EPS of $0.59 increased by 61.3% from previous year
Gross margin of 100.0%
Net income of 27.00M
""During the quarter, we reduced the investment portfolio weighted average debt to EBITDA from 3.5x to 3.4x. The investment revenue PIK rate from 7.6% to 5.8% and our nonaccrual rate from 1.7% to 0.8% of the investment portfolio at fair value."" - Michael Scott Sarner
Capital Southwest Corporation (CSWC) QQ1 2026 Earnings Analysis: Balance Sheet Fortitude, Solid NII Generation, and Disciplined Growth in the Lower Middle Market
Executive Summary
Capital Southwest (CSWC) delivered a productive QQ1 2026, underscoring the resilience of its internally managed BDC model in a competitive lower middle-market environment. Key highlights include pretax net investment income of $32.7 million, or $0.61 per share, and total investment income of $55.9 million for the quarter. The portfolio remains high-quality: nonaccruals declined to 0.8% of fair value (from 1.7%), and the weighted average yield on debt investments stood at 11.8%, with leverage at 3.4x EBITDA. The company also advanced its capitalization program—adding $25 million to the ING-led facility to $510 million, securing final SBA approval for a second SBIC license (up to $175 million), and raising $42 million of gross equity via ATM at $20.50 per share (123% of NAV). Management signaled a cautious but constructive outlook: run-rate operating leverage is expected to decline to the 1.4%–1.5% range by year-end, while liquidity remains robust with roughly $444 million in cash and undrawn facilities. The equity co-investment program continues to contribute upside (UTI per share at $1; $27.2 million in realized equity gains in the quarter). The strategic shift to monthly regular dividends, ongoing capital deployment, and potential AFFE reform in the U.S. legislative environment could further lift investor volumes and cash-flow visibility for CSWC.
In sum, CSWC demonstrates balance-sheet discipline, ongoing liquidity, and a diversified, PE-backed credit portfolio positioned to compound value through add-ons and platform investments. The primary investment questions relate to macro-rate paths, the durability of spread levels in a competitive market, and the regulatory backdrop that could alter sector flows and mutual fund/ETF trading dynamics.
Key Performance Indicators
Revenue
77.88M
QoQ: -11.94% | YoY:114.82%
Gross Profit
77.88M
1.00% margin
QoQ: 168.02% | YoY:53.35%
Operating Income
45.73M
QoQ: 155.51% | YoY:59.72%
Net Income
27.00M
QoQ: -55.74% | YoY:92.38%
EPS
0.50
QoQ: -62.41% | YoY:61.29%
Revenue Trend
Margin Analysis
Key Insights
Revenue: $77.88 million for the quarter; gross profit $77.88 million; gross margin effectively 100% by reported figures.
Operating metrics: EBITDA $45.734 million; operating income $45.734 million; EBITDAR ratio 0.5872; pretax net investment income $32.7 million or $0.61 per share; total investment income $55.9 million, up from prior quarter (drivers: $5.2 million higher cash interest and dividend income; offset by $0.9 million lower fees and $0.7 million lower PIK).
Net income per share: $0.61 (NII) and $0.50 (GAAP EPS) with diluted EPS of $0.59; weighted average shares outstanding 53.517 million, diluted 62.778 million.
Dividends: Regular dividend of $0.58 per share for the quarter plus a supplemental $0.06 per share; transitioning to monthly regular dividends, total September quarter dividend $0.64 per share.
UTI and NAV: Undistributed taxable income (UTI) balance per share increased to $1.00 from $0.79; NAV per share decreased to $16.59 from $16.70 due to restricted stock compensation charges.
Financial Highlights
Overview of critical QQ1 2026 metrics with YoY and QoQ context where available:
- Revenue: $77.88 million for the quarter; gross profit $77.88 million; gross margin effectively 100% by reported figures.
- Operating metrics: EBITDA $45.734 million; operating income $45.734 million; EBITDAR ratio 0.5872; pretax net investment income $32.7 million or $0.61 per share; total investment income $55.9 million, up from prior quarter (drivers: $5.2 million higher cash interest and dividend income; offset by $0.9 million lower fees and $0.7 million lower PIK).
