Capital Southwest Corporation (CSWC) delivered a solid QQ1 2025 performance anchored by strong net investment income (NII) and resilient portfolio metrics in a competitive lower middle-market environment. Pretax NII of $31.3 million, or $0.69 per share, comfortably covered the regular dividend of $0.57 and supplemental dividend of $0.06 in the quarter, reinforcing a prudent dividend policy aimed at sustainability in a rising-rate regime. The Board subsequently lifted the regular quarterly dividend by $0.01 to $0.58 for the September quarter, while maintaining a $0.06 supplemental payout, underscoring confidence in ongoing excess earnings and realized gains from the equity portfolio.
Key portfolio dynamics include 8 debt prepayments in the quarter (totaling $77.2 million) with a 12.6% weighted-average IRR on exits, and $108.1 million of new commitments across three new platform companies and 11 add-ons. Equity co-investments totaled $133 million across 69 investments, representing 9% of total fair value, with the equity portfolio marked at 134% of cost and $0.72 per share in embedded appreciation. The on-balance-sheet credit portfolio stood at $1.3 billion, up 20% YoY, with 98% of the portfolio first lien senior secured. Portfolio yield averaged 13.3% and leverage per security averaged 3.8x EBITDA. LTM operating leverage reached 1.8%, modestly below the BDC industry average of ~2.8%, reflecting the efficiency advantages of Capital Southwest’s internally managed model.
Liquidity remains a salient strength, with roughly $485 million of cash and undrawn leverage commitments across two credit facilities and SBA commitments, equating to about 3.1x unfunded commitments. The SPV credit facility was increased by $200 million in the June quarter, and the ING-led corporate facility remains a primary growth vehicle, with capacity to expand up to $750 million under an accordion feature. The company continues to balance disciplined leverage with the flexibility to fund accretive investments and opportunistic share repurchases should the stock trade meaningfully below NAV. Looking ahead, management signaled expectations for continued investment activity in a solid market backdrop, potential near-term prepayments, and ongoing execution of a multi-source capital plan including a MAC SBA license review with an end-2024/early-2025 timeline. Overall, CSWC remains well-positioned to grow NAV, sustain elevated dividend coverage, and expand its balance sheet while navigating a competitive, rate-sensitive market environment.