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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2021
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
FORM 10-K
For the transition period from to
Commission File Number: 814-00061
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction of incorporation
or organization)
5400 Lyndon B Johnson Freeway, Suite 1300, Dallas, Texas
(Address of principal executive offices)
75-1072796
(I.R.S. Employer
Identification No.)
75240
(Zip Code)
Registrant’s telephone number, including area code: (214) 238-5700
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.25 par value per share
Trading Symbol(s)
CSWC
Name of Each Exchange on Which Registered
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). YES ☐ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer
☐ Non-accelerated filer
x
Smaller reporting
company
Emerging growth
company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effective of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15.U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES ☐ NO ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2020 was $241,338,972 based on the last
sale price of such stock as quoted by The Nasdaq Global Select Market on such date.
The number of shares of common stock, $0.25 par value per share, outstanding as of May 24, 2021 was 20,964,092.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for its 2021 Annual Meeting of Shareholders to be filed not later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements regarding the plans and objectives of management for future operations and
future performance (including the internal rate of return to the Company). Any such forward-looking statements may involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results,
performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and
describe our future plans, strategies and expectations are generally identifiable by use of the words “may,” “predict,” “will,” “continue,” “likely,”
“would,” “could,” “should,” “expect,” “anticipate,” “potential,” “estimate,” “indicate,” “seek,” “believe,” “target,” “intend,” “plan,” or “project” or
the negative of these words or other variations on these words or comparable terminology. These forward-looking statements involve risks and
uncertainties and are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking
statements will come to pass. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those
expressed or implied by the forward-looking statements. We believe these factors include, but are not limited to, the following:
• our future operating results;
• market conditions and our ability to access debt and equity capital and our ability to manage our capital resources effectively;
• the timing of cash flows, if any, from the operations of our portfolio companies;
• our business prospects and the prospects of our existing and prospective portfolio companies;
• the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;
• the adequacy of our cash resources and working capital;
• our ability to recover unrealized losses;
• our expected financings and investments;
• our contractual arrangements and other relationships with third parties;
• the impact of fluctuations in interest rates on our business;
• the impact of a protracted decline in the liquidity of credit markets on our business;
• our ability to operate as a BDC and to qualify and maintain our qualification as a RIC, including the impact of changes in laws or regulations,
including the tax reform, governing our operations or the operations of our portfolio companies;
• our ability to operate our wholly owned subsidiary, Capital Southwest SBIC I, LP, as an SBIC;
• the dependence of our future success on the general economy and its impact on the industries in which we invest;
• changes in laws and regulations, changes in political, economic or industry conditions, and changes in the interest rate environment or other
conditions affecting the financial and capital markets, including with respect to changes resulting from or in response to, or potentially even the
absence of changes as a result of, the impact of the COVID-19 pandemic;
• our ability to successfully invest any capital raised in an offering;
• the return or impact of current and future investments;
• the performance and the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
• our regulatory structure and tax treatment;
• the timing, form and amount of any dividend distributions; and
• uncertainties associated with the impact from the COVID-19 pandemic, including: its impact on the global and U.S. capital markets and the global
and U.S. economy; the length and duration of the COVID-19 outbreak in the United States as well as worldwide and the magnitude of the economic
impact of that outbreak; the effect of the COVID-19 pandemic on our business prospects and the operational and financial performance of our
portfolio companies, including our and their ability to achieve their respective objectives; and the effect of the disruptions caused by the COVID-19
pandemic on our ability to continue to effectively manage our business.
For a discussion of these and other factors that could cause our actual results to differ materially from forward-looking statements contained in this
Annual Report, please see the discussion under “Risk Factors” in Item 1A.
We have based the forward-looking statements included in this Annual Report on Form 10-K on information available to us on the date of this Annual
Report on Form 10-K. You should not place undue reliance on these forward-looking statements and you should carefully consider all of the factors
identified in this report that could cause actual results to differ. We assume no obligation to update any such forward-looking statements, unless we are
required to do so by applicable law.
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Item 1. Business
ORGANIZATION
PART I
Capital Southwest Corporation, which we refer to as “we,” “our,” “us,” “CSWC,” or the “Company” is an internally managed closed-end, non-
diversified investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940,
as amended, or the 1940 Act. We specialize in providing customized financing to middle market companies in a broad range of industry segments located
primarily in the United States. Our common stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.”
We were organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a small business investment company, or SBIC,
licensed under the Small Business Investment Act of 1958. At that time, we transferred to our wholly-owned subsidiary, Capital Southwest Venture
Corporation, or CSVC, certain assets including our SBIC license. CSVC was a closed-end, non-diversified investment company registered under the 1940
Act. Effective June 14, 2016, CSVC was dissolved and its SBIC license was surrendered. All assets held in CSVC were transferred to us upon dissolution.
Prior to March 30, 1988, we were registered as a closed-end, non-diversified investment company under the 1940 Act. On that date, we elected to be
treated as a BDC under the 1940 Act. On September 30, 2015, we completed the spin-off, which we refer to as the Share Distribution, of CSW Industrials,
Inc., or CSWI. CSWI is now an independent publicly traded company. The Share Distribution was effected through a tax-free, pro-rata distribution of
100% of CSWI’s common stock to our shareholders. Each of our shareholders received one share of CSWI common stock for every one share of our
common stock on the record date, September 18, 2015. Cash was paid in lieu of any fractional shares of CSWI common stock. Following the Share
Distribution, we have maintained operations as an internally managed BDC and pursued a credit-focused investing strategy akin to similarly structured
organizations. We intend to continue to provide capital to middle-market companies. We invest primarily in debt securities, including senior debt, second
lien and subordinated debt, and also invest in preferred stock and common stock alongside our debt investments or through warrants.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our assets in
“qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high
quality debt investments that mature in one year or less. In addition, effective April 25, 2019, we are allowed to borrow money such that our asset
coverage, as defined in the 1940 Act, equals at least 150% after such borrowing. Additionally, the Board of Directors approved a resolution that limits the
Company's issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, at any time
after the effective date.
We have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes as a regulated investment company, or RIC, under
Subchapter M of the U.S. Internal Revenue Code of 1986, or the Code. As such, we generally will not have to pay corporate-level U.S. federal income tax
on any ordinary income or capital gains that we timely distribute to our shareholders as dividends. To continue to maintain our RIC tax treatment, we must
meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-
term capital gains in excess of realized net long-term capital losses, if any. Depending on the level of taxable income earned in a tax year, we may choose to
carry forward taxable income in excess of current year distributions into the next year and pay a 4% U.S. federal excise tax on such income. Any such
carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year that generated such taxable
income.
Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, was the management company for CSWC. Effective
December 31, 2020, CSMC merged with and into CSWC, with CSWC continuing as the surviving entity in the merger. Prior to December 31, 2020, CSMC
generally incurred all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other
administrative costs required for its day-to-day operations (the “Administrative Expenses”). After December 31, 2020, the Administrative Expenses will be
directly incurred by CSWC. The Company continues to be internally managed and the merger has no material impact on the day-to-day operations of the
business.
We also have a direct wholly-owned subsidiary that has elected to be a taxable entity (the “Taxable Subsidiary”). The primary purpose of the Taxable
Subsidiary is to permit us to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other forms of pass-
through entities) and still allow us to satisfy the RIC tax requirement that at least 90% of our gross income for U.S. federal income tax purposes must
consist of qualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.
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SBIC License
On April 20, 2021, our wholly owned subsidiary, Capital Southwest SBIC I, LP (“SBIC I”) received a license from the U.S. Small Business
Administration (the “SBA”) to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended. SBIC I will have an
investment strategy substantially similar to ours and make similar types of investments in accordance with SBA regulations. SBIC I and its general partner
will be consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it will be included in the consolidated financial statements.
See “Regulation as a Small Business Investment Company” below for more information about the regulations applicable to SBIC I.
Corporate Information
Our principal executive offices are located at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240. We maintain a website at
www.capitalsouthwest.com. You can review the filings we have made with the Securities and Exchange Commission, or the SEC, free of charge on
EDGAR, the Electronic Data Gathering, Analysis, and Retrieval System of the SEC, accessible at http://www.sec.gov. We also make available free of
charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to those
reports and any other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, as soon as
reasonably practicable after filing these reports with the SEC. Information on our website is not incorporated by reference into this Annual Report on Form
10-K and you should not consider that information to be part of this Annual Report on Form 10-K. The charters adopted by the committees of our Board of
Directors are also available on our website.
OVERVIEW OF OUR BUSINESS
We are an internally managed closed-end, non-diversified investment company that has elected to be regulated as a BDC under the 1940 Act. We
specialize in providing customized debt and equity financing to lower middle market, or LMM, companies and debt capital to upper middle market, or
UMM, companies in a broad range of investment segments located primarily in the United States. Our investment objective is to produce attractive risk-
adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments. Our
investment strategy is to partner with business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth,
changes of control, or other corporate events. We invest primarily in senior debt securities, secured by security interests in portfolio company assets. We
also invest in equity interests in our portfolio companies alongside our debt securities.
We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management
teams with strong operating discipline. We primarily target senior debt and equity investments in LMM companies, as well as first and second lien loans in
UMM companies. Our target LMM companies typically have annual earnings before interest, taxes, depreciation and amortization, or EBITDA, generally
between $3.0 million and $20.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. Our UMM investments
generally include first and second lien loans in companies with EBITDA generally greater than $20.0 million, and our UMM investments typically range in
size from $5.0 million to $15.0 million.
We seek to fill the financing gap for LMM companies, which historically have had more limited access to financing from commercial banks and other
traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also
negotiating favorable transaction terms and equity participation. Our ability to invest across a LMM company’s capital structure, from secured loans to
equity securities, allows us to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is important
to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, management teams and business owners in making our
investments. Our LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company. Our LMM debt investments
typically have a term of between five and seven years from the original investment date. We also often seek to invest in the equity securities of our LMM
portfolio companies.
Our investments in UMM companies primarily consist of direct investments in or secondary purchases of interest bearing debt securities in privately
held companies that are generally larger in size than the LMM companies included in our portfolio. Our UMM debt investments are generally secured by
either a first or second priority lien on the assets of the portfolio company and typically have an expected duration of between three and seven years from
the original investment date.
We offer managerial assistance to our portfolio companies and provide them access to our investment experience, direct industry expertise and contacts.
Our obligation to offer to make available significant managerial assistance to our
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portfolio companies is consistent with our belief that providing managerial assistance to a portfolio company is important to its business development
activities.
Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with
employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating
expense structure when compared to other publicly traded and privately held investment firms that are externally managed, and our internally managed
structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio.
Recent Developments
On April 21, 2021, the Board of Directors declared a total dividend of $0.53 per share, comprised of a regular dividend of $0.43 and a supplemental
dividend of $0.10, for the quarter ended June 30, 2021. The record date for the dividend is June 15, 2021. The payment date for the dividend is June 30,
2021.
Our Business Strategy
Our business strategy is to achieve our investment objective of producing attractive risk-adjusted returns by generating current income from our debt
investments and realizing capital appreciation from our equity and equity-related investments. We have adopted the following business strategies to achieve
our investment objective:
•
Leveraging the Experience of Our Management Team. Our senior management team has extensive experience investing in and lending to middle
market companies across changing market cycles. The members of our management team have diverse investment backgrounds, with prior
experience at BDCs in the capacity of senior officers. We believe this extensive experience provides us with an in-depth understanding of the
strategic, financial and operational challenges and opportunities of the middle market companies in which we invest. We believe this understanding
allows us to select and structure better investments and to efficiently monitor and provide managerial assistance to our portfolio companies.
• Applying Rigorous Underwriting Policies and Active Portfolio Management. Our senior management team has implemented rigorous
underwriting policies that are followed in each transaction. These policies include a thorough analysis of each potential portfolio company’s
competitive position, financial performance, management team operating discipline, growth potential and industry attractiveness, which we believe
allows us to better assess the company’s prospects. After investing in a company, we monitor the investment closely, typically receiving monthly,
quarterly and annual financial statements. Senior management, together with the deal team and accounting and finance departments, generally meets
at least monthly to analyze and discuss in detail the company’s financial performance and industry trends. We believe that our initial and ongoing
portfolio review process allows us to monitor effectively the performance and prospects of our portfolio companies.
•
Investing Across Multiple Companies, Industries, Regions and End Markets. We seek to maintain a portfolio of investments that is
appropriately diverse among various companies, industries, geographic regions and end markets. This portfolio balance is intended to mitigate the
potential effects of negative economic events for particular companies, regions, industries and end markets. However, we may from time to time
hold securities of an individual portfolio company that comprise more than 5% of our total assets and/or more than 10% of the outstanding voting
securities of the portfolio company. For that reason, we are classified as a non-diversified investment company that has elected to be regulated as a
BDC under the 1940 Act.
• Utilizing Long-Standing Relationships to Source Deals. Our senior management team and investment professionals maintain extensive
relationships with entrepreneurs, financial sponsors, attorneys, accountants, investment bankers, commercial bankers and other non-bank providers
of capital who refer prospective portfolio companies to us. These relationships historically have generated significant investment opportunities. We
believe that our network of relationships will continue to produce attractive investment opportunities.
•
Focusing on Underserved Markets. The middle market has traditionally been underserved. We believe that operating margin and growth
pressures, as well as regulatory concerns, have caused many financial institutions to de-emphasize services to middle market companies in favor of
larger corporate clients and more liquid capital market transactions. We also invest in securities that would be rated below investment grade if they
were rated. We believe these dynamics have resulted in the financing market for middle market companies being underserved, providing us with
greater investment opportunities.
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•
Focus on Established Companies. We generally invest in companies with established market positions, proven management teams with strong
operating discipline, histories of generating revenues, and recurring cash flow streams. We believe that those companies generally possess better risk
adjusted return profiles than earlier stage companies that are building their management teams and establishing their revenue base. We also believe
that established companies in our target size range generally provide opportunities for capital appreciation.
• Capital Structures Appropriate for Potential Industry and Business Volatility. Our investment team spends significant time understanding the
performance of both the target portfolio company and its specific industry throughout a full economic cycle. The history of each specific industry
and target portfolio company will demonstrate a different level of potential volatility in financial performance. We seek to understand this dynamic
thoroughly and invest our capital at leverage levels in the capital structure that will remain within enterprise value and in securities that will receive
interest payments if such downside volatility were to occur.
•
Providing Customized Financing Solutions. We offer a variety of financing structures and have the flexibility to structure our investments to meet
the needs of our portfolio companies. We primarily invest in senior debt securities coupled with equity interests. We believe our ability to customize
financing structures makes us an attractive partner to middle market companies.
INVESTMENT CRITERIA AND OBJECTIVES
Our investment team has identified the following investment criteria that we believe are important in evaluating prospective investment opportunities.
However, not all of these criteria have been or will be met in connection with each of our investments:
• Companies with Positive and Sustainable Cash Flow: We generally seek to invest in established companies with sound historical financial
•
•
•
performance.
Excellent Management: Management teams with a proven record of achievement, exceptional ability, unyielding determination and integrity. We
believe management teams with these attributes are more likely to manage the companies in a manner that protects and enhances value.
Industry: We primarily focus on companies having competitive advantages in their respective markets and/or operating in industries with barriers
to entry, which may help protect their market position.
Strong Private Equity Sponsors: We focus on developing relationships with leading private equity firms in order to partner with these firms and
provide them capital to support the acquisition and growth of their portfolio companies.
• Appropriate Risk-Adjusted Returns: We focus on and price opportunities to generate returns that are attractive on a risk-adjusted basis, taking
into consideration factors, in addition to the ones depicted above, including credit structure, leverage levels and the general volatility and potential
volatility of cash flows.
We have an investment committee that is responsible for all aspects of our investment process relating to investments made by us. The current members
of the investment committee are Bowen Diehl, Chief Executive Officer, Michael Sarner, Chief Financial Officer, Josh Weinstein, Senior Managing
Director, and William Thomas, member of the Board of Directors.
Investment Process
Our investment strategy involves a team approach, whereby our investment team screens potential transactions before they are presented to the
investment committee for approval. Transactions that are either above a certain hold size or outside our general investment policy will also be reviewed
and approved by the Board of Directors. Our investment team generally categorizes the investment process into six distinctive stages:
• Deal Generation/Origination: Deal generation and origination is maximized through long-standing and extensive relationships with private equity
firms, leveraged loan syndication desks, brokers, commercial and investment bankers, entrepreneurs, service providers such as lawyers and
accountants, and current and former portfolio companies and investors.
•
Screening: Once it is determined that a potential investment has met our investment criteria, we will screen the investment by performing
preliminary due diligence, which could include discussions with the private equity firm, management team, loan syndication desk, etc. Upon
successful screening of the proposed investment, the investment team makes a recommendation to move forward and prepares an initial screening
memo for our investment
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committee. We then issue either a non-binding term sheet (in the case of a directly originated transaction), or submit an order to the loan syndication
desk (in the case of a large-market syndicated loan transaction).
•
Term Sheet: In a directly originated transaction, the non-binding term sheet will typically include the key economic terms of our investment
proposal, along with exclusivity, confidentiality, and expense reimbursement provisions, among other terms relevant to the particular investment.
Upon acceptance of the term sheet, we will begin our formal due diligence process. In a syndicated loan transaction, rather than a formal term sheet,
we will submit an order for an allocation to the syndicated loan desk.
• Due Diligence: Due diligence is performed under the direction of our senior investment professionals, and involves our entire investment team as
well as certain external resources, who together perform due diligence to understand the relationships among the prospective portfolio company’s
business plan, operations, financial performance, and legal risks. On our directly originated transactions, our due diligence will often include (1)
conducting site visits with management and key personnel; (2) performing a detailed review of historical and projected financial statements, often
with a third-party accounting firm, to evaluate the target company’s normalized cash flow; (3) creating our own detailed modeling projections,
including a downside case which attempts to project how the business would perform in a recession based on past operating history of either the
company or the industry; (4) interviewing key customers and suppliers; (5) evaluating company management, including a formal background check;
(6) reviewing material contracts; (7) conducting an industry, market and strategy analysis; and (8) obtaining a review by legal, environmental or
other consultants. In instances where a financial sponsor is investing in the equity in a transaction, we will leverage work done by the financial
sponsor for purposes of our due diligence. In syndicated loan transactions, our due diligence may exclude direct customer and supplier interviews,
and will consist of a detailed review of reports from the financial sponsor or syndication agent for industry and market analysis, and legal and
environmental diligence.
• Document and Close: Upon completion of a satisfactory due diligence review, our investment team presents its written findings to the investment
committee. For transactions that are either over a certain hold size, or outside our general investment policy, the investment team will present the
transaction to our Board of Directors for approval. Upon approval for the investment, we re-confirm our regulatory company compliance, process
and finalize all required legal documents and fund the investment.
•
Post-Investment: We continuously monitor the status and progress of our portfolio companies, as well as our investment thesis developed at the
time of investment. We offer managerial assistance to our portfolio companies and provide them access to our investment experience, direct
industry expertise and contacts. The same investment team leader that was involved in the investment process will continue to be involved in the
portfolio company post-investment. This approach provides continuity of knowledge and allows the investment team to maintain a strong business
relationship with the financial sponsor, business owner and key management of our portfolio companies. As part of the monitoring process,
members of our investment team will analyze monthly, quarterly and annual financial statements against previous periods, review financial
projections, meet with the financial sponsor and management (when necessary), attend board meetings (when appropriate) and review all
compliance certificates and covenants. Our investment team generally meets once each month with senior management to review the performance of
our portfolio companies.
We utilize an internally developed investment rating system to rate the performance and monitor the expected level of returns for each debt investment in
our portfolio. The investment rating system takes into account both quantitative and qualitative factors of the portfolio company and the investments held
therein, including each investment’s expected level of returns and the collectability of our debt investments, comparisons to competitors and other industry
participants and the portfolio company’s future outlook. The ratings are not intended to reflect the performance or expected level of returns of our equity
investments.
•
•
•
Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materially above underwriting expectations
and the trends and risk factors are generally favorable. The investment generally has a higher probability of being prepaid in part or in full.
Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trends and risk factors are generally
favorable to neutral.
Investment Rating 3 involves an investment performing below underwriting expectations and the trends and risk factors are generally neutral to
negative. The investment may be out of compliance with financial covenants and interest payments may be impaired, however principal payments
are generally not past due.
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•
Investment Rating 4 indicates that the investment is performing materially below underwriting expectations, the trends and risk factors are generally
negative and the risk of the investment has increased substantially. Interest and principal payments on our investment are likely to be impaired.
Determination of Net Asset Value
Quarterly Determinations
We determine our net asset value, or NAV, per share on a quarterly basis. The NAV per share is equal to our total assets minus liabilities divided by the
total number of shares of common stock outstanding.
We determine in good faith the fair value of our portfolio investments pursuant to a valuation policy in accordance with Accounting Standards
Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) and a valuation process approved by our Board of Directors and
in accordance with the 1940 Act. Our valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio.
We undertake a multi-step valuation process each quarter in connection with determining the fair value of our investments. The valuation process is led
by the finance department in conjunction with the investment teams and senior management. Valuations of each portfolio security are prepared quarterly
by the finance department using updated portfolio company financial and operational information. Each investment valuation is also subject to review by
the executive officers and investment teams.
In conjunction with the internal valuation process, we have engaged multiple independent consulting firms that specialize in financial due diligence,
valuation and business advisory services to provide third-party valuation reviews of the majority of our investments on a quarterly basis. Our Board of
Directors is ultimately responsible for overseeing, reviewing and approving, in good faith, our determination of the fair value of each investment in our
portfolio.
Determinations in Connection with our Offerings
The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such stock, with certain exceptions.
One such exception is prior shareholder approval of issuances below current NAV per share provided that our Board of Directors determines that such sale
is in the best interests of the Company and its shareholders. We do not intend to seek shareholder authorization to sell shares of our common stock below
the then current NAV per share of our common stock at our 2021 annual meeting of shareholders. However, in the event we change our position, we will
seek requisite approval of our shareholders.
In connection with each offering of shares of our common stock, our Board of Directors or an authorized committee thereof is required by the
1940 Act to make the determination of whether we are selling shares of our common stock at a price below our then current NAV at the time at which the
sale is made. Our Board of Directors or an authorized committee thereof considers the following factors, among others, in making such determination:
•
•
•
the NAV of our common stock disclosed in the most recent periodic report we filed with the SEC;
our management’s assessment of whether any material change in the NAV has occurred (including through the realization of net gains on the sale
of our investments) from the period beginning on the date of the most recently disclosed NAV per share of our common stock and ending as of a
time within 48 hours (excluding Sundays and holidays) of the sale of our common stock; and
the magnitude of the difference between (i) a value that our Board of Directors or an authorized committee thereof has determined reflects the
current (as of a time within 48 hours, excluding Sundays and holidays) NAV of our common stock, which is based upon the NAV disclosed in the
most recent periodic report we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the NAV since
the date of the most recently disclosed NAV, and (ii) the offering price of the shares of our common stock in the proposed offering.
Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common stock at a price below the then current NAV of
our common stock at the time at which the sale is made or (ii) trigger the undertaking (which we provided to the SEC) to suspend the offering of shares of
our common stock if the NAV fluctuates by certain amounts in certain circumstances, our Board of Directors or an authorized committee thereof will elect,
in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the occurrence of such event or to
undertake to determine NAV within two days prior to any such sale to ensure that such sale will not be below our then
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current NAV, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine NAV to ensure that such undertaking has
not been triggered.
These processes and procedures are part of our compliance policies and procedures. Records are made contemporaneously with all determinations
described in this section and these records are maintained with other records we are required to maintain under the 1940 Act.
COMPETITION
We compete for attractive investment opportunities with other financial institutions, including BDCs, junior capital lenders, and banks. We believe we
are able to be competitive with these entities primarily on the basis of the experience and contacts of our management team and our responsive and efficient
investment analysis and decision-making processes. However, many of our competitors are substantially larger and have considerably greater financial,
technical and marketing resources than we do. Furthermore, our competitors may have a lower cost of funds and many have access to funding sources that
are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to
consider a wider variety of investments, establish more relationships and build their market shares. Likewise, many of our competitors are not subject to
the regulatory restrictions and valuation requirements that the 1940 Act imposes on us as a BDC. See “Risk Factors—Risks Related to Our Business and
Structure—We operate in a highly competitive market for investment opportunities.”
We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of
operations. In addition, because of this competition, we may be unable to take advantage of attractive investment opportunities and may be unable to
identify and make investments that satisfy our investment objectives or meet our investment goals.
HUMAN CAPITAL
As of March 31, 2021, we had twenty-one employees. These employees include our corporate officers, investment and portfolio management
professionals and administrative staff. All of our employees are located in our principal executive offices in Dallas, Texas.
Our employees are vital to our success as an internally managed BDC. The long-term success of our business and the success of our investment
strategy depends on our people. We strive to attract, develop and retain our employees by offering advancement and promotion opportunities, attractive
compensation and benefit packages and a close-knit culture. The departure of our key investment and operations personnel could cause our operating
results to suffer.
We strive to recruit talented and driven individuals who share our values. Our recruiting efforts utilize strong relationships with a variety of
sources from which we recruit. We routinely promote from within, promoting current employees who have shown the technical ability, attitude, interest and
the initiative to take on greater responsibility.
In addition to our normal prioritization of the health and safety of our employees, since March 2020, to address the specific safety and health
matters of our workforce in response to the COVID-19 pandemic, we implemented the following, among other steps:
Temporarily closing our offices and establishing new safety protocols and procedures;
•
• Maintaining regular communication with our employees regarding the impacts of the COVID-19 pandemic on our team members and operations;
• Developing and distributing return-to-office guidelines to ensure the safe return of employees to our office;
•
•
Enhanced cleaning protocols; and
Creating and refining protocols to address actual and suspected COVID-19 cases and potential exposure of our employees.
LEVERAGE
We borrow funds to make investments, a practice known as “leverage,” in an attempt to increase returns to our shareholders. Effective April 25, 2019,
we are allowed to borrow amounts such that our asset coverage, as calculated in accordance with the 1940 Act, equals at least 150% after such borrowing.
Additionally, the Board of Directors approved a resolution that limits the Company's issuance of senior securities such that the asset coverage ratio, taking
into account any such issuance, would not be less than 166%, at any time after the effective date. The amount of leverage that we employ at any
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particular time will depend on management’s and our Board of Directors’ assessments of portfolio mix, prevailing market advance rates and other market
factors at the time of any proposed borrowing. See “Risk Factors – Risks Related to Our Business and Structure – Because we borrow money to make
investments, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.” On April 30, 2021, we filed
an exemptive application with the SEC to permit us to modify the asset coverage requirement to exclude SBA-guaranteed debentures from the calculation.
There can be no assurance if and when the Company will receive the exemptive relief.
We intend to continue borrowing under our senior secured credit facility with ING Capital LLC (as amended, restated, supplemented or otherwise
modified from time to time, the "Credit Facility") in the future and we may increase the size of the Credit Facility, add additional credit facilities or
otherwise issue additional debt securities or other evidences of indebtedness in the future, although there can be no assurance that we will be able to do so.
See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Liquidity and Capital Resources" as well as
Note 5 to our consolidated financial statements for the year ended March 31, 2021 for information regarding the Credit Facility, and the issuance of the
5.375% Notes due 2024 (the "October 2024 Notes") and the 4.50% Notes due 2026 (the "January 2026 Notes").
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BROKERAGE ALLOCATION AND OTHER PRACTICES
Because we generally acquire and dispose of our investments in privately negotiated transactions, we infrequently use brokers in the normal course of
our business. Our investment team is primarily responsible for the execution of the publicly traded securities portion of our portfolio transactions and the
allocation of brokerage commissions. We do not expect to execute transactions through any particular broker or dealer, but will seek to obtain the best net
results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of
execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While we will generally seek reasonably
competitive trade execution costs, we will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may
select a broker based partly upon brokerage or research services provided to us. In return for such services, we may pay a higher commission than other
brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided. We did not pay any brokerage
commissions during the fiscal years ended March 31, 2021, 2020 and 2019.
DIVIDEND REINVESTMENT PLAN
We have adopted a dividend reinvestment plan, or DRIP, that provides for the reinvestment of dividends on behalf of our shareholders. Under the DRIP,
if we declare a dividend, registered shareholders who have opted into the DRIP as of the dividend record date will have their dividend automatically
reinvested into additional shares of our common stock. The share requirements of the DRIP are satisfied through open market purchases of common stock
by the DRIP plan administrator. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the
applicable shares purchased by the DRIP plan administrator, before any associated brokerage or other costs.
ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY
We are a closed-end, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act. In addition, we have elected, and
intend to qualify annually, to be treated as a RIC. Our election to be regulated as a BDC and our election to be treated as a RIC for U.S. federal income tax
purposes have a significant impact on our operations. Some of the most important effects on our operations of our election to be regulated as a BDC and
our election to be treated as a RIC are outlined below.
• We report our investments at market value or fair value with changes in value reported through our Consolidated Statements of
Operations.
In accordance with the requirements of the 1940 Act and Article 6 of Regulation S-X, we report all of our investments, including debt investments, at
market value or, for investments that do not have a readily available market value, at their “fair value” as determined in good faith by our Board of
Directors. Changes in these values are reported through our Consolidated Statements of Operations under the caption of “net change in unrealized
appreciation on investments.” See “Determination of Net Asset Value” above.
• We intend to distribute substantially all of our income to our shareholders. We generally will be required to pay income taxes only on the
portion of our taxable income we do not distribute to shareholders (actually or constructively).
As a RIC, so long as we meet certain minimum distribution, source of income and asset diversification requirements, we generally are required to pay
U.S. federal income taxes only on the portion of our taxable income and gains we do not distribute (actually or constructively) and certain built-in gains.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into
the next year and pay a 4% U.S. federal excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared
prior to filing the final tax return related to the year that generated such taxable income. We intend to distribute to our shareholders substantially all of our
income. We may, however, make deemed distributions to our shareholders of any retained net long-term capital gains. If this happens, our shareholders will
be treated as if they received an actual distribution of the net capital gains and reinvested the net after-tax proceeds in us. Our shareholders also may be
eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to their allocable share of the corporate-level U.S. federal income tax we pay
on the deemed distribution. See “Material U.S. Federal Income Tax Considerations.” We met the minimum distribution requirements for tax years 2019 and
2018 and intend to meet the minimum distribution requirements for tax year 2020. We continually monitor our distribution requirements with the goal of
ensuring compliance with the Code.
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In addition, we have a Taxable Subsidiary that holds a portion of one or more of our portfolio investments that are listed on the Consolidated Schedule of
Investments. The Taxable Subsidiary is consolidated for financial reporting purposes in accordance with U.S. Generally Accepted Accounting Principles,
or GAAP, so that our consolidated financial statements reflect our investments in the portfolio companies owned by the Taxable Subsidiary. The purpose of
the Taxable Subsidiary is to permit us to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other
forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross income for U.S. federal income tax purposes must
consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionate amount of any gross income of a partnership or LLC (or other
pass-through entity) portfolio investment would flow through directly to us. To the extent that such income did not consist of investment income, it could
jeopardize our ability to qualify as a RIC and therefore cause us to incur significant amounts of corporate-level U.S. federal income taxes. Where interests
in LLCs (or other pass-through entities) are owned by the Taxable Subsidiary, the income from those interests is taxed to the Taxable Subsidiary and does
not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages. The Taxable Subsidiary is not consolidated for U.S. federal
income tax purposes and may generate income tax expense as a result of its ownership of the portfolio companies. This income tax expense, if any, is
reflected in our Consolidated Statements of Operations.
• Our ability to use leverage as a means of financing our portfolio of investments is limited.
As a BDC, we are required to meet a coverage ratio of total assets to total senior securities of at least 150%, which became effective April 25, 2019.
Additionally, the Board of Directors approved a resolution that limits the Company's issuance of senior securities such that that asset coverage ratio, taking
into account any such issuance, would not be less than 166%, at any time after the effective date. For this purpose, senior securities include all borrowings
and any preferred stock we may issue in the future. Additionally, our ability to utilize leverage as a means of financing our portfolio of investments may be
limited by this asset coverage requirement. While the use of leverage may enhance returns if we meet our investment objective, our returns may be reduced
or eliminated if our returns on investments are less than the costs of borrowing.
• We are required to comply with the provisions of the 1940 Act applicable to business development companies.
As a BDC, we are required to have a majority of directors who are not “interested persons” as such term is defined in Section 2(a)(19) of the 1940 Act.
In addition, we are required to comply with other applicable provisions of the 1940 Act, including those requiring the adoption of a code of ethics,
maintaining a fidelity bond and placing and maintaining its securities and similar investments in custody. See “Regulation as a Business Development
Company” below.
Regulation as a Business Development Company
We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between
BDCs and their affiliates and principal underwriters as well as their respective affiliates. The 1940 Act requires that a majority of the members of the board
of directors of a BDC be persons other than “interested persons,” as defined in the 1940 Act. In addition, the 1940 Act provides that we may not change
the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by holders of a majority of our outstanding voting
securities.
The 1940 Act defines “a majority of the outstanding voting securities” as the lesser of (1) 67% or more of the voting securities of holders present or
represented by proxy at a meeting if the holders of more than 50% of our outstanding voting securities are present or represented by proxy or (2) more than
50% of our voting securities.
The following is a brief description of the 1940 Act provisions applicable to BDCs, which is qualified in its entirety by reference to the full text of the
1940 Act and rules issued thereunder by the SEC.
• Generally, BDCs must offer, and must provide upon request, significant managerial assistance available to certain portfolio companies. In general,
as a BDC, a company must, among other things: (1) be a domestic company; (2) have registered a class of its securities pursuant to Section 12 of the
Exchange Act; (3) operate for the purpose of investing in the securities of certain types of eligible portfolio companies, including early stage or
emerging companies and businesses suffering or just recovering from financial distress (see following paragraph); (4) offer to make available
significant managerial assistance to such portfolio companies; and (5) file a proper notice of election with the SEC.
• An eligible portfolio company generally is a domestic company that is not a regulated or private investment company or a financial company (such
as brokerage firms, banks, insurance companies and investment banking firms) and that: (1) does not have a class of securities listed on a national
securities exchange; (2) has a class of securities listed on a national securities exchange with an equity market capitalization of less than $250
million; or (3) is controlled by the BDC itself or together with others and, as a result of such control, the BDC has an affiliated person on the board
of directors of the
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company. The 1940 Act presumes that a person has “control” of a portfolio company if that person owns at least 25% of its outstanding voting
securities.
• As a BDC, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect against larceny and
embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our shareholders
arising from any act or omission constituting willful malfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of that person’s office.
• We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws,
review these policies and procedures annually for their adequacy and the effectiveness of their implementation and designate a chief compliance
officer to be responsible for administering these policies and procedures.