- Net income per share: $0.61 (NII) and $0.50 (GAAP EPS) with diluted EPS of $0.59; weighted average shares outstanding 53.517 million, diluted 62.778 million.
- Dividends: Regular dividend of $0.58 per share for the quarter plus a supplemental $0.06 per share; transitioning to monthly regular dividends, total September quarter dividend $0.64 per share.
- UTI and NAV: Undistributed taxable income (UTI) balance per share increased to $1.00 from $0.79; NAV per share decreased to $16.59 from $16.70 due to restricted stock compensation charges.
- Portfolio quality and yield: Credit portfolio yield 11.8% with a weighted average leverage (debt to EBITDA) of 3.4x; 92% of the portfolio rated in the top 1–2 categories; nonaccruals at 0.8% of fair value (down from 1.7%).
- Liquidity and capitalization: Approximately $444 million in cash and undrawn leverage commitments; corporate credit facility increased to $510 million; SBA SBIC license approved for up to $175 million in debentures over time; 48% of liabilities are unsecured covenant-free bonds with earliest maturity Oct 2026; total debt $394.6 million; net debt $347.7 million.
- Growth and deployment: New commitments of $51 million in the quarter (including $50 million first-lien secured debt and $1 million equity) to 3 new companies; add-ons for 12 existing portfolio companies totaling $64 million in first-lien secured debt and $1 million equity; equity ATM proceeds of $42 million at an average price of $20.50.
- Growth drivers and risk factors: Add-ons represent roughly 55% of total commitments in the quarter; first-lien senior secured debt dominates the portfolio (99% of credit portfolio at end of quarter); ongoing pipeline strength with a recent pickup in deal flow; competitive landscape with banks competing aggressively on pricing; AFFE reform could increase trading volumes and improve transparency for BDCs.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
77.88M
114.82%
-11.94%
Gross Profit
77.88M
53.35%
168.02%
Operating Income
45.73M
59.72%
155.51%
Net Income
27.00M
92.38%
-55.74%
EPS
0.50
61.29%
-62.41%
Key Financial Ratios
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management insights drawn from the QQ1 2026 earnings call, grouped by themes:
- Capital structure and balance sheet optimization:
- Quote: "During the quarter, we reduced the investment portfolio weighted average debt to EBITDA from 3.5x to 3.4x. The investment revenue PIK rate from 7.6% to 5.8% and our nonaccrual rate from 1.7% to 0.8% of the investment portfolio at fair value." — Michael S. Sarner. Significance: Demonstrates ongoing balance-sheet discipline and improved credit quality, supporting a stronger risk-adjusted yield profile.
- Dividend policy and cash-flow visibility:
- Quote: "Furthermore, as previously announced, we transitioned our regular dividend payment frequency from quarterly to monthly." — Michael S. Sarner. Significance: Enhances investor cash-flow certainty and aligns with shareholder-friendly governance.
- Growth, origination, and pipeline dynamics:
- Quote: "From an originations perspective, we took a conservative approach to underwriting this quarter... deal flow in the lower middle market remained solid this quarter with $115 million in total new commitments to 3 new portfolio companies and 12 existing portfolio companies." — Josh Weinstein. Significance: Highlights disciplined risk-taking with meaningful growth in new and follow-on commitments.
- Quote: "We deployed a total of $51 million of new committed capital, including $50 million in first lien senior secured debt and $1 million of equity across 3 new portfolio companies." — Josh Weinstein. Significance: Indicates selective deployment and focus on top-tier credit structures.
- Market environment and competitive dynamics:
- Quote: "There's a bit of a supply-demand dynamic here... spread compression... the structures, which is something we focus on heavily on loan-to-value leverage quality credit agreements, those kinds of things have we stayed prudent on structuring." — Joshua S. Weinstein. Significance: Acknowledges competitive pressure while emphasizing disciplined underwriting.
- AFFE and regulatory backdrop:
- Quote: "There has been some long-awaited progress on the AFFE rule... the AFFE reform could significantly increase trading volumes in the sector, especially through mutual funds and ETFs." — Amy L. Baker / Michael S. Sarner. Significance: Points to potential secular tailwinds for BDC liquidity and share price responsiveness if the rule is clarified or revised.
