deal summary, some our job deal we are in quarterly opportunities. strong morning to interesting robust with industry done relationships to and originations, activity has an the results. as past flow been on pleased teams excellent capitalizing and of you be our closing on

our the exists. believe on Xst significant a building upside remains Lower loan stated, equity we portfolio co-investments focus Secured Lien Senior of opportunity consistently consisting Debt Market portfolio, have largely we with As Middle equity where across

X our per stable, at XXXX. some performance long-term interest important quarter in points which our for increasing internally-managed our generating through Slide the capital aligns NAV sustainable, summary September are out share execute with closely preservation dividends, fellow ended continue under of to Laid on We XX, shareholder-friendly, foundation shareholders structure, on growth. our the value and interests its

regular a and per pre-tax share dividend net share. investment we paid earned of per $X.XX quarter, of This income $X.XX

we generated paid strategy. supplemental of a from gains $X.XX UTI funded dividend excess balance per and by date addition, capital share sizable investment to In income our from our accumulated

per paid The each we our current our future our to out allow supplemental $X.XX and per share dividend excess stated shareholders dividend for generated UTI earnings quarter of As annualized foreseeable to quarter continue balance, a capital the total that should distribution in of the in gains investments, equity to us total previously, anticipated portfolio X.X%. pay dividends from during yield future. share $X.XX expect

grew at at we to from the our X by June XXXX, commitments companies $XXX demonstrate as million market. portfolio to companies. the million to originating originated in deals XXXX our traction of Five our XX% were portfolio During portfolio directly $XXX add-on X investments total teams, the they in new existing X XX, continue million quarter, investment September and XX, $XX in

Fund Senior continued performance, also quarter. the capital Our in our fund XX.X% for I-XX annualized providing cash-on-cash Loan on a yield the its solid

no with credit to portfolio internal pleased and on our on since loans have announcing We that are years and we note investment initiating X our strategy, one non-accrual only almost a watchlist.

program, trade date, we we ATM, $XX the quarter, bonds or unsecured raised program of At-The-Market, for the continuing sheet, of at $XX.X its CSWCL approximately under During our million, bonds, total baby proceeds to an increasing CSWCL. To right yield through our from outstanding size approximately amount effective ticker $XX million this grow up current the the million. balance original of continued deal which the of our the side X.XX% to in have gross on NASDAQ

and outstanding quarter, availability facility, portfolio million our to $XX continue grow had $XXX in the As on of to credit million the our with our leaving earnings. we of end us

work common of offering per than offer of million. generating that back shares respected and responded Additionally, from offering proceeds share. in priced X% in market, were be BDC post Interestingly, our size to represented The so large path these IPO target the to to The materially earning pleased base. net offering while a was large also The investors a at enough to opportunistic less as $XX.XX issued first above we amount meaningful $XX.X for Capital be knowledge institutional quarter put are the our equity discount capital have leverage. of value assets offering we being to that in not XXX,XXX this too and stock offering establish asset inquiries was as able to dilute we doesn't deep raised achieving is quickly since can space to shareholder Southwest direct to by overly sense elongate the shareholders. an X positions that XXXX. in institutions size Capital Southwest, highly with in We to end, its

X through of of our dividends track shows shareholder As record building income-generating past in Slide updates, a thoughtfully we continued growing assets. have illustrated portfolio well-performing, quarterly

through investments. the NAV increases benefit consistent lucrative to shareholders, we incremental As shareholders of we our contract. equity will sheet, our reaching newer record to On this are in generate as our we a earnings driving internally-managed our levered that fully structure our track XXX% more portfolio virtually balance towards slide, progression rather also continue benefit our management external than a illustrate of the of

adjusted cumulative the by driven per unrealized was time, for For $XX.XX $XX.XX NAV share which per in quarter, defined from supplemental appreciation as increased quarter. share, our investments paid dividends largely share, to over per plus equity out the NAV