On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law and, among other things, instructs the SEC to
issue rules or amendments to rules allowing BDCs to use the same registration, offering and communication processes that are available to operating
companies. The rules and amendments specified by the SBCAA became self-implementing on March 24, 2019. On April 8, 2020, the SEC adopted rules
and amendments to implement certain provisions of the SBCAA (the “Final Rules”) that, among other things, modify the registration, offering, and
communication processes available to BDCs relating to: (i) the shelf offering process to permit the use of short-form registration statements on Form N-2
and incorporation by reference; (ii) the ability to qualify for well-known seasoned issuer status; (iii) the immediate or automatic effectiveness of certain
filings made in connection with continuous public offerings; and (iv) communication processes and prospectus delivery. In addition, the SEC adopted rules
that will require BDCs to comply with certain structured data and inline XBRL requirements. The Final Rules will generally become effective on August 1,
2020, except that a BDC eligible to file short-form registration statements on Form N-2, like the Company, must comply with the Inline XBRL structure
data requirements for its financial statements, registration statement cover page, and certain prospectus information by August 1, 2022.
Qualifying Assets
The 1940 Act provides that we may not make an investment in non-qualifying assets unless at the time of the investment at least 70% of the value
of our total assets (measured as of the date of our most recently filed financial statements) consists of qualifying assets. Qualifying assets include: (1)
securities of eligible portfolio companies; (2) securities of certain companies that were eligible portfolio companies at the time we initially acquired their
securities and in which we retain a substantial interest; (3) securities of certain controlled companies; (4) securities of certain bankrupt, insolvent or
distressed companies; (5) securities received in exchange for or distributed in or with respect to any of the foregoing; and (6) cash items, U.S. government
securities and high-quality short-term debt.
Significant Managerial Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the qualifying assets requirement, we must either control the issuer of
the securities or must offer to make available to the issuer of the securities significant managerial assistance. However, where we purchase securities in
conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making
available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to
provide, and, if accepted, provides, significant guidance and counsel concerning the management, operations or business objectives and policies of a
portfolio company.
Temporary Investments
Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S.
government securities, short-term investments in secured debt investments, independently rated debt investments and diversified bond funds, which we
refer to as temporary investments.
Senior Securities
BDCs generally have been permitted by the 1940 Act, under specific conditions, to issue multiple classes of debt and one class of stock senior to
its common stock if its asset coverage, as defined by the 1940 Act, is at least 200% immediately after each such issuance. However, recent legislation has
modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage it may incur by reducing the minimum asset coverage ratio from
200% to 150%, if certain requirements are met. On April 25, 2018, the Board of Directors unanimously approved the application of the recently modified
asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicable to the
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Company was decreased from 200% to 150%, which became effective April 25, 2019. Additionally, the Board of Directors also approved a resolution that
limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, at
any time after the effective date. We are required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt
of approval to reduce its asset coverage requirement to 150%, its leverage capacity and usage, and risks related to leverage.
As of March 31, 2021, we had $120.0 million, $125.0 million and $140.0 million in total aggregate principal amount of debt outstanding under
our Credit Facility, the October 2024 Notes and the January 2026 Notes, respectively. As of March 31, 2021, our asset coverage was 187%.
In addition, while any preferred stock or publicly traded debt securities are outstanding, we may be prohibited from making distributions to our
shareholders or the repurchasing of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or
repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset
coverage. Under specific conditions, we are also permitted by the 1940 Act to issue warrants.
Common Stock
We are not generally able to issue and sell our common stock at a price below NAV per share. We may, however, sell our common stock, warrants,
options or rights to acquire our common stock, at a price below the current NAV of the common stock if our Board of Directors determines that such sale is
in our best interests and that of our shareholders, and our shareholders approve such sale. In any such case, the price at which our securities are to be issued
and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of such securities (less
any distributing commission or discount). We do not intend to seek shareholder authorization to sell shares of our common stock below the then current
NAV per share of our common stock at our 2021 annual meeting of shareholders. See "Risk Factors - Risks Relating to Our Business and Structure -
Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital."
Code of Ethics and Code of Conduct
We adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain
personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts including securities that may
be purchased or held by us, so long as those investments are made in accordance with the code’s requirements. We have also adopted a code of conduct that
applies to our Chief Executive Officer, Chief Financial Officer (or persons performing similar functions), our Board, and all other employees. This code
sets forth policies that these executives and employees must follow when performing their duties. The code of ethics and code of conduct are available on
the Company website at www.capitalsouthwest.com/governance.
Proxy Voting Policies and Procedures
We vote proxies relating to our portfolio securities in a manner in which we believe is consistent with the best interest of our shareholders. We
review on a case-by-case basis each proposal submitted to a shareholder vote to determine its impact on the portfolio securities held by us. Although we
generally vote against proposals that we expect would have a negative impact on our portfolio securities, we may vote for such a proposal if there exists
compelling long-term reasons to do so. Our proxy voting decisions are made by the investment team that is responsible for monitoring the investments. To
ensure that our vote is not the product of a conflict of interest, we require that anyone involved in the decision-making process discloses to our Chief
Compliance Officer any potential conflict of which he or she is aware. Shareholders may obtain information, without charge, regarding how we voted
proxies with respect to our portfolio securities by making a written request for proxy voting information to: Chief Financial Officer c/o Capital Southwest
Corporation, 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240.
Compliance Policies and Procedures
We have adopted and implemented written policies and procedures reasonably designed to prevent violation of the U.S. federal securities laws,
and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation, and to
designate a Chief Compliance Officer to be responsible for administering these policies and procedures. Michael S. Sarner serves as our Chief Compliance
Officer.
Exemptive Relief
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On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to our executive officers and certain
key employees, or the Original Order. On August 22, 2017, we received an exemptive order that supersedes the Original Order, or the Exemptive Order,
and in addition to the relief granted under the Original Order, allows us to withhold shares to satisfy tax withholding obligations related to the vesting of
restricted stock granted pursuant to the 2010 Restricted Stock Award Plan, or the 2010 Plan, and to pay the exercise price of options to purchase shares of
our common stock granted pursuant to the 2009 Stock Incentive Plan, or the 2009 Plan. The right to grant restricted stock awards under the 2010 Plan will
terminate ten years after the date that the 2010 Plan was approved by the Company’s shareholders, which is July 18, 2021.
In connection with the termination of the 2010 Plan, the Company’s Board of Directors of Company approved the Capital Southwest Corporation
2021 Employee Restricted Stock Award Plan (the "2021 Employee Plan") as part of the compensation packages for its employees, the terms of which are,
in all material respects, identical to the 2010 Plan. In connection therewith, on March 29, 2021, we filed an exemptive application with the SEC that would
supersede the Exemptive Order (the “Superseding Exemptive Order”) to permit the Company to (i) issue restricted stock as part of the compensation
package for its employees in the 2021 Employee Plan, and (ii) withhold shares of the Company’s common stock or purchase shares of the Company’s
common stock from the participants to satisfy tax withholding obligations relating to the vesting of restricted stock pursuant to the 2021 Employee Plan. In
addition, on March 29, 2021, we filed an exemptive application with the SEC (the “Non-Employee Director Plan Exemptive Order”) to permit the
Company to (i) issue restricted stock as part of the compensation package for non-employee directors of the Board of Directors (the “Non-Employee
Directors”) under the Capital Southwest Corporation 2021 Non-Employee Director Restricted Stock Award Plan (the “Non-Employee Director Plan”), and
(ii) withhold shares of the Company’s common stock or purchase shares of the Company’s common stock from the Non-Employee Directors to satisfy tax
withholding obligations relating to the vesting of restricted stock pursuant to the Non-Employee Director Plan. There can be no assurance if and when the
Company will receive the Superseding Exemptive Order or the Non-Employee Director Plan Exemptive Order. The terms of the Superseding Exemptive
Order and the Non-Employee Director Plan Exemptive Order, if received, is expected to be substantially similar to the Exemptive Order. Each of the 2021
Employee Plan and the Non-Employee Director Plan will also be subject to shareholder approval upon receipt of the Superseding Exemptive Order and the
Non-Employee Director Plan Exemptive Order, respectively.
Other
We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval
of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC. The prior approval of the SEC is not required,
however, where a transaction involves no negotiation of terms other than price.
We expect to periodically be examined by the SEC for compliance with the 1940 Act.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in our
shares. This summary does not purport to be a complete description of the income tax considerations applicable to us or to investors in such an investment.
For example, we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant to
certain types of holders subject to special treatment under U.S. federal income tax laws, including shareholders subject to the alternative minimum tax, tax-
exempt organizations, insurance companies, dealers in securities, pension plans and trusts, financial institutions, U.S. shareholders (as defined below)
whose functional currency is not the U.S. dollar, persons who mark-to-market our shares and persons who hold our shares as part of a “straddle,” “hedge”
or “conversion” transaction. This summary assumes that investors hold shares of our common stock as capital assets (within the meaning of the Code). The
discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this Annual Report on Form
10-K and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. This summary does not
discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that
could result if we invested in tax-exempt securities or certain other investment assets.
For purposes of our discussion, a “U.S. shareholder” means a beneficial owner of shares of our common stock that is for U.S. federal income tax
purposes:
• A citizen or individual resident of the United States;
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• A corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United
States or any state thereof of the District of Columbia;
• An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
• A trust if (1) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.
For purposes of our discussion, a “Non-U.S. shareholder” means a beneficial owner of shares of our common stock that is neither a U.S.
shareholder nor a partnership (including an entity treated as a partnership for U.S. federal income tax purposes).
If an entity treated as a partnership for U.S. federal income tax purposes (a “partnership”) holds shares of our common stock, the tax treatment of a
partner or member of the partnership will generally depend upon the status of the partner or member and the activities of the partnership. A prospective
shareholder that is a partner or member in a partnership holding shares of our common stock should consult his, her or its tax advisors with respect to the
purchase, ownership and disposition of shares of our common stock.
Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its
particular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax
reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the
effect of any possible changes in the tax laws.
Taxation as a Regulated Investment Company
Election to be Taxed as a RIC
We have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally are not subject to corporate-level U.S. federal income
taxes on any income that we distribute to our shareholders from our tax earnings and profits. To qualify as a RIC, we must, among other things, meet
certain source-of-income and asset diversification requirements (as described below). In addition, in order to obtain RIC tax treatment, we must distribute
to our shareholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the
excess, if any, of realized net short-term capital gain over realized net long-term capital loss, or the Annual Distribution Requirement. Depending on the
level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next year and
pay a 4% U.S. federal excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the
final tax return related to the year that generated such taxable income. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S.
federal income tax on our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreign taxes.
Taxation as a RIC
Provided that we qualify as a RIC, we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net
capital gain (which we define as net long-term capital gain in excess of net short-term capital loss) that we timely distribute to shareholders. We will be
subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our shareholders.
We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at
least equal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the calendar year ended
December 31 and (3) any income and gains recognized, but not distributed, in preceding years and on which we paid no U.S. federal income tax.
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
• Meet the Annual Distribution Requirement;
• Qualify to be treated as a BDC or be registered as a management investment company under the 1940 Act at all times during each taxable
year;
• Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains
from the sale or other disposition of stock or other securities or foreign currencies or other income derived with respect to our business of
investing in such stock, securities or currencies and net
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income derived from an interest in a “qualified publicly traded partnership” (as defined in the Code), or the 90% Income Test; and
• Diversify our holdings so that at the end of each quarter of the taxable year:
◦
◦
at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and
other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10%
of the outstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualified publicly
traded partnership”); and
no more than 25% of the value of our assets is invested in the securities, other than U.S. Government securities or securities of other
RICs, (1) of one issuer (2) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are
engaged in the same or similar or related trades or businesses or (3) of one or more “qualified publicly traded partnerships,” or the
Diversification Tests.
To the extent that we invest in entities treated as partnerships for U.S. federal income tax purposes (other than a “qualified publicly traded partnership”),
we generally must include the items of gross income derived by the partnerships for purposes of the 90% Income Test, and the income that is derived from
a partnership (other than a “qualified publicly traded partnership”) will be treated as qualifying income for purposes of the 90% Income Test only to the
extent that such income is attributable to items of income of the partnership which would be qualifying income if realized by us directly. In addition, we
generally must take into account our proportionate share of the assets held by partnerships (other than a “qualified publicly traded partnership”) in which
we are a partner for purposes of the Diversification Tests.
In order to meet the 90% Income Test, we have established the Taxable Subsidiary to hold assets from which we do not anticipate earning dividend,
interest or other income under the 90% Income Test. We may establish additional subsidiaries for the same purpose in the future. Any investments held
through a Taxable Subsidiary generally are subject to U.S. federal income and other taxes, and therefore we can expect to achieve a reduced after-tax yield
on such investments.
We may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold
debt obligations that are treated under applicable tax rules as having original issue discount (including debt instruments with payment-in-kind interest or, in
certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount or payment-in-
kind interest that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We
anticipate that a portion of our income may constitute original issue discount or other income required to be included in taxable income prior to receipt of
cash.
Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual, we
may be required to make a distribution to our shareholders in order to satisfy the Annual Distribution Requirement, even though we will not have received
any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax
treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt
or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC
tax treatment and thus become subject to corporate-level U.S. federal income tax.
Furthermore, a portfolio company in which we invest may face financial difficulty that requires us to work-out, modify or otherwise restructure our
investment in the portfolio company. Any such restructuring may result in unusable capital losses and future non-cash income. Any restructuring may also
result in our recognition of a substantial amount of non-qualifying income for purposes of the 90% Income Test, such as cancellation of indebtedness
income in connection with the work-out of a leveraged investment (which, while not free from doubt, may be treated as non-qualifying income) or the
receipt of other non-qualifying income.
Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital
gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.
Investments by us in non-U.S. securities may be subject to non-U.S. income, withholding and other taxes, and therefore, our yield on any such securities
may be reduced by such non-U.S. taxes. Shareholders will generally not be entitled to claim a credit or deduction with respect to non-U.S. taxes paid by us.
We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. Under the 1940 Act, we are not permitted to make
distributions to our shareholders while our debt obligations and other senior securities are
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outstanding unless certain “asset coverage” tests are met. See “Regulation as a Business Development Company” above. Moreover, our ability to dispose
of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status
as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or to avoid the excise tax, we
may make such dispositions at times that, from an investment standpoint, are not advantageous.
If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, we will be subject to tax in that year on
all of our taxable income, regardless of whether we make any distributions to our shareholders. In that case, all of such income will be subject to corporate-
level U.S. federal income tax, reducing the amount available to be distributed to our shareholders. See “Failure To Obtain RIC Tax Treatment” below.
As a RIC, we are not allowed to carry forward or carry back a net operating loss for purposes of computing our investment company taxable income in
other taxable years. U.S. federal income tax law generally permits a RIC to carry forward (1) the excess of its net short-term capital loss over its net long-
term capital gain for a given year as a short-term capital loss arising on the first day of the following year and (2) the excess of its net long-term capital loss
over its net short-term capital gain for a given year as a long-term capital loss arising on the first day of the following year. Future transactions we engage
in may cause our ability to use any capital loss carryforwards, and unrealized losses once realized, to be limited under Section 382 of the Code. Certain of
our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (1) disallow, suspend or
otherwise limit the allowance of certain losses or deductions, (2) convert lower taxed long-term capital gain and qualified dividend income into higher
taxed short-term capital gain or ordinary income, (3) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited),
(4) cause us to recognize income or gain without a corresponding receipt of cash, (5) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur, (6) adversely alter the characterization of certain complex financial transactions and (7) produce income that will not be
qualifying income for purposes of the 90% Income Test. We will monitor our transactions and may make certain tax elections in order to mitigate the effect
of these provisions.
As described above, to the extent that we invest in equity securities of entities that are treated as partnerships for U.S. federal income tax purposes, the
effect of such investments for purposes of the 90% Income Test and the Diversification Tests will depend on whether or not the partnership is a “qualified
publicly traded partnership” (as defined in the Code). If the entity is a “qualified publicly traded partnership,” the net income derived from such
investments will be qualifying income for purposes of the 90% Income Test and will be “securities” for purposes of the Diversification Tests. If the entity is
not treated as a “qualified publicly traded partnership,” however, the consequences of an investment in the partnership will depend upon the amount and
type of income and assets of the partnership allocable to us. The income derived from such investments may not be qualifying income for purposes of the
90% Income Test and, therefore, could adversely affect our qualification as a RIC. We intend to monitor our investments in equity securities of entities that
are treated as partnerships for U.S. federal income tax purposes to prevent our disqualification as a RIC.
We may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject to re-
characterization by the Internal Revenue Service, or the IRS. To the extent the tax treatment of such securities or the income from such securities differs
from the expected tax treatment, it could affect the timing or character of income recognized, requiring us to purchase or sell securities, or otherwise
change our portfolio, in order to comply with the tax rules applicable to RICs under the Code.
We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of each shareholder. Under certain applicable
provisions of the Code and the Treasury regulations, distributions payable in cash or in shares of stock at the election of shareholders are treated as taxable
dividends. The IRS has issued a revenue procedure indicating that this rule will apply where the total amount of cash to be distributed is not less than 20%
of the total distribution (which has been temporarily reduced to 10% for distributions declared on or after April 1, 2020, and on or before December 31,
2020). Under this revenue procedure, if too many shareholders elect to receive their distributions in cash, each such shareholder would receive a pro rata
share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If we decide to make any distributions
consistent with this revenue procedure that are payable in part in our stock, taxable shareholders receiving such dividends will be required to include the
full amount of the dividend (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent
such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal
income tax purposes. As a result, a U.S. shareholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S.
shareholder sells the stock it receives in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the
dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. shareholders, we may be required to
withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. If a significant number of
our shareholders
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determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.
Failure to Obtain RIC Tax Treatment
If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as a RIC for that year
if certain relief provisions are applicable (which may, among other things, require us to pay certain corporate-level U.S. federal taxes or to dispose of
certain assets).
If we were unable to obtain tax treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be
able to deduct distributions to shareholders, nor would they be required to be made. Distributions would generally be taxable to our shareholders as
dividend income to the extent of our current and accumulated earnings and profits (in the case of non-corporate U.S. shareholders, generally at a maximum
federal income tax rate applicable to qualified dividend income of 20%). Subject to certain limitations under the Code, corporate distributees would be
eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return
of capital to the extent of the shareholder’s tax basis, and any remaining distributions would be treated as a capital gain.
If we fail to meet the RIC requirements for more than two consecutive years, and then seek to re-qualify as a RIC, we would be subject to corporate-level
U.S. federal income taxation on any built-in gain recognized during the succeeding 5-year period unless we made a special election to recognize all that
built-in gain upon our re-qualification as a RIC and to pay the corporate-level U.S. federal income tax on that built-in gain.
Coronavirus Aid, Relief and Economic Security Act
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in March 2020. The
CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). The enactment of the CARES Act
did not result in any material adjustments to our income tax provision for the years ended March 31, 2021 or 2020, or to our net deferred tax assets as of
March 31, 2021 or 2020.
Possible Legislative or Other Actions Affecting Tax Considerations
Prospective investors should recognize that the present U.S. federal income tax treatment of an investment in our stock may be modified by legislative,
judicial or administrative action at any time, and that any such action may affect investments and commitments previously made. The rules dealing with
U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department,
resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in U.S. federal tax laws and
interpretations thereof could affect the tax consequences of an investment in our stock. See "Risk Factors – Legislative or other actions relating to taxes
could have a negative effect on us."
REGULATION AS A SMALL BUSINESS INVESTMENT COMPANY
SBIC I’s SBIC license will allow it to incur leverage by issuing SBA-guaranteed debentures, subject to the issuance of a leverage commitment by
the SBA and other customary procedures. SBA regulations currently permit SBIC I to borrow up to $175 million in SBA-guaranteed debentures with at
least $87.5 million in regulatory capital (as defined in the SBA regulations), subject to SBA approval. SBA-guaranteed debentures are non-recourse,
interest only debentures with interest payable semi-annually and have a ten-year maturity. The principal amount of SBA-guaranteed debentures is not
required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed at the time of
issuance at a market-driven spread over U.S. Treasury Notes with ten-year maturities. Receipt of an SBIC license does not assure that SBIC I will receive
SBA guaranteed debenture funding, which is dependent upon SBIC I continuing to be in compliance with SBA regulations and policies. The SBA, as a
creditor, will have a superior claim to SBIC I’s assets over our shareholders in the event we liquidate SBIC I or the SBA exercises its remedies under the
SBA-guaranteed debentures issued by SBIC I upon an event of default.
On April 21, 2021, we filed an application requesting exemptive relief from the SEC to permit us to exclude the debt of SBIC I guaranteed by the
SBA from the definition of senior securities in the asset coverage requirement applicable to us under the 1940 Act. The SEC previously has granted
exemptive relief to permit similar operations, but there can be no assurance that such exemptive relief will be granted and the timing thereof.
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SBICs are designed to stimulate the flow of private investor capital to eligible “small businesses” as defined by the SBA. Under SBA regulations,
SBICs may make loans to eligible small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory
services. Under current SBA regulations, eligible small businesses generally include businesses that (together with their affiliates) have a tangible net worth
not exceeding $19.5 million and have average annual net income after U.S. federal income taxes not exceeding $6.5 million (average net income to be
computed without benefit of any carryover loss) for the two most recent fiscal years. In addition, an SBIC must invest 25.0% of its investment capital to
“smaller enterprises” as defined by the SBA. The definition of a smaller enterprise generally includes a business that (together with its affiliates) has a
tangible net worth not exceeding $6.0 million for the most recent fiscal year and have average net income after U.S. federal income taxes not exceeding
$2.0 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years. SBA regulations also provide
alternative industry size standard criteria to determine eligibility for designation as an eligible small business or a smaller enterprise, which criteria depend
on the primary industry in which the business is engaged and is based on the number of employees or gross revenue of the business and its affiliates.
However, once an SBIC has invested in an eligible small business, it may continue to make follow-on investments in the company, regardless of the size of
the company at the time of the follow-on investment, up to the time of the company's initial public offering, if any.
The SBA generally prohibits an SBIC from providing financing to small businesses with certain characteristics, such as relending or businesses
with the majority of their employees located outside the United States, and business engaged in certain prohibited industries, such as project finance, real
estate, farmland, financial intermediaries or “passive” (i.e. non-operating) businesses. Without prior SBA approval, an SBIC may not provide financing or a
commitment to a small business in an amount equal to more than approximately 30.0% of the SBIC’s regulatory capital in any one company and its
affiliates.
The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies (such as limiting the permissible
interest rate on debt securities held by an SBIC in a portfolio company). An SBIC may exercise control over a small business for a period of up to seven
years from the date on which the SBIC initially acquires its control position. This control period may be extended for an additional period of time with the
SBA's prior written approval.
The SBA restricts the ability of an SBIC to provide financing to an “associate” as defined in the SBA regulations, without prior written approval
from the SBA. SBA regulations also prohibit, without prior SBA approval, a “change of control” or “change in ownership” of transfer of an SBIC (as such
terms are defined in the SBA regulations) and require that SBICs invest idle funds in accordance with SBA regulations. In addition, SBIC I may also be
limited in its ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations.
SBIC I is subject to regulation and oversight by the SBA, including, among other things, requirements with respect to maintaining certain
minimum financial ratios and other covenants, a periodic examination by an SBA examiner, and the performance of a financial audit by an independent
auditor.
THE NASDAQ GLOBAL SELECT MARKET CORPORATE GOVERNANCE REGULATIONS
The NASDAQ Global Select Market, or Nasdaq, has adopted corporate governance listing standards with which listed companies must comply in order
to remain listed. We believe that we are in compliance with these corporate governance listing standards. We intend to monitor our compliance with future
listing standards and to take all necessary actions to ensure that we remain in compliance.
SECURITIES EXCHANGE ACT OF 1934 AND SARBANES-OXLEY ACT COMPLIANCE
We are subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly, annual and current reports, proxy
statements and other required items. In addition, we are subject to the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and regulations
promulgated thereunder, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. For example:
•
•
•
Pursuant to Rule 13a-14 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer are required to certify the accuracy of the
financial statements contained in our periodic reports;
Pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosure
controls and procedures;
Pursuant to Rule 13a-15 under the Exchange Act, our management is required to prepare a report on its assessment of our internal control over
financial reporting; and
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•
Pursuant to Item 308 of Regulation S-K and Rule 13a-15 under the Exchange Act, our periodic reports must disclose whether there were significant
changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Item 1A. Risk Factors
Investing in our securities involves a number of significant risks. In addition to other information contained in this Annual Report on Form 10-K,
investors should consider the following information before making an investment in our securities. The risks and uncertainties described below could
materially adversely affect our business, financial conditions and results of operations. The risks set forth below are not the only risks we face. Additional
risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance. If any of the
following risks, or risks not presently known to us, actually occur, the trading price of our securities could decline, and you may lose all or part of your
investment.
The following is a summary of the principal risk factors associated with an investment in us. Further details regarding each risk included in the
below summary list can be found further below.
• Our financial condition and results of operations will depend on our ability to effectively allocate and manage capital.
• Our business model depends to a significant extent upon strong referral relationships. Our inability to maintain or develop these relationships, as
well as the failure of these relationships to generate investment opportunities, could adversely affect our business.
• All of our assets are subject to security interests under our secured Credit Facility and if we default on our obligations under the Credit Facility, we
may suffer adverse consequences, including foreclosure on our assets.
•
•
In addition to regulatory limitations on our ability to raise capital, our current debt obligations contain various covenants, which, if not complied
with, could accelerate our repayment obligations under the Credit Facility thereby materially and adversely affecting our liquidity, financial
condition, results of operations and ability to pay distributions.
Because we borrow money to make investments, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of
investing in us.
• A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.
• We will become subject to corporate-level U.S. federal income tax if we are unable to maintain our qualification as a regulated investment company
under Subchapter M of the Code or satisfy regulated investment company distribution requirements.
• Our portfolio investments generally are not publicly traded. As a result, the fair value of these investments may not be readily determinable and will
be recorded at fair value as determined in good faith and under the direction of our Board of Directors. As a result, there may be uncertainty as to the
value of our portfolio investments.
• We are currently operating in a period of capital markets disruptions and economic uncertainty. Such market conditions may materially and
adversely affect debt and equity capital markets, which may have a negative impact on our business, financial condition and operations.
•
Events outside of our control, such as the COVID-19 pandemic, could negatively affect our portfolio companies and our results of our operations.
• We operate in a highly competitive market for investment opportunities.
• Our success depends on attracting and retaining qualified personnel in a competitive environment.
• Our investments in portfolio companies involve a number of significant risks.
•
The lack of liquidity in our investments may adversely affect our business.
• Defaults by our portfolio companies could harm our operating results.
• We generally will not control our portfolio companies.
•
•
•
Investing in shares of our common stock may involve an above average degree of risk.
Shares of closed-end investment companies, including BDCs, may trade at a discount to their net asset value.
The October 2024 Notes and the January 2026 Notes are unsecured and therefore are effectively subordinated to any existing and future secured
indebtedness, including indebtedness under our Credit Facility.
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• We may not be able to repurchase the October 2024 Notes and the January 2026 Notes upon a Change of Control Repurchase Event.
•
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the October 2024 Notes and the January
2026 Notes.
RISKS RELATED TO OUR BUSINESS AND STRUCTURE
Our financial condition and results of operations will depend on our ability to effectively allocate and manage capital.
Our ability to achieve our investment objective of maximizing risk-adjusted returns to shareholders depends on our ability to effectively allocate and
manage capital. Capital allocation depends, in part, upon our investment team’s ability to identify, evaluate, invest in and monitor companies that meet our
investment criteria.
Accomplishing our investment objectives is largely a function of our investment team’s management of the investment process and our access to
investments offering attractive risk adjusted returns. In addition, members of our investment team are called upon, from time to time, to provide
managerial assistance to some of our portfolio companies.
The results of our operations depend on many factors, including the availability of opportunities for investment, readily accessible short- and long-term
funding alternatives in the financial markets and economic conditions. Our ability to make new investments at attractive relative returns is also a function
of our marketing and our management of the investment process, as well as conditions in the private credit markets in which we invest. If we fail to invest
our capital effectively, our return on equity may be negatively impacted, which could have a material adverse effect on the price of the shares of our
common stock.
Any unrealized losses we experience may be an indication of future realized losses, which could reduce our income available to make distributions.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith
by our Board of Directors pursuant to a valuation methodology approved by our Board of Directors. Decreases in the market values or fair values of our
investments will be recorded as unrealized losses. An unrealized loss could be an indication of a portfolio company’s inability to generate cash flow or
meet its repayment obligations. This could result in realized losses in the future and ultimately in reductions of our income available to pay dividends or
interest and principal on our securities and could have a material adverse effect on your investment.
Our business model depends to a significant extent upon strong referral relationships. Our inability to maintain or develop these relationships, as
well as the failure of these relationships to generate investment opportunities, could adversely affect our business.
We expect that members of our management team will maintain their relationships with financial sponsors, intermediaries, financial institutions,
investment bankers, commercial bankers, financial advisors, attorneys, accountants, consultants and other individuals within our network, and we will rely
to a significant extent upon these relationships to provide us with potential investment opportunities. If our management team fails to maintain its existing
relationships or develop new relationships with sources of investment opportunities, we will not be able to effectively invest our capital. Individuals with
whom members of our management team have relationships are not obligated to provide us with investment opportunities; therefore, there is no assurance
that these relationships will generate investment opportunities for us.
All of our assets are subject to security interests under our secured Credit Facility and if we default on our obligations under the Credit Facility,
we may suffer adverse consequences, including foreclosure on our assets.
All of our assets are currently pledged as collateral under our Credit Facility. If we default on our obligations under the Credit Facility, the lenders party
thereto may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests. In such event, we may be forced
to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices
we would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business
in the manner in which we have historically operated. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate
the dividends that we have historically paid to our shareholders. In addition, if the lenders exercise their right to sell the assets pledged under our Credit
Facility, such sales may be completed at distressed sale
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prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the Credit
Facility. These distressed prices could be materially below our most recent valuation of each security, which could have a significantly negative effect on
NAV.
In addition to regulatory limitations on our ability to raise capital, our current debt obligations contain various covenants, which, if not complied
with, could accelerate our repayment obligations under the Credit Facility thereby materially and adversely affecting our liquidity, financial
condition, results of operations and ability to pay distributions.
We will have a continuing need for capital to finance our investments. As of March 31, 2021, the Credit Facility provides us with a revolving credit line
of up to $340.0 million of which $120.0 million was drawn.
The Credit Facility contains customary terms and conditions, including, without limitation, affirmative and negative covenants such as information
reporting requirements, minimum consolidated net worth, minimum consolidated interest coverage ratio, minimum asset coverage, and maintenance of RIC
tax treatment and BDC status. The Credit Facility also contains customary events of default with customary cure and notice provisions, including, without
limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenants, bankruptcy, and change of control.
The Credit Facility permits us to fund additional loans and investments as long as we are within the conditions set out in the Credit Facility.
Our continued compliance with these covenants depends on many factors, some of which are beyond our control, and there are no assurances that we
will continue to comply with these covenants. Our failure to satisfy these covenants could result in foreclosure by our lenders, which would accelerate our
repayment obligations under the credit facility and thereby have a material adverse effect on our business, liquidity, financial condition, results of
operations and ability to pay distributions to our shareholders.
Because we borrow money to make investments, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of
investing in us.
Borrowings to fund investments, also known as leverage, magnify the potential for loss on investments in our indebtedness and gain or loss on
investments in our equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities.
We may borrow from banks and other lenders, including under our Credit Facility, and may issue debt securities or enter into other types of borrowing
arrangements in the future. If the value of our assets decreases, leveraging would cause NAV to decline more sharply than it otherwise would have had we
not leveraged our business. Similarly, any decrease in our income would cause net investment income to decline more sharply than it would have had we
not leveraged our business. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments
related to our securities. Use of leverage is generally considered a speculative investment technique.
As of March 31, 2021, we had $120.0 million debt outstanding out of $340 million of total commitments under our Credit Facility. Borrowings under the
Credit Facility bear interest, on a per annum basis at a rate equal to the applicable LIBOR rate plus 2.50%. We pay unused commitment fees of 0.50% to
1.00% per annum, based on utilization, on the unused lender commitments under the Credit Facility. The Credit Facility is secured by substantially all of
our assets. If we are unable to meet the financial obligations under the Credit Facility, the lenders under the Credit Facility may exercise its remedies under
the Credit Facility as the result of a default by us. On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements that
increased the total commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed under the accordion
feature of the Credit Facility and increased total commitments from $180 million to $210 million. On December 21, 2018, CSWC entered into the
Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit Agreement"), and a related Amended and Restated Guarantee, Pledge and
Security Agreement, to amend and restate its Credit Facility. The Credit Agreement (1) increased the total commitments by $60 million from $210 million
to an aggregate total of $270 million, provided by a diversified group of nine lenders, (2) increased the Credit Facility's accordion feature to $350 million
under the Credit Facility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on
borrowings from LIBOR plus 3.00% to LIBOR plus 2.50%, subject to certain conditions as outlined in the Credit Agreement, (4) reduced the minimum
asset coverage with respect to senior securities representing indebtedness from 200% to 150% after the date on which such minimum asset coverage is
permitted to be reduced by the Company under applicable law, subject to certain conditions as outlined in the Credit Agreement, and (5) extended the
Credit Facility's revolving period from November 16, 2020 to December 21, 2022 and the final maturity was extended from November 16, 2021 to
December 21, 2023. On March 19, 2020, CSWC entered into an Incremental Assumption Agreement that increased the total commitments under the Credit
Facility by $30 million, which
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increased total commitments from $295 million to $325 million. On December 10, 2020, CSWC entered into Amendment No. 1 to the Credit Agreement
that expanded the accordion feature from $350 million to $400 million. In addition, on December 10, 2020, CSWC entered into an Incremental
Commitment Agreement that increased the total commitments under the Credit Facility by $15 million, which increased total commitments from $325
million to $340 million.
As of March 31, 2021, the carrying amount of the October 2024 Notes was $122.9 million. The October 2024 Notes mature on October 1, 2024 and may
be redeemed in whole or in part at any time prior to July 1, 2024, at par plus a “make-whole” premium, and thereafter at par. The October 2024 Notes bear
interest at a rate of 5.375% per year, payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2020. The October 2024 Notes are
the direct unsecured obligations of the Company and rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are
effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.
As of March 31, 2021, the carrying amount of the January 2026 Notes was $138.4 million. The January 2026 Notes mature on January 31, 2026
and may be redeemed in whole or in part at any time prior to October 31, 2025, at par plus a "make-whole" premium, and thereafter at par. The January
2026 Notes bear interest at a rate of 4.50% per year, payable semi-annually on January 31 and July 31 of each year, beginning on July 31, 2021. The
January 2026 Notes are the direct unsecured obligations of the Company and rank pari passu with our other outstanding and future unsecured
unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit
Facility.