"During the quarter, we reduced the investment portfolio weighted average debt to EBITDA from 3.5x to 3.4x. The investment revenue PIK rate from 7.6% to 5.8% and our nonaccrual rate from 1.7% to 0.8% of the investment portfolio at fair value."
— Michael Scott Sarner
"Furthermore, as previously announced, we transitioned our regular dividend payment frequency from quarterly to monthly."
— Michael Scott Sarner
Forward Guidance
Assessment and forward-looking view based on management commentary and industry dynamics:
- Revenue and leverage trajectory: Management projects run-rate operating leverage in the 1.4%–1.5% range by the end of the current fiscal year, down from LTM 1.7%. This implies continued efficiency gains from the internally managed BDC model and ongoing cost discipline.
- Dividend stability and coverage: NII is expected to support a regular dividend of $0.58 per share per quarter (monthly payment cadence) with a $0.06 per share supplemental dividend, supported by a UTI balance of $1 per share and anticipated gains from the equity portfolio. The company notes that if rates were to trough meaningfully lower (e.g., SOFR moving toward 1.5%), the dividend policy would require reevaluation; otherwise, CSWC expects ~$0.58 NII to cover the regular dividend.
- Growth and capital deployment: The company maintains a disciplined deployment cadence (~$40 million to $60 million per quarter historically, with the current quarter anticipated closer to ~$50 million). The SBA SBIC license provides optionality for lower-cost financing, which could enhance lower-middle-market origination economics.
- Balance sheet resilience: With approximately $444 million of liquidity and a 0.82x debt-to-equity ratio (target range 0.8x–0.95x), CSWC aims to preserve covenant cushions and remain opportunistic. The continued ATM equity activity and secured/unsecured debt issuance will support ballast sheet growth without compromising leverage targets.
- Risks and monitoring: Key factors include macroeconomic volatility, potential widening in lending spreads as banks' risk appetites shift, policy changes affecting BDCs (AFFE-related dynamics), and potential rate volatility that could affect NII and UTI dynamics. Investors should monitor quarterly dividend coverage, nonaccruals, and the evolution of net realisation gains from equity co-investments as inputs into UTI and dividend sustainability.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
CSWC Focus
1.00%
N/A
N/A
N/A
XFLT
0.00%
0.00%
0.00%
0.00%
CGBD
0.00%
0.00%
0.00%
0.00%
TSLX
1.00%
97.10%
3.71%
8.83%
HTGC
86.40%
55.60%
0.00%
0.00%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
CSWC presents an attractive, defensible investment case anchored in disciplined credit underwriting, strong balance-sheet liquidity, and a high-quality, PE-backed portfolio. The internally managed model supports meaningful fixed-cost leverage benefits and operating leverage that CSWC expects to trend toward 1.4%–1.5% on a run-rate basis by year-end, well below the industry average ~2.7%, suggesting superior cost efficiency and ROE for shareholders. The combination of: (1) a robust NII framework supported by diversified first-lien assets and ongoing entitlements to a $1 UTI per share; (2) a capital-raising program via ATM and a $175 million SBIC license that expands financing options; and (3) a strong liquidity cushion (~$444 million) and a conservative leverage stance (0.8x–0.95x target) provides guardrails against macro shocks and supports growth in the quarters ahead.
Near-term catalysts include continued strong new platform and add-on origination (with ~75% new deals in the latest referenced period) and sustained equity recoveries from the co-investment book (UTI and realized gains totaling $41.3 million over the past two quarters). The AFFE reform could materially alter sector liquidity dynamics, potentially enhancing CSWC’s market presence and trading volumes. Key watch points for investors: trajectory of weighted-average loan yields (currently ~7%–8% seen in recent quarters; 7%+ is the stated target in upcoming quarters), the evolution of SOFR/yield curves and their impact on funding costs, the pace of new originations versus repayments, the sustainability of monthly dividend cadence, and any shifts in nonaccruals or impairment risk in the portfolio. Overall, CSWC’s QQ1 2026 results support a constructive equity story for long-horizon holders, with prudent risk management and upside optionality from capital-structure optimization and strategic growth initiatives.