to attractive blend In and which share future opportunities alongside Middle strategic losses. growth performing flexibility provides as focuses the the important well assets, mitigating out made debt. us driving described as is seek of on Market Lower Middle NAV Upper markets. co-investments we portfolio as equity co-investments built consisting Lower per of of and Building investments core have robust a originate risk-adjusted capability credit we both debt to directly Our equity Market, Market our Middle investment market, in X, in both a as on strategy, returns highly Slide our granular while

us the invest market presence in as attractive Middle other Currently, the in hand, when liquid provides opportunistically exist. Market On our Upper can risk-adjusted more have a see, returns the environment Market. Middle to and capability capability investment been activity in or the our very so, Upper in during in it past to an year value we is where one difficult find the

to generating we return in some risk origination conservative the the We that positions so to well For the attractive that we us that in a and generating find deal approximately allowing flow, competitive through small into our are perspective. from the deals Lower perspective, origination from return take highly fit economic structures employ been At Middle close maximizing a time Market we strong often believe a to perform end acceptable, credit choosing and million, platform the over our it funnel performance investment we to consider a $X which of of robust on cycle. ensures is will able of critical underwriting I-XX. risk as market, portfolio our time, opportunities wide same are deals top strong build has array a standards thoughtfully

debt portfolio portfolio new to Middle Slide of the investments one as in committed existing companies. were the to During and All $XX X, Capital Middle average and of led the on quarter we made add-on investments the yield deals X a but Southwest. On X to the maturity originated the being of Lower seen million quarter, investments Lower Market, Market XX.X%. weighted a basis, with by during investments had all directly

investment million of this in investment. million Secured alongside debt $XX.X included in Xst $X.X up and Xnd Debt, made invested Senior $XX.X secured secured in our Our debt new Lien debt and Lien one $X.X Lien of million million quarter Xst Lien secured originations secured debt Split

in quarter, X X of all the transactions. transactions, co-investments invested million $XX.X of the as -- well equity in equity funded add-on we X During new as portfolio the alongside

out targets. to portfolio, or Loan committed on-balance amounts the portfolio $X.X the facilities transactions an I-XX, XX, certain credit Market Draw additional including commit our to of Delayed certain credit Term growth sheet that fund in of and Lower In structures EBITDA Slide Market. form excluding Middle Upper on of transactions addition, we either new based million On revolving add-on and break conditions, X Middle to between the one the we

of end quarter, to our We XX.X% of had basis. our Market weighted approximately to Market Lower the XX% quarter, Middle Middle of -- XX% end times. of and of debt as portfolio, as ownership a measured the Lower $X -- we of was measured $XX.X on EBITDA EBITDA and equity through to approximately and debt the and the Middle million, investments Lower weighted cost total average hold Market the in XX% our the XX a of with size Within to X.X portfolio the leverage average EBITDA As held average Market of a Upper portfolio of security companies. Middle an million, as yield weighted

Market Our EBITDA with portfolio our through weighted $XX.X million, of of a of of weighted average loans, $X.X Upper Middle and average leverage average times. a an of hold million, security XX consisted XX.X% yield X.X size

XX, as Capital $c XX, Market at Our $XXX activity. XXXX million XXXX, June I-XX, on-balance again Lower Southwest, shown to at on September sheet Middle by origination credit XX, excluding grew million portfolio from Slide driven strong XX%

now the As Lower portfolio XX%. has increased the the the percentage grown, Middle Market has represented to by design of credit portfolio by

continued by to the the Lower While emphasize Xst heavily Secured we in Lien have also Middle increased Market, Debt strategy. of our the have represented Senior we percentage investment portfolio

credit quarter, Debt. As our XX% of we sheet Senior of Xst portfolio of the on-balance end had Secured Lien the in

ago, Finally, on X $XXX activity, since at harvested exits XX IRR excluding weighted launching almost years million strategy I-XX have $XXX credit a our of XX%. invested proceeds in we average exits and those million, generating