Our ability to achieve our investment objective may depend in part on our ability to access additional leverage on favorable terms by borrowing from
banks or insurance companies or by issuing debt securities and there can be no assurance that such additional leverage can in fact be achieved.
Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns,
net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below.
Assumed Return on Our Portfolio
(net of expenses)
(1)
Corresponding net return to common shareholder
(2)
(10.0)%
(27.15)%
(5.0)%
(16.21)%
0.0%
(5.27)%
5.0%
5.67%
10.0%
16.61%
(1) Assumes $735.6 million in total assets, $385.0 million in debt principal outstanding, $336.3 million in net assets and a weighted-average interest rate of 4.32% on our senior securities
based on our financial data available on March 31, 2021. Actual interest payments may be different.
In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our March 31, 2021 total assets of at least 2.41%.
(2)
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according
to our current business strategy.
As a BDC, we are not permitted to acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at
least 70% of our total assets are qualifying assets.
As of March 31, 2021, 87.4% of our total assets consist of qualifying assets. However, we may be precluded from investing in what we believe are
attractive investments if those investments are not qualifying assets for purposes of the 1940 Act. Similarly, these rules could prevent us from making
follow-on investments in existing portfolio companies or we could be required to dispose of investments at inappropriate times to comply with the 1940
Act (which could result in the dilution of our position).
A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.
If we fail to maintain our status as a BDC, we might be regulated as a closed-end investment company that is required to register under the 1940 Act,
which would subject us to additional regulatory restrictions and significantly decrease our
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operating flexibility. In addition, any such failure could cause an event of default under our outstanding indebtedness, which could have a material adverse
effect on our business, financial condition or results of operations.
We will become subject to corporate-level U.S. federal income tax if we are unable to maintain our qualification as a regulated investment
company under Subchapter M of the Code or satisfy regulated investment company distribution requirements.
We have elected, and intend to qualify annually, to be treated as a RIC under Subchapter M of the Code. No assurance can be given that we will be able
to maintain our qualification as a RIC. To maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and
asset diversification requirements:
•
•
•
The annual distribution requirement for a RIC is satisfied if we timely distribute to our shareholders on an annual basis at least 90% of our net
ordinary income and realized short-term capital gains in excess of realized net long-term capital losses. Depending on the level of taxable income
earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next year and pay a 4% U.S.
federal excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax
return related to the year that generated such taxable income.
The source of income requirement is satisfied if we obtain at least 90% of our gross income for each taxable year from dividends, interest, payments
with respect to certain securities loans, gains from the sale or other disposition of stock or other securities or foreign currencies or other income
derived with respect to our business of investing in such stock, securities or currencies and net income derived from an interest in a “qualified
publicly traded partnership” (as defined in the Code), or the 90% Income Test.
The asset diversification requirement is satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable
year. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. Government securities,
securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or
more than 10% of the outstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualified publicly
traded partnership”). In addition, no more than 25% of the value of our assets can be invested in the securities, other than U.S Government
securities or securities of other RICs, (1) of one issuer (2) of two or more issuers that are controlled, as determined under applicable tax rules, by us
and that are engaged in the same or similar or related trades or businesses or (3) of one or more “qualified publicly traded partnerships,” or the
Diversification Tests.
Failure to meet these requirements may result in us having to dispose of certain unqualified investments quickly in order to prevent the loss of RIC tax
treatment. If we fail to maintain RIC tax treatment for any reason and are subject to corporate-level U.S. federal income tax, the resulting corporate-level
taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. In addition, to the
extent we had unrealized gains, we would have to establish deferred tax liabilities for taxes, which would reduce our NAV accordingly. In addition, our
shareholders would lose the tax credit realized when we, as a RIC, decide to retain the net realized capital gain and make deemed distributions of net
realized capital gains, and pay taxes on behalf of our shareholders at the end of the tax year. The loss of this pass-through tax treatment could have a
material adverse effect on the total return of an investment in our common stock.
Even if the Company qualifies as a regulated investment company, it may face tax liabilities that reduce its cash flow.
Even if we qualify for taxation as a RIC under the Code, we may be subject to certain U.S. federal, state and local taxes on our income and assets. In
addition, we may hold some of our assets through our Taxable Subsidiary, which is not consolidated for U.S. federal income tax purposes, or any other
taxable subsidiary we may form. Any taxes paid by our subsidiary corporations would decrease the cash available for distribution to our shareholders.
Our portfolio investments generally are not publicly traded. As a result, the fair value of these investments may not be readily determinable and
will be recorded at fair value as determined in good faith and under the direction of our Board of Directors. As a result, there may be uncertainty
as to the value of our portfolio investments.
Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as
determined by us, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, our fair value
determination. Typically, there is not a public market for the securities of the privately held companies in which we have invested and will continue to
invest. As a result, we value these securities
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quarterly at fair value based on inputs from management and our investment team, along with the oversight, review and approval of our Board of Directors.
The determination of fair value and, consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree, subjective and
dependent on a valuation process approved by our Board of Directors. Certain factors that may be considered in determining the fair value of our
investments include external events, such as private mergers, sales and acquisitions involving comparable companies. Because of the inherent uncertainty
of the valuation of portfolio securities that do not have readily ascertainable market values, our fair value determinations may differ materially from the
values a third party would be willing to pay for our portfolio securities or the values which would be applicable to unrestricted securities having a public
market. Due to this uncertainty, our fair value determinations may cause our NAV on a given date to materially understate or overstate the value that we
may ultimately realize on one or more of our investments. As a result, investors purchasing our common stock based on an overstated NAV may pay a
higher price than the value of our investments might warrant. Conversely, investors selling shares during a period in which the NAV understates the value
of our investments may receive a lower price for their shares than the value of our investments might warrant.
We are currently operating in a period of capital markets disruptions and economic uncertainty. Such market conditions may materially and
adversely affect debt and equity capital markets, which may have a negative impact on our business, financial condition and operations.
From time to time, capital markets may experience periods of disruption and instability. The U.S. capital markets have experienced extreme volatility
and disruption following the global outbreak of coronavirus (“COVID-19”) that began in December 2019. Some economists and major investment banks
have expressed concern that the continued spread of the COVID-19 globally could lead to a world-wide economic downturn. Even after the COVID-19
pandemic subsides, the U.S. economy, as well as most other major economies, may continue to experience a recession, and we anticipate our businesses
would be materially and adversely affected by a prolonged recession in the United States and other major markets. Disruptions in the capital markets have
increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. The COVID-
19 outbreak continues to have, and any future outbreaks could have, an adverse impact on the ability of lenders to originate loans, the volume and type of
loans originated, the ability of borrowers to make payments and the volume and type of amendments and waivers granted to borrowers and remedial
actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by the
Company and returns to the Company, among other things. With respect to the U.S. credit markets (in particular for middle-market loans), the COVID-19
outbreak has resulted in, and until fully resolved is likely to continue to result in, the following among other things: (i) increased draws by borrowers on
revolving lines of credit and other financing instruments; (ii) increased requests by borrowers for amendments and waivers of their credit agreements to
avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iii) greater
volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility; and (iv) rapidly evolving proposals and/or actions by
state and federal governments to address problems being experienced by the markets and by businesses and the economy in general which will not
necessarily adequately address the problems facing the loan market and middle-market businesses. These and future market disruptions and/or illiquidity
could have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also could
increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our
investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity
investments. We may have to access, if available, alternative markets for debt and equity capital, and a severe disruption in the global financial markets,
deterioration in credit and financing conditions or uncertainty regarding U.S. government spending and deficit levels or other global economic conditions
could have a material adverse effect on our business, financial condition and results of operations.
Past economic downturns or recessions have had a significant negative impact on the operating performance and fair value of middle market companies.
For example, between 2008 and 2009, the U.S. and global capital markets were unstable as evidenced by periodic disruptions in liquidity in the debt capital
markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major
financial institutions. Despite actions of the U.S. federal government and foreign governments, these events contributed to worsening general economic
conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the
market as a whole and financial services firms in particular.
Equity capital may be difficult to raise during periods of adverse or volatile market conditions because, subject to some limited exceptions, as a BDC, we
are generally not able to issue additional shares of our common stock at a price less than NAV without first obtaining approval for such issuance from our
shareholders and our independent directors. Volatility and dislocation in the capital markets can also create a challenging environment in which to raise or
access debt capital. If the
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current market conditions, similar to those experienced from 2008 through 2009, continue for any substantial length of time, it could make it difficult to
extend the maturity of or refinance our existing indebtedness or obtain new indebtedness with similar terms and any failure to do so could have a material
adverse effect on our business. The debt capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and
conditions than what we currently experience, including being at a higher cost in a rising interest rate environment. If any of these conditions appear, they
may have an adverse effect on our business, financial condition, and results of operations. These events could limit our investment originations, limit our
ability to increase returns to equity holders through the effective use of leverage, and negatively impact our operating results.
In addition, significant changes or volatility in the capital markets may also have a negative effect on the valuations of our investments. While most of
our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold
in a principal market to market participants (even if we plan on holding an investment through its maturity). Significant changes in the capital markets may
also affect the pace of our investment activity and the potential for liquidity events involving our investments. Thus, the illiquidity of our investments may
make it difficult for us to sell our investments to access capital if required, and as a result, we could realize significantly less than the value at which we
have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital could have a material adverse
effect on our business, financial condition or results of operations.
Government authorities worldwide have taken increased measures to stabilize the markets and support economic growth. The success of these measures
is unknown and they may not be sufficient to address the market dislocations or avert severe and prolonged reductions in economic activity.
We also face an increased risk of investor, creditor or portfolio company disputes, litigation and governmental and regulatory scrutiny as a result of the
effects of COVID-19 on economic and market conditions.
Events outside of our control, such as the COVID-19 pandemic, could negatively affect our portfolio companies and our results of our operations.
Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These
types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies. For example, the
COVID-19 pandemic has led to, and for an unknown period of time will continue to lead to, disruptions in local, regional, national and global markets and
economies affected thereby, including the United States. The COVID-19 pandemic and restrictive measures taken to contain or mitigate its spread have
caused, and are continuing to cause, business shutdowns, or the re-introduction of business shutdowns, cancellations of events and restrictions on travel,
significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and
overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the COVID-19
pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states, counties and cities in the United States, have
begun to relax the early public health restrictions with a view to partially or fully reopening their economies or lifted such restrictions entirely, many cities,
both globally and in the United States, have since experienced a surge in the reported number of cases, hospitalizations and deaths related to the COVID-19
pandemic. This recent increase in cases has led to the re-introduction of restrictions and business shutdowns in certain states, counties and cities in the
United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Additionally, the U.S. Food and Drug
Administration authorized vaccines produced by Pfizer-BioNTech and Moderna for emergency use in December 2020 and Janssen Biotech Inc. for
emergency use in February 2021. However, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd
immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the
vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time.
COVID-19 and the resulting economic dislocations have had adverse consequences for the business operations and financial performance of some
of our portfolio companies, which may, in turn impact the valuation of our investments and have adversely affected, and threaten to continue to adversely
affect, our operations. We cannot predict the full impact of COVID-19, including the duration of the restrictions described above. As a result, we are unable
to predict the duration of these business and supply-chain disruptions, the extent to which COVID-19 will negatively affect our portfolio companies’
operating results or the impact that such disruptions may have on our results of operations and financial condition. With respect to loans to portfolio
companies, the Company will be impacted if, among other things, (i) amendments and waivers are granted (or are required to be granted) to borrowers
permitting deferral of loan payments or allowing for PIK interest payments, (ii) borrowers default on their loans, are unable to refinance their loans at
maturity, or go out of business, or (iii) the value of loans held by the Company decreases as a result of such events and the uncertainty they cause. Portfolio
companies may also be more likely to
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seek to draw on unfunded commitments we have made, and the risk of being unable to fund such commitments is heightened during such periods.
Depending on the duration and extent of the disruption to the business operations of our portfolio companies, we expect some portfolio companies,
particularly those in vulnerable industries, to experience financial distress and possibly to default on their financial obligations to us and/or their other
capital providers. In addition, if such portfolio companies are subjected to prolonged and severe financial distress, we expect some of them to substantially
curtail their operations, defer capital expenditures and lay off workers. These developments would be likely to permanently impair their businesses and
result in a reduction in the value of our investments in them. Any potential impact to our results of operations will depend to a large extent on future
developments and new information that could emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities
and other entities to contain the spread or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely
affect our and our portfolio companies’ operating results and financial condition.
Political, social and economic uncertainty, including uncertainty related to the COVID-19 pandemic, creates and exacerbates risks.
Social, political, economic and other conditions and events (such as natural disasters, epidemics and pandemics, terrorism, conflicts and social
unrest) will occur that create uncertainty and have significant impacts on issuers, industries, governments and other systems, including the financial
markets, to which companies and their investments are exposed. As global systems, economies and financial markets are increasingly interconnected,
events that once had only local impact are now more likely to have regional or even global effects. Events that occur in one country, region or financial
market will, more frequently, adversely impact issuers in other countries, regions or markets, including in established markets such as the United States.
These impacts can be exacerbated by failures of governments and societies to adequately respond to an emerging event or threat.
Uncertainty can result in or coincide with, among other things: increased volatility in the financial markets for securities, derivatives, loans, credit
and currency; a decrease in the reliability of market prices and difficulty in valuing assets (including portfolio company assets); greater fluctuations in
spreads on debt investments and currency exchange rates; increased risk of default (by both government and private obligors and issuers); further social,
economic, and political instability; nationalization of private enterprise; greater governmental involvement in the economy or in social factors that impact
the economy; changes to governmental regulation and supervision of the loan, securities, derivatives and currency markets and market participants and
decreased or revised monitoring of such markets by governments or self-regulatory organizations and reduced enforcement of regulations; limitations on
the activities of investors in such markets; controls or restrictions on foreign investment, capital controls and limitations on repatriation of invested capital;
the significant loss of liquidity and the inability to purchase, sell and otherwise fund investments or settle transactions (including, but not limited to, a
market freeze); unavailability of currency hedging techniques; substantial, and in some periods extremely high, rates of inflation, which can last many years
and have substantial negative effects on credit and securities markets as well as the economy as a whole; recessions; and difficulties in obtaining and/or
enforcing legal judgments.
As a result of the U.S. presidential election and the subsequent senate runoff elections, there has been a change in control of the executive and
legislative branches of the U.S. government. Changes in federal policy, including tax policies, and at regulatory agencies occur over time through policy
and personnel changes following elections, which lead to changes involving the level of oversight and regulation of the financial services industry, as well
as changes in tax rates. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting
financial institutions remain highly uncertain.
In addition, the COVID-19 pandemic outbreak has led and for an unknown period of time will continue to lead to disruptions in local, regional,
national and global markets and economies affected thereby. The COVID-19 pandemic has impacted the U.S. credit markets (in particular for middle
market loans). See “We are currently operating in a period of capital markets disruptions and economic uncertainty. Such market conditions may materially
and adversely affect debt and equity capital markets, which may have a negative impact on our business, financial condition and operations” and “Events
outside of our control, such as the COVID-19 pandemic, could negatively affect our portfolio companies and our results of our operations.”
Although it is impossible to predict the precise nature and consequences of these events, or of any political or policy decisions and regulatory
changes occasioned by emerging events or uncertainty on applicable laws or regulations that impact us, our portfolio companies and our investments, it is
clear that these types of events are impacting and will, for at least some time, continue to impact us and our portfolio companies and, in many instances, the
impact will be adverse and profound. The effects of the COVID-19 pandemic may materially and adversely impact (i) the value and performance of us and
our portfolio companies, (ii) the ability of our borrowers to continue to meet loan covenants or repay loans provided by us on a timely basis
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or at all, which may require us to restructure our investments or write down the value of our investments, (iii) our ability to repay debt obligations, on a
timely basis or at all, or (iv) our ability to source, manage and divest investments and achieve our investment objectives, all of which could result in
significant losses to us.
The United Kingdom’s referendum decision to leave the European Union may create significant risks and uncertainty for global markets and our
investments.
The decision made in the United Kingdom referendum to leave the European Union has led to volatility in global financial markets, and in
particular in the markets of the United Kingdom and across Europe, and may also lead to weakening in consumer, corporate and financial confidence in the
United Kingdom and Europe. Under the terms of the withdrawal agreement negotiated and agreed to between the United Kingdom and the European
Union, the United Kingdom’s departure from the European Union was followed by a transition period that ran until December 31, 2020 and during which
the United Kingdom continued to apply European Union law and was treated for all material purposes as if it were still a member of the European Union.
On December 24, 2020, the European Union and United Kingdom governments signed a trade deal that became provisionally effective on January 1, 2021
and that now governs the relationship between the United Kingdom and the European Union (the “Trade Agreement”). The Trade Agreement implements
significant regulation around trade, transport of goods and travel restrictions between the United Kingdom and the European Union.
Notwithstanding the foregoing, the longer term economic, legal, political and social framework to be put in place between the United Kingdom
and the European Union is unclear at this stage and is likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in
both the United Kingdom and in wider European markets for some time. In particular, the decision made in the United Kingdom referendum may lead to a
call for similar referenda in other European jurisdictions, which may cause increased economic volatility and uncertainty in the European and global
markets. This volatility and uncertainty may have an adverse effect on the economy generally and on our ability, and the ability of our portfolio companies,
to execute our respective strategies and to receive attractive returns.
Potential declines in the value of the British Pound and/or the euro against other currencies, along with the potential downgrading of the United
Kingdom’s sovereign credit rating, may also have an impact on the performance of any of our portfolio companies located in the United Kingdom or
Europe.
Changes in the laws or regulations governing our business or the operations of our portfolio companies, changes in the interpretations thereof of
newly enacted laws or regulations, and any failure by us to comply with these laws or regulations, could require changes to certain business
practices of us or our portfolio companies, negatively affect the profitability of the operations, cash flows or financial condition of us or our
portfolio companies, impose additional costs on us or our portfolio companies or otherwise adversely affect our business or the business of our
portfolio companies.
We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including
our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and
foreclosure procedures and other trade practices. These laws and regulations, as well as their interpretation, may be changed from time to time, and new
laws and regulations may be enacted. Any change in the laws or regulations, the interpretations of the laws and regulations, or newly enacted laws or
regulations could require changes to certain business practices of us or our portfolio companies, negatively impact the operations, cash flows or financial
condition of us or our portfolio companies, impose additional costs on us or our portfolio companies or otherwise adversely affect our business or the
business of our portfolio companies. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the
conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, results of
operations or financial condition.
We operate in a highly competitive market for investment opportunities.
We compete for attractive investment opportunities with other financial institutions, including BDCs, junior capital lenders, and banks. Some of these
competitors are substantially larger and have greater financial, technical and marketing resources, and some are subject to different, and frequently less
stringent, regulations. Our competitors may have a lower cost of funds and may have access to funding sources that are not available to us. Furthermore,
many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC and the Code imposes on us as a RIC. As a
result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and there can be no assurance that
we will be able to identify and make investments that satisfy our objectives. A significant increase in the number and/or size of our competitors in our
target market could force us to accept less attractive investment
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terms, which may impact our return on these investments. We cannot assure you that the competitive pressures we face will not have a materially adverse
effect on our business, financial condition and results of operation.
Our success depends on attracting and retaining qualified personnel in a competitive environment.
Sourcing, selecting, structuring and closing our investments depends upon the diligence and skill of our management. Our management’s capabilities
may significantly impact our results of operations. Our success requires that we retain investment and operations personnel in a competitive
environment. Our ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors, including, but not
limited to, our ability to offer competitive wages, benefits and professional growth opportunities.
The competitive environment for qualified personnel may require us to take certain measures to ensure that we are able to attract and retain experienced
personnel. Such measures may include increasing the attractiveness of our overall compensation packages, altering the structure of our compensation
packages through the use of additional forms of compensation or other steps. The inability to attract and retain experienced personnel could potentially
have an adverse effect on our business.
Effective April 25, 2019, our asset coverage requirement was reduced from 200% to 150%, which could increase the risk of investing in the
Company.
The 1940 Act generally prohibits BDCs from incurring indebtedness unless immediately after such borrowing it has an asset coverage for total
borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our total assets). However, on March 23, 2018, the SBCAA was
signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA included changes to the
1940 Act to allow BDCs to decrease their asset coverage requirement from 200% to 150%, if certain requirements are met. On April 25, 2018, the Board of
Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board of Directors, approved the application of
the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the minimum asset coverage ratio applicable to the
Company was decreased from 200% to 150%, which became effective April 25, 2019. Additionally, the Board of Directors also approved a resolution that
limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account such issuance, would not be less than 166%, at any
time after the effective date. We are required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of
approval to reduce its asset coverage requirement to 150%, its leverage capacity and usage, and risks related to leverage.
Leverage is generally considered a speculative investment technique and increases the risk of investing in our securities. Leverage magnifies the
potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you will
experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the NAV attributable to our
common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause
NAV to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest
payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our
income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our
ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. If we incur additional leverage, you will
experience increased risks of investing in our common stock.
We expend significant financial and other resources to comply with the requirements of being a public company.
As a public entity, we are subject to the reporting requirements of the Exchange Act and requirements of the Sarbanes-Oxley Act and the related rules
and regulations promulgated by the SEC. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and
financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial
reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls, significant resources and
management oversight are required. We have implemented procedures, processes, policies and practices for the purpose of addressing the standards and
requirements applicable to public companies. These activities may divert management’s time and attention from other business concerns, which could have
a material adverse effect on our business, financial condition, results of operations and cash flows.
Our ability to enter into transactions with our affiliates is restricted.
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We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of our
independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our
affiliate for purposes of the 1940 Act, and we generally are prohibited from buying or selling any security from or to an affiliate, absent the prior approval
of our independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the
same portfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, the SEC. If a
person acquires more than 25% of our voting securities, we are prohibited from buying or selling any security from or to that person or certain of that
person’s affiliates, or entering into prohibited joint transactions with that person, absent the prior approval of the SEC. Similar restrictions limit our ability
to transact business with our officers or directors or their affiliates.
Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital.
Our business will require capital to operate and grow. We may acquire such additional capital from the following sources:
Senior Securities. We may issue debt securities, preferred stock and/or borrow money from banks or other financial institutions, which we refer to
collectively as senior securities. As a result of issuing senior securities, we will be exposed to additional risks, including the following:
• Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage, as
defined in the 1940 Act, equals at least 150% immediately after each issuance of senior securities. In accordance with the 1940 Act, on April 25,
2018, our Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of our Board of
Directors, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the
minimum asset coverage ratio applicable to the Company was decreased from 200% to 150%, effective April 25, 2019. The Board also
approved a resolution that limits the Company's issuance of senior securities such that the asset coverage ratio, taking into account such
issuance, would not be less than 166%, at any time after the effective date. If the value of our assets declines, we may be unable to satisfy this
requirement. If that happens, we will be prohibited from issuing debt securities and/or borrowing money from banks or other financial
institutions and may not be permitted to declare a dividend or make any distribution to shareholders or repurchase shares until such time as we
satisfy this test.
• Any amounts that we use to service our debt will not be available for dividends to our common shareholders.
•
It is likely that any senior securities or other indebtedness we issue will be governed by an indenture or other instrument containing covenants
restricting our operating flexibility. Additionally, some of these securities or other indebtedness may be rated by rating agencies, and in
obtaining a rating for such securities and other indebtedness, we may be required to abide by operating and investment guidelines that further
restrict operating and financial flexibility.
• We and, indirectly, our shareholders will bear the cost of issuing and servicing such securities and other indebtedness.
• Any unsecured debt issued by us would rank (1) pari passu with our future unsecured indebtedness and effectively subordinated to all of our
existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, and (2) structurally subordinated to
all existing and future indebtedness and other obligations of any of our subsidiaries
• Upon a liquidation of our company, holders of our debt securities and lenders with respect to other borrowings would receive a distribution of
our available assets prior to the holders of our common stock. Future offerings of additional debt securities, which would be senior to our
common stock upon liquidation, or equity securities, which could dilute our existing shareholders, may harm the value of our common stock.
Additional Common Stock. The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such
stock, with certain exceptions. One such exception is prior shareholder approval of issuances below current NAV per share provided that our Board of
Directors determines that such sale is in the best interests of the Company and its shareholders. We do not intend to seek shareholder authorization to sell
shares of our common stock below the then current NAV per share of our common stock at our 2021 annual meeting of shareholders. However, in the event
we change our position, we will seek requisite approval of our shareholders. See “-Shareholders may incur dilution if we sell shares of our common stock
in one or more offerings at prices below the then current NAV per share of our common stock or issue securities to subscribe to, convert to or purchase
shares of our common stock” for a discussion of the risks related to us issuing shares of our common stock below NAV. If we raise additional funds by
issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our shareholders at
that time would
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decrease, and they may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the
future, on favorable terms or at all.
SBIC I has an SBIC license and is subject to SBA regulations, and any failure to comply with SBA regulations could have an adverse effect on our
operations.
On April 20, 2021, SBIC I received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of
1958, as amended, and is regulated by the SBA.
The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies, regulates the types of financing,
prohibits investing in small businesses with certain characteristics or in certain industries and requires capitalization thresholds that limit distributions to us.
Accordingly, compliance with SBIC requirements may cause SBIC I to forego attractive investment opportunities that are not permitted under SBA
regulations and/or to invest at less competitive rates in order to find investments that qualify under the SBA regulations.
Further, SBA regulations require that an SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant
SBA regulations. If SBIC I fails to comply with applicable regulations, the SBA could, depending on the severity of the violation, limit or prohibit SBIC I’s
use of the debentures, declare outstanding debentures immediately due and payable, and/or limit SBIC I from making new investments. In addition, the
SBA could revoke or suspend SBIC I’s license for willful or repeated violation of, or willful or repeated failure to observe, any provision of the Small
Business Investment Act of 1958, as amended, or any rule or regulation promulgated thereunder. These actions by the SBA would, in turn, negatively effect
on our operations because SBIC I is our wholly owned subsidiary. We do not have any prior experience managing an SBIC. Our lack of experience in
complying with SBA regulations may hinder our ability to take advantage of SBIC I’s access to SBA-guaranteed debentures.
Shareholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of
our common stock or issue securities to convert to shares of our common stock.
The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such stock, with certain
exceptions. One such exception is prior shareholder approval of issuances below NAV provided that our Board of Directors determines that such sale is in
the best interests of the Company and its shareholders. We do not intend to seek shareholder authorization to sell shares of our common stock below the
then current NAV per share of our common stock at our 2021 annual meeting of shareholders. However, in the event we change our position, we will seek
the requisite approval of our shareholders.
If we were to sell shares of our common stock below NAV per share, such sales would result in an immediate dilution to the NAV per share. This
dilution would occur as a result of the sale of shares at a price below the then current NAV per share of our common stock and a proportionately greater
decrease in a shareholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. Because
the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be
predicted. Notwithstanding the foregoing, the example below illustrates the effect of dilution to existing shareholders resulting from the sale of common
stock at prices below the NAV of such shares.
In addition, if we issue securities to convert to shares of common stock, the exercise or conversion of such securities would increase the number of
outstanding shares of our common stock. Any such exercise would be dilutive on the voting power of existing shareholders, and could be dilutive with
regard to dividends and our NAV, and other economic aspects of the common stock.
Illustration: Example of Dilutive Effect of the Issuance of Shares Below Net Asset Value. Assume that Company XYZ has 1,000,000 total shares
outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The NAV per share of the common stock of Company XYZ is $10.00. The
following table illustrates the reduction NAV and the dilution experienced by shareholder A following the sale of 100,000 shares of the common stock of
Company XYZ at $9.00 per share, a price below its NAV per share.
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Reduction to NAV
Total Shares Outstanding
NAV per share
Dilution to Existing Shareholder
Shares held by Shareholder A
Percentage Held by Shareholder A
Total Interest of Shareholder A in NAV
Prior to Sale Below
NAV
Following Sale Below
NAV
Percentage Change
1,000,000
10.00
$
1,100,000
9.91
10,000
1.00 %
100,000
$
10,000
(1)
0.91 %
99,091
$
$
10.00 %
(0.91)%
— %
(9.09)%
(0.91)%
(1)
Assumes that Shareholder A does not purchase additional shares in the sale of shares below NAV.
Legislative or other actions relating to taxes could have a negative effect on us.
Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S. federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. We cannot predict with certainty how
any changes in the tax laws might affect us, our shareholders, or our portfolio investments. New legislation and any U.S. Treasury regulations,
administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect our ability to qualify for tax treatment
as a RIC or the U.S. federal income tax consequences to us and our shareholders of such qualification, or could have other adverse consequences.
Shareholders are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative developments and proposals and their
potential effect on an investment in our securities.
We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, have a material
adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our
shareholders.
Our business is highly dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems,
including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our
financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a
result of a number of factors, including events that are wholly or partially beyond our control and adversely affect our business. There could be:
•
•
•
•
•
sudden electrical or telecommunications outages;
natural disasters such as earthquakes, tornadoes and hurricanes;
disease pandemics (including the COVID-19 pandemic);
events arising from local or larger scale political or social matters, including terrorist acts; and
cyber-attacks.
These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and
our ability to pay dividends to our shareholders.
A failure of cybersecurity systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity
planning could impair our ability to conduct business effectively.
The occurrence of a disaster, such as a cyber-attack against us or against a third-party that has access to our data or networks, a natural catastrophe,
an industrial accident, failure of our disaster recovery systems, or consequential employee error, could have an adverse effect on our ability to communicate
or conduct business, negatively impacting our operations and financial condition. This adverse effect can become particularly acute if those events affect
our electronic data processing, transmission, storage, and retrieval systems, or impact the availability, integrity, or confidentiality of our data.
We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures,
our computer systems, networks, and data, like those of other companies, could be subject to cyber-attacks and unauthorized access, use, alteration, or
destruction, such as from physical and electronic break-ins or unauthorized tampering, malware and computer virus attacks, or system failures and
disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary, and other information processed, stored in,
and transmitted through our computer systems and networks. Such an attack could cause interruptions or malfunctions in our operations, which
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could result in financial losses, litigation, regulatory penalties, client dissatisfaction or loss, reputational damage, and increased costs associated with
mitigation of damages and remediation.
Third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions, and
these relationships allow for the storage and processing of our information, as well as counterparty, employee and borrower information. Cybersecurity
failures or breaches by service providers (including, but not limited to, accountants and custodians), and the issuers of securities in which we invest, also
have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with our ability to calculate its
NAV, impediments to trading, the inability of our stockholders to transact business, violations of applicable privacy and other laws, regulatory fines,
penalties, reputation damages, reimbursement of other compensation costs, or additional compliance costs. While we engage in actions to reduce our
exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity
incidents with increased costs and other consequences, including those as described above. In addition, substantial costs may be incurred in order to prevent
any cyber incidents in the future.
Privacy and information security laws and regulation changes, and compliance with those changes, may result in cost increases due to system
changes and the development of new administrative processes. In addition, we may be required to expend significant additional resources to modify our
protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks.
Our service providers are currently impacted by restrictions enacted by governments in response to COVID-19, which are obstructing the regular
functioning of business workforces (including requiring employees to work from external locations and their homes). Accordingly, the risks described
above are heightened under current conditions.
Terrorist attacks, acts of war or natural disasters may affect any market for our common stock, impact the businesses in which we invest and
harm our business, operating results and financial condition.
Terrorist attacks, acts of war or natural disasters may disrupt our operations, as well as the operations of the businesses in which we invest. These
events have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist
activities, military or security operations, or natural disasters could further weaken the domestic or global economy. These events could create additional
uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on
our business, operating results and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.
Our business and operations may be negatively affected if we become subject to securities litigation or shareholder activism, which could cause us
to incur significant expense, hinder execution of our investment strategy and impact our stock price.
In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been brought
against that company. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in the BDC space recently.
While we are currently not subject to any securities litigation or shareholder activism, due to the potential volatility of our stock price and for a variety of
other reasons, we may in the future become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism,
including potential proxy contests, could result in substantial costs and divert management’s and our Board of Directors’ attention and resources from our
business. Additionally, such securities litigation and shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our
relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal
fees and other expenses related to any securities litigation and activist shareholder matters. Further, our stock price could be subject to significant
fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism.
RISKS RELATED TO OUR INVESTMENTS
Our investments in portfolio companies involve a number of significant risks.
We primarily invest in privately held U.S. middle-market companies. Investments in privately held middle-market companies involve a number of
significant risks, including the following:
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•
•
•
•
•
These companies are more likely to depend on the management talents and efforts of a small group of key employees. Therefore, the death,
disability, resignation, termination, or significant under-performance of one or more of these persons could have a material adverse impact
on our portfolio company and, in turn, on us.
These companies may have unpredictable operating results, could become parties to litigation, may be engaged in rapidly changing
businesses with products subject to a substantial risk of obsolescence and may require substantial additional capital to support their
operations, finance expansion or maintain their competitive position.
Private companies may not have readily publicly available information about their businesses, operations and financial condition.
Consequently, we rely on the ability of our management team and investment professionals to obtain adequate information to evaluate the
potential returns from making investments in these portfolio companies. If we are unable to uncover all material information about the
target portfolio company, we may not make a fully informed investment decision and may lose all or part of our investment.
These companies may have shorter operating histories, narrower product lines, smaller market shares and/or more significant customer
concentration than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as
general economic downturns.
These companies may have limited financial resources and may be unable to meet their obligations under their debt instruments that we
hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any
guarantees from subsidiaries or affiliates of our portfolio companies that we may have obtained in connection with our investment, as well
as a corresponding decrease in the value of the equity components of our investments.
In addition, in the course of providing significant managerial assistance to certain of our portfolio companies, certain of our officers and directors
may serve as directors on the boards of these companies. To the extent that litigation arises out of our investments in these companies, our officers and
directors may be named as defendants in such litigation, which could result in an expenditure of funds for claims in excess of our directors’ and officers’
insurance coverage (through our indemnification of our officers and directors) and the diversion of management’s time and resources.
The lack of liquidity in our investments may adversely affect our business.
We invest, and will continue to invest, in portfolio companies whose securities are not publicly traded. These securities are generally subject to
legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. As a result, we do not expect to achieve liquidity in our
investments in the near-term. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are
required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these
investments and, as a result, we may suffer losses.
Defaults by our portfolio companies could harm our operating results.
Portfolio companies may fail to satisfy financial, operating or other covenants imposed by us or other lenders, which could lead to a default and,
potentially, acceleration of its loans and foreclosure on its secured assets. These events could trigger cross-defaults under other agreements and jeopardize
the portfolio company’s ability to meet its obligations, including under the debt or equity securities we hold. We may also incur expenses to the extent
necessary to recover upon a default or to negotiate new terms with the defaulting portfolio company.