Key Investment Factors
Growth Potential
Strength in deal flow and portfolio construction supports growth in net investment income and NAV. The balance-sheet remains well-positioned with ample liquidity and a robust equity co-investment program (UTI per share at $1; $27.2 million in realized equity gains in the quarter). The SBA SBIC license expansion enables up to $175 million in additional debentures, expanding lower-middle-market deployment capacity. The company’s focus on add-ons and platform acquisitions, coupled with a broader PE ecosystem (80 unique PE firms represented; 122 companies in portfolio), provides multiple paths to growth through both portfolio optimization and new platform investments.
Profitability Risk
Key risks include continued competition for higher-quality assets leading to compression of yields (though CSWC is maintaining ~7%+ deal yields in the current cycle), macroeconomic shocks affecting credit quality, potential deterioration in equity revaluations, regulatory changes impacting BDC economics (AFFE reform), and the sensitivity of NII to interest-rate paths if they surprise to the downside. Nonaccruals, while low, can still exhibit volatility due to macro developments; the company acknowledges a material macro risk if rates trough lower than anticipated.
- Competitive and liquidity risk: Banks and nonbank lenders compete aggressively in the lower middle market; CSWC notes that spreads could widen if competition eases and banks derisk.
- Regulatory risk: AFFE reform could alter disclosure and liquidity dynamics in the sector; CSWC sees potential upside from increased trading volumes and improved transparency.
Financial Position
Strong liquidity and conservative balance-sheet management underpin earnings quality. Key financials include: cash and undrawn commitments around $444 million, debt-to-equity 0.82x, 48% of liabilities in unsecured covenant-free bonds with earliest maturity Oct 2026, and total debt of $394.6 million with net debt of $347.7 million. The company’s NAV per share declined modestly to $16.59 due to restricted stock compensation, while UTI per share sits at $1.00, supporting regular and supplemental dividends. Weighted average yield on debt investments is 11.8%, with leverage at 3.4x EBITDA, and the portfolio remains heavily oriented to first-lien senior secured debt (89.6%). These metrics collectively indicate a defensible, high-quality credit portfolio and a prudent capital structure to support ongoing dividend policy and growth initiatives.
SWOT Analysis
Strengths
Internally managed BDC structure with fixed-cost leverage benefits and alignment with shareholders.
High-quality credit portfolio: 92% rated in top 1–2 categories; 0.8% nonaccrual at quarter-end; 11.8% weighted-average yield.
Strong liquidity position: ~$444 million in cash and undrawn commitments; SBA SBIC license approval expanding funding options.
Significant PE sponsorship network: 122 portfolio companies; 80 unique PE firms; 93% of credit portfolio backed by PE sponsors; substantial deal flow potential via add-ons and platform investments.
Active capital deployment and equity co-investment upside: 9% of portfolio in equity co-investments; $27.2 million realized equity gains this quarter; UTI per share of $1 supports dividend capability.
Weaknesses
Moderate to high reliance on lower middle-market deal activity, which can be sensitive to macro volatility and policy shifts.
Dividend sustainability is tied to NII and realized gains; sensitivity to rate moves could pressure payout stability if macro paths diverge from base case.
Equity market sensitivity: unrealized gains depend on equity portfolio performance; markdowns or exits could influence UTI levels.
Opportunities
AFFE reform could increase overall sector trading volumes and reduce cost disclosure distortions, potentially boosting liquidity and ROE for CSWC.
Strategic initiatives around asset management enhancements and larger deal origination capabilities could improve win rates on higher-quality platforms.
Continued strong platform and add-on activity could accelerate NAV growth and UTI accumulation.
Threats
Credit-cycle risk: sustained spread compression or a deterioration in macro conditions could pressure NII and ROE.
Regulatory and policy risk could alter BDC economics (AFFE, capital rules, and disclosure requirements).
Competition from banks and nonbanks could intensify, driving leverage and pricing dynamics and potentially compress margins.