Xst on have portfolio, recession. biased debt illustrated a well- preparing heavily towards Slide for diversified established us XX, investments, As we Lien

the floating Slide rates such as to on that is seen continue time, our benefit interest of shareholders should XX, invested to same rise. at XX% can in credit rate also continue exposure be our While securities,

of As and X.X% with average X.X end shown portfolio leverage of weighted the Slide I-XX million as portfolio. among a through XX, $XX of portfolio diversity security was the the a EBITDA hold weighted and of I-XX the industries Xst times. Lien, the had The on size average of average a an of XX% quarter,

financial harvested I-XX -- years. We and through Main the our been solid the and past harvested million of X the $XXX fund, invested in performance partner have have Capital, XX Street We over with proceeds I-XX, pleased of million generating quarter. a will specifics the average our review Michael exits IRR call of to XX.X%. the over weighted the exits to now hand I the in for $XXX performance on at

Michael Sarner

Bowen. Thanks,

As portfolio income million $XX.X versus in represents from Slide this weighted the for the quarter, yield weighted XX, quarter, investment an net XX%. of seen down The attributable And on $X.X mostly our previous of from of produced assets the all on million quarter. with million credit average $XX.X This there average portfolio XX.X% slightly investments a XX.X% end our as of on investment non-accrual. increase no portfolio the the to on quarter, growth. quarter, yield were was previous

Excluding interest was which quarter. incurred million expense, operating we in expenses with previous the this $X.X quarter, flat

earned the $X.XX or net million, $X.X quarter. $X.XX pre-tax the compared share For share investment quarter, income prior during of we to per per

As for share a regular the the per in share increase quarter, per an quarter. prior paid $X.XX over dividends in we result, out per $X.XX share paid out $X.XX the of

off. dividend We in the a on cumulative demonstrated regular spin since growing dividends of our focus XXX% coverage by sustainable regular continue to our manner,

Program. shareholders program As net This the out the to and debt our of $X.XX per this Bowen undistributed both exits taxable our continue paid part investment mentioned quarter from income, be from share was our Dividend as earlier, estimated current well participate supplemental a our gains in successful over undistributable past of dividend realized meaningfully investment funded announced recently program to will as equity, allows earned we several portfolio. Supplemental quarters. as income on The also which

foreseeable of our Market the program, of of all improve continue As With longer we about unrealized regulated requirements, company corporate distribution equity in target our minimum the investment of due co-investments leverage portfolio the senior we pleased from likely portfolio, quarters. are time XX, Industrials operating groundwork sub-X.X% investment CSW has the term date, been has leverage coming of as to infrastructure Dividend the X% believe leverage, to improved the the appreciation growth On which our in place, and our currently will the internally-managed operating professionals our the we with we we our to and continue made here at of for be Lower the Supplemental quarter structure. toward strategy, achieving ended the think work in duration our being Though to place X.X% that Program to spin-off future. largely to of Middle laid operating XX/XX/XX. for progress importance Slide our in to illustrate portfolio certainly significantly from have across mindful we the

Slide of net $X.XX equity during our annualized quarter, to the share. $X.XX on portfolio seen $X.XX decreased per -- during by quarter. driven by share The XX, was per unrealized supplemental dividend decrease appreciation $XX.XX As total increase share the of per the The NAV offset for an return per a quarter, on appreciation. share paid drove X.X% the in of by

Our X.XX ended regulatory at to leverage the quarter X.