Our investments in equity securities involve a substantial degree of risk.
We may purchase common stock and other equity securities, including warrants. Although equity securities have historically generated higher
average total returns than fixed-income securities over the long term, equity securities have also experienced significantly more volatility in those returns.
The equity securities we acquire may fail to appreciate and may decline in value or become worthless, and our ability to recover our investment depends on
our portfolio company’s success. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of
additional issuances, inability to access additional capital and failure to pay current distributions. Investments in preferred securities involve special risks,
such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights.
We may not realize gains from our equity investments.
Certain investments that we have made in the past and may make in the future include warrants or other equity securities. Investments in equity
securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additional capital
and failure to pay current distributions. Investments in preferred
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securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. In addition, we may from time to
time make non-control, equity investments in portfolio companies. Our goal is ultimately to realize gains upon our disposition of these equity interests.
However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains
from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we
experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business,
recapitalization or public offering, which would allow us to sell the underlying equity interests. We often seek puts or similar rights to give us the right to
sell our equity securities back to the portfolio company issuer; however, we may be unable to exercise these put rights for the consideration provided in our
investment documents if the issuer is in financial distress.
Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on
equity.
From time to time, certain portfolio companies may prepay our debt investments in our portfolio companies prior to maturity, the specific timing
of which we do not control. When this occurs, we will generally reinvest these proceeds in temporary investments, pending their future investment in new
portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and we could experience
significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was
repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed
to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our securities.
Changes in interest rates may affect our cost of capital, the value of investments and net investment income.
Some of our debt investments will bear interest at variable rates and the interest income from these investments could be negatively affected by
decreases in market interest rates. In addition, an increase in interest rates would make it more expensive for us to use debt to finance our investments. As a
result, a significant increase in market interest rates could increase our cost of capital, which would reduce our net investment income. Also, an increase in
interest rates available to investors could make an investment in our securities less attractive than alternative investments, a situation which could reduce
the value of our securities. Conversely, a decrease in interest rates may have an adverse impact on our returns by requiring us to seek lower yields on our
debt investments and by increasing the risk that our portfolio companies will prepay our debt investments, resulting in the need to redeploy capital at
potentially lower rates. A decrease in market interest rates may also adversely impact our returns on temporary investments, which would reduce our net
investment income. In addition, certain of our debt investments and debt liabilities may bear interest at fixed rates. To the extent that our fixed rate assets
and liabilities are not perfectly hedged, our net investment income may decrease based on changes in market interest rates. An increase in market interest
rates may also decrease the fair value of our fixed rate investments, as these may be less attractive securities in a rising rate environment.
There may be circumstances in which our debt investments could be subordinated to claims of other creditors or we could be subject to lender
liability claims.
Even though we may have structured our investments as secured debt, if one of our portfolio companies were to go bankrupt, depending on the
facts and circumstances, and based upon principles of equitable subordination, a bankruptcy court could subordinate all or a portion of our claim to that of
other creditors and transfer any lien securing our subordinated claim to the bankruptcy estate. The principles of equitable subordination based on case law
generally provide that a claim may be subordinated only if its holder is guilty of misconduct or where the secured debt is re-characterized as an equity
investment and the senior lender has actually provided significant managerial assistance to the bankrupt debtor. We may also be subject to lender liability
claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could
become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance or actions to compel and
collect payments from the borrower outside the ordinary course of business.
As a RIC, we may have certain regulatory restrictions that could preclude us from making additional investments in our portfolio companies.
We may not have the ability to make additional investments in our portfolio companies. After our initial investment in a portfolio company, we
may be called upon from time to time to provide additional funds to that company or have the opportunity to increase our investment or make follow-on
investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a
portfolio company in need of such an
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investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected return on the
investment.
Changes relating to the LIBOR calculation process may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in our
portfolio.
In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (‘‘BBA’’) in
connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-
bank lending rate applicable to them in order to profit on their derivative positions or to avoid an appearance of capital insufficiency or adverse reputational
or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member
banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by
regulators and governmental authorities in various jurisdictions are ongoing.
Actions by the ICE Benchmark Administration, regulators or law enforcement agencies as a result of these or future events, may result in changes
to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for
LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the
determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact
on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities, loans, and other financial
obligations or extensions of credit held by or due to us.
On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling
banks to submit LIBOR rates after 2021. We have exposure to LIBOR, including in financial instruments that mature after 2021. Our exposure arises from
the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
In the United States, the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, in conjunction with the Alternative Reference
Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index
calculated by short-term repurchase agreements, backed by Treasury securities, called the Secured Overnight Financing Rate (“SOFR”). The Federal
Reserve Bank of New York began publishing SOFR in April 2018. In addition, on March 25, 2020, the U.K. Financial Conduct Authority stated that,
although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has
impacted the timing of many firms’ transition planning, and the U.K. Financial Conduct Authority will continue to assess the impact of the COVID-19
outbreak on transition timelines and update the marketplace as soon as possible. Although SOFR appears to be the preferred replacement rate for U.S.
dollar LIBOR, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to
LIBOR that may be enacted in the United States, United Kingdom or elsewhere or, whether the COVID-19 outbreak will have further effect on LIBOR
transition plans. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on
the market for or value of any LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to
us or on our overall financial condition or results of operations. Furthermore, on November 30, 2020, the Intercontinental Exchange, Inc. (“ICE”)
announced that the ICE Benchmark Administration Limited, a wholly owned subsidiary of ICE and the administrator of LIBOR, announced its plan to
extend the date that most U.S. LIBOR values would cease being computed from December 31, 2021 to June 30, 2023. Despite this extension of the U.S.
LIBOR transition deadline for certain LIBOR values, U.S. regulators continue to urge financial institutions to stop entering into new LIBOR transactions
by the end of 2021.
The Company intends to monitor the developments with respect to the scheduled phasing out of LIBOR after 2021 and work with its portfolio
companies and lenders to ensure such transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances
regarding the impact of the discontinuation of LIBOR.
As of March 31, 2021, approximately 95.5% of our debt investment portfolio (at fair value) bore interest rates indexed upon LIBOR. Additionally,
our Credit Facility accrues interest at the applicable LIBOR rate plus 2.50%, subject to certain conditions as outlined in the Credit Agreement. If LIBOR
ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in
determining the interest rate to replace LIBOR with the new standard that is established. Any such renegotiated agreements or methodology of the new
standard may not be as favorable to us as the current agreements and LIBOR, which may adversely affect our results of operations.
We generally will not control our portfolio companies.
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We do not, and do not expect to, control most of our portfolio companies, even though we may have board representation or board observation
rights, and our debt agreements may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest
may make business decisions with which we disagree, and the management of such company, as representatives of the holders of their common equity, may
take risks or otherwise act in ways that do not serve our interests as debt investors. Due to the lack of liquidity of our investments in private companies, we
may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation. As a result, a portfolio
company may make decisions that could decrease the value of our portfolio holdings.
Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first
priority liens. Further, in cases where we invest in unsecured subordinated debt, we would not have any lien on the collateral. In each of these
cases, if there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
Certain loans that we make are either secured by a second priority security interest in the same collateral pledged by a portfolio company to secure
senior debt owed by the portfolio company to commercial banks or other traditional lenders, or in the case of unsecured subordinated debt, we have no lien
at all on the assets. Often the senior lender has procured covenants from the portfolio company prohibiting the incurrence of additional secured debt
without the senior lender’s consent. Prior to and as a condition of permitting the portfolio company to borrow money from us secured by the same collateral
pledged to the senior lender, or in the case where we invest in unsecured subordinated debt, the senior lender will require assurances that it will control the
disposition of any collateral in the event of bankruptcy or other default. In many cases, the senior lender will require us to enter into an “intercreditor
agreement” prior to permitting the portfolio company to borrow from us. Typically,the intercreditor agreements we are requested to execute expressly
subordinate our debt instruments to those held by the senior lender and further provide that the senior lender shall control: (1) the commencement of
foreclosure or other proceedings to liquidate and collect on the collateral, subject to a negotiated “standstill period” after which we can initiate; (2) the
nature, timing and conduct of foreclosure or other collection proceedings, subject to a negotiated “standstill period” after which we can initiate; (3) the
amendment of any collateral document; (4) the release of the security interests in respect of any collateral; and (5) the waiver of defaults under any security
agreement. Because of the control we may cede to senior lenders under intercreditor agreements we may enter, we may be unable to realize the proceeds of
any collateral securing some of our loans.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in those companies.
We invest primarily in the secured term debt of middle market companies and equity issued by middle market companies. Our portfolio companies
may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, these debt instruments
may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the
debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders
of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any
distribution. After repaying its senior creditors, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the
case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors
holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
RISKS RELATED TO OUR SECURITIES
The market price of our common stock may fluctuate significantly.
The market price of our common stock will fluctuate with market conditions and other factors. Our common stock is intended for long-term
investors and should not be treated as a trading vehicle. The market price and liquidity of the market for shares of our common stock may be significantly
affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
•
•
•
•
significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which is not necessarily related
to the operating performance of these companies;
exclusion of our common stock from certain market indices, such as the Russell 2000 Financial Services Index, which could reduce the ability of
certain investment funds to own our common stock and put short-term selling pressure on our common stock;
changes in regulatory policies or tax guidelines, particularly with respect to BDCs or RICs;
failure to qualify for RIC tax treatment;
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•
•
•
•
•
•
•
•
•
our origination activity, including the pace of, and competition for, new investment opportunities;
changes or perceived changes in earnings or variations of operating results;
changes or perceived changes in the value of our portfolio of investments;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
potential future sales of common stock or debt securities convertible into or exchangeable or exercisable for our common stock or the conversion of
such securities;
departure of our key personnel;
operating performance of companies comparable to us;
general economic trends and other external factors, such as the COVID-19 pandemic; and
loss of a major funding source.
Investing in shares of our common stock may involve an above average degree of risk.
The investments we make in accordance with our investment objectives may result in a higher amount of risk, volatility or loss of principal than
alternative investment options. Our investments in portfolio companies may be highly speculative, and therefore, an investment in our common stock may
not be suitable for investors with lower risk tolerance.
Shares of closed-end investment companies, including BDCs, may trade at a discount to their net asset value.
Our common stock is listed on The NASDAQ Global Select Market. Shareholders desiring liquidity may sell their shares on The NASDAQ
Global Select Market at current market value, which could be below NAV. Shares of closed-end investment companies frequently trade at discounts from
NAV, which is a risk separate and distinct from the risk that a fund’s performance will cause its NAV to decrease. We cannot predict whether our common
stock will trade at, above or below NAV. In addition, if our common stock trades below our NAV per share, we will generally not be able to issue additional
common stock at the market price unless our shareholders approve such a sale and our Board of Directors make certain determinations. See “Shareholders
may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock or
issue securities to subscribe to, convert to or purchase shares of our common stock” for a discussion of the risks related to us issuing shares of our common
stock below NAV.
The October 2024 Notes and the January 2026 Notes are unsecured and therefore are effectively subordinated to any existing and future secured
indebtedness, including indebtedness under our Credit Facility.
Each of the October 2024 Notes and the January 2026 Notes (collectively, the “Notes”) are not secured by any of our assets or any of the assets of
any of our subsidiaries. As a result, the Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred
(including our Credit Facility) or may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant a security
interest) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the
holders of any of our secured indebtedness or secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that
indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes.
As of March 31, 2021, we had $120.0 million in outstanding indebtedness under our Credit Facility, which is secured by (1) substantially all of the present
and future property and assets of the Company and the guarantors and (2) 100.0% of the equity interests in the Company’s wholly-owned subsidiaries.
The indenture under which the October 2024 Notes and the January 2026 Notes were issued contain limited protection for holders of the October
2024 Notes and the January 2026 Notes.
The respective indenture under which the October 2024 and the January 2026 Notes were issued offer limited protection to holders of the October
2024 and the January 2026 Notes. The terms of the respective indenture and the October 2024 and the January 2026 Notes do not restrict our or any of our
subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse
impact on the investment of the holders of the October 2024 and the January 2026 Notes, respectively. In particular, the terms of the respective indenture
and the October 2024 and the January 2026 Notes will not place any restrictions on our or our subsidiaries’ ability to:
•
issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be
equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in
right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or
more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by
our
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subsidiaries that would be senior to our equity interests in those entities and therefore rank structurally senior to the Notes with respect to the
assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)
(A) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of
the 1940 Act, but giving effect, in each case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us
from incurring additional borrowings, including through the issuance of additional debt securities, unless our asset coverage, as defined in the
1940 Act, equals at least 150% after such borrowings;
pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to
the Notes, including subordinated indebtedness, except that we have agreed that, for the period of time during which the Notes are outstanding, we
will not violate Section 18(a)(1)(B) as modified by (i) Section 61(a)(2) of the 1940 Act or any successor provisions and after giving effect to any
exemptive relief granted to us by the SEC and (ii) the following two exceptions: (A) we will be permitted to declare a cash dividend or distribution
notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions, but
only up to such amount as is necessary for us to maintain our status as a RIC under Subchapter M of the Code; and (B) this restriction will not be
triggered unless and until such time as our asset coverage has not been in compliance with the minimum asset coverage required by Section 18(a)
(1)(B) as modified by Section 61(a)(2) of the 1940 Act or any successor provisions (after giving effect to any exemptive relief granted to us by the
SEC) for more than six consecutive months. If Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act were currently applicable to us
in connection with this offering, these provisions would generally prohibit us from declaring any cash dividend or distribution upon any class of
our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, were below 150% at the time of the
declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase;
sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);
enter into transactions with affiliates;
create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
•
•
•
•
• make investments; or
•
create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
In addition, the respective indenture governing the October 2024 Notes and the January 2026 Notes will require us to make an offer to purchase
the October 2024 Notes and the January 2026 Notes in connection with a change of control or any other event, respectively.
Furthermore, the terms of the respective indenture and the October 2024 Notes and the January 2026 Notes do not protect holders of the October
2024 Notes and the January 2026 Notes, respectively, in the event that we experience changes (including significant adverse changes) in our financial
condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified
levels of net worth, revenues, income, cash flow, or liquidity.
Our ability to recapitalize, incur additional debt (including additional debt that matures sooner than the October 2024 Notes and the January 2026
Notes), and take a number of other actions that are not limited by the terms of each of the October 2024 Notes and the January 2026 Notes may have
important consequences for you as a holder of the October 2024 Notes and the January 2026 Notes, including making it more difficult for us to satisfy our
obligations with respect to the October 2024 Notes and the January 2026 Notes or negatively affecting the market value of the October 2024 Notes and the
January 2026 Notes.
Other debt we issue or incur in the future could contain more protections for its holders than the respective indenture and the October 2024 Notes
and the January 2026 Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections
could affect the market for, trading levels, and prices of the October 2024 Notes and the January 2026 Notes.
We may not be able to repurchase the October 2024 Notes and the January 2026 Notes upon a Change of Control Repurchase Event.
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Upon a Change of Control Repurchase Event (as defined in the relevant indenture), holders of the October 2024 Notes and the January 2026 Notes
may require us to repurchase for cash some or all of the October 2024 Notes and the January 2026 Notes, respectively, at a repurchase price equal to 100%
of the aggregate principal amount of the October 2024 Notes and the January 2026 Notes, respectively, being repurchased, plus their respective accrued and
unpaid interest to, but not including, the repurchase date. We may not be able to repurchase the October 2024 Notes and/or the January 2026 Notes upon a
Change of Control Repurchase Event because we may not have sufficient funds. Before making any such repurchase of the October 2024 Notes or the
January 2026 Notes, we would also have to comply with certain requirements under our Credit Facility, to the extent such requirements remain in effect at
such time, or otherwise obtain consent from the lenders under our Credit Facility. The terms of our Credit Facility also provide that certain change of
control events will constitute an event of default thereunder entitling the lenders to accelerate any indebtedness outstanding under our Credit Facility at that
time and to terminate our Credit Facility. In addition, the occurrence of a Change of Control Repurchase Event enabling the holders of the October 2024
Notes and/or the January 2026 Notes to require the mandatory purchase of the October 2024 Notes and/or the January 2026 Notes, respectively, would
likely constitute an event of default under our Credit Facility, entitling the lenders to accelerate any indebtedness outstanding under our Credit Facility at
that time and to terminate our Credit Facility. Our and our subsidiaries' future financing facilities may contain similar restrictions and provisions. Our
failure to purchase such tendered October 2024 Notes or the January 2026 Notes upon the occurrence of such Change of Control Repurchase Event would
cause an event of default under the respective indenture governing the October 2024 Notes or the January 2026 Notes, respectively, and a cross-default
under the agreements governing certain of our other indebtedness, including under the agreements governing our Credit Facility, which may result in the
acceleration of such indebtedness requiring us to repay that indebtedness immediately. If the holders of the October 2024 Notes or the January 2026 Notes
exercise their respective right to require us to repurchase the October 2024 Notes or the January 2026 Notes, respectively, upon a Change of Control
Repurchase Event, the financial effect of any such repurchase could cause a default under our current and future debt instruments, even if the Change of
Control Repurchase Event itself would not cause a default. If a Change of Control Repurchase Event were to occur, we may not have sufficient funds to
repay any such accelerated indebtedness.
The trading market or market value of our publicly issued debt securities may be volatile.
The trading market for the Notes may from time to time be significantly affected by numerous factors, including:
Creditworthiness;
Terms, including, but not limited to, maturity, principal amount, redemption, and repayment of convertible features;
•
•
• Market and economic conditions; and
• Demand for our debt securities.
In addition, credit rating assessments by third parties regarding our ability to pay our obligations will generally affect the market value of our debt
securities.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the October 2024 Notes and the January
2026 Notes.
Any default under the agreements governing our indebtedness, including a default under our Credit Facility, the respective indenture governing the
October 2024 Notes and the January 2026 Notes, or other indebtedness to which we may be a party that is not waived by the required lenders or holders,
and the remedies sought by lenders or the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the the
October 2024 Notes and the January 2026 Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow
and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we
otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including
the Credit Facility, the October 2024 Notes and the January 2026 Notes), we could be in default under the terms of the agreements governing such
indebtedness, including the Notes. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to
be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to
terminate their commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or
liquidation.
Our ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive, legislative and
regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or
that future borrowings will be available to us under the Credit Facility
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or otherwise, in an amount sufficient to enable us to meet our payment obligations under the Notes, our other debt, and to fund other liquidity needs.
If our operating performance declines and we are not able to generate sufficient cash flow to service our debt obligations, we may in the future
need to refinance or restructure our debt, including the Notes, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to
obtain waivers from the lenders under the Credit Facility, the holders of the Notes, or other debt that we may incur in the future to avoid being in default. If
we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes and our other debt. If
we breach our covenants under the Credit Facility, the respective indenture governing the October 2024 Notes and the January 2026 Notes, or any of our
other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders thereof. If this occurs, we would be in default
under the Credit Facility, the Notes,the respective indenture governing the October 2024 Notes and the January 2026 Notes, or other debt, the lenders or
holders could exercise rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having
secured obligations could proceed against the collateral securing the debt. Because the Credit Facility has, and any future credit facilities will likely have,
customary cross-default provisions, if the indebtedness under the October 2024 Notes and the January 2026 Notes, the Credit Facility or under any future
credit facility is accelerated, we may be unable to repay or finance the amounts due.
We currently intend to pay quarterly dividends. However, in the future we may not pay any dividends depending on a variety of factors.
While we intend to pay dividends to our shareholders out of taxable income available for distribution, there can be no assurance that we will do so.
Any dividends that we do pay may be payable in cash, in our stock, or in stock in any of our holdings or in a combination of all three. All dividends will be
paid at the discretion of our Board of Directors and will depend upon our financial condition, maintenance of our RIC tax treatment, and compliance with
applicable BDC regulations.
Terms relating to redemption may materially adversely affect the return on our debt securities.
The October 2024 Notes are redeemable, in whole or in part, at any time at our option prior to July 1, 2024, at par plus a "make-whole" premium,
and thereafter at par. The January 2026 Notes are redeemable, in whole or in part, at any time at our option prior to October 31, 2025, at par plus a "make-
whole" premium, and thereafter at par. We may choose to redeem the October 2024 Notes or the January 2026 Notes at times when prevailing interest rates
are lower than the interest rate paid on the October 2024 Notes or the January 2026 Notes.
We currently pay dividends in cash. However, in the future we may choose to pay dividends in our own stock, in which case you may be required
to pay tax in excess of the cash you receive.
We may distribute taxable dividends that are payable in part in our stock. Under certain applicable provisions of the Code and the Treasury
regulations, distributions payable by us in cash or in shares of stock (at the shareholders election) would satisfy the annual distribution requirement for a
RIC. The IRS has issued a revenue procedure providing that a dividend payable in stock or in cash at the election of the shareholders will be treated as a
taxable dividend eligible for the dividends paid deduction provided that at least 20% of the total dividend is payable in cash and certain other requirements
are satisfied. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term
capital gain to the extent such dividend is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for
U.S. federal income tax purposes. As a result, a U.S. shareholder may be required to pay tax with respect to such dividends in excess of any cash
received. If a U.S. shareholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in
income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. shareholders,
we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividends payable in stock. If a
significant number of our shareholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the
trading price of our stock.
We may not be able to invest a significant portion of the net proceeds from future capital raises on acceptable terms, which could harm our
financial condition and operating results.
Delays in investing the net proceeds raised in an offering may cause our performance to be worse than that of other fully invested BDCs or other
lenders or investors pursuing comparable investment strategies. We cannot assure you that we will be able to identify any investments that meet our
investment objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of any offering on
acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.
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In the event that we cannot invest our net proceeds as desired we will invest the net proceeds from any offering primarily in cash, cash equivalents,
U.S. Government securities and other high-quality debt investments that mature in one year or less from the time of investment. These securities may have
lower yields than our other investments and accordingly may result in lower distributions, if any, during such period.
Provisions of the Texas law and our charter could deter takeover attempts and have an adverse impact on the price of our common stock.
Texas law and our charter contain provisions that may have the effect of discouraging, delaying or making difficult a change in control. The
existence of these provisions, among others, may have a negative impact on the price of our common stock and may discourage third-party bids for
ownership of our company. These provisions may prevent any premiums being offered to you for our common stock.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We do not own any real estate or other physical properties. We maintain our offices at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas
75240, where we lease approximately 9,261 square feet of office space pursuant to a lease agreement expiring in February 2022. We believe that our offices
are adequate to meet our current and expected future needs.
Item 3. Legal Proceedings
We and our subsidiaries may, from time to time, be involved in litigation arising out of our operations in the normal course of business or
otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. As of the date
hereof, we and our subsidiaries are not a party to, and none of our assets are subject to, any material pending legal proceedings and are not aware of any
claims that could have a materially adverse effect on our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
SENIOR SECURITIES
Information about our senior securities is shown in the following table for the years ended March 31, 2021, 2020, 2019 2018 and 2017. The report of
RSM US LLP, our independent registered public accountants for the fiscal years ended March 31, 2021, 2020 and 2019, on the senior securities table as of
March 31, 2021, 2020 and 2019, is attached as an exhibit to this Annual Report on Form 10-K.
Class and Year
Credit Facility
2021
2020
2019
2018
2017
December 2022 Notes
2021
2020
2019
2018
2017
October 2024 Notes
2021
2020
2019
2018
2017
January 2026 Notes
2021
2020
2019
2018
2017
Total Amount
Outstanding Exclusive of
Treasury Securities (1)
(dollars in thousands)
Asset Coverage per Unit
(2)
Involuntary Liquidating
Preference per Unit (3)
Average Market Value
per Unit (4)
$
$
$
$
120,000
154,000
141,000
40,000
25,000
—
77,136
77,136
57,500
—
125,000
75,000
—
—
—
140,000
—
—
—
—
1.87
1.89
2.49
4.16
12.40
—
1.89
2.49
4.16
—
1.87
1.89
—
—
—
1.87
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
N/A
N/A
N/A
N/A
N/A
—
22.01
25.50
25.40
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) Total amount of each class of senior securities outstanding at the end of the period presented.
(2) Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate
amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
(3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The “-” indicates
information which the SEC expressly does not required to be disclosed for certain types of senior securities.
(4) Average market value per unit for our Credit Facility, October 2024 Notes and January 2026 Notes is not applicable because these are not registered for public trading.
PRICE RANGE OF COMMON STOCK AND HOLDERS
Market Information
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Our common stock is traded on the Nasdaq Global Select Market under the symbol “CSWC.”
The following table sets forth, for each fiscal quarter within the two most recent fiscal years and the current fiscal year to date, the range of high and low
selling prices of our common stock as reported on the Nasdaq Global Select Market, as applicable, and the sales price as a percentage of the NAV per share
of our common stock.
NAV (1)
High
Low
Premium (Discount) of High
Sales Price to NAV (2)
Premium (Discount) of Low
Sales Price to NAV (2)
Price Range
Year ending March 31, 2022
First Quarter (through May 25, 2021)
*
$
26.95 $
Year ended March 31, 2021
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year ended March 31, 2020
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
$
16.01 $
15.74
15.36
14.95
15.13 $
16.74
18.30
18.58
22.75 $
17.98
15.20
16.02
21.71 $
22.56
22.90
22.49
22.16
17.55
12.63
12.32
8.76
7.39
20.60
20.57
20.86
*
*
42.10 %
14.23
(1.04)
7.16
43.49 %
34.77
25.14
21.04
9.62 %
(19.76)
(19.79)
(41.40)
(51.16)%
23.06
12.40
12.27
(1) NAV per share, is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown
are based on outstanding shares at the end of each period.
(2) Calculated as the respective high or low share price divided by NAV and subtracting 1.
*
Not determinable at the time of filing.
Our common stock is traded on The Nasdaq Global Select Market under the symbol “CSWC.” On May 24, 2021, there were approximately 359 holders
of record of our common stock, which did not include shareholders for whom shares are held in "nominee" or "street name."
Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of
common stock will trade at a discount from net asset value per share or at premiums that are unsustainable over the long term are separate and distinct from
the risk that our net asset value per share will decrease. It is not possible to predict whether our common stock will trade at, above, or below net asset value
per share.
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DISTRIBUTIONS
We intend to make distributions on a quarterly basis to our shareholders of substantially all of our taxable income. In lieu of cash, we may make deemed
distributions of certain net capital gains to our shareholders.
The payment dates and amounts of cash dividends per share for the past three fiscal years are as follows:
Payment Date
Fiscal Year 2021
1
June 30, 2020
1
September 30, 2020
1
December 31, 2020
1
March 31, 2021
Fiscal Year 2020
1
June 28, 2019
1
September 30, 2019
2
December 31, 2019
1
March 31, 2020
Fiscal Year 2019
3
July 2, 2018
1
September 28, 2018
1
December 31, 2018
1
March 29, 2019
Cash Dividend
0.51
0.51
0.51
0.52
2.05
0.49
0.50
1.25
0.51
2.75
0.89
0.44
0.46
0.48
2.27
$
$
$
$
$
$
1
2
3
On each of these dates, the cash dividend paid included a supplemental dividend of $0.10 per share.
On December 31, 2019, CSWC paid a regular dividend of $0.40 per share, a supplemental dividend of $0.10 per share and a special dividend of $0.75 per share.
On July 2, 2018, CSWC paid a regular dividend of $0.29 per share and a supplemental dividend of $0.60 per share.
On April 21, 2021, the Company’s Board of Directors declared a total dividend of $0.53 per share, comprised of a regular dividend of $0.43 and a
supplemental dividend of $0.10, for the quarter ended June 30, 2021. The record date for the dividend is June 15, 2021. The payment date for the dividend
is June 30, 2021.
The amounts and timing of cash dividend payments have generally been dictated by requirements of the Code regarding the distribution of taxable net
investment income (ordinary income) of regulated investment companies.
Distribution Policy
We generally intend to make distributions on a quarterly basis to our shareholders of substantially all of our taxable income. In order to avoid certain
excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the
calendar year, (2) 98.2% of our capital gains in excess of capital losses for the calendar year ended December 31, and (3) any ordinary income and net
capital gains for the preceding year that were not distributed during that year. We will not be subject to excise taxes on amounts on which we are required
to pay corporate income tax (such as retained net capital gains). In order to obtain the tax benefits applicable to RICs, we will be required to distribute to
our shareholders with respect to each taxable year at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net
long-term capital losses. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of
current year distributions into the next year and pay a 4% U.S. federal excise tax on such income. Any such carryover taxable income must be distributed
through a dividend declared prior to filing the final tax return related to the year that generated such taxable income.
We may retain for investment realized net long-term capital gains in excess of realized net short-term capital losses. We may make deemed distributions
to our shareholders of any retained net capital gains. If this happens, our shareholders will
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be treated as if they received an actual distribution of the capital gains we retain and then reinvested the net after-tax proceeds in our common stock. Our
shareholders also may be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to their allocable share of the tax we paid on the
capital gains deemed distributed to them. Please refer to “Business —Material U.S. Federal Income Tax Considerations” included in Item 1 of Part I of this
Annual Report for further information regarding the consequences of our retention of net capital gains. We may, in the future, make actual distributions to
our shareholders of some or all realized net long-term capital gains in excess of realized net short-term capital losses. Our ability to make distributions in
the future may be limited by our Credit Facility, the indentures governing each of our October 2024 Notes and our January 2026 Notes and the 1940 Act.
For a more detailed discussion, see “Business — Election to be Regulated as a Business Development Company – Regulation as a Business Development
Company,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Note 5” to our consolidated financial
statements included in this Annual Report on Form 10-K.
We have adopted a DRIP which provides for reinvestment of our distributions on behalf of our common shareholders if opted into by a common
shareholder. See “Business — Dividend Reinvestment Plan” included in Item I of Part I of this Annual Report on Form 10-K.
Shareholders who receive dividends in the form of stock generally are subject to the same federal, state and local tax consequences as are shareholders
who elect to receive their dividends in cash. A shareholder’s basis for determining gain or loss upon the sale of stock received in a dividend from us will be
equal to the total dollar amount of the dividend payable to the shareholder. Any stock received in a dividend will have a holding period for tax purposes
commencing on the day following the day on which the shares are credited to the U.S. shareholder’s account.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
We did not sell any securities during the period covered by this Annual Report that were not registered under the Securities Act of 1933.
ISSUER PURCHASES OF EQUITY SECURITIES
In January 2016, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $10 million of
its outstanding common stock in the open market at certain thresholds below its NAV per share, in accordance with guidelines specified in Rules 10b5-1(c)
(1)(i)(B) and 10b-18 under the Securities Exchange Act of 1934. On March 1, 2016, the Company entered into a share repurchase agreement, which
became effective immediately and terminated on March 26, 2020 upon the Company's purchase of the aggregate gross dollar amount (inclusive of
commission fees) of its common stock under the share repurchase program meeting the threshold set forth in the share repurchase agreement.
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The following table provides information regarding purchases of our common stock during the year ended March 31, 2021.
Total Number of
Shares Purchased
Average Price
Paid Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Period
April 1 through April 30, 2020
May 1 through May 31, 2020
June 1 through June 30, 2020 (1)
July 1 through July 31, 2020
August 1 through August 31, 2020
September 1 through September 30, 2020
October 1 through October 31, 2020
November 1 through November 30, 2020 (1)
December 1 through December 31, 2020
January 1 through January 31, 2021
February 1 through February 28, 2021
March 1 through March 31, 2021
Total
— $
—
204
—
—
—
—
15,105
—
—
—
—
15,309 $
—
—
14.72
—
—
—
—
15.63
—
—
—
—
15.62
Approximate Dollar
Value of Shares That
May Yet Be
Purchased Under the
Plans or Programs (2)
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
— $
(1) Represents shares of common stock withheld upon vesting of restricted stock to cover withholding tax obligations.
(2) On January 25, 2016, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate
market value of up to $10 million. On March 1, 2016, the Company entered into a share repurchase agreement, which became effective immediately and terminated
on March 26, 2020 upon the Company's purchase of the aggregate gross dollar amount (inclusive of commission fees) of its common stock under the share
repurchase program meeting the threshold set forth in the share repurchase agreement.
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Performance Graph
The following graph compares our cumulative total shareholder return during the last five years (based on the market price of our common stock and
assuming reinvestment of all dividends, prior to any tax effect) with the Russell 2000 Total Return Index, the S&P BDC Index and the KBW Regional
Bank Total Return Index. In the current year, we replaced the Nasdaq Composite Total Return Index with the S&P BDC Index in the graph below, as this
index includes companies with an investment strategy similar to our own. The Nasdaq Composite Total Return over the last five years was 186.6%
compared to Capital Southwest's cumulative total shareholder return of 123.6%. The graph assumes initial investment of $100 on March 31, 2016 and
reinvestment of dividends. The graph measures total shareholder return, which takes into account both changes in stock price and distributions. It assumes
that distributions paid are invested in like securities.
The graph and other information furnished under this Part II Item 5 of this Annual Report on Form 10-K shall not be deemed to be "soliciting material"
or to be filed with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance
included in the above graph is not necessarily indicative of future stock performance.
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Item 6. Selected Financial Data
The following table provides selected financial data relating to our historical financial condition and results of operations as of and for each of the years
ended March 31, 2017 through 2021. This data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the consolidated financial statements and related notes.
Selected Consolidated Financial Data
(In thousands except per share data)
2021
2020
Year ended March 31,
2019
2018
2017
Income statement data:
Investment income:
Interest and dividends
Interest income from cash and cash equivalents
Fees and other income
Total investment income
Operating expenses:
Compensation-related expenses
Interest expense
General, administrative and other
Total operating expenses
Income before income taxes
Income tax expense
Net investment income
Net realized (losses) gains:
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Taxes on deemed distribution of long-term capital gains
Net realized (losses) gains on investments
Net unrealized appreciation (depreciation) on investments
Net realized and unrealized gains (losses) on investments
Realized losses on extinguishment of debt
$
Net increase (decrease) in net assets resulting from operations
$
Pre-tax net investment income per share - basic and diluted
$
Net investment income per share - basic and diluted
1
Net realized earnings per share - basic and diluted
$
Net increase (decrease) in net assets from operations - basic and diluted $
$
Net asset value per common share
Total dividends/distributions declared per common share
$
Weighted average number of shares outstanding – basic
Weighted average number of shares outstanding – diluted
$
64,686 $
9
3,367
68,062
59,361 $
73
2,605
62,039
50,192 $
36
1,653
51,881
34,233 $
21
872
35,126
10,700
17,941
5,308
33,949
34,113
2,442
31,671
(6,908)
(1,628)
—
—
(8,536)
28,755
20,219
(1,007)
50,883 $
1.79 $
1.66 $
1.21 $
2.67 $
16.01 $
2.05 $
19,060
19,060
10,163
15,836
5,746
31,745
30,294
2,062
28,232
1,335
57
44,300
(3,461)
42,231
(92,814)
(50,583)
—
(22,351) $
1.68 $
1.57 $
3.91 $
(1.24) $
15.13 $
2.75 $
18,000
18,000
9,986
12,178
4,959
27,123
24,758
1,048
23,710
2,124
77
18,653
—
20,854
(11,506)
9,348
—
33,058 $
1.48 $
1.42 $
2.66 $
1.98 $
18.62 $
2.27 $
16,727
16,734
9,238
4,875
4,585
18,698
16,428
195
16,233
1,492
90
—
—
1,582
21,492
23,074
—
39,307 $
1.02 $
1.01 $
1.11 $
2.45 $
19.08 $
0.99 $
16,074
16,139
22,324
166
984
23,474
8,217
989
4,601
13,807
9,667
1,779
7,888
3,992
3,876
28
—
7,896
7,690
15,586
—
23,474
0.61
0.50
1.00
1.48
17.80
0.79
15,825
15,877
1
“Net realized earnings per share – basic and diluted” is calculated as the sum of “Net investment income (loss)” and “Net realized gain (loss) on investments”
divided by weighted average shares outstanding – basic and diluted.