Capital was normal prudent this and an share before As $XX.XX to understanding at capital with was institutional X effective favorably of -- equity subsequent closing only Bowen amount completed our before a Based feel NAV for previously, offering raise to execution to We shares of approximately per $XX.X until end, to the fully for our the common offering. total new a XX, on mentioned we deal. to investors. that regulatory XXX,XXX prudent and of proceeds, able net it stock stock modest believe market levels leverage of not quarter we April million. Southwest price a equity The BDC day the discount X.XX marketed time. compares our were price We XX% a will current execute expenses, leverage capital above X.X% a with of it to of this this on go the X% discount were at at XXXX, regulatory raise

on constructive credit in with completed. to we additional $XX have revolving enhanced working once update available the ING to had capacity achieve our continue a the quarter amendment discussions end, on have make we'll on million this and to Deutsche million regarding the flexibility million million facility, is time, At formal our an to and $XXX led weeks of on-balance facility. our balance Though the with ING cash. in an coming capacity in I-XX facility, credit we provide facility, sheet and progress Bank we the don't $XX we lenders terms $XX.X amendment at are Additionally, within sheet announcement

program X.XX% place ATM to quarter, our noted put As we've additional in notes. XXXX last an raise December capital on

of million We As of is have attractively an raise an in today, time program gross priced, effective shares capital, at as under to for our the to way we of approximately believe our the XXX,XXX continue notes program sold we of yield just thoughtfully $XX proceeds X.XX%. grow ATM portfolio. effective investment

Slide have Bowen capacity payment calendar on significant seen late until to XX, I year hand will no we final debt the portfolio. comments. back which now for our grow obligations will and us call to significantly XXXX, As unused enable some

Bowen Diehl

almost strategy and you, everyone, and shareholders thank with Capital and Michael, our the ago. have four developed, years business portfolio has for us grown, vision joining consistent the and Thanks, today. communicated Southwest to we

Capital by Everyone remarks. creating value being to strong Our shareholders. our open deliver concludes Operator, stewards shareholders' our is Q&A. lines are for team capital of generating ready to shareholders. continuing Southwest the performance and our job performance to at sustainable good here has done long excellent term strong our an we This for for dedicated prepared totally

Operator

[Operator Instructions].

Our comes Mickey from of first question Schleien Ladenburg.

Mickey Schleien

sold Bowen million. the the proceeds June, couple you months of October, $X.XX the for Yes. and of million. common to total $XX you later about in in and special decided pay And shares $XX a Michael, dividend

Was assuming declared across those cheaper you than period. deemed distribution this, to I'd if I'm through could into or you the walk So, had insight us understand, a instead? had like you well, backlog time And that good pretty decisions?

Michael Sarner

is UTI before. distribution predicated really Yes, year. on this a of about they're your requirements, the end balance we what talked We've at have Yes.

our So we've in future. with balance, expect we our dividend consistent to what be sized it's the

get really So quarters. our increase the that perspective, we subsequent to have $X.XX us made we distribution pretty was, level comfortable, in felt at from regular our that we so dividend much a required wouldn't to

that has we offering variables considered. that we the about we think talk currently I equity raise, different it,

Bowen Diehl

after to the Michael in, reverse decision. Well, mentioned, but it the equity so of while and was little wasn't too to out, really much, on little a as Goldilocks raise Mickey, it I be touched a We but the frankly of made the to decision originations modest target much was like level given and had things it base, it too we the on where decision. a situation, of was a capital, seemed on were which amount offering inquiry, based made right meaningful sense get offering, is right paid that want didn't so ones the it they it thought leverage that in the shareholders, too -- wasn't -- coming equity a towards we a the do. position, to shareholder we separate based kind $X.XX didn't where considered leverage, bit were size opportunity, trajectory and on a and and path the so elongate and on all we our based X wanted

Michael Sarner

UTI depreciation. a and at the And have unrealized Deepwater talked to past, we MRI. Mickey, also in perspective, our from look about We've

those that are So other UTI prospective balances future. assets in are the

So the making prudent was with to time. a $X.XX do distribution thing a

Mickey Schleien

Okay.

seen understand you're I'm increase I to think, in sort portfolio, in of over meaningful Bowen, rates your trends seeing interest I fixed in charge given understand. several the also quarters. And ratios coverage curious the the that what last we've