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Balance sheet data:
Assets:
Investments at fair value
Cash and cash equivalents
Interest, escrow and other receivables
Deferred tax asset
Other assets
Total assets
Liabilities:
December 2022 Notes
October 2024 Notes
January 2026 Notes
Credit facility
Other liabilities
Dividends payable
Accrued restoration plan liability
Income taxes payable
Deferred income taxes
Total liabilities
Net assets
Total liabilities and net assets
Other data:
Number of portfolio companies
Weighted average yield on debt investments at end of period
Weighted average yield on total investments at end of period
Expense ratios (as percentage of average net assets):
Total expenses, excluding interest expense
2021
2020
Year ended March 31,
2019
2018
2017
$
$
$
$
688,432
31,613
12,009
—
3,530
735,584
—
122,879
138,425
120,000
11,655
—
2,979
50
3,345
399,333
336,251
735,584
$
$
$
$
553,072
13,744
12,230
1,402
4,511
584,959
75,812
73,484
—
154,000
4,883
—
3,082
513
963
312,737
272,222
584,959
$
$
$
$
524,071
9,924
11,049
1,807
4,992
551,843
75,099
—
—
141,000
6,516
—
3,073
192
—
225,880
325,963
551,843
$
$
$
$
393,095
7,907
5,894
2,050
8,544
417,490
55,305
—
—
40,000
6,142
4,525
2,937
103
190
109,202
308,288
417,490
$
$
$
$
286,880
22,386
4,308
2,017
10,161
325,752
—
—
—
25,000
5,523
7,191
2,170
473
323
40,680
285,072
325,752
55
10.76 %
10.22 %
46
10.50 %
10.63 %
37
11.58 %
10.96 %
30
11.46 %
10.48 %
28
10.28 %
10.49 %
5.43 %
4.94 %
4.75 %
4.70 %
4.59 %
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this
Annual Report on Form 10-K. Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are not
historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements,
or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and
uncertainties we have referred to under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in Part I of
this report.
OVERVIEW
We are an internally managed closed-end, non-diversified investment company that has been elected to be regulated as a BDC under the 1940 Act. We
specialize in providing customized debt and equity financing to LMM companies and debt capital to UMM companies in a broad range of investment
segments located primarily in the United States. Our investment objective is to produce attractive risk-adjusted returns by generating current income from
our debt investments and capital appreciation from our equity and equity related investments. Our investment strategy is to partner with business owners,
management teams and financial sponsors to provide flexible financing solutions to fund growth, changes of control, or other corporate events. We invest
primarily in senior debt securities, secured by security interests in portfolio company assets. We also invest in equity interests in our portfolio companies
alongside our debt securities.
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We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management
teams with strong operating discipline. We primarily target senior debt and equity investments in LMM companies, as well as first and second lien loans in
UMM companies. Our target LMM companies typically have annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) generally
between $3.0 million and $20.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. Our UMM investments
generally include first and second lien loans in companies with EBITDA generally greater than $20.0 million, and our UMM investments typically range in
size from $5.0 million to $15.0 million.
We seek to fill the financing gap for LMM companies, which, historically, have had more limited access to financing from commercial banks and other
traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also
negotiating favorable transaction terms and equity participations. Our ability to invest across a LMM company’s capital structure, from secured loans to
equity securities, allows us to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is important
to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, management teams and business owners in making our
investments. Our LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company. Our LMM debt investments
typically have a term of between five and seven years from the original investment date. We also often seek to invest in the equity securities of our LMM
portfolio companies.
Our investments in UMM companies primarily consist of direct investments in or secondary purchases of interest bearing debt securities in privately
held companies that are generally larger in size than the LMM companies included in our portfolio. Our UMM debt investments are generally secured by
either a first or second priority lien on the assets of the portfolio company and typically have an expected duration of between three and seven years from
the original investment date.
Since the Share Distribution on September 30, 2015 through March 31, 2021, our exited investments resulted in total proceeds received of approximately
$383.5 million and a weighted average internal rate of return to the Company of approximately 15.5% (based on original cash invested of approximately
$340.2 million). Internal rate of return is the discount rate that makes the net present value of all cash flows related to a particular investment equal to zero.
Internal rate of return is gross of expenses related to investments as these expenses are not allocable to specific investments. Investments are considered to
be exited when the original investment objective has been achieved through the receipt of cash and/or non-cash consideration upon the repayment of a debt
investment or sale of an investment or through the determination that no further consideration was collectible and, thus, a loss may have been realized.
Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with
employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating
expense structure when compared to other publicly traded and privately held investment firms which are externally managed, and our internally managed
structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the years ended March 31,
2021, 2020 and 2019, the ratio of our total operating expenses, excluding interest expense, as a percentage of our annual average total assets was 2.42%,
2.76% and 3.04%, respectively.
Recent COVID-19 Developments
The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets.
The global impact of the COVID-19 outbreak has been rapidly evolving and has led to, and for an unknown period of time will continue to lead to,
disruptions in local, regional, national and global markets and economies affected thereby, including the United States. The COVID-19 pandemic and
restrictive measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, or the re-introduction of business
shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain goods and services, reductions in business activity
and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. In
addition, although the U.S. Food and Drug Administration authorized vaccines for emergency use starting in December 2020, it is unclear how quickly the
vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of
the virus will be lifted entirely and nationwide. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies
may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in
the United States and other major markets.
We have been closely monitoring, and will continue to monitor, the impact of the COVID-19 pandemic and its impact on all aspects of our business,
including how it will impact our portfolio companies, employees, due diligence and underwriting processes, and financial markets. Given the fluidity of the
pandemic, we cannot estimate the long-term impact of COVID-19 on
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our business, future results of operations, financial position or cash flows at this time. Further, the operational and financial performance of the portfolio
companies in which we make investments may be significantly impacted by COVID-19, which may in turn impact the valuation of our investments. We
believe our portfolio companies have taken, and continue to take, immediate actions to effectively and efficiently respond to the challenges posed by
COVID-19 and related orders imposed by state and local governments, including developing liquidity plans supported by internal cash reserves, and
shareholder support, and, as appropriate, accessing their ability to participate in the government Paycheck Protection Program, including the second draw
Paycheck Protection Program loans. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future
developments, which are highly uncertain and cannot be accurately predicted, including guidance from U.S. and international authorities, including federal,
state and local public health authorities. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to
and volatility in the financial markets remain unknown.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses for the periods covered by the consolidated financial statements. We have identified investment valuation and revenue recognition
as our most critical accounting estimates. On an on-going basis, we evaluate our estimates, including those related to the matters below. These estimates are
based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual
results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Valuation of Investments
The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our investment portfolio and
the related amounts of unrealized appreciation and depreciation. As of March 31, 2021 and 2020, our investment portfolio at fair value represented
approximately 93.6% and 94.5% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of ASC
820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to
measure fair value, and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be
sold in the principal market to independent market participants, which may be a hypothetical market. See Note 4 — “Fair Value Measurements” in the
notes to consolidated financial statements for a detailed discussion of our investment portfolio valuation process and procedures.
Due to the inherent uncertainty in the valuation process, our determination of fair value for our investment portfolio may differ materially from the
values that would have been determined had a ready market for the securities actually existed. In addition, changes in the market environment, portfolio
company performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on these
investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes
in fair value as unrealized appreciation or depreciation.
Our Board of Directors is responsible for determining, in good faith, the fair value for our investment portfolio and our valuation procedures, consistent
with 1940 Act requirements. Our Board of Directors believes that our investment portfolio as of March 31, 2021 and 2020 reflects fair value as of those
dates based on the markets in which we operate and other conditions in existence on those reporting dates.
Revenue Recognition
Interest and Dividend Income
Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized on the
date dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution.
Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life of the loan. In accordance with
our valuation policy, accrued interest and dividend income is evaluated periodically for collectability. When we do not expect the debtor to be able to
service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security
on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay
contractual amounts due. If a loan or debt security’s status significantly
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improves regarding ability to service debt or other obligations, it will be restored to accrual basis. As of March 31, 2021, we did not have any investments
on non-accrual status. As of March 31, 2020, we had four investments on non-accrual status, which represented approximately 3.3% of our total investment
portfolio's fair value and approximately 5.8% of its cost.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU 2020-04, "Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on
financial reporting." The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging
relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance
for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and certain lenders. Many of these
agreements include language for choosing an alternative successor rate when LIBOR reference is no longer considered to be appropriate. With respect to
other agreements, the Company intends to work with its portfolio companies and lenders to modify agreements to choose an alternative successor rate.
Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the
continuation of existing contracts. The standard is effective as of March 12, 2020 through December 31, 2022 and the Company plans to apply the
amendments in this update to account for contract modifications due to changes in reference rates. The Company does not believe that it will have a
material impact on its consolidated financial statements or its disclosures.
In May 2020, the SEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the
financial statements of certain of their portfolio companies or certain acquired funds (the “Final Rules”). The Final Rules adopted a new definition of
“significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require
investment companies to include separate financial statements or summary financial information, respectively, in such investment company’s periodic
reports for any portfolio company that meets the definition of “significant subsidiary.” The Final Rules adopt a new definition of “significant subsidiary”
applicable only to investment companies that (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition
of “significant subsidiary” in Rule 1-02(w) of Regulation S-X. The new Rule 1-02(w)(2) of Regulation S-X is intended to more accurately capture those
portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective on
January 1, 2021, but voluntary compliance is permitted in advance of the effective date. The Company applied the Final Rule and concluded it did not have
a material impact on its consolidated financial statements.
In November 2020, the SEC issued a final rule that modernized and simplifies Management's Discussion and Analysis and certain financial
disclosure requirements in Regulation S-K (the “Amendments”). Specifically, the Amendments: (i) eliminate Item 301 of Regulation S-K (Selected
Financial Data); (ii) simplify Item 302 of Regulation S-K (Supplementary Financial Information); and (iii) amend certain aspects of Item 303 of Regulation
S-K (Management's Discussion and Analysis of Financial Condition and Results of Operations). The Amendments became effective on February 10, 2021
and compliance will be required for the registrants' fiscal year ending on or after August 9, 2021. Early adoption of the Amendments is permitted on an
item-by-item basis after the effective date; however, a registrant must fully comply with each adopted item in its entirety. The Company is currently
evaluating the impact of the Amendments on its consolidated financial statements.
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INVESTMENT PORTFOLIO COMPOSITION
Our LMM investments consist primarily of secured debt, equity warrants and direct equity investments in privately held, LMM companies generally
based in the United States. Our LMM portfolio companies typically have annual EBITDA generally between $3.0 million and $20.0 million, and our LMM
investments typically range in size from $5.0 million to $25.0 million. The LMM debt investments are typically secured by either a first or second priority
lien on the assets of the portfolio company, generally bear interest at floating rates, and generally have a term of between five and seven years from the
original investment date.
Our UMM investments consist of direct investments in or secondary purchases of interest-bearing debt securities in privately held companies based in
the United States that are generally larger in size than the LMM companies included in our portfolio with EBITDA generally greater than $20.0 million.
Our UMM investments typically range in size from $5.0 million to $15.0 million. Our UMM debt investments are generally secured by ether a first or
second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
The total value of our investment portfolio was $688.4 million as of March 31, 2021, as compared to $553.1 million as of March 31, 2020. As of March
31, 2021, we had investments in 55 portfolio companies with an aggregate cost of $703.6 million. As of March 31, 2020, we had investments in 46
portfolio companies with an aggregate cost of $599.2 million.
As of March 31, 2021 and 2020, approximately $546.6 million, or 95.5%, and $459.0 million, or 96.8%, respectively, of our debt investment portfolio (at
fair value) bore interest at floating rates, of which 100.0% and 97.6%, respectively, were subject to contractual minimum interest rates. As of March 31,
2021 and 2020, the weighted average contractual minimum interest rate is 1.30% and 1.38%, respectively. As of March 31, 2021 and 2020, approximately
$26.0 million, or 4.5%, and $15.3 million, or 3.2%, respectively, of our debt investment portfolio (at fair value) bore interest at fixed rates.
The following tables provide a summary of our investments in LMM and UMM companies as of March 31, 2021 and 2020 (excluding our investment in
I-45 SLF LLC):
Number of portfolio companies
Fair value
Cost
% of portfolio at cost - debt
% of portfolio at cost - equity
% of debt investments at cost secured by first lien
Weighted average annual effective yield (b)(c)
Weighted average EBITDA (c)
Weighted average leverage through CSWC security (c)(d)
As of March 31, 2021
LMM (a)
UMM
(dollars in thousands)
$
$
$
44
554,199
551,144
92.4 %
7.6 %
85.9 %
10.8 %
9,883
4.2x
$
$
$
10
77,075
79,613
91.8 %
8.2 %
71.6 %
10.3 %
69,988
4.0x
At March 31, 2021, we had equity ownership in approximately 59.1% of our LMM investments and 30.0% of our UMM investments.
(a)
(b)
The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March 31, 2021, including
accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status. As of March 31,
2021, there were no investments on non-accrual status. Weighted-average annual effective yield is not a return to shareholders and is higher than what an investor in
shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor.
(c) Weighted average EBITDA metric is calculated using investment cost basis weighting. For the year ended March 31, 2021, two UMM portfolio companies and
four LMM portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.
(d)
Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to
CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Weighted average
leverage is calculated using investment cost basis weighting. Management uses this metric as a guide to evaluate relative risk of its position in each portfolio debt
investment. For the year ended March 31, 2021, two UMM portfolio companies and four LMM portfolio companies are excluded from this calculation due to a reported
debt to adjusted EBITDA ratio that was not meaningful.
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Number of portfolio companies
Fair value
Cost
% of portfolio at cost - debt
% of portfolio at cost - equity
% of debt investments at cost secured by first lien
Weighted average annual effective yield (b)(c)
Weighted average EBITDA (c)
Weighted average leverage through CSWC security (c)(d)
As of March 31, 2020
LMM (a)
UMM
(dollars in thousands)
34
437,142
435,015
$
$
91.8 %
8.2 %
84.1 %
11.2 %
11
76,170
96,172
100.0 %
—
84.5 %
6.6 %
8,322
$
74,143
3.7x
4.2x
$
$
$
At March 31, 2020, we had equity ownership in approximately 64.7% of our LMM investments.
(a)
(b)
The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March 31, 2020, including
accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debt investments on non-accrual status. As of March 31,
2020, there were four investments on non-accrual status. Weighted-average annual effective yield is higher than what an investor in shares in our common stock will
realize on its investment because it does not reflect our expenses or any sales load paid by an investor.
(c) Weighted average EBITDA metric is calculated using investment cost basis weighting. For the quarter ended March 31, 2020, two UMM portfolio companies are
excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.
Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to
(d)
CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Weighted average
leverage is calculated using investment cost basis weighting. Management uses this metric as a guide to evaluate relative risk of its position in each portfolio debt
investment. For the quarter ended March 31, 2020, two UMM portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that
was not meaningful.
Portfolio Asset Quality
We utilize an internally developed investment rating system to rate the performance and monitor the expected level of returns for each debt investment in
our portfolio. The investment rating system takes into account both quantitative and qualitative factors of the portfolio company and the investments held
therein, including each investment’s expected level of returns and the collectability of our debt investments, comparisons to competitors and other industry
participants and the portfolio company’s future outlook. The ratings are not intended to reflect the performance or expected level of returns of our equity
investments.
•
•
•
•
Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materially above underwriting expectations
and the trends and risk factors are generally favorable. The investment generally has a higher probability of being prepaid in part or in full.
Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trends and risk factors are generally
favorable to neutral.
Investment Rating 3 involves an investment performing below underwriting expectations and the trends and risk factors are generally neutral to
negative. The investment may be out of compliance with financial covenants and interest payments may be impaired, however principal payments
are generally not past due.
Investment Rating 4 indicates that the investment is performing materially below underwriting expectations, the trends and risk factors are generally
negative and the risk of the investment has increased substantially. Interest and principal payments on our investment are likely to be impaired.
As the COVID-19 pandemic continues to evolve, we are maintaining close communications with our portfolio companies to proactively assess and
manage potential risks across our debt investment portfolio. We have also increased oversight and analysis of credits in vulnerable industries in an attempt
to improve loan performance and reduce credit risk.
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The following table shows the distribution of our debt portfolio investments on the 1 to 4 investment rating scale at fair value as of March 31, 2021 and
2020:
Investment Rating
1
2
3
4
Total
Investment Rating
1
2
3
4
Total
As of March 31, 2021
Debt
Investments at
Fair Value
Percentage of
Debt Portfolio
(dollars in thousands)
58,466
461,239
52,909
—
572,614
As of March 31, 2020
10.2 %
80.6
9.2
—
100.0 %
Debt
Investments at
Fair Value
Percentage of
Debt Portfolio
(dollars in thousands)
53,488
347,056
59,266
14,523
474,333
11.3 %
73.2
12.5
3.0
100.0 %
$
$
$
$
Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. When we do not expect the debtor to be
able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt
security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and
intent to pay contractual amounts due.
As of March 31, 2021, we did not have any investments on non-accrual status. As of March 31, 2020, we had four debt investments on non-accrual
status, which represents approximately 3.3% of our total investment portfolio's fair value and approximately 5.8% of its cost.
Investment Activity
During the year ended March 31, 2021, we made new debt investments in sixteen portfolio companies totaling $164.0 million, follow-on debt
investments in fourteen portfolio companies totaling $26.3 million, and equity investments in four existing and seven new portfolio companies totaling $8.8
million. We received contractual principal repayments totaling approximately $24.7 million and full prepayments of approximately $63.1 million. We
funded $7.5 million on revolving loans and received $11.0 million in repayments on revolving loans. In addition, we received proceeds from sales of equity
investments totaling $9.8 million.
During the year ended March 31, 2020, we made new debt investments in eleven portfolio companies totaling $155.7 million, follow-on debt
investments in twelve portfolio companies totaling $33.8 million, and equity investments in two existing and four new portfolio companies totaling $5.6
million. We received contractual principal repayments totaling approximately $22.8 million and full prepayments of approximately $33.1 million from four
portfolio companies. In addition, we received proceeds from sales of investments totaling $69.6 million.
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Total portfolio investment activity for the years ended March 31, 2021 and 2020 was as follows (in thousands):
Year ended March 31, 2021
Fair value, beginning of period
New investments
Proceeds from sales of investments
Principal repayments received
Conversion of security from debt to equity
PIK interest capitalized
Accretion of loan discounts
Realized (loss) gain
Unrealized gain (loss)
Fair value, end of period
Weighted average yield on debt
investments at end of period
Weighted average yield on total
investments at end of period
Year ended March 31, 2020
Fair value, beginning of period
New investments
Proceeds from sales of investments
Principal repayments received
Conversion of security from debt to equity
PIK interest capitalized
Accretion of loan discounts
Realized gain
Unrealized gain (loss)
Fair value, end of period
Weighted average yield on debt
investments at end of period
Weighted average yield on total
investments at end of period
$
$
$
$
First Lien
Loans
427,447 $
197,237
—
(98,567)
(9,692)
5,919
2,125
(13,581)
13,273
524,161 $
Second Lien
Loans
Subordinated
Debt
Preferred &
Common
Equity &
Warrants
Financial
Instruments
I-45 SLF LLC
37,139 $
—
—
(250)
778
899
192
—
(1,839)
36,919 $
9,747 $
516
—
—
—
1,062
30
—
179
11,534 $
38,979 $
8,796
(9,841)
—
8,914
—
—
6,549
5,263
58,660 $
— $
—
—
—
—
—
—
(1,517)
1,517
— $
39,760 $
12,800
—
(8,000)
—
—
—
—
12,598
57,158 $
First Lien
Loans
317,544 $
187,563
(12,630)
(51,133)
—
1,360
1,730
756
(17,743)
427,447 $
Second Lien
Loans
Subordinated
Debt
Preferred &
Common
Equity &
Warrants
Financial
Instruments
I-45 SLF LLC
35,896 $
1,960
—
(250)
—
651
161
—
(1,279)
37,139 $
14,287 $
—
—
(4,569)
—
12
47
32
(62)
9,747 $
90,601 $
5,566
(57,014)
—
—
55
—
45,316
(45,545)
38,979 $
— $
1,517
—
—
—
—
—
—
(1,517)
— $
65,743 $
—
—
—
—
—
—
—
(25,983)
39,760 $
Total
553,072
219,349
(9,841)
(106,817)
—
7,880
2,347
(8,549)
30,991
688,432
10.76 %
10.22 %
Total
524,071
196,606
(69,644)
(55,952)
—
2,078
1,938
46,104
(92,129)
553,072
10.50 %
10.63 %
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RESULTS OF OPERATIONS
The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Net increase (decrease) in net assets
from operations” and consists of four elements. The first is “Net investment income (loss),” which is the difference between income from interest,
dividends and fees and our combined operating and interest expenses, net of applicable income taxes. The second element is “Net realized gain (loss) on
investments before income tax,” which is the difference between the proceeds received from the disposition of portfolio securities and their stated
cost. The third element is the “Net change in unrealized appreciation on investments, net of tax” which is the net change in the market or fair value of our
investment portfolio, compared with stated cost. It should be noted that the “Net realized gain (loss) on investments before income tax” and “Net change in
unrealized appreciation on investments, net of tax” are directly related in that when an appreciated portfolio security is sold to realize a gain, a
corresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from being “unrealized” to being
“realized.” Conversely, when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs. The fourth element is
the “Realized losses on extinguishment of debt,” which is the difference between the principal amount due at maturity adjusted for any unamortized debt
issuance costs at the time of the debt extinguishment.
Set forth below is a comparison of the results of operations for the years ended March 31, 2021 and 2020. For the comparison of the results of operations
for the years ended March 31, 2020 and 2019, see the Company's Annual Report on Form 10-K for the year ended March 31, 2020, which was filed with
the SEC on June 2, 2020, located within Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, which is
incorporated by reference herein.
Comparison of years ended March 31, 2021 and March 31, 2020
Total investment income
Interest expense
Other operating expenses
Income before taxes
Income tax expense
Net investment income
Net realized (loss) gain on investments before income tax
Net unrealized appreciation (depreciation) on investments, net of tax
Realized losses on extinguishment of debt
Net increase (decrease) in net assets from operations
Investment Income
Year ended March 31,
Net Change
2021
2020
Amount
%
(in thousands)
$
$
68,062 $
(17,941)
(16,008)
34,113
2,442
31,671
(8,536)
28,755
(1,007)
50,883 $
62,039 $
(15,836)
(15,909)
30,294
2,062
28,232
42,231
(92,814)
—
(22,351) $
6,023
(2,105)
(99)
3,819
380
3,439
(50,767)
121,569
(1,007)
73,234
9.7 %
13.3 %
0.6 %
12.6 %
18.4 %
12.2 %
(120.2)%
131.0 %
100.0 %
327.7 %
Total investment income consisted of interest income, dividend income and other income for each applicable period. For the year ended March 31, 2021,
total investment income was $68.1 million, a $6.0 million, or 9.7%, increase as compared to total investment income of $62.0 million for the year ended
March 31, 2020. The increase was primarily due to a $9.4 million, or 20.0%, increase in interest income generated from our debt investments due to a
17.5% increase in the cost basis of debt investments held from $495.5 million to $582.2 million year-over-year, partially offset by a $4.0 million decrease
in dividend income as a result of the sale of Media Recovery, Inc. and a decrease in dividend income received from I-45 SLF.
We received fees and other income of $3.4 million and $2.6 million for the years ended March 31, 2021 and 2020, respectively. The increase year-over-
year primarily related to prepayment fees and administrative fees received from portfolio companies.
Operating Expenses
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Due to the nature of our business, the majority of our operating expenses are related to interest and fees on our borrowings, employee compensation
(including both cash and share-based compensation), and general and administrative expenses.
Interest and Fees on our Borrowings
For the year ended March 31, 2021, total interest expense was $17.9 million, an increase of $2.1 million, as compared to the total interest expense of
$15.8 million for the year ended March 31, 2020. The increase was primarily attributable to the issuance of an additional $50 million in aggregate principal
amount of the October 2024 Notes and the issuance of $140 million in aggregate principal amount of the January 2026 Notes, offset by a decrease due to
the redemption of the December 2022 Notes and a decrease in the weighted average interest rate on our Credit Facility from 4.82% to 3.05% during
the twelve months ended March 31, 2021.
Salaries, General and Administrative Expenses
For the year ended March 31, 2021, total employee compensation expense (including both cash and share-based compensation) was $10.7 million, a $0.5
million, or 5.3%, increase over total employee compensation expense of $10.2 million for the year ended March 31, 2020. The increase was primarily due
to an increase in accrued bonus compensation for the current year due to the Company's performance. For the year ended March 31, 2021, our total general
and administrative expense was $5.3 million, a decrease of $0.4 million as compared to the total general and administrative expense of $5.7 million for the
year ended March 31, 2020. The decrease was primarily due to the write off of deferred offering costs of approximately $0.5 million during the year ended
March 31, 2020.
Net Investment Income
For the year ended March 31, 2021, net investment income increased from the prior year by $3.4 million, or 12.2%, to $31.7 million as a result of a $6.0
million increase in total investment income, offset by a $2.1 million increase in interest expense and $0.4 million increase in income tax expense.
Increase in Net Assets from Operations
During the fiscal year ended March 31, 2021, we recognized net realized losses totaling $8.5 million, which consisted of losses of $12.7 million on the
restructuring of three non-control/non-affiliate investment, $1.9 million on the repayment of one non-control/non-affiliate investment, $1.6 million on the
sale of one affiliate equity investment and $1.5 million on the write-off of a financial instrument, partially offset by a gain of $8.2 million on the sale of one
non-control/non-affiliate equity investment and gains on partial and full repayments of debt investments.
In addition, for the fiscal year ended March 31, 2021, we recorded net unrealized appreciation on investments, net of tax, totaling $28.8 million,
consisting of net unrealized appreciation on our current portfolio of $15.2 million, which included unrealized gains of $12.6 million on I-45 SLF LLC and
$6.8 million on equity investments, partially offset by unrealized losses on LMM debt investments of $3.2 million and UMM debt investments of $1.0
million. These unrealized gains and losses were due to changes in fair value as of March 31, 2021 based on the overall EBITDA performance and cash
flows of each investment as determined by our Board of Directors. We also recorded the reversal of $15.8 million of net unrealized depreciation recognized
in prior periods due to the realized losses noted above, and net unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of
$2.2 million.
During the fiscal year ended March 31, 2020, we recognized gross realized gains totaling $45.7 million, which consisted of gains on the partial
repayments and sale of debt investments of $1.6 million and the sale of Media Recovery, Inc. of $44.1 million. With respect to the sale of Media Recovery,
Inc., we elected to retain $16.5 million of long-term capital gains and to designate the retained amount as "deemed distributions" to our shareholders. As a
result, we incurred $3.5 million of federal taxes on such retained amount on behalf of shareholders, which is recognized as a realized loss in the twelve
months ended March 31, 2020, resulting in a total net realized gain on investments of $42.2 million.
In addition, for the fiscal year ended March 31, 2020, we recorded net unrealized depreciation on investments, net of tax, totaling $92.8 million,
consisting of net unrealized depreciation on our current portfolio of $42.9 million, the reversal of $49.2 million of net unrealized appreciation recognized in
prior periods due to the realized gains noted above, and net unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of $0.7
million. Net unrealized depreciation on our current portfolio included unrealized gains on Vistar Media, Inc. of $5.3 million and ITA Holdings Group, LLC
of $2.5 million, offset by unrealized losses on I-45 SLF LLC of $26.0 million, Delphi Intermediate Healthco, Inc. of $5.1
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million, SIMR, LLC of $4.8 million, AAC Holdings Inc. of $4.5 million, AG Kings Holdings, Inc. of $2.9 million, and California Pizza Kitchen, Inc. of
$2.2 million. These unrealized gains and losses were due to changes in fair value as of March 31, 2020 based on the overall EBITDA performance and cash
flows of each investment as determined by our Board of Directors.
Realized Losses on Extinguishment of Debt
During the fiscal year ended March 31, 2021, we recognized losses on extinguishment of debt of $1.0 million due to the redemption of the
December 2022 Notes.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are generated primarily from cash flows from operations, the net proceeds of public offerings of debt and equity
securities and advances from the Credit Facility. Management believes that the Company’s cash and cash equivalents, cash available from investments, and
commitments under the Credit Facility are adequate to meet its needs for the next twelve months. We anticipate that we will continue to fund our
investment activities through existing cash and cash equivalents, cash flows generated through our ongoing operating activities, utilization of available
borrowings under our Credit Facility and future issuances of debt and equity on terms we believe are favorable to the Company and our shareholders. Our
primary uses of funds will be investments in portfolio companies and operating expenses. Due to the diverse capital sources available to us at this time, we
believe we have adequate liquidity to support our near-term capital requirements. As the impact of COVID-19 continues to evolve, we will continually
evaluate our overall liquidity position and take proactive steps to maintain that position based on the current circumstances.
Cash Flows
At March 31, 2021, the Company had cash and cash equivalents of approximately $31.6 million. For the year ended March 31, 2021, we experienced a
net increase in cash and cash equivalents in the amount of $17.9 million. During that period, our operating activities used $68.3 million in cash, consisting
primarily of new portfolio investments of $219.3 million, partially offset by $97.6 million of repayments received from debt investments in portfolio
companies and $17.8 million of proceeds from sales of equity investments. In addition, our financing activities increased cash by $86.1 million, consisting
primarily of net repayments under the Credit Facility of $34.0 million, proceeds from the issuance of additional October 2024 Notes of $49.0 million,
proceeds from the issuance of the January 2026 Notes of $138.6 million and proceeds from the offering of our common stock of $50.4 million, partially
offset by the redemption of the December 2022 Notes of $77.1 million and cash dividends paid in the amount of $39.9 million.
At March 31, 2020, the Company had cash and cash equivalents of approximately $13.7 million. For the year ended March 31, 2020, we experienced a
net increase in cash and cash equivalents in the amount of $3.8 million. During that period, our operating activities used $47.9 million in cash, consisting
primarily of new portfolio investments of $196.6 million, partially offset by $67.8 million of repayments received from debt investments in portfolio
companies and $56.0 million of proceeds from sales of equity investments. In addition, our financing activities increased cash by $51.8 million, consisting
primarily of net borrowings under the Credit Facility of $13.0 million, proceeds from the issuance of the October 2024 Notes of $73.5 million and proceeds
from the offering of our common stock of $26.1 million, partially offset by cash dividends paid in the amount of $50.3 million.
Financing Transactions
In accordance with the 1940 Act, with certain limitations, effective April 25, 2019, the Company is only allowed to borrow amounts such that its asset
coverage (i.e., the ratio of assets less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940
Act, is at least 150% after such borrowing. The Board of Directors also approved a resolution which limits the Company’s issuance of senior securities
such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, which became effective April 25, 2019. As of March
31, 2021, the Company’s asset coverage was 187%.
Credit Facility
In August 2016, CSWC entered into a senior secured credit facility (as amended, restated, supplemented or otherwise modified from time to time, the
“Credit Facility”) to provide additional liquidity to support its investment and operational activities, which included total commitments of $100 million.
The Credit Facility contained an accordion feature that allowed CSWC to increase the total commitments under the Credit Facility up to $150 million from
new and existing lenders on the
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same terms and conditions as the existing commitments. In August 2017, we increased our total commitments by $15 million through adding an additional
lender using the accordion feature.
On November 16, 2017, CSWC entered into Amendment No. 1 (the “Amendment”) to its Credit Facility. Prior to the Amendment, borrowings
under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicable LIBOR rate plus 3.25% with no LIBOR floor. CSWC paid
unused commitment fees of 0.50% to 1.50% per annum, based on utilization, on the unused lender commitments under the Credit Facility. The Amendment
(1) increased the total borrowing capacity under the Credit Facility to $180 million, with commitments from a diversified group of eight lenders, (2)
increased the Credit Facility’s accordion feature that allows for an increase in total commitments of up to $250 million under the Credit Facility from new
and existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.25%
down to LIBOR plus 3.00%, with a further step-down to LIBOR plus 2.75% at the time the Company’s net worth exceeds $325 million, (4) reduced unused
commitment fees from a utilization-based grid of 0.50% to 1.5% down to a range of 0.50% to 1.0% per annum, and (5) extended the Credit Facility’s
revolving period that ended on August 30, 2019 through November 16, 2020. Additionally, the final maturity of the Credit Facility was extended from
August 30, 2020 to November 16, 2021.
On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased the total commitments under the
Credit Facility by $20 million and $10 million, respectively. The increases were executed in accordance with the accordion feature of the Credit Facility,
increasing total commitments from $180 million to $210 million.
On December 21, 2018, CSWC entered into the Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit Agreement"),
and a related Amended and Restated Guarantee, Pledge and Security Agreement, to amend and restate its Credit Facility. The Credit Agreement (1)
increased the total commitments by $60 million from $210 million to an aggregate total of $270 million, provided by a diversified group of nine lenders,
(2) increased the Credit Facility's accordion feature to $350 million under the Credit Facility from new and existing lenders on the same terms and
conditions as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.00% to LIBOR plus 2.50%, subject to certain
conditions as outlined in the Credit Agreement, (4) reduced the minimum asset coverage with respect to senior securities representing indebtedness from
200% to 150% after the date on which such minimum asset coverage is permitted to be reduced by the Company under applicable law, and (5) extended the
Credit Facility's revolving period from November 16, 2020 to December 21, 2022 and the final maturity was extended from November 16, 2021 to
December 21, 2023.