Bowen Diehl

the charge up, in at we're things mean, lower imagine, of deals. portfolio when Great of to than we go flow I about level a And think, recession look part, can to past, look I our the bit in Recession, as you talked the increasing. that provides, the companies, burden larger the cash a Yes. quite the in be on at industry. lot business. cushion in And across one many leverage tends as else at It's our we've rates all look we the a fixed well performance, these -- as look portfolio of you underwriting that's clearly, and as equal. also specifically we portfolio, inherent players We see interest rates volatility the can just in on at as cover the

-- rates to inherent certainly volatility to the much or charge so levels a negative And you are flow on you coverage, well really up or business and while cushion as comes cash the businesses potential at in need interest margins. that considering it both leveraging down as is internal going the be volatility fixed in the have prudent how

And I much more portfolio so, leverage the perspective. charge on say in would equals fixed just lower a the cushions

Michael Sarner

clearly, But, coverage. is up going a interest rates zero charge greater pressure on than fixed

Mickey Schleien

least So Bowen, borrowers, at up you expense, interest indicating EBITDA? going is than their are within then that your faster

Bowen Diehl

No, I but me, I of it's it of It's in have about in front last couple probably quarters. wouldn't the don't that say obviously, about -- offset.

Mickey Schleien

So would... that

Bowen Diehl

I portfolio. it's Maybe would in say, fixed it in coverage mean, increasing. I a the have I of front don't would it's say little, me, charge but probably I

So to across because to increasing our value is loan or those is it's XX% level average probably typical -- typically -- on mean, rates portfolio XX% EBITDA XX%. to slightly companies, companies see is particular certainly remember loan you can are the faster I -- -- are the probably the increasing than on the leverage value

which of these lot cost. interest you've And below have an companies, a obviously us doesn't so got in equity

Operator

next comes question National Christopher Corporation. of Securities Our from Testa

Christopher Testa

in credit flat dislocation of absent the sort Middle expect that on just Michael, be Market, we to static obviously the kind significant remain pretty quarter, had of the markets? and JV seems given you SLF in to of and a the Upper should frothiness curious, kind cited Bowen, the Bowen

Bowen Diehl

could have trade in fund pristine, think I couple the the the not of actually par that the trade some we're in We and and -- credits. assumption, in to of fair that Chris. leverage are of out trends the taken at actually, credits a that's in fact, we we've business out a opportunity

inevitably So some we happen. still refinancings will have

now. a We of Main afraid is market comfortable credit us, we with it par, out we're what works it's perfectly if sell to right is it The great not have can for it not -- Street. we're we if works a for are it. -- fund, And get

I've together a [Technical and while. at as that -- that it's So, boil fund you all a flat said, least for Difficulty] probably

Christopher Testa

more making Okay. organic Middle of the and trends starting least And anymore. market have mean, the Upper type up haven't dividend I some we you Market? seen kind in obviously, LBOs volume excuse recap M&A, dreaded seen growth, at We've the and of over any me. XX% encouraging seen

going year kind and calendar of at into that is of still as bad frothy just So all? encouraging end ever it is Or here? the as the

Bowen Diehl

you of right. answered question for just that's mean, my Well, I me. kind

So in is definitely market the encouraging. that trend

EBITDA levels add to that that. I'd spreads, sensitive say leverage as recaps is and seen. a seen couple like situations hesitate backs that to of we've dividend we have a the necessarily, Certainly encouraging. heavy far instances, I market, As that of been to heavy, the trend lack in in more but call

Christopher Testa

wondering talk monetizing having potentially there's Recovery. Yes. this this at change Obviously, you're yet. the if kind kind and been any front a are how thoughts within I of in have successful pretty of maybe just that. equity at the definitely. wanted down to of portfolio large of Media would paring Don't and And for agree, But the just benefit of on about wanted your position been optics an looking guys. looking this the you Q very has what me in