The Credit Agreement modified certain covenants in the Credit Facility, including: (1) to provide for a minimum senior coverage ratio of 2-to-1
(in addition to the asset coverage ratio noted below), (2) to increase the minimum obligors’ net worth test from $160 million to $180 million, (3) to reduce
the minimum consolidated interest coverage ratio from 2.50-to-1 to 2.25-to-1 as of the last day of any fiscal quarter, and (4) to provide for the fact that the
Company will not declare or pay a dividend or distribution in cash or other property unless immediately prior to and after giving effect thereto the
Company's asset coverage ratio exceeds 150% (and certain other conditions are satisfied). The Credit Facility also contains certain affirmative and negative
covenants, including but not limited to: (1) certain reporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum shareholders’
equity, (4) maintaining a minimum consolidated net worth, and (5) at any time the outstanding advances exceed 90% of the borrowing base, maintaining a
minimum liquidity of not less than 10% of the covered debt amount.
On May 23, 2019, CSWC entered into an Incremental Assumption Agreement which increased the total commitments under the Credit Facility by
$25 million. The increase was executed under the accordion feature of the Credit Facility and increased total commitments from $270 million to $295
million.
On March 19, 2020, CSWC entered into an Incremental Assumption Agreement that increased the total commitments under the accordion feature
of the Credit Facility by $30 million, which increased total commitments from $295 million to $325 million.
On December 10, 2020, CSWC entered into Amendment No. 1 to the Credit Agreement, which expanded the accordion feature from $350 million
to $400 million. In addition, on December 10, 2020, the Company entered into an Incremental Commitment Agreement that increased the total
commitments under the Credit Agreement from $325 million to $340 million.
The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and
warranties in a material respect, breach of covenant, bankruptcy, and change of control, with customary cure and notice provisions. If the Company defaults
on its obligations under the Credit Facility, the
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lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests. There are no changes to the
covenants or the events of default in the Credit Facility as a result of the Amendment.
The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Company and the guarantors and (2)
100% of the equity interests in the Company’s wholly-owned subsidiary. As of March 31, 2021, substantially all of the Company’s assets were pledged as
collateral for the Credit Facility.
At March 31, 2021, CSWC had $120.0 million in borrowings outstanding under the Credit Facility. CSWC recognized interest expense related to
the Credit Facility, including unused commitment fees and amortization of deferred loan costs of $6.8 million and $8.3 million, respectively, for the years
ended March 31, 2021 and 2020. The weighted average interest rate on the Credit Facility was 3.05% and 4.82%, respectively, for the years ended March
31, 2021 and 2020. Average borrowings for the years ended March 31, 2021 and 2020 were $166.0 million and $134.7 million, respectively. As of March
31, 2021 and 2020, CSWC was in compliance with all financial covenants under the Credit Facility.
December 2022 Notes
In December 2017, the Company issued $57.5 million in aggregate principal amount, including the underwriters’ full exercise of their option to purchase
additional principal amounts to cover over-allotments, of 5.95% Notes due 2022 (the “December 2022 Notes”). The December 2022 Notes mature on
December 15, 2022 and may be redeemed in whole or in part at any time, or from time to time, at the Company’s option on or after December 15, 2019.
The December 2022 Notes bear interest at a rate of 5.95% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year,
beginning on March 15, 2018. The December 2022 Notes are an unsecured obligation, rank pari passu with our other outstanding and future unsecured
unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit
Facility.
On June 11, 2018, the Company entered into an ATM debt distribution agreement, pursuant to which it may offer for sale, from time to time, up to $50
million in aggregate principal amount of December 2022 Notes through B. Riley FBR, Inc., acting as its sales agent. Sales of the December 2022 Notes
may be made in negotiated transactions or transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act of
1933, as amended, including sales made directly on The Nasdaq Global Select Market, or similar securities exchanges or sales made through a market
maker other than on an exchange at prices related to prevailing market prices or at negotiated prices.
On September 29, 2020, the Company redeemed $20,000,000 in aggregate principal of the $77,136,175 in aggregate principal amount of issued
and outstanding December 2022 Notes. On December 10, 2020, the Company redeemed $20,000,000 in aggregate principal of the $57,136,175 in
aggregate principal amount of issued and outstanding December 2022 Notes. On January 21, 2021, the Company redeemed the remaining $37,136,175 in
aggregate principal amount of issued and outstanding December 2022 Notes. The December 2022 Notes were redeemed at 100% of their principal amount,
plus the accrued and unpaid interest thereon, through, but excluding each of the redemption dates. Accordingly, the Company recognized realized losses on
extinguishment of debt, equal to the write-off of the related unamortized debt issuance costs, of $1.0 million during the year ended March 31, 2021.
The Company recognized interest expense related to the December 2022 Notes, including amortization of deferred issuance costs, of $3.5 million
and $5.3 million for the years ended March 31, 2021 and 2020, respectively. Average borrowings for the years ended March 31, 2021 and 2020 were $53.8
million and $77.1 million, respectively. The December 2022 Notes had a weighted average effective yield of 5.93%.
October 2024 Notes
In September 2019, the Company issued $65.0 million in aggregate principal amount of 5.375% Notes due 2024 (the “Existing October 2024 Notes”). In
October 2019, the Company issued an additional $10.0 million in aggregate principal amount of the October 2024 Notes (the "Additional October 2024
Notes"). In August 2020, the Company issued an additional $50.0 million in aggregate principal amount of the October 2024 Notes (the "New Notes"
together with the Existing October 2024 Notes and the Additional October 2024 Notes, the "October 2024 Notes"). The Additional October 2024 Notes and
the New Notes are being treated as a single series with the Existing October 2024 Notes under the indenture and have the same terms as the Existing
October 2024 Notes. The October 2024 Notes mature on October 1, 2024 and may be redeemed in whole or in part at any time prior to July 1, 2024, at par
plus a “make-whole” premium, and thereafter at par. The October 2024 Notes bear interest at a rate of 5.375% per year, payable semi-annually on April 1
and October 1 of each year, beginning on April 1, 2020. The October 2024 Notes are the direct unsecured obligations of the Company and rank pari passu
with our other
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outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness,
including borrowings under our Credit Facility.
As of March 31, 2021, the carrying amount of the October 2024 Notes was $122.9 million on an aggregate principal amount of $125.0 million at a
weighted average effective yield of 5.375%. As of March 31, 2021, the fair value of the October 2024 Notes was $122.9 million. This is a Level 3 fair
value measurement under ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to
the October 2024 Notes, including amortization of deferred issuance costs, of $6.3 million and $2.2 million, respectively, for the years ended March 31,
2021 and 2020. For the year ended March 31, 2021, average borrowings were $106.1 million. Since the issuance of the October 2024 Notes through March
31, 2020, average borrowings were $74.4 million.
The indenture governing the October 2024 Notes contains certain covenants, including certain covenants requiring the Company to comply with
Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not the Company continues to be subject to
such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to the Company by the SEC, to comply with Section 18(a)
(1)(B) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, after giving effect to any exemptive relief granted to the Company by
the SEC and subject to certain other exceptions, and to provide financial information to the holders of the October 2024 Notes and the trustee under the
indenture if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to important limitations
and exceptions that are described in the indenture and the second supplemental indenture relating to the October 2024 Notes.
In addition, holders of the Notes can require the Company to repurchase some or all of the October 2024 Notes at a purchase price equal to 100% of their
principal amount, plus accrued and unpaid interest to, but not including, the repurchase date upon the occurrence of a “Change of Control Repurchase
Event,” as defined in the second supplemental indenture relating to the October 2024 Notes.
January 2026 Notes
In December 2020, the Company issued $75.0 million in aggregate principal amount of 4.50% Notes due 2026 (the "Existing January 2026
Notes"). In February 2021, the Company issued an additional $65.0 million in aggregate principal amount of the January 2026 Notes (the "Additional
January 2026 Notes" together with the Existing January 2026 Notes, the "January 2026 Notes"). The Additional January 2026 Notes were issued at a price
of 102.11% of the aggregate principal amount of the Additional January 2026 Notes, resulting in a yield-to-maturity of approximately 4.0% at issuance.
The January 2026 Notes mature on January 31, 2026 and may be redeemed in whole or in part at any time prior to October 31, 2025, at par plus a "make-
whole" premium, and thereafter at par. The January 2026 Notes bear interest at a rate of 4.50% per year, payable semi-annually on January 31 and July 31
of each year, beginning on July 31, 2021. The January 2026 Notes are the direct unsecured obligations of the Company and rank pari passu with our other
outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness,
including borrowings under our Credit Facility.
As of March 31, 2021, the carrying amount of the January 2026 Notes was $138.4 million on an aggregate principal amount of $140.0 million at a
weighted average effective yield of 4.46%. As of March 31, 2021, the fair value of the January 2026 Notes was $138.8 million. This is a Level 3 fair value
measurement under ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to the
January 2026 Notes, including amortization of deferred issuance costs, of $1.2 million for the year ended March 31, 2021. Since the issuance of the January
2026 Notes on December 29, 2020 through March 31, 2021, average borrowings were $99.5 million.
The indenture governing the January 2026 Notes contains certain covenants, including certain covenants requiring the Company to comply with
Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not the Company continues to be subject to
such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to the Company by the SEC, to comply with Section 18(a)
(1)(B) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, after giving effect to any exemptive relief granted to the Company by
the SEC and subject to certain other exceptions, and to provide financial information to the holders of the January 2026 Notes and the trustee under the
indenture if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to important limitations
and exceptions that are described in the indenture and the third supplemental indenture relating to the January 2026 Notes.
In addition, holders of the Notes can require the Company to repurchase some or all of the January 2026 Notes at a purchase price equal to 100%
of their principal amount, plus accrued and unpaid interest to, but not including, the repurchase
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date upon the occurrence of a “Change of Control Repurchase Event,” as defined in the third supplemental indenture relating to the January 2026 Notes.
SBA Debentures
On April 20, 2021, SBIC I received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of
1958, as amended. The license will allow SBIC I to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a leverage
commitment by the SBA. SBA debentures are loans issued to an SBIC which have interest payable semi-annually and a ten-year maturity. The interest rate
is fixed shortly after issuance at a market-driven spread over U.S. Treasury Notes with ten-year maturities. Current statutes and regulations permit SBIC I
to borrow up to $175 million in SBA debentures.
Equity Capital Activities
In January 2016, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $10 million of its
outstanding common stock in the open market at certain thresholds below its NAV per share, in accordance with guidelines specified in Rules 10b5-1(c)(1)
(i)(B) and 10b-18 under the Exchange Act. On March 1, 2016, the Company entered into a share repurchase agreement, which became effective
immediately and terminated on March 26, 2020 upon the Company's purchase of the aggregate gross dollar amount (inclusive of commission fees) of its
common stock under the share repurchase program meeting the threshold set forth in the share repurchase agreement. Accordingly, during the year ended
March 31, 2021, the Company did not repurchase any shares of the Company's common stock under the share repurchase program.
During the year ended March 31, 2020, the Company repurchased a total of 794,180 shares at an average price of $11.57 per share, including
commissions paid. Cumulative to date, we have repurchased a total of 804,632 shares of our common stock in the open market under the stock repurchase
program, at an average price of $11.85, including commissions paid.
On March 4, 2019, the Company established an "at-the-market" offering (the "Equity ATM Program") which the Company may offer and sell, from time
to time through sales agents, shares of its common stock having an aggregate offering price of up to $50,000,000. On February 4, 2020, the Company (i)
increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $100,000,000 from $50,000,000 and (ii)
added two additional sales agents to the Equity ATM Program.
During the year ended March 31, 2021, the Company sold 2,810,541 shares of its common stock under the Equity ATM Program at a weighted-
average price of $18.30 per share, raising $51.4 million of gross proceeds. Net proceeds were $50.4 million, after deducting commissions to the sales
agents on shares sold. Cumulative to date, the Company has sold 4,305,629 shares of its common stock under the Equity ATM Program at a weighted-
average price of $19.47, raising $83.8 million of gross proceeds. Net proceeds were $82.2 million after commissions to the sales agents on shares sold. As
of March 31, 2021, the Company has $16.2 million available under the Equity ATM Program.
On August 1, 2019, after receiving the requisite shareholder approval, the Company filed an amendment to its Amended and Restated Articles of
Incorporation to increase the amount of authorized shares of common stock from 25,000,000 to 40,000,000.
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OFF-BALANCE SHEET ARRANGEMENTS
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio
companies. These instruments may include commitments to extend credit and fund equity capital and involve, to varying degrees, elements of liquidity and
credit risk in excess of the amount recognized in the balance sheet.
At March 31, 2021 and 2020, we had a total of approximately $37.4 million and $15.2 million, respectively, in currently unfunded commitments (as
discussed in Note 11 to the Consolidated Financial Statements). As of March 31, 2021, the total unfunded commitments included commitments to issue
letters of credit through a financial intermediary on behalf of certain portfolio companies. As of March 31, 2021 and 2020, we had $3.5 million and $3.4
million, respectively, in letters of credit issued and outstanding under these commitments on behalf of the portfolio companies. For the letters of credit
issued and outstanding, we would be required to make payments to third parties if the portfolio companies were to default on their related payment
obligations. Of these letters of credit, $3.1 million expire in May 2022 and $0.4 million expire in July 2021. As of March 31, 2021 and March 31, 2020,
none of the letters of credit issued and outstanding were recorded as a liability on the Company's balance sheet as such letters of credit are considered in the
valuation of the investments in the portfolio company.
The Company believes its assets will provide adequate coverage to satisfy these unfunded commitments. As of March 31, 2021, the Company had cash
and cash equivalents of $31.6 million and $216.9 million in available borrowings under the Credit Facility.
Contractual Obligations
As shown below, we had the following contractual obligations as of March 31, 2021. For information on our unfunded investment commitments, see
Note 11 of the Notes to Consolidated Financial Statements.
Contractual Obligations
Operating lease obligations
Credit Facility (1)
October 2024 Notes (2)
January 2026 Notes (2)
Total
Payments Due By Period
(In thousands)
Total
248 $
130,106
151,875
172,043
454,272 $
$
$
Less than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
248 $
3,711
6,719
6,843
17,521 $
— $
126,395
13,437
12,600
152,432 $
— $
—
131,719
152,600
284,319 $
—
—
—
—
—
(1) Amounts include interest payments calculated at an average rate of 3.05% of outstanding Credit Facility borrowings, which were $120.0 million as
of March 31, 2021.
(2) Includes interest payments.
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RECENT DEVELOPMENTS
On April 21, 2021, the Board of Directors declared a total dividend of $0.53 per share, comprised of a regular dividend of $0.43 and a supplemental
dividend of $0.10, for the quarter ended June 30, 2021. The record date for the dividend is June 15, 2021. The payment date for the dividend is June 30,
2021.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to market risk. Market risk includes risk that arise from changes in interest rates, commodity prices, equity prices and other market
changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly
involving the companies in which we invest; conditions affecting the general economy, including the impact of COVID-19; overall market changes,
including an increase in market volatility due to COVID-19; legislative reform; local, regional, national or global political, social or economic instability;
and interest rate fluctuations.
Interest Rate Risk
We are subject to interest rate risk. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of
spread relationships, the difference in re-pricing internals between our assets and liabilities and the effect that interest rates may have on our cash flows.
Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest
earning assets and our interest expense incurred in connection with our interest-bearing liabilities. Changes in interest rates can also affect, among other
things, our ability to acquire and originate loans and securities and the value of our investment portfolio. Our net investment income is affected by
fluctuations in various interest rates including LIBOR and prime rates. A large portion of our portfolio is comprised of floating rate investments that utilize
LIBOR. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has
decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if
such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments or a decrease in
the interest rate of our floating interest rate liabilities tied to LIBOR. Our interest expenses will also be affected by changes in the published LIBOR rate in
connection with our Credit Facility. The interest rates on the October 2024 Notes and the January 2026 Notes are fixed for the life of such debt. Our risk
management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these
risks. We regularly measure exposure to interest rate risk and determine whether or not any hedging transactions are necessary to mitigate exposure to
changes in interest rates. As of March 31, 2021, we were not a party to any hedging arrangements.
As of March 31, 2021, approximately 95.5% of our debt investment portfolio (at fair value) bore interest at floating rates, of which 100.0% were subject
to contractual minimum interest rates. Based on interest rates at March 31, 2021, a hypothetical 100 basis point increase in interest rates could decrease our
net investment income by a maximum of $0.8 million, or $0.04 per share, on an annual basis. A hypothetical 100 basis point decrease in interest rates could
increase our net investment income by a maximum of $0.3 million, or $0.02 per share, on an annual basis. Our Credit Facility bears interest on a per annum
basis equal to the applicable LIBOR rate plus 2.50%. We pay unused commitment fees of 0.50% to 1.00% per annum, based on utilization.
Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the
credit market, credit quality, size and composition of the assets in our portfolio. It also does not adjust for other business developments, including future
borrowings that could affect the net increase in net assets resulting from operations, or net income. It also does not assume any repayments from borrowers.
Accordingly, no assurances can be given that actual results would not differ materially from the statement above.
Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the
difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a
significant change in interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds
would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment
portfolio.
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Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Assets and Liabilities as of March 31, 2021 and 2020
Consolidated Statements of Operations for Years Ended March 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for Years Ended March 31, 2021, 2020 and 2019
Consolidated Schedules of Investments as of March 31, 2021 and 2020
Notes to Consolidated Financial Statements
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70
72
73
74
75
76
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Capital Southwest Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of assets and liabilities of Capital Southwest Corporation and Subsidiaries (the Company),
including the consolidated schedules of investments, as of March 31, 2021 and 2020, the related consolidated statements of operations, changes in net
assets, and cash flows for each of the three years in the period ended March 31, 2021, the related notes to the consolidated financial statements, and the
Schedule of Investments in and Advances to Affiliates of the Company listed in Schedule 12-14 for the year ended March 31, 2021 (collectively, the
financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31,
2021 and 2020, and the results of its operations, changes in net assets, and cash flows for each of the three years in the period ended March 31, 2021, in
conformity with accounting principles generally accepted in the United States of America, and in our opinion, the related Schedule of Investments in and
Advances to Affiliates, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments owned as of March 31, 2021 and 2020, by correspondence with the
custodians and/or brokers or the underlying investee. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical
audit matters or on the accounts or disclosures to which they relate.
Evaluation of the fair value of investments using significant unobservable inputs and assumptions
At March 31, 2021, the fair value of the Company’s investments categorized as Level 3 investments within the fair value hierarchy (Level 3 investments)
totaled $688,432 thousand. Management determines, and the Board of Directors approves, the fair value of the Company’s Level 3 investments by applying
the methodologies outlined in Notes 2 and 4 to the consolidated financial statements. We identified the evaluation of the fair value of investments using
significant unobservable inputs and assumptions as a critical audit matter. Auditing the fair value of the Company’s Level 3 investments is complex, as the
unobservable inputs and assumptions used by the Company are highly judgmental and could have a significant effect on the fair value measurements of
such investments. Changes in these techniques, inputs and assumptions could have a significant impact on the fair value of investments.
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The primary procedures we performed to address this critical audit matter included the following, among others:
• We obtained an understanding of the relevant controls related to the Company’s process to determine fair value of its Level 3 investments,
including controls over the Company’s methods and selection of significant unobservable inputs.
• We evaluated the appropriateness of the Company’s valuation methodologies used for Level 3 investments, such as the discounted cash flow or
enterprise value, and management’s asset coverage analysis. We also tested whether assumptions used by management, including revenue or
EBITDA multiples and discounts rates, were reasonable by comparing these inputs to market information obtained from external sources.
• Valuation specialists, with specialized skill and knowledge, were involved in our testing.
• We evaluated the reasonableness of any significant changes in valuation methodologies from the prior year-end.
• We evaluated the Company’s historical ability to estimate fair value by comparing the transaction price of available transactions occurring
subsequent to the prior period valuation date against the fair value estimate determined by the Company in the prior period.
• We evaluated subsequent events and other available information and considered whether they corroborated or contradicted the Company’s year-
end valuations.
• We tested broker quotes using third party quotes, if available.
/s/ RSM US LLP
We have served as the Company's auditor since 2017.
Chicago, Illinois
May 26, 2021
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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(In thousands except share and per share data)
Assets
Investments at fair value:
Non-control/Non-affiliate investments (Cost: $540,556 and $436,463, respectively)
Affiliate investments (Cost: $90,201 and $94,724, respectively)
Control investments (Cost: $72,800 and $68,000, respectively)
Total investments (Cost: $703,557 and $599,187, respectively)
Cash and cash equivalents
Receivables:
Dividends and interest
Escrow
Other
Income tax receivable
Deferred tax asset
Debt issuance costs (net of accumulated amortization of $3,582 and $2,720, respectively)
Other assets
Total assets
Liabilities
December 2022 Notes (Par value: $0 and $77,136, respectively)
October 2024 Notes (Par value: $125,000 and $75,000, respectively)
January 2026 Notes (Par value: $140,000 and $0, respectively)
Credit facility
Other liabilities
Accrued restoration plan liability
Income tax payable
Deferred income taxes
Total liabilities
Commitments and contingencies (Note 11)
Net Assets
Common stock, $0.25 par value: authorized, 40,000,000 shares; issued, 23,344,836 shares at March 31, 2021 and
20,337,610 shares at March 31, 2020
Additional paid-in capital
Total distributable earnings
Treasury stock - at cost, 2,339,512 shares
Total net assets
Total liabilities and net assets
Net asset value per share (21,005,324 shares outstanding at March 31, 2021 and 17,998,098 shares outstanding at
March 31, 2020)
March 31,
2021
March 31,
2020
546,028 $
85,246
57,158
688,432
31,613
10,533
1,150
171
155
—
2,246
1,284
735,584 $
— $
122,879
138,425
120,000
11,655
2,979
50
3,345
399,333 $
5,836 $
356,447
(2,095)
(23,937)
336,251
735,584 $
421,280
92,032
39,760
553,072
13,744
10,389
1,643
51
147
1,402
2,980
1,531
584,959
75,812
73,484
—
154,000
4,883
3,082
513
963
312,737
5,085
310,846
(19,772)
(23,937)
272,222
584,959
16.01 $
15.13
$
$
$
$
$
$
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
2021
Years Ended March 31,
2020
2019
Investment income:
Interest income:
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Dividend income:
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Interest income from cash and cash equivalents
Fees and other income
Total investment income
Operating expenses:
Compensation
Share-based compensation
Interest
Professional fees
Net pension expense
General and administrative
Total operating expenses
Income before taxes
Income tax expense
Net investment income
Realized (loss) gain
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Taxes on deemed distribution of long-term capital gains
Total net realized (loss) gain on investments, net of tax
Net unrealized appreciation (depreciation) on investments
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Income tax (provision) benefit
Total net unrealized appreciation (depreciation) on investments, net of tax
Net realized and unrealized gains (losses) on investments
Realized losses on extinguishment of debt
Net increase (decrease) in net assets from operations
Pre-tax net investment income per share - basic and diluted
Net investment income per share - basic and diluted
Net increase (decrease) in net assets from operations - basic and diluted
Weighted average shares outstanding – basic
Weighted average shares outstanding – diluted
$
$
$
$
$
$
$
47,148 $
9,144
—
38,094 $
8,559
265
1,752
33
6,609
9
3,367
68,062
7,756
2,944
17,941
2,193
131
2,984
33,949
34,113
2,442
31,671 $
(6,908) $
(1,628)
—
—
(8,536)
21,218
(2,825)
12,598
(2,236)
28,755
20,219
(1,007)
50,883 $
1.79 $
1.66 $
2.67 $
166
141
12,136
73
2,605
62,039
7,310
2,853
15,836
2,029
143
3,574
31,745
30,294
2,062
28,232 $
1,335 $
57
44,300
(3,461)
42,231
(14,250)
(4,320)
(73,561)
(683)
(92,814)
(50,583)
—
(22,351) $
1.68 $
1.57 $
(1.24) $
28,716
7,143
1,406
197
82
12,648
36
1,653
51,881
7,715
2,271
12,178
1,737
159
3,063
27,123
24,758
1,048
23,710
2,124
77
18,653
—
20,854
(934)
1,109
(11,859)
178
(11,506)
9,348
—
33,058
1.48
1.42
2.45
19,060,131
19,060,131
17,999,836
17,999,836
16,727,254
16,734,369
The accompanying Notes are an integral part of these Consolidated Financial Statements.
73
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(In thousands)
Operations:
Net investment income
Net realized (loss) gain on investments
Taxes on deemed distribution of long-term capital gains
Net unrealized appreciation (depreciation) on investments, net of tax
Realized losses on extinguishment of debt
Net increase (decrease) in net assets from operations
Dividends to shareholders
Capital share transactions:
Change in restoration plan liability
Issuance of common stock
Exercise of employee stock options
Share-based compensation expense
Common stock withheld for payroll taxes upon vesting of restricted stock
Repurchase of common stock
Increase (decrease) in net assets
Net assets, beginning of year
Net assets, end of year
$
$
2021
Years Ended March 31,
2020
2019
31,671 $
(8,536)
—
28,755
(1,007)
50,883
(39,945)
(7)
50,393
—
2,944
(239)
—
64,029
272,222
336,251 $
28,232 $
45,692
(3,461)
(92,814)
—
(22,351)
(50,343)
(91)
25,819
—
2,853
(419)
(9,209)
(53,741)
325,963
272,222 $
23,710
20,854
—
(11,506)
—
33,058
(38,010)
(185)
18,744
2,169
2,271
(187)
(185)
17,675
308,288
325,963
The accompanying Notes are an integral part of these Consolidated Financial Statements.
74
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net increase (decrease) in net assets from operations
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used in
operating activities:
Purchases and originations of investments
Proceeds from sales and repayments of debt investments in portfolio companies
Proceeds from sales and return of capital of equity investments in portfolio companies
Payment of accreted original issue discounts
Depreciation and amortization
Net pension benefit
Realized loss (gain) on investments before income tax
Realized losses on extinguishment of debt
Taxes payable on deemed distribution of long-term capital gains
Net unrealized (appreciation) depreciation on investments
Accretion of discounts on investments
Payment-in-kind interest and dividends
Stock option and restricted awards expense
Deferred income taxes
Changes in other assets and liabilities:
Increase in dividend and interest receivable
Decrease in escrow receivables
(Increase) decrease in tax receivable
(Increase) decrease in other receivables
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Increase (decrease) in payable for unsettled transaction
Decrease in taxes payable
Net cash used in operating activities
Cash flows from financing activities
Proceeds from common stock offering
Equity offering costs paid
Borrowings under credit facility
Repayments of credit facility
Debt issuance costs paid
Proceeds from issuance of December 2022 Notes
Proceeds from issuance of October 2024 Notes
Proceeds from issuance of January 2026 Notes
Redemption of December 2022 Notes
Dividends to shareholders
Proceeds from exercise of employee stock options
Common stock withheld for payroll taxes upon vesting of restricted stock
Repurchase of common stock
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow disclosures:
Cash paid for income taxes
Cash paid for interest
Years Ended March 31,
2021
2020
2019
$
50,883 $
(22,351) $
33,058
(219,349)
97,589
17,841
1,228
1,967
(110)
8,549
1,007
—
(30,991)
(2,347)
(7,880)
2,944
3,784
(144)
493
(8)
(119)
95
6,779
—
(463)
(68,252)
(196,606)
67,794
55,960
788
2,405
(82)
(46,084)
—
3,461
92,131
(1,938)
(2,079)
2,853
1,368
(1,137)
111
36
910
(644)
(543)
(1,158)
(3,142)
(47,947)
50,410
—
182,000
(216,000)
(540)
—
49,000
138,571
(77,136)
(39,945)
—
(239)
—
86,121
17,869
13,744
31,613 $
26,084
(105)
132,000
(119,000)
(742)
—
73,500
—
—
(50,343)
—
(418)
(9,209)
51,767
3,820
9,924
13,744 $
(229,598)
74,669
33,928
524
1,393
(51)
(20,854)
—
—
11,684
(1,390)
(681)
2,271
53
(3,850)
310
(74)
(797)
4,236
(695)
1,158
—
(94,706)
18,891
(127)
146,000
(45,000)
(1,827)
19,524
—
—
—
(42,535)
2,169
(187)
(185)
96,723
2,017
7,907
9,924
1,464 $
11,738
4,524 $
13,944
802
10,912
$
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
75
Table of Contents
1
Portfolio Company
Non-control/Non-affiliate
5
Investments
AAC NEW HOLDCO INC.
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
Type of
2
Investment
Industry
Current
Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
First Lien
374,543 shares
common stock
Warrants (Expiration -
December 11, 2025)
Healthcare services
10.00%, 8.00%
PIK
12/11/2020
6/25/2025
$
7,981 $
7,981 $
7,941
—
—
12/11/2020
12/11/2020
—
—
—
—
1,785
1,785
2,198
11,964
2,198
11,924
ACCELERATION PARTNERS,
LLC
8,13
First Lien
Media, marketing &
entertainment
10
Delayed Draw Term
Loan
9
1,000 Preferred Units
1,000 Class A
9
Common Units
ACE GATHERING, INC.
Second Lien
15
ADAMS PUBLISHING GROUP,
LLC
ALLIANCE SPORTS GROUP, L.P.
First Lien
Senior subordinated
debt
Unsecured convertible
note
3.88% preferred
membership interest
Energy services
(midstream)
Media, marketing &
entertainment
Consumer products &
retail
ALLOVER MEDIA, LLC
Revolving Loan
10
Media, marketing &
entertainment
First Lien
L+8.21% (Floor
1.00%)/Q,
Current Coupon
9.21%
L+8.21% (Floor
1.00%)/Q,
Current Coupon
9.21%
—
12/1/2020
12/1/2025
8,750
8,500
8,750
12/1/2020
12/1/2020
12/1/2025
—
—
12/1/2020
—
2,965
—
—
2,889
1,000
—
12,389
2,965
1,000
—
12,715
L+10.50%
(Floor
2.00%)/Q,
Current Coupon
12.50%
L+7.00% (Floor
1.75%)/Q,
Current Coupon
8.75%
12/13/2018
12/13/2023
9,438
9,319
8,975
7/2/2018
7/2/2023
9,920
9,795
9,920
14.00% PIK
8/1/2017
2/1/2023
11,134
11,043
10,989
6.00% PIK
7/15/2020
9/30/2024
—
8/1/2017
—
173
—
173
173
2,500
13,716
2,500
13,662
3/10/2021
3/10/2026
—
(39)
—
3/10/2021
3/10/2026
13,000
12,742
12,703
12,742
12,742
L+8.50% (Floor
1.00%)
L+8.50% (Floor
1.00%)/Q,
Current Coupon
9.50%
76
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
AMERICAN NUTS OPERATIONS
LLC
13
First Lien - Term Loan
Food, agriculture and
beverage
10
First Lien - Term Loan
C
3,000,000 units of
9
Class A common stock
AMERICAN
TELECONFERENCING SERVICES,
LTD. (DBA PREMIERE GLOBAL
SERVICES, INC.)
First Lien
Telecommunications
Second Lien
AMWARE FULFILLMENT LLC
First Lien
Distribution
ASC ORTHO MANAGEMENT
COMPANY, LLC
13
Revolving Loan
Healthcare services
First Lien
Second Lien
9
2,042 Common Units
BINSWANGER HOLDING CORP.
First Lien
900,000 shares of
common stock
Distribution
Current
Interest
3
Rate
L+8.00% (Floor
1.00%)/Q,
Current Coupon
9.00%
L+8.00% (Floor
1.00%)/Q,
Current Coupon
9.00%
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
4/10/2018
4/10/2023
17,019
16,856
17,019
12/21/2018
4/10/2023
1,804
1,785
1,804
—
4/10/2018
—
—
3,000
21,641
2,752
21,575
L+6.50% (Floor
1.00%)/Q,
Current Coupon
7.50%
0.5%, L+9.00%
PIK (Floor
1.00%)/Q,
Current Coupon
10.50%
L+9.00% (Floor
1.00%)/M,
Current Coupon
10.00%
L+7.50% (Floor
1.00%)/Q,
Current Coupon
8.50%
L+7.50% (Floor
1.00%)/Q,
Current Coupon
8.50%
13.25% PIK
—
L+8.50% (Floor
1.00%)/M,
Current Coupon
9.50%
9/21/2016
6/8/2023
5,915
5,865
3,141
11/3/2016
6/6/2024
2,341
2,317
8,182
55
3,196
7/29/2016
12/31/2021
17,407
17,315
17,407
8/31/2018
8/31/2023
1,500
1,485
1,410
8/31/2018
8/31/2018
8/31/2018
8/31/2023
12/1/2023
—
8,854
4,237
—
8,756
4,191
750
15,182
8,322
3,822
356
13,910
3/9/2017
3/9/2022
10,942
10,890
10,942
—
3/9/2017
—
—
900
11,790
924
11,866
77
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
BLASCHAK COAL CORP.
Second Lien Term
Loan
15
Commodities &
mining
Second Lien- Term
Loan B
15
BROAD SKY NETWORKS LLC
13
Revolving Loan
10
Telecommunications
First Lien
1,000,000 Series A
9
Preferred units
CALIFORNIA PIZZA KITCHEN,
INC.
First Lien
Restaurants
First Lien Rolled Up
Second Lien
48,423 shares of
common stock
Current
Interest
3
Rate
L+13.00%,
1.00% PIK
(Floor
1.00%)/Q,
Current Coupon
15.00%
L+13.00%,
1.00% PIK
(Floor
1.00%)/Q,
Current Coupon
15.00%
L+7.50% (Floor
1.00%)/Q,
Current Coupon
8.50%
L+7.50% (Floor
1.00%)/Q,
Current Coupon
8.50%
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
7/30/2018
7/30/2023
8,712
8,617
8,233
3/30/2020
7/30/2023
2,016
1,986
10,603
1,905
10,138
12/11/2020
12/11/2025
500
453
496
12/11/2020
12/11/2025
15,000
14,715
14,880
—
12/11/2020
—
—
1,000
16,168
1,000
16,376
11/23/2020
11/23/2024
669
652
668
11/23/2020
11/23/2024
741
739
737
L+10.00%
(Floor
1.50%)/Q,
Current Coupon
11.50%
1.00%,
L+11.00% PIK
(Floor
1.50%)/Q,
Current Coupon
13.50%
1.00%,
L+12.50% PIK
(Floor
1.50%)/Q,
Current Coupon
15.00%
11/23/2020
5/23/2025
—
11/23/2020
—
814
—
814
1,317
3,522
796
1,317
3,518
CAPITAL PAWN HOLDINGS, LLC First Lien
Consumer products &
retail
CHEMISTRY RX HOLDINGS,
LLC
First Lien
Specialty chemicals
L+7.25% (Floor
1.00%)/Q,
Current Coupon
8.25%
L+7.00% (Floor
1.00%)/Q,
Current Coupon
8.00%
78
12/21/2017
7/8/2023
8,854
8,840
8,854
3/15/2021
3/13/2026
8,000
7,841
7,841
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
CITYVET, INC.