Bowen Diehl

two was question. say, Yes. things. there's a would That good I

optimize we steadfast equation. First risk right. portfolio of are building our equity on at include shareholders returns and return for generates that that our a That million, to credit kind strategy XXX% doesn't attractive foremost, $XX risk of lower investments,

so Media perspective. not core from is clearly that Recovery And

it's We $XX interesting could $XX put $XX in And and afford [indiscernible] think to business true, that's see strategic the buy someone firm equity past an to it's acquisitions million so, of we lot in actually is for the interest asset calls said make million, still it. an private a asset. million, asset in to around that as I've that

that's We think do that, we attractive. As right. a pretty platform, couldn't

for partner So business. we're wrong the that

it's is and the the would our at okay, a things as about or of kind kind intermediate. the the months it's minus. that, sale a candidate, say, it different strategy, so it kind next X And doing as I the sale -- and I we an over over all next management of like, is kind when. candidate And think the question of think with about team like And look business you it's feels of plus

Christopher Testa

Okay, got facility have it. That's remind your guys helpful. reduced with that over credit And okay is asset you, Thank Bowen. just me, XXX%? that already -- is coverage you the

Michael Sarner

the that's -- something and that's hoping all to with cost, We're part -- part looking that. No, the we're reduce that's negotiation are of ongoing capacity with increase negotiation. to reduce stretch ING That the duration, of right now. Those several things asset the also coverage. do

Christopher Testa

when kind quarter would Got it, happening? that Is Michael, one And event? kind two or okay. that of of a anticipate you

Michael Sarner

it's near I the in would term. tell

Christopher Testa

And Okay, yield the kind quarter, a at maturity. coal with of you plus it. got originations there company to during looking new guys just talk, the want XX% a on had

that can of give of nature. sort could on color the things excuse me, was the just leverage, front if attachment you potential and you and that you a there revolver in ability -- if wondering discuss to some Just of that point

Bowen Diehl

Yes.

So company? want in know in a world the why would invest you we you mean coal to

Christopher Testa

much. Pretty Yes.

Bowen Diehl

Right. Yes.

to areas in homes you So low leverage infrastructure. anthracite can't really it's really -- and a Blaschak that gas point. infrastructure, rural gas very regional of very niche pay build Northeast, in coal distributor heating a interesting. doesn't It's for where of coal it's the is build minor -- not

and [indiscernible] it's got a times, significant So, sub asset times two amount X sub coverage. of

as -- mentioned is I Split you loan. Lien it's as mentioned, a So

of So we have Xst coal on -- a including assets, reserves the several Lien themselves. the

in And a equity equity private from of so sponsor. -- amount significant got and a it's it

would you your -- risk. company, of this like if lot to a pretty were given pretty And people to be coal a the interesting you credit ever So, rate a is lend interesting, because a one. react, react,

it exist. continue I significant an business a niche a well as pretty nice low a and pretty very about -- interest cash multiple a well, where asset reason moat deal asset so, it to a interesting think around very exist at And it to rate flow has at and to covered

pretty so, And credit. interesting

Christopher Testa

definitely Yes. sound No, that really unique. does

Operator

this back Instructions]. session. like Diehl remarks. closing over call to I does our now question-and-answer would Bowen turn And [Operator the conclude for to any

Bowen Diehl

operator, again, joining apprised you, keeping you and calls. a Have forward for us look thanks future Thank and our today, we to of progress great everyone, on week.

Operator

you This Ladies for today's in participating today's thank and gentlemen, program. conference. concludes

Everyone, have a disconnect. all great day. may You

Chris Rehberger	VP, Finance & Treasurer
Bowen Diehl	President, CEO & Director
Michael Sarner	Treasurer, Secretary, Chief Compliance Officer & CFO
Mickey Schleien	Ladenburg Thalmann & Co.
Christopher Testa	National Securities Corporation

Capital Southwest (CSWC) 11 Nov 182019 Q2 Earnings call transcript