13
Type of
2
Investment
Industry
10
Delayed Draw Term
Loan
9
271,739 Class A units
Healthcare services
CLICKBOOTH.COM, LLC
Revolving Loan
10
Media, marketing &
entertainment
First Lien
DANFORTH ADVISORS, LLC
13
875 Class A equity
9
units
Business services
DRIVEN, INC.
First Lien
Business services
DUNN PAPER, INC.
ELECTRONIC TRANSACTION
CONSULTANTS LLC
13
Second Lien
Revolving Loan
10
Paper & forest
products
Software & IT
services
First Lien
9
1,000 Class A units
ESCP DTFS, INC.
First Lien - Term Loan
A
Industrial services
First Lien - Term Loan
B
Delayed Draw Term
Loan B1
Delayed Draw Term
Loan B2
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
3/5/2021
3/5/2021
3/5/2026
—
3,250
—
12/5/2017
1/31/2025
—
12/5/2017
1/31/2025
18,525
3,053
500
3,553
(5)
3,053
500
3,553
—
18,308
18,303
18,525
18,525
9/28/2018
—
—
875
2,855
6/28/2019
6/28/2024
5,820
5,737
5,878
9/28/2016
8/26/2023
3,000
2,974
3,000
7/24/2020
7/24/2025
—
(56)
—
7/24/2020
7/24/2020
7/24/2025
—
10,000
—
9,845
1,000
10,789
9,840
1,000
10,840
1/31/2020
1/31/2025
5,350
5,269
4,986
1/31/2020
1/31/2025
5,350
5,270
4,986
1/31/2020
1/31/2025
500
491
466
1/31/2020
1/31/2025
500
491
11,521
466
10,904
Current
Interest
3
Rate
L+7.50% (Floor
1.00%)/Q,
Current Coupon
8.50%
—
L+8.50% (Floor
1.00%)
L+8.50% (Floor
1.00%)/Q,
Current Coupon
9.50%
—
L+8.00% (Floor
2.00%)/Q,
Current Coupon
10.00%
L+8.75% (Floor
1.00%)/M,
Current Coupon
9.75%
L+7.50% (Floor
1.00%)
L+7.50% (Floor
1.00%)/Q,
Current Coupon
8.50%
—
L+6.50% (Floor
1.75%)/Q,
Current Coupon
8.25%
L+8.50% (Floor
1.75%)/Q,
Current Coupon
10.25%
L+6.50% (Floor
1.75%)/Q,
Current Coupon
8.25%
L+8.50% (Floor
1.75%)/Q,
Current Coupon
10.25%
79
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
FAST SANDWICH, LLC
Revolving Loan
10
Restaurants
First Lien
FLIP ELECTRONICS, LLC
8,13
First Lien
2,000,000 Common
9
Units
Technology products
& components
Current
Interest
3
Rate
L+9.00% (Floor
1.00%)
L+9.00% (Floor
1.00%)/Q,Current
Coupon 10.00%
L+8.05% (Floor
1.00%)/M,
Current Coupon
9.05%
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
5/24/2018
5/23/2023
—
(32)
—
5/24/2018
5/23/2023
3,359
3,332
3,300
3,023
3,023
1/4/2021
1/2/2026
15,500
15,177
15,252
—
1/4/2021
—
—
2,000
17,177
2,285
17,537
GS OPERATING, LLC
IAN, EVAN, & ALEXANDER
CORPORATION (DBA
EVERWATCH)
First Lien
Distribution
Revolving Loan
10
Aerospace & defense
First Lien
8
ICS DISTRIBUTION, LLC
First Lien
Industrial services
JVMC HOLDINGS CORP.
First Lien
Financial services
KLEIN HERSH, LLC
Revolving Loan
10
Business services
First Lien
KMS, LLC
17
First Lien
15
Distribution
LANDPOINT HOLDCO, INC.
First Lien
Business services
L+6.50%(Floor
1.50%)/M,
Current Coupon
8.00%
L+8.50% (Floor
1.00%)
L+8.50% (Floor
1.00%)/Q,
Current Coupon
9.50%
L+8.48% (Floor
2.00%)/Q,
Current Coupon
10.48%
L+7.75% (Floor
1.00%)/M,
Current Coupon
8.75%
L+8.00% (Floor
0.75%)
L+8.00% (Floor
0.75%)/S,
Current Coupon
8.75%
L+6.00% (Floor
1.00%)/Q,
Current Coupon
7.00%
L+11.00%(Floor
1.00%)/Q,
Current Coupon
12.00%
80
3/6/2020
2/24/2025
7,920
7,791
7,920
7/31/2020
7/31/2025
—
(34)
—
7/31/2020
7/31/2025
9,668
9,493
9,459
9,668
9,668
10/31/2019
10/31/2024
20,500
20,121
20,275
2/28/2019
2/28/2024
7,047
7,000
6,850
11/13/2020
11/13/2025
—
(17)
—
11/13/2020
11/13/2025
14,813
14,534
14,517
14,813
14,813
1/5/2021
11/23/2025
16,000
15,923
15,968
12/30/2019
12/30/2024
18,840
18,540
17,239
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
LGM PHARMA, LLC
13
First Lien
Healthcare products
Delayed Draw Term
Loan
142,278.89 units of
Class A common
9
stock
LIGHTING RETROFIT
INTERNATIONAL, LLC (DBA
ENVOCORE)
Environmental
services
First Lien
25,603 shares of Series
C preferred stock
396,825 shares of
Series B preferred
stock
MAKO STEEL LP
Revolving Loan
10
Business services
First Lien
NINJATRADER, INC.
13
Revolving Loan
10
Financial services
First Lien
Delayed Draw Term
Loan
2,000,000 Preferred
9
Units
10
RESEARCH NOW GROUP, INC.
Second Lien
Business services
ROSELAND MANAGEMENT, LLC Revolving Loan
10
Healthcare services
Current
Interest
3
Rate
L+8.50% (Floor
1.00%)/M,
Current Coupon
9.50%
L+10.00%
(Floor
1.00%)/Q,
Current Coupon
11.00%
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
11/15/2017
11/15/2023
11,424
11,315
11,424
7/24/2020
11/15/2023
2,488
2,448
2,487
—
11/15/2017
—
—
1,600
15,363
2,309
16,220
7.50%,
L+1.50% PIK
(Floor
2.00%)/Q,
Current Coupon
11.00%
6/30/2017
6/30/2022
14,027
13,984
12,021
8/13/2018
—
6/30/2017
—
—
—
—
25
—
500
14,509
—
12,021
L+7.25% (Floor
(0.75%)/Q,
Current Coupon
8.00%
L+7.25% (Floor
(0.75%)/Q,
Current Coupon
8.00%
L+6.75% (Floor
1.50%)
L+6.75% (Floor
1.50%)/Q,
Current Coupon
8.25%
L+6.75% (Floor
1.50%)/Q
03/15/2021
03/13/2026
660
623
647
03/15/2021
03/13/2026
8,113
12/18/2019
12/18/2024
—
7,952
8,575
(6)
7,952
8,599
—
12/18/2019
12/18/2024
19,250
18,784
19,250
12/31/2020
12/18/2024
—
12/18/2019
—
—
—
(36)
—
2,000
20,742
6,223
25,473
L+9.50% (Floor
1.00%)/M,
Current Coupon
10.50%
L+7.00% (Floor
2.00%)/Q,
Current Coupon
9.00%
81
12/8/2017
12/20/2025
10,500
9,980
10,132
11/9/2018
11/9/2023
500
482
500
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
First Lien
13,811 Class A Units
RTIC SUBSIDIARY HOLDINGS,
LLC
Revolving Loan
10
Consumer products &
retail
First Lien
8
SCRIP, INC.
First Lien
100 shares of common
stock
Healthcare products
TAX ADVISORS GROUP, LLC
13
9
143.3 Class A units
Financial services
TRAFERA, LLC (FKA TRINITY 3,
LLC)
13
15
First Lien
9
896.43 Class A units
Technology products
& components
USA DEBUSK, LLC
First Lien
Industrial services
Current
Interest
3
Rate
L+7.00% (Floor
2.00%)/Q,
Current Coupon
9.00%
—
L+7.75% (Floor
1.25%)/Q,
Current Coupon
9.00%
L+7.75% (Floor
1.25%)/Q,
Current Coupon
9.00%
L+9.68% (Floor
2.00%)/M,
Current Coupon
11.68%
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
11/9/2018
11/9/2018
11/9/2023
—
14,270
—
14,108
1,381
15,971
14,270
1,720
16,490
9/1/2020
9/1/2025
329
317
329
9/1/2020
9/1/2025
7,135
7,054
7,371
7,135
7,464
3/21/2019
3/21/2024
16,750
16,422
16,750
—
3/21/2019
6/23/2017
—
—
9/30/2020
11/15/2019
9/30/2025
—
—
—
9,975
—
1,000
17,422
541
9,838
1,205
11,043
967
17,717
1,539
9,975
3,204
13,179
VISTAR MEDIA INC.
8
VTX HOLDINGS, INC.
First Lien
171,617 shares of
Series A preferred
stock
Warrants (Expiration -
April 3, 2029)
First Lien
1,397,707 Series A
Preferred units
Media, marketing &
entertainment
2/25/2020
10/22/2024
7,900
7,782
7,892
2/17/2017
4/3/2023
11,481
10,920
11,481
—
—
4/3/2019
4/3/2019
—
—
—
—
1,874
3,904
620
13,414
1,853
17,238
Software & IT
services
L+9.00% (Floor
2.00%)/Q,
Current Coupon
11.00%
7/23/2019
7/23/2024
21,575
21,181
21,575
—
7/23/2019
—
—
1,398
1,654
82
—
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
—
L+5.75% (Floor
1.00%)/M,
Current Coupon
6.75%
L+7.50%,
2.50% PIK
(Floor
2.00%)/M,
Current Coupon
12.00%
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
Current
Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
22,579
23,229
ZENFOLIO INC.
Revolving Loan
Business services
First Lien
Total Non-control/Non-affiliate
Investments
6
Affiliate Investments
CENTRAL MEDICAL SUPPLY
LLC
13
Revolving Loan
10
Healthcare services
First Lien
Delayed Draw Capex
10
Term Loan
875,000 Preferred
9
Units
1,500,000 units of
Class A-1 common
9
stock
Business services
CHANDLER SIGNS, LLC
13
DELPHI BEHAVIORAL HEALTH
GROUP, LLC
First Lien
Healthcare services
First Lien
1,681.04 Common
Units
L+9.00% (Floor
1.00%)/Q,
Current Coupon
10.00%
L+9.00% (Floor
1.00%)/Q,
Current Coupon
10.00%
L+9.00% (Floor
1.75%)/Q,
Current Coupon
10.75%
L+9.00% (Floor
1.75%)/Q,
Current Coupon
10.75%
L+9.00% (Floor
1.75%)/Q,
Current Coupon
10.75%
—
L+9.50% (Floor
1.00%)/M,
Current Coupon
10.50%
L+7.50% (Floor
1.00%)/M,
Current Coupon
8.50%
7/17/2017
7/17/2023
2,000
1,992
1,820
7/17/2017
7/17/2023
14,888
14,722
16,714
13,548
15,368
$
540,556 $
546,028
5/22/2020
5/22/2025
$
300 $
275 $
276
5/22/2020
5/22/2025
7,500
7,371
6,908
5/22/2020
5/22/2025
—
5/22/2020
—
—
1/4/2016
100
—
75
875
8,596
92
641
7,917
—
1,500
1,343
4/8/2020
4/7/2023
1,414
1,414
1,398
4/8/2020
4/7/2023
—
4/8/2020
—
83
1,580
—
1,580
3,615
6,609
1,500
3,615
6,513
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
DYNAMIC COMMUNITIES, LLC
13
Revolving Loan
10
Business services
First Lien
Senior subordinated
debt
2,000,000 Preferred
9
Units
GRAMMATECH, INC.
Revolving Loan
10
Software & IT
services
First Lien
1,000 Class A units
ITA HOLDINGS GROUP, LLC
13
Revolving Loan
10
Transportation &
logistics
First Lien - Term Loan
First Lien - Term B
Loan
First Lien - PIK Note
A
First Lien - PIK Note B
Warrants (Expiration -
9
March 29, 2029)
9.25% Class A
9
Membership Interest
SIMR, LLC
First Lien
9,374,510.2 Class B
Common Units
Healthcare services
Current
Interest
3
Rate
L+3.75%,
7.75% PIK
(Floor 1.00%)
L+3.75%,
7.75% PIK
(Floor
1.00%)/Q,
Current Coupon
12.50%
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
7/17/2018
7/17/2023
—
(2)
—
7/17/2018
7/17/2023
11,061
10,950
9,966
25% PIK
12/4/2020
1/16/2024
—
7/17/2018
—
372
—
372
372
2,000
13,320
1,274
11,612
L+7.50% (Floor
2.00%)
L+7.50% (Floor
2.00%)/Q,
Current Coupon
9.50%
—
L+9.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q,
Current Coupon
8.00%
L+10.00%
(Floor
1.00%)/Q,
Current Coupon
11.00%
10.00% PIK
10.00% PIK
—
—
L+17.00% PIK
(Floor
2.00%)/M,
Current Coupon
19.00%
11/1/2019
11/1/2024
—
(31)
—
11/1/2019
11/1/2019
11/1/2024
—
11,500
—
11,346
1,000
12,315
11,420
1,208
12,628
2/14/2018
2/14/2023
—
(23)
—
2/14/2018
2/14/2023
10,071
9,996
10,061
6/5/2018
2/14/2023
3/29/2019
3/29/2019
3/29/2019
2/14/2018
2/14/2023
2/14/2023
—
—
5,036
2,678
106
—
—
4,984
2,282
106
538
1,500
19,383
5,101
2,630
103
2,968
2,532
23,395
9/7/2018
9/7/2023
13,661
13,527
12,103
—
9/7/2018
—
—
6,107
19,634
—
12,103
84
Table of Contents
1
Portfolio Company
SONOBI, INC.
13
Total Affiliate Investments
7
Control Investments
I-45 SLF LLC
9,11
Total Control Investments
TOTAL INVESTMENTS
12
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
Type of
2
Investment
Industry
First Lien
500,000 Class A
9
Common Units
Media, marketing, &
entertainment
Current
Interest
3
Rate
L+8.00% (Floor
1.00%)/Q,
Current Coupon
9.00%
9/17/2020
9/16/2025
—
9/17/2020
—
Acquisition
Date
14
Maturity
Principal
Cost
16
Fair
4
Value
8,500
—
8,344
500
8,844
8,500
1,235
9,735
$
90,201 $
85,246
80% LLC equity
interest
Multi-sector holdings
—
10/20/2015
—
— $
72,800 $
57,158
$
$
72,800 $
57,158
703,557 $
688,432
1
2
3
4
5
6
7
8
All debt investments are income-producing, unless otherwise noted. Equity investments and warrants are non-income producing, unless otherwise noted.
All of the Company’s investments, unless otherwise noted, are pledged as collateral for the Company’s senior secured credit facility.
The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) and reset
daily (D), monthly (M), quarterly (Q), or semiannually (S). For each the Company has provided the spread over LIBOR or Prime and the current contractual interest
rate in effect at March 31, 2021. Certain investments are subject to a LIBOR or Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind ("PIK")
interest.
The Company's investment portfolio is comprised entirely of privately held debt and equity securities for which quoted prices falling within the categories of Level 1
and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the Board of Directors,
using significant unobservable Level 3 inputs. Refer to Note 4 for further discussion.
Non-Control/Non-Affiliate investments are generally defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments that are neither
control investments nor affiliate investments. At March 31, 2021, approximately 79.3% of the Company’s investment assets were non-control/non-affiliate investments.
The fair value of these investments as a percent of net assets is 162.4%.
Affiliate investments are generally defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investments are
not classified as control investments. At March 31, 2021, approximately 12.4% of the Company’s investment assets were affiliate investments. The fair value of these
investments as a percent of net assets is 25.3%.
Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned. At March 31, 2021,
approximately 8.3% of the Company’s investment assets were control investments. The fair value of these investments as a percent of net assets is 17.0%.
The investment is structured as a first lien last out term loan.
85
Table of Contents
9
10
11
12
13
14
15
16
17
Indicates assets that are considered "non-qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time
of acquisition of any additional non-qualifying assets. As of March 31, 2021, approximately 12.6% of the Company's assets are non-qualifying assets.
The investment has an unfunded commitment as of March 31, 2021. Refer to Note 11 - Commitments and Contingencies for further discussion.
Income producing through dividends or distributions.
As of March 31, 2021, the cumulative gross unrealized appreciation for federal income tax purposes is approximately $40.2 million; cumulative gross unrealized
depreciation for federal income tax purposes is $27.3 million. Cumulative net unrealized appreciation is $12.9 million, based on a tax cost of $700.9 million.
Our investments in Acceleration Partners preferred and common units, American Nuts Operations LLC Class A common stock, ASC Ortho Management Company,
LLC common units, Broad Sky Networks LLC Series A Preferred units, CityVet, Inc. Class A units, Danforth Advisors, LLC common units, Electronic Transaction
Consultants LLC Class A units, Flip Electronics, LLC common units, LGM Pharma, LLC Class A common stock, NinjaTrader, LLC preferred units, Tax Advisors
Group, LLC Class A units, Trafera, LLC Class A units, Central Medical Supply LLC Preferred units, Chandler Signs, LP Class A-1 common stock, Dynamic
Communities, LLC Preferred units, ITA Holdings Group, LLC membership interest and Sonobi, Inc. Class A common units are held through a wholly-owned taxable
subsidiary of the Company.
The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act").
These investments, which as of March 31, 2021 represented 204.7% of the Company's net assets or 93.6% of the Company's total assets, are generally subject to certain
limitations on resale, and may be deemed "restricted securities" under the Securities Act.
The investment is structured as a split lien term loan, which provides the Company with a first lien priority on certain assets of the obligor and a second lien priority on
different assets of the obligor.
Represents amortized cost. Negative cost in this column represents the original issue discount of certain undrawn revolvers and delayed draw term loans.
The investment is structured as a first lien first out term loan.
A brief description of the portfolio company in which we made an investment that represents greater than 5% of our total assets as of March 31, 2021 is included in Note 16.
Significant Subsidiaries.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
86
Table of Contents
1
Portfolio Company
Non-control/Non-affiliate
5
Investments
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2020
Type of
Investment
2,14
Industry
Current
Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
AAC HOLDINGS, INC.
First Lien - Priming Healthcare services
First Lien
16
ACE GATHERING, INC.
Second Lien
15
Energy services
(midstream)
ADAMS PUBLISHING GROUP,
LLC
First Lien
Media, marketing &
entertainment
AG KINGS HOLDINGS INC.
8,16
ALLIANCE SPORTS GROUP, L.P.
Delayed Draw Term
Loan
First Lien
Senior subordinated
debt
3.88% preferred
membership interest
Food, agriculture &
beverage
Consumer products &
retail
AMERICAN NUTS OPERATIONS
LLC
13
First Lien - Term
Loan
Food, agriculture and
beverage
First Lien - Term
10
Loan C
3,000,000 units of
Class A common
9
stock
AMERICAN
TELECONFERENCING
SERVICES, LTD. (DBA
PREMIERE GLOBAL SERVICES,
INC.)
First Lien
Telecommunications
Second Lien
P +13.50% (Floor
1.00%)/Q, Current
Coupon 16.75%
L+6.75% (Floor
1.00%)/Q, 4.00%
PIK, Current
Coupon 13.33%
L+8.50% (Floor
2.00%)/Q, Current
Coupon 10.50%
L+7.50% (Floor
1.75%)/Q, Current
Coupon 9.29%
L+7.50% (Floor
1.75%)/Q, Current
Coupon 9.25%
L+10.02% (Floor
1.00%)/M, Current
Coupon 12.69%
3/21/2019
4/15/2020
$
1,968 $
1,969 $
1,968
6/28/2017
6/30/2023
9,079
8,915
10,884
3,977
5,945
12/13/2018
12/13/2023
9,688
9,532
9,445
7/2/2018
7/2/2023
10,730
10,572
10,312
7/2/2018
7/2/2023
344
320
10,892
9,194
9,980
2,500
12,480
330
10,642
5,445
9,747
2,335
12,082
8/4/2016
8/8/2021
11.00%
8/1/2017
2/1/2023
—
8/1/2017
—
9,308
10,100
—
L+9.50% (Floor
1.00%)/Q, Current
Coupon 11.41%
L+9.50% (Floor
1.00%)/Q, Current
Coupon 11.41%
4/10/2018
4/10/2023
17,194
16,963
16,884
12/21/2018
4/10/2023
1,804
1,781
1,771
—
4/10/2018
—
—
3,000
21,744
1,523
20,178
9/21/2016
6/8/2023
5,926
5,856
3,348
11/3/2016
6/6/2024
2,111
2,072
7,928
792
4,140
L+6.50% (Floor
1.00%)/Q, Current
Coupon 8.24%
0.5%, L+9.00%
PIK (Floor
1.00%)/Q, Current
Coupon 11.35%
87
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2020
1
Portfolio Company
Type of
Investment
2,14
Industry
AMWARE FULFILLMENT LLC
First Lien
Distribution
ASC ORTHO MANAGEMENT
COMPANY, LLC
13
Revolving Loan
Healthcare services
First Lien
Second Lien
2,042 Common
9
Units
Current
Interest
3
Rate
L+9.50% (Floor
1.00%)/M, Current
Coupon 10.95%
L+7.50% (Floor
1.00%)/Q, Current
Coupon 8.70%
L+7.50% (Floor
1.00%)/Q, Current
Coupon 9.41%
13.25% PIK
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
7/29/2016
12/31/2020
12,027
11,988
11,991
8/31/2018
8/31/2023
1,500
1,480
1,425
8/31/2018
8/31/2018
8/31/2023
12/1/2023
—
8/31/2018
—
9,028
3,709
—
8,894
3,649
750
14,773
8,577
3,275
356
13,633
BINSWANGER HOLDING CORP.
First Lien
900,000 shares of
common stock
Distribution
L+8.50% (Floor
1.00%)/M, Current
Coupon 9.96%
3/9/2017
3/9/2022
11,604
11,500
11,163
—
3/9/2017
—
—
900
12,400
636
11,799
BLASCHAK COAL CORP.
Second Lien Term
Loan
15
Commodities &
mining
Second Lien- Term
Loan B
15
CALIFORNIA PIZZA KITCHEN,
INC.
16
First Lien
Restaurants
CAPITAL PAWN HOLDINGS, LLC First Lien
CLICKBOOTH.COM, LLC
Revolving Loan
Consumer products &
retail
Media, marketing &
entertainment
First Lien
L+11.00%/Q,
(Floor 1.00%)
1.00% PIK, Current
Coupon 13.91%
L+11.00%/Q,
(Floor 1.00%)
1.00% PIK, Current
Coupon 13.43%
L+6.00% (Floor
1.00%)/M, Current
Coupon 7.62%
L+9.50%/Q,
Current Coupon
11.41%
L+8.50% (Floor
1.00%)/Q, Current
Coupon 9.5%
L+8.50% (Floor
1.00%)/Q, Current
Coupon 10.41%
88
7/30/2018
7/30/2023
8,624
8,497
8,451
3/30/2020
7/30/2023
2,000
1,960
10,457
1,960
10,411
8/19/2016
8/23/2022
4,825
4,802
2,441
12/21/2017
7/8/2020
11,097
11,068
11,075
12/5/2017
1/31/2025
1,086
1,080
1,086
12/5/2017
1/31/2025
19,000
18,739
19,819
19,000
20,086
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2020
1
Portfolio Company
Type of
Investment
2,14
Industry
DANFORTH ADVISORS, LLC
13
Revolving Loan
10
Business services
First Lien
875 Class A equity
9
units
DELPHI INTERMEDIATE
HEALTHCO, LLC
16
Revolving Loan
Healthcare services
First Lien
DRIVEN, INC.
First Lien
Business Services
DUNN PAPER, INC.
ENVIRONMENTAL PEST
SERVICE MANAGEMENT
COMPANY, LLC
Second Lien
Paper & forest
products
First Lien
Consumer services
Delayed Draw Term
Loan
10
ESCP DTFS, INC.
First Lien - Term
Loan A
Industrial services
First Lien - Term
Loan B
Delayed Draw Term
10
Loan A1
Delayed Draw Term
10
Loan A2
Delayed Draw Term
10
Loan B1
Delayed Draw Term
10
Loan B2
Current
Interest
3
Rate
L+7.25% (Floor
2.00%)/Q, Current
Coupon 9.25%
L+7.25% (Floor
2.00%)/Q, Current
Coupon 9.25%
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
9/28/2018
9/28/2023
500
486
500
9/28/2018
9/28/2023
—
9/28/2018
—
7,250
—
7,141
875
8,502
7,250
1,445
9,195
10/2/2019
10/3/2022
1,223
1,223
1,223
11/3/2017
10/3/2022
10,605
10,533
11,756
5,101
6,324
6/28/2019
6/28/2024
11,940
11,730
11,940
9/28/2016
8/26/2023
3,000
2,965
3,000
6/22/2018
6/22/2023
15,292
15,103
15,292
6/22/2018
6/22/2023
6,110
6,015
21,118
6,111
21,403
1/31/2020
1/31/2025
5,350
5,253
5,253
1/31/2020
1/31/2025
5,350
5,253
5,253
1/31/2020
1/31/2025
1/31/2020
1/31/2025
1/31/2020
1/31/2025
1/31/2020
1/31/2025
—
—
—
—
(10)
(10)
(3)
—
—
—
(3)
10,480
—
10,506
L+9.50% (Floor
1.00%)/Q, Current
Coupon 11.97%
L+9.50% (Floor
1.00%)/Q, Current
Coupon 11.20%
L+8.00% (Floor
2.00%)/Q, Current
Coupon 10.00%
L+8.75% (Floor
1.00%)/M, Current
Coupon 9.75%
L+7.00%(Floor
1.00%)/Q, Current
Coupon 8.91%
L+7.00%(Floor
1.00%)/Q, Current
Coupon 8.91%
L+6.50%(Floor
1.75%)/Q, Current
Coupon 8.27%
L+8.50%(Floor
1.75%)/Q, Current
Coupon 10.27%
L+6.50%(Floor
1.75%)
L+8.50%(Floor
1.75%)
L+6.50%(Floor
1.75%)
L+8.50%(Floor
1.75%)
89
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2020
1
Portfolio Company
Type of
Investment
2,14
Industry
FAST SANDWICH, LLC
Revolving Loan
10
Restaurants
First Lien
GS OPERATING, LLC
First Lien
Distribution
8
ICS DISTRIBUTION, LLC
First Lien
Industrial services
IENERGIZER LIMITED
9
First Lien
Business services
JVMC HOLDINGS CORP.
First Lien
Financial services
LANDPOINT HOLDCO, INC.
First Lien
Business Services
LGM PHARMA, LLC
13
LIGHTING RETROFIT
INTERNATIONAL, LLC (DBA
ENVOCORE)
First Lien
110,000 units of
Class A common
9
stock
First Lien
25,603 shares of
Series C preferred
stock
396,825 shares of
Series B preferred
stock
Healthcare products
Environmental
services
6%, L+3.00% PIK
(Floor 2.00%)/Q,
Current Coupon
11.00%
MEDIA RECOVERY, INC.
Earnout
Industrial Products
Current
Interest
3
Rate
L+9.00% (Floor
1.00%)/Q, 5.0%
PIK
L+9.00% (Floor
1.00%)/Q, 5.0%
PIK,Current
Coupon 15.91%
L+6.50%(Floor
1.50%)/M, Current
Coupon 8.00%
L+8.21%(Floor
2.00%)/Q, Current
Coupon 10.21%
L+6.00%(Floor
1.00%)/M, Current
Coupon 7.00%
L+6.50% (Floor
1.00%)/M, Current
Coupon 7.50%
L+7.00%(Floor
1.00%)/Q, Current
Coupon 8.96%
L+8.50% (Floor
1.00%)/M, Current
Coupon 10.02%
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
5/24/2018
5/23/2023
—
(43)
—
5/24/2018
5/23/2023
3,393
3,354
3,311
3,179
3,179
3/6/2020
2/24/2025
8,000
7,842
7,842
10/31/2019
10/29/2024
18,000
17,617
17,617
4/17/2019
4/17/2024
12,000
11,899
12,000
2/28/2019
2/28/2024
8,183
8,115
8,183
12/30/2019
12/30/2024
19,500
19,128
19,110
11/15/2017
11/15/2022
11,541
11,400
11,472
—
11/15/2017
—
—
1,100
12,500
821
12,293
6/30/2017
6/30/2022
13,439
13,364
12,149
8/13/2018
6/30/2017
11/25/2019
—
—
—
—
—
—
25
—
500
13,889
1,517
—
12,149
—
—
—
—
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Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2020
1
Portfolio Company
Type of
Investment
2,14
Industry
NINJATRADER, INC.
13
Revolving Loan
10
Financial Services
First Lien
2,000,000 Preferred
9
Units
RESEARCH NOW GROUP, INC.
Second Lien
Business services
8
SCRIP INC.
First Lien
100 shares of
common stock
Healthcare products
TAX ADVISORS GROUP, LLC
13
9
143.3 Class A units
Financial services
TRINITY 3, LLC
13
TINUITI INC.
Technology products
& components
Media, marketing &
entertainment
First Lien
9
562.5 Class A units
1,114 Preferred
Units
1,443 Common
Units
USA DEBUSK, LLC
First Lien
Industrial Services
VISTAR MEDIA INC.
Media, marketing &
entertainment
First Lien
171,617 shares of
Series A preferred
stock
Warrants (Expiration
- April 3, 2029)
Current
Interest
3
Rate
L+6.00% (Floor
1.50%)/Q, Current
Coupon 7.90%
L+6.00% (Floor
1.50%)/Q, Current
Coupon 7.90%
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
12/18/2019
12/18/2024
1,100
1,093
1,100
12/18/2019
12/18/2024
18,250
17,902
18,250
—
12/18/2019
—
—
2,000
20,995
2,000
21,350
L+9.50% (Floor
1.00%)/M, Current
Coupon 11.26%
L+9.86% (Floor
2.00%)/M, Current
Coupon 11.86%
12/8/2017
12/20/2025
10,500
9,904
10,217
3/21/2019
3/21/2024
16,750
16,332
16,482
—
3/21/2019
6/23/2017
—
—
—
—
11/15/2019
11/15/2019
11/15/2024
—
14,161
—
—
L+7.50% (Floor
1.50%)/Q, Current
Coupon 9.41%
—
—
—
2/1/2017
2/1/2017
—
—
—
—
1,000
17,332
541
13,894
563
14,457
1,114
277
1,391
1,000
17,482
1,053
14,048
563
14,611
3,100
1,756
4,856
L+5.75% (Floor
1.00%)/M, Current
Coupon 6.75%
L+7.5% (Floor
2.00%)/M, Current
Coupon 9.5%
2/25/2020
10/22/2024
7,980
7,833
7,833
2/17/2017
4/3/2023
11,416
10,605
11,416
—
—
4/3/2019
4/3/2019
—
—
—
—
1,874
4,776
620
13,099
2,718
18,910
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Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2020
1
Portfolio Company
8
VTX HOLDINGS, INC.
Type of
Investment
2,14
First Lien
1,000,000 series A
Preferred units
Industry
Software & IT
services
Total Non-control/Non-affiliate
Investments
6
Affiliate Investments
CHANDLER SIGNS, LLC
13
1,500,000 units of
Class A-1 common
9
stock
Business services
DYNAMIC COMMUNITIES, LLC
13
Revolving Loan
10
Business services
First Lien
2,000,000 Preferred
9
Units
GRAMMATECH, INC.
Revolving Loan
Software & IT
services
First Lien
1000 Class A units
ITA HOLDINGS GROUP, LLC
13
Revolving Loan
10
Transportation &
logistics
First Lien - Term
Loan
First Lien - Term B
Loan
First Lien - PIK Note
A
First Lien - PIK Note
B
Warrants (Expiration
9
- March 29, 2029)
Current
Interest
3
Rate
L+8.87% (Floor
2.00%)/Q, Current
Coupon 10.87%
Acquisition
Date
14
Maturity
Principal
Cost
7/23/2019
7/23/2024
20,075
19,581
—
7/23/2019
—
—
1,000
20,581
Fair
4
Value
19,914
1,000
20,914
$
436,463 $
421,280
1/4/2016
—
$
— $
1,500 $
3,110
7/17/2018
7/17/2023
—
(3)
—
7/17/2018
7/17/2023
10,780
10,625
—
7/17/2018
—
—
2,000
12,622
9,928
1,850
11,778
11/1/2019
11/1/2024
2,500
2,460
2,460
11/1/2019
11/1/2019
11/1/2024
—
11,500
—
11,312
1,000
14,772
2/14/2018
2/14/2023
—
(31)
11,316
1,000
14,776
—
2/14/2018
2/14/2023
10,030
9,910
9,900
6/5/2018
2/14/2023
10.00% PIK
3/29/2019
2/14/2023
10.00% PIK
3/29/2019
2/14/2023
—
3/29/2019
—
92
5,015
2,425
96
—
4,940
1,950
96
538
5,136
2,233
88
2,762
—
L+8.00% (Floor
1.00%)
L+8.00% (Floor
1.00%)/M, Current
Coupon 9.00%
L+7.50% (Floor
2.00%)/Q, Current
Coupon 9.50%
L+7.50% (Floor
2.00%)/Q, Current
Coupon 9.50%
—
L+9.00% (Floor
1.00%)
L+8.00% (Floor
1.00%)/Q, Current
Coupon 9.91%
L+11.00% (Floor
1.00%)/Q, Current
Coupon 12.91%
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2020
Industry
Current
Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
1
Portfolio Company
2,14
Type of
Investment
9.25% Class A
Membership
9
Interest
ROSELAND MANAGEMENT, LLC Revolving Loan
10
Healthcare services
First Lien
10,000 Class A Units
SIMR, LLC
First Lien
9,374,510.2 Class B
Common Units
Healthcare services
ZENFOLIO INC.
Revolving Loan
Business services
First Lien
190 shares of
common stock
—
2/14/2018
—
—
1,500
18,903
2,099
22,218
L+7.00% (Floor
2.00%)/Q, Current
Coupon 9.00%
L+7.00% (Floor
2.00%)/Q, Current
Coupon 9.00%
—
L+10.00% (Floor
2.00%)/M, 7.00%
PIK, Current
Coupon 19.00%
11/9/2018
11/9/2023
500
475
500
11/9/2018
11/9/2018
11/9/2023
—
10,369
—
10,228
1,000
11,703
10,369
1,334
12,203
9/7/2018
9/7/2023
11,693
11,522
11,190
—
9/7/2018
—
—
6,107
17,629
1,742
12,932
7/17/2017
7/17/2022
2,000
1,991
1,888
L+9.00% (Floor
1.00%)/Q, Current
Coupon 10.34%
L+9.00% (Floor
1.00%)/Q, Current
Coupon 10.91%
7/17/2017
7/17/2022
13,906
—
7/17/2017
—
—
13,704
1,900
17,595
13,127
—
15,015
$
94,724 $
92,032
Total Affiliate Investments
7
Control Investments
I-45 SLF LLC
Total Control Investments
9,11
TOTAL INVESTMENTS
12
80% LLC equity
interest
Multi-sector holdings
—
10/20/2015
—
— $
$
68,000 $
68,000 $
39,760
39,760
$
599,187 $
553,072
1
2
All debt investments are income-producing, unless otherwise noted. Equity investments and warrants are non-income producing, unless otherwise noted.
All of the Company’s investments, unless otherwise noted, are pledged as collateral for the Company’s senior secured credit facility
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Table of Contents
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) and reset
daily (D), monthly (M), quarterly (Q), or semiannually (S). For each the Company has provided the spread over LIBOR or Prime and the current contractual interest
rate in effect at March 31, 2020. Certain investments are subject to a LIBOR or Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind ("PIK")
interest.
The Company's investment portfolio is comprised entirely of privately held debt and equity securities for which quoted prices falling within the categories of Level 1
and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the Board of Directors,
using significant unobservable Level 3 inputs. Refer to Note 4 for further discussion.
Non-Control/Non-Affiliate investments are generally defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments that are neither
control investments nor affiliate investments. At March 31, 2020, approximately 76.2% of the Company’s investment assets were non-control/non-affiliate investments.
The fair value of these investments as a percent of net assets is 154.8%.
Affiliate investments are generally defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and the investments are
not classified as control investments. At March 31, 2020, approximately 16.6% of the Company’s investment assets were affiliate investments. The fair value of these
investments as a percent of net assets is 33.8%.
Control investments are generally defined by the 1940 Act as investments in which more than 25% of the voting securities are owned. At March 31, 2020,
approximately 7.2% of the Company’s investment assets were control investments. The fair value of these investments as a percent of net assets is 14.6%.
The investment is structured as a first lien last out term loan.
Indicates assets that are considered "non-qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time
of acquisition of any additional non-qualifying assets. As of March 31, 2020, approximately 11.9% of the Company's assets are non-qualifying assets.
The investment has an unfunded commitment as of March 31, 2020. Refer to Note 11 - Commitments and Contingencies for further discussion.
Income producing through dividends or distributions.
As of March 31, 2020, the cumulative gross unrealized appreciation for federal income tax purposes is approximately $19.3 million; cumulative gross unrealized
depreciation for federal income tax purposes is $63.4 million. Cumulative net unrealized depreciation is $44.1 million, based on a tax cost of $597.7 million.
Our investment in ASC Ortho Management Company, LLC common units, Danforth Advisors, LLC Class A units, American Nuts Operations LLC Class A common
stock, LGM Pharma, LLC Class A common stock, NinjaTrader, LLC preferred units, Trinity 3, LLC Class A units, Tax Advisors Group, LLC Class A units, Chandler
Signs, LLC Class A-1 common stock, Dynamic Communities, LLC Preferred units, and ITA Holdings Group, LLC Class A membership interest are held through a
wholly-owned taxable subsidiary of the Company.
The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act").
These investments are generally subject to certain limitations on resale, and may be deemed "restricted securities" under the Securities Act.
The investment is structured as a split lien term loan, which provides the Company with a first lien priority on certain assets of the obligor and a second lien priority on
different assets of the obligor.
Investment was on non-accrual status as of March 31, 2020, meaning the Company has ceased to recognize interest income on the investment. The current interest rate
and terms disclosed on investments on non-accrual reflect the terms at the time of placement on non-accrual status.
Negative cost in this column represents the original issue discount of certain undrawn revolvers and delayed draw term loans.
A brief description of the portfolio company in which we made an investment that represents greater than 5% of our total assets as of March 31, 2020 is included in Note 16.
Significant Subsidiaries.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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Table of Contents
1. ORGANIZATION AND BASIS OF PRESENTATION
Notes to Consolidated Financial Statements
References in this Annual Report on Form 10-K to “we,” “our,” “us,” “CSWC,” or the “Company” refer to Capital Southwest Corporation, unless the
context requires otherwise.
Organization
Capital Southwest Corporation is an internally managed investment company that specializes in providing customized financing to middle market
companies in a broad range of investment segments located primarily in the United States. Our common stock currently trades on The Nasdaq Global
Select Market under the ticker symbol “CSWC.”
CSWC was organized as a Texas corporation on April 19, 1961. On March 30, 1988, CSWC elected to be regulated as a business development company
(“BDC”) under the 1940 Act. In order to comply with the 1940 Act requirements for a BDC, we must, among other things, generally invest at least 70% of
our assets in eligible portfolio companies and limit the amount of leverage we incur.
We have elected, and intend to qualify annually, to be treated as a regulated investment company (“RIC”) under Subchapter M of the U.S. Internal
Revenue Code of 1986, as amended (the “Code”). As such, we generally will not have to pay corporate-level U.S. federal income tax on any ordinary
income or capital gains that we distribute to our shareholders as dividends. To continue to maintain our RIC treatment, we must meet specified source-of-
income and asset diversification requirements and distribute annually at least 90% of our net ordinary income and realized net short-term capital gains in
excess of realized net long-term capital losses, if any. Depending on the level of taxable income earned in a tax year, we may choose to carry forward
taxable income in excess of current year distributions into the next year and pay a 4% U.S. federal excise tax on such income. Any such carryover taxable
income must be distributed through a dividend declared prior to filing the final tax return related to the year that generated such taxable income.
Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, was the management company for CSWC. Effective
December 31, 2020, CSMC merged with and into CSWC, with CSWC continuing as the surviving entity in the merger. Prior to December 31, 2020, CSMC
generally incurred all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other
administrative costs required for its day-to-day operations (the “Administrative Expenses”). After December 31, 2020, the Administrative Expenses will be
directly incurred by CSWC. The Company continues to be internally managed and the merger has no impact on the day-to-day operations of the business.
CSWC also has a direct wholly owned subsidiary that has been elected to be a taxable entity (the “Taxable Subsidiary”). The primary purpose of the
Taxable Subsidiary is to permit CSWC to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other
forms of pass-through entities) and still allow us to satisfy the RIC tax requirement that at least 90% of our gross income for federal income tax purposes
must consist of qualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.
We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management
teams with strong operating discipline. We target senior debt investments and equity investments in lower middle market ("LMM") companies, as well as
first and second lien loans in upper middle market ("UMM") companies. Our target LMM companies typically have annual earnings before interest, taxes,
depreciation and amortization (“EBITDA”) generally between $3.0 million and $20.0 million, and our LMM investments generally range in size from $5.0
million to $25.0 million. Our UMM investments generally include first and second lien loans in companies with EBITDA generally greater than $20.0
million and typically range in size from $5.0 million to $15.0 million. We make available significant managerial assistance to the companies in which we
invest as we believe that providing managerial assistance to an investee company is critical to its business development activities.
On April 20, 2021, our wholly owned subsidiary, Capital Southwest SBIC I, LP (“SBIC I”) received a license from the U.S. Small Business
Administration (the “SBA”) to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958. SBIC I will have an investment
strategy substantially similar to ours and make similar types of investments in accordance with SBA regulations. SBIC I and its general partner will be
consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it will be included in the consolidated financial statements.
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Table of Contents
Basis of Presentation
The consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America
(“U.S. GAAP”). We meet the definition of an investment company and follow the accounting and reporting guidance in the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 – Financial Services – Investment Companies (“ASC 946”). Under
rules and regulations applicable to investment companies, we are generally precluded from consolidating any entity other than another investment
company, subject to certain exceptions. One of the exceptions to this general principle occurs if the investment company has an investment in an operating
company that provides services to the investment company. Accordingly, the consolidated financial statements include the Taxable Subsidiary. Prior to the
merger of CSMC into CSWC that became effective December 31, 2020, we consolidated the results of CSWC's wholly owned management company.
Portfolio Investment Classification
We classify our investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are generally defined as
investments in which we own more than 25% of the voting securities; “Affiliate Investments” are generally defined as investments in which we own
between 5% and 25% of the voting securities, and the investments are not classified as “Control Investments”; and “Non-Control/Non-Affiliate
Investments” are generally defined as investments that are neither “Control Investments” nor “Affiliate Investments.”
Under the 1940 Act, a BDC must meet certain requirements, including investing at least 70% of our total assets in qualifying assets. As of March 31,
2021, the Company has 87.4% of our assets in qualifying assets. The principal categories of qualifying assets relevant to our business are:
(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an
eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the Securities and Exchange Commission
("SEC").
(2) Securities of any eligible portfolio company that we control.
(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in
transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its
securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing
arrangements.
(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no readily available market for such
securities and we already own 60% of the outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of
warrants or rights relating to such securities.
(6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
Additionally, in order to qualify for RIC tax treatment for U.S. federal income tax purposes, we must, among other things meet the following
requirements:
(1) Continue to maintain our election as a BDC under the 1940 Act at all times during each taxable year.
(2) Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities, loans, gains
from the sale of stock or other securities, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to
our business of investing in such stock or securities.
(3) Diversify our holdings in accordance with two Diversification Requirements: (a) Diversify our holdings such that at the end of each quarter of the
taxable year at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and
such other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the
outstanding voting securities of the issuer; and (b) Diversify our holdings such that no more than 25% of the value of our assets is invested in the
securities, other than U.S. government securities or securities of other RICs, (i) of one issuer, (ii) of two or more issuers that are controlled, as
determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) of certain
"qualified publicly traded partnerships" (collectively, the "Diversification Requirements").
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The two Diversification Requirements must be satisfied quarterly. If a RIC satisfies the Diversification Requirements for one quarter, and then, due
solely to fluctuations in market value, fails to meet one of the Diversification Requirements in the next quarter, it retains RIC tax treatment. A RIC that fails
to meet the Diversification Requirements as a result of a nonqualified acquisition may be subject to excess taxes unless the nonqualified acquisition is
disposed of and the Diversification Requirements are satisfied within 30 days of the close of the quarter in which the Diversification Requirements are
failed.
This quarter we satisfied all RIC requirements and have 7.5% in nonqualified assets according to measurement criteria established in Section 851(d) of
the Code.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements of CSWC.
Fair Value Measurements We account for substantially all of our financial instruments at fair value in accordance with ASC Topic 820 – Fair Value
Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for
fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation
inputs. ASC 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. We believe that the carrying
amounts of our financial instruments such as cash, receivables and payables approximate the fair value of these items due to the short maturity of these
instruments. This is considered a Level 1 valuation technique. The carrying value of our credit facility approximates fair value (Level 3 input). See Note 4
below for further discussion regarding the fair value measurements and hierarchy.
Investments Investments are stated at fair value and are reviewed and approved by our Board of Directors as described in the Notes to the Consolidated
Schedule of Investments and Notes 3 and 4 below. Investments are recorded on a trade date basis.
Net Realized Gains or Losses and Net Unrealized Appreciation or Depreciation Realized gains or losses are measured by the difference between the net
proceeds from the sale or redemption of an investment or a financial instrument and the cost basis of the investment or financial instrument, without regard
to unrealized appreciation or depreciation previously recognized, and includes investments written off during the period net of recoveries and realized gains
or losses from in-kind redemptions. Net unrealized appreciation or depreciation reflects the net change in the fair value of the investment portfolio and
financial instruments and the reclassification of any prior period unrealized appreciation or depreciation on exited investments and financial instruments to
realized gains or losses.
Cash and Cash Equivalents Cash and cash equivalents, which consist of cash and highly liquid investments with an original maturity of three months or
less at the date of purchase, are carried at cost, which approximates fair value. Cash may be held in a money market fund from time to time, which is a
Level 1 security. Cash and cash equivalents includes deposits at financial institutions. We deposit our cash balances in financial institutions and, at times,
such balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At March 31, 2021 and 2020, cash balances
totaling $30.4 million and $12.6 million, respectively, exceeded FDIC insurance limits, subjecting us to risk related to the uninsured balance. All of our
cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any
uninsured balances is remote.
Segment Information We operate and manage our business in a singular segment. As an investment company, we invest in portfolio companies in
various industries and geographic areas as discussed in Note 3.
Consolidation As permitted under Regulation S-X and ASC 946, we generally do not consolidate our investment in a portfolio company other than an
investment company subsidiary or a controlled operating company whose business consists of providing services to CSWC. Accordingly, we consolidate
the results of CSWC's wholly-owned Taxable Subsidiary. Prior to the merger of CSMC into CSWC, we consolidated the results of CSWC’s wholly-owned
management company, CSMC. All intercompany balances have been eliminated upon consolidation.
Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those
estimates. We have identified investment valuation and revenue recognition as our most critical accounting estimates.
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Interest and Dividend Income Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend
income is recognized on the date dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a
distribution. Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life of the loan using
the effective interest method. In accordance with our valuation policy, accrued interest and dividend income is evaluated quarterly for collectability. When
we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable,
thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has
demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding its ability to service
debt or other obligations, it will be restored to accrual basis. As of March 31, 2021, we did not have any investments on non-accrual status. As of March
31, 2020, we had four investments on non-accrual status, which represented approximately 3.3% of our total investment portfolio's fair value and
approximately 5.8% of its cost.
To maintain RIC tax treatment, non-cash sources of income such as accretion of interest income may need to be paid out to shareholders in the form of
distributions, even though CSWC may not have collected the interest income. For the year ended March 31, 2021, approximately 3.5% of CSWC’s total
investment income was attributable to non-cash interest income for the accretion of discounts associated with debt investments, net of any premium
reduction. For the year ended March 31, 2020, approximately 3.1% of CSWC’s total investment income was attributable to non-cash interest income for
the accretion of discounts associated with debt investments, net of any premium reduction.
Payment-in-Kind Interest The Company currently holds, and expects to hold in the future, some investments in its portfolio that contain payment-in-kind
(“PIK”) interest provisions. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the
loan, rather than being paid to the Company in cash, and is recorded as interest income. Thus, the actual collection of PIK interest may be deferred until the
time of debt principal repayment. PIK interest, which is a non-cash source of income, is included in the Company’s taxable income and therefore affects the
amount the Company is required to distribute to shareholders to maintain its qualification as a RIC for U.S. federal income tax purposes, even though the
Company has not yet collected the cash. Generally, when current cash interest and/or principal payments on a loan become past due, or if the Company
otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the investment on non-accrual status
and will generally cease recognizing PIK interest income on that loan for financial reporting purposes until all principal and interest have been brought
current through payment or due to a restructuring such that the interest income is deemed to be collectible. The Company writes off any accrued and
uncollected PIK interest when it is determined that the PIK interest is no longer collectible. As of March 31, 2021 and 2020, we have not written off any
accrued and uncollected PIK interest from prior periods. For the year ended March 31, 2021, we did not have any investments for which we stopped
accruing PIK interest. For the year ended March 31, 2020, we had two investments for which we stopped accruing PIK interest. For the years ended March
31, 2021 and 2020, approximately 10.7% and 3.5%, respectively, of CSWC’s total investment income was attributable to non-cash PIK interest income.
Warrants In connection with the Company's debt investments, the Company will sometimes receive warrants or other equity-related securities from the
borrower. The Company determines the cost basis of warrants based upon their respective fair values on the date of receipt in proportion to the total fair
value of the debt and warrants received. Any resulting difference between the face amount of the debt and its recorded fair value resulting from the
assignment of value to the warrants is treated as original issue discount (“OID”), and accreted into interest income using the effective interest method over
the term of the debt investment.
Debt Issuance Costs Debt issuance costs include commitment fees and other costs related to CSWC’s senior secured credit facility and its unsecured
notes (as discussed further in Note 5). The costs in connection with the credit facility have been capitalized and are amortized into interest expense over the
term of the credit facility. The costs in connection with the unsecured notes are a direct deduction from the related debt liability and amortized into interest
expense over the term of the December 2022 Notes (as defined below), the October 2024 Notes (as defined below) and the January 2026 Notes (as defined
below).
Deferred Offering Costs Deferred offering costs include registration expenses related to shelf registration statements and expenses related to the launch
of the "at-the-market" ("ATM") program through which we can sell, from time to time, shares of our common stock (the "Equity ATM Program"). These
expenses consist primarily of SEC registration fees, legal fees and accounting fees incurred related thereto. These expenses are included in other assets on
the Consolidated Statements of Assets and Liabilities. Upon the completion of an equity offering or a debt offering, the deferred expenses are charged to
additional paid-in capital or debt issuance costs, respectively. If there are any deferred offering costs remaining at the expiration of the shelf registration
statement, these deferred costs are charged to expense.
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Realized Losses on Extinguishment of Debt Upon the repayment of debt obligations that are deemed to be extinguishments, the difference
between the principal amount due at maturity adjusted for any unamortized debt issuance costs is recognized as a loss (i.e., the unamortized debt issuance
costs are recognized as a loss upon extinguishment of the underlying debt obligation).
Leases The Company is obligated under an operating lease pursuant to which it is leasing an office facility from a third party with a remaining term of
approximately one year. The operating lease is included as an operating lease right-of-use ("ROU") asset and operating lease liability in the accompanying
Consolidated Statements of Assets and Liabilities. The Company does not have any financing leases.
The ROU asset represents the Company’s right to use an underlying asset for the lease term and the operating lease liability represents the Company’s
obligation to make lease payments arising from such lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on
the present value of lease payments over the remaining lease term. The Company’s leases do not provide an implicit discount rate, and as such the
Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of the
remaining lease payments. Lease expense is recognized on a straight-line basis over the remaining lease term.
Federal Income Taxes CSWC has elected, and intends to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subsection
M of the Code. By meeting these requirements, we will not be subject to corporate federal income taxes on ordinary income or capital gains timely
distributed to shareholders. In order to qualify as a RIC, the Company is required to timely distribute to its shareholders at least 90% of investment
company taxable income, as defined by the Code, each year. Investment company taxable income generally differs from net income for financial reporting
purposes due to temporary and permanent differences in the recognition of income and expenses. Investment company taxable income generally excludes
net unrealized appreciation or depreciation, as investment gains and losses are not included in investment company taxable income until they are realized.
Depending on the level of taxable income or capital gains earned in a tax year, we may choose to carry forward taxable income or capital gains in excess
of current year distributions into the next year and pay a 4% U.S. federal excise tax on such income. Any such carryover taxable income or capital gains
must be distributed through a dividend declared on or prior to the later of (1) the filing of the U.S. federal income tax return for the applicable fiscal year
and (2) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.
In lieu of distributing our net capital gains for a year, we may decide to retain some or all of our net capital gains. We will be required to pay a 21%
corporate-level federal income tax on any such retained net capital gains. We may elect to treat such retained capital gain as a deemed distribution to
shareholders. Under such circumstances, shareholders will be required to include their share of such retained capital gain in income, but will receive a
credit for the amount of corporate-level U.S. federal income tax paid with respect to their shares. As an investment company that qualifies as a RIC, federal
income taxes payable on security gains that we elect to retain are accrued only on the last day of our tax year, December 31. Any net capital gains actually
distributed to shareholders and properly reported by us as capital gain dividends are generally taxable to the shareholders as long-term capital gains. See
Note 6 for further discussion.
CSMC, a former wholly-owned subsidiary of CSWC, was not a RIC and was required to pay taxes at the corporate rate of 21%. Effective December 31,
2020, CSMC merged with and into CSWC and, as a result, the calendar year ended December 31, 2020 is the last year in which the Company will incur tax
expense or benefit related to CSMC. For tax purposes, CSMC had elected to be treated as a taxable entity, and therefore CSMC was not consolidated for
tax purposes and was taxed at normal corporate tax rates based on taxable income and, as a result of its activities, may generate income tax expense or
benefit. The taxable income, or loss, of CSMC may differ from its book income, or loss, due to temporary book and tax timing differences and permanent
differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements.
The Taxable Subsidiary, a wholly-owned subsidiary of CSWC, is not a RIC and is required to pay taxes at the corporate rate of 21%. For tax
purposes, the Taxable Subsidiary has elected to be treated as a taxable entity, and therefore is not consolidated for tax purposes and is taxed at normal
corporate tax rates based on taxable income and, as a result of its activities, may generate income tax expense or benefit. The taxable income, or loss, of the
Taxable Subsidiary may differ from its book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax
expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements.
Management evaluates tax positions taken or expected to be taken in the course of preparing the Company’s consolidated financial statements to
determine whether the tax positions are “more-likely-than-not” to be sustained by the
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applicable tax authority. Tax positions with respect to tax at the CSWC level not deemed to meet the “more-likely-than-not” threshold would be recorded as
an expense in the current year. Management’s conclusions regarding tax positions will be subject to review and may be adjusted at a later date based on
factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. The Company has concluded that it does not
have any uncertain tax positions that meet the recognition of measurement criteria of ASC 740, Income Taxes, (“ASC 740”) for the current period. Also,
we account for interest and, if applicable, penalties for any uncertain tax positions as a component of income tax expense. No interest or penalties expense
was recorded during the years ended March 31, 2021, 2020 and 2019.
Deferred Taxes Deferred tax assets and liabilities are recorded for losses or income at our taxable subsidiaries using statutory tax rates. A valuation
allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. ASC
740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation was enacted. See
Note 6 for further discussion.
Stock-Based Compensation We account for our stock-based compensation using the fair value method, as prescribed by ASC Topic 718, Compensation
– Stock Compensation. Accordingly, we recognize stock-based compensation cost on a straight-line basis for all share-based payments awards granted to
employees. For restricted stock awards, we measure the grant date fair value based upon the market price of our common stock on the date of the grant.
For restricted stock awards, we amortize this fair value to share-based compensation expense over the vesting term. We recognize forfeitures as they occur.
The unvested shares of restricted stock awarded pursuant to CSWC’s equity compensation plans are participating securities and are included in the basic
and diluted earnings per share calculation. On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to our
executive officers and certain key employees (the “Original Order”). On August 22, 2017, we received an exemptive order that supersedes the Original
Order (the “Exemptive Order”) and, in addition to the relief granted under the Original Order, allows us to withhold shares to satisfy tax withholding
obligations related to the vesting of restricted stock granted pursuant to the 2010 Restricted Stock Award Plan (the “2010 Plan”). The right to grant
restricted stock awards under the 2010 Plan will terminate ten years after the date that the 2010 Plan was approved by the Company’s shareholders, which
is July 18, 2021.
In connection with the termination of the 2010 Plan, the Company’s Board of Directors of Company approved the Capital Southwest Corporation
2021 Employee Restricted Stock Award Plan (the “2021 Employee Plan”) as part of the compensation packages for its employees, the terms of which are,
in all material respects, identical to the 2010 Plan. In connection therewith, on March 29, 2021, we filed an exemptive application with the SEC that would
supersede the Exemptive Order (the “Superseding Exemptive Order”) to permit the Company to (i) issue restricted stock as part of the compensation
package for its employees in the 2021 Employee Plan, and (ii) withhold shares of the Company’s common stock or purchase shares of the Company’s
common stock from the participants to satisfy tax withholding obligations relating to the vesting of restricted stock pursuant to the 2021 Employee Plan. In
addition, on March 29, 2021, we filed an exemptive application with the SEC (the “Non-Employee Director Plan Exemptive Order”) to permit the
Company to (i) issue restricted stock as part of the compensation package for non-employee directors of the Board of Directors (the “Non-Employee
Directors”) under the Capital Southwest Corporation 2021 Non-Employee Director Restricted Stock Award Plan (the “Non-Employee Director Plan”), and
(ii) withhold shares of the Company’s common stock or purchase shares of the Company’s common stock from the Non-Employee Directors to satisfy tax
withholding obligations relating to the vesting of restricted stock pursuant to the Non-Employee Director Plan. There can be no assurance if and when the
Company will receive the Superseding Exemptive Order or the Non-Employee Director Plan Exemptive Order. The terms of the Superseding Exemptive
Order and the Non-Employee Director Plan Exemptive Order, if received, is expected to be substantially similar to the Exemptive Order. Each of the 2021
Employee Plan and the Non-Employee Director Plan will also be subject to shareholder approval upon receipt of the Superseding Exemptive Order and the
Non-Employee Director Plan Exemptive Order, respectively.
At the years ended March 31, 2021 and 2020, there was no adjustment made for the dilutive effect of stock-based awards as there are no options to
acquire shares of common stock outstanding. At the year ended March 31, 2019, weighted-average basic shares were adjusted for the diluted effect of
stock-based awards of 7,115.
Shareholder Distributions Distributions to common shareholders are recorded on the ex-dividend date. The amount of distributions, if any, is determined
by the Board of Directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally
distributed, although the Company may decide to retain such capital gains for investment.
Presentation Presentation of certain amounts in the Consolidated Financial Statements for the prior year comparative consolidated financial statements is
updated to conform to the current period presentation.
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Recently Issued or Adopted Accounting Standards In March 2020, the FASB issued ASU 2020-04, "Reference rate reform (Topic 848)—Facilitation of
the effects of reference rate reform on financial reporting." The amendments in this update provide optional expedients and exceptions for applying U.S.
GAAP to certain contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate
reform and became effective upon issuance for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio
companies and certain lenders. Many of these agreements include language for choosing an alternative successor rate when LIBOR reference is no longer
considered to be appropriate. With respect to other agreements, the Company intends to work with its portfolio companies and lenders to modify
agreements to choose an alternative successor rate. Contract modifications are required to be evaluated in determining whether the modifications result in
the establishment of new contracts or the continuation of existing contracts. The standard is effective as of March 12, 2020 through December 31, 2022 and
the Company plans to apply the amendments in this update to account for contract modifications due to changes in reference rates. The Company does not
believe that it will have a material impact on its consolidated financial statements and disclosures.
In May 2020, the SEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the
financial statements of certain of their portfolio companies or certain acquired funds (the “Final Rules”). The Final Rules adopted a new definition of
“significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require
investment companies to include separate financial statements or summary financial information, respectively, in such investment company’s periodic
reports for any portfolio company that meets the definition of “significant subsidiary.” The Final Rules adopt a new definition of “significant subsidiary”
applicable only to investment companies that (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition
of “significant subsidiary” in Rule 1-02(w) of Regulation S-X. The new Rule 1-02(w)(2) of Regulation S-X is intended to more accurately capture those
portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective on
January 1, 2021, but voluntary compliance is permitted in advance of the effective date. The Company applied the Final Rule and concluded it did not have
a material impact on its consolidated financial statements.
In November 2020, the SEC issued a final rule that modernized and simplifies Management's Discussion and Analysis and certain financial
disclosure requirements in Regulation S-K (the “Amendments”). Specifically, the Amendments: (i) eliminate Item 301 of Regulation S-K (Selected
Financial Data); (ii) simplify Item 302 of Regulation S-K (Supplementary Financial Information); and (iii) amend certain aspects of Item 303 of Regulation
S-K (Management's Discussion and Analysis of Financial Condition and Results of Operations). The Amendments became effective on February 10, 2021
and compliance will be required for the registrants' fiscal year ending on or after August 9, 2021. Early adoption of the Amendments is permitted on an
item-by-item basis after the effective date; however, a registrant must fully comply with each adopted item in its entirety. The Company is currently
evaluating the impact of the Amendments on its consolidated financial statements.
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3. INVESTMENTS
The following tables show the composition of the investment portfolio, at cost and fair value (with corresponding percentage of total portfolio
investments), as of March 31, 2021 and 2020:
March 31, 2021:
1
First lien loans
2
Second lien loans
Subordinated debt
Preferred equity
Common equity & warrants
3
I-45 SLF LLC
March 31, 2020:
1
First lien loans
2
Second lien loans
Subordinated debt
Preferred equity
Common equity & warrants
4
Financial instruments
3
I-45 SLF LLC
Fair
Value
Percentage of
Total Portfolio
at Fair Value
Percentage of
Net Assets
(dollars in thousands)
Cost
Percentage of
Total Portfolio
at Cost
$
$
$
$
524,161
36,919
11,534
22,608
36,052
57,158
688,432
427,447
37,139
9,747
16,624
22,355
—
39,760
553,072
76.1 %
5.4
1.7
3.3
5.2
8.3
100.0 %
77.3 %
6.7
1.8
3.0
4.0
—
7.2
100.0 %
155.9 % $
11.0
3.4
6.7
10.7
17.0
204.7 % $
157.0 % $
13.6
3.6
6.1
8.2
—
14.6
203.1 % $
530,366
40,198
11,588
15,378
33,227
72,800
703,557
446,925
38,580
9,980
12,576
21,609
1,517
68,000
599,187
75.4 %
5.7
1.6
2.2
4.7
10.4
100.0 %
74.6 %
6.4
1.7
2.1
3.6
0.3
11.3
100.0 %
1
2
3
4
Included in first lien loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in payment priority to other senior
secured lenders. As of March 31, 2021 and 2020, the fair value of the first lien last out loans are $85.6 million and $59.5 million, respectively.
Included in first lien loans and second lien loans are loans structured as split lien term loans. These loans provide the Company with a first lien priority on certain
assets of the obligor and a second lien priority on different assets of the obligor. As of March 31, 2021 and 2020, the fair value of the split lien term loans included
in first lien loans is $25.9 million and $0, respectively. As of March 31, 2021 and 2020, the fair value of the split lien term loans included in second lien loans is
$19.1 million and $19.9 million, respectively.
I-45 SLF LLC is a joint venture between CSWC and Main Street Capital Corporation. This entity primarily invests in syndicated senior secured loans to the
UMM. The portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests
directly. See Note 16 for further discussion.
Included in financial instruments is the earnout received in connection with the sale of Media Recovery, Inc.
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The following tables show the composition of the investment portfolio by industry, at cost and fair value (with corresponding percentage of total
portfolio investments), as of March 31, 2021 and 2020:
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of
Net Assets
(dollars in thousands)
Cost
Percentage of
Total Portfolio
at Cost
March 31, 2021:
Business Services
Media, Marketing, & Entertainment
Healthcare Services
1
I-45 SLF LLC
Distribution
Software & IT Services
Industrial Services
Healthcare Products
Financial Services
Technology Products & Components
Consumer Products & Retail
Transportation & Logistics
Food, Agriculture & Beverage
Telecommunications
Environmental Services
Commodities & Mining
Aerospace & Defense
Energy Services (Midstream)
Specialty Chemicals
Restaurants
Paper & Forest Products
$
$
87,839
80,876
72,411
57,158
53,160
46,696
39,071
33,937
33,861
30,716
29,980
23,395
21,575
19,572
12,021
10,138
9,668
8,975
7,841
6,542
3,000
688,432
12.8 %
11.7
10.5
8.3
7.7
6.8
5.7
4.9
4.9
4.5
4.4
3.4
3.1
2.8
1.7
1.5
1.4
1.3
1.1
1.1
0.4
100.0 %
103
26.1 % $
24.1
21.5
17.0
15.8
13.9
11.6
10.1
10.1
9.1
8.9
7.0
6.4
5.8
3.6
3.0
2.9
2.7
2.3
1.9
0.9
204.7 % $
89,758
75,447
81,509
72,800
52,819
45,683
39,424
32,785
28,283
28,220
29,927
19,383
21,641
24,350
14,510
10,603
9,459
9,319
7,841
6,822
2,974
703,557
12.8 %
10.7
11.6
10.3
7.5
6.5
5.6
4.7
4.0
4.0
4.2
2.8
3.1
3.5
2.1
1.5
1.3
1.3
1.1
1.0
0.4
100.0 %
Table of Contents
March 31, 2020:
Business Services
Media, Marketing, & Entertainment
Healthcare Services
1
I-45 SLF LLC
Industrial Services
Software & IT Services
Distribution
Financial Services
Healthcare Products
Food, Agriculture & Beverage
Consumer Products and Retail
Transportation & Logistics
Consumer Services
Technology Products & Components
Environmental Services
Commodities & Mining
Energy Services (Midstream)
Restaurants
Telecommunications
Paper & Forest Products
Industrial Products
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of
Net Assets
(dollars in thousands)
Cost
Percentage of
Total Portfolio
at Cost
$
$
92,365
54,494
51,037
39,760
35,956
35,690
31,632
30,586
29,775
25,624
23,157
22,218
21,403
14,610
12,148
10,411
9,445
5,621
4,140
3,000
—
553,072
16.7 %
10.0
9.2
7.2
6.5
6.5
5.7
5.5
5.4
4.6
4.2
4.0
3.9
2.6
2.2
1.9
1.7
1.0
0.7
0.5
—
100.0 %
33.9 % $
20.0
18.7
14.6
13.2
13.1
11.6
11.2
10.9
9.4
8.5
8.2
7.9
5.4
4.5
3.8
3.5
2.1
1.5
1.1
—
203.1 % $
92,879
45,202
66,744
68,000
35,931
35,353
32,229
29,651
29,832
30,937
23,549
18,903
21,118
14,457
13,889
10,458
9,532
8,113
7,928
2,965
1,517
599,187
15.5 %
7.5
11.1
11.3
6.0
5.9
5.5
4.9
5.0
5.2
3.9
3.2
3.5
2.4
2.3
1.7
1.6
1.4
1.3
0.5
0.3
100.0 %
1
I-45 SLF LLC is a joint venture between CSWC and Main Street Capital Corporation. This entity primarily invests in syndicated senior secured loans to the
UMM. The portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests
directly. See Note 16 for further discussion.
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The following tables summarize the composition of the investment portfolio by geographic region of the United States, at cost and fair value (with
corresponding percentage of total portfolio investments), as of March 31, 2021 and 2020:
March 31, 2021:
Southwest
Northeast
Southeast
West
Midwest
1
I-45 SLF LLC
March 31, 2020:
Southwest
Northeast
Southeast
West
Midwest
1
I-45 SLF LLC
International
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of
Net Assets
(dollars in thousands)
$
$
$
$
196,956
153,761
120,168
90,910
69,479
57,158
688,432
167,082
124,250
107,541
58,985
43,454
39,760
12,000
553,072
28.6 %
22.3
17.5
13.2
10.1
8.3
100.0 %
30.2 %
22.4
19.4
10.7
7.9
7.2
2.2
100.0 %
58.6 % $
45.7
35.7
27.0
20.7
17.0
204.7 % $
61.3 % $
45.6
39.5
21.7
16.0
14.6
4.4
203.1 % $
Cost
200,091
150,595
125,317
87,363
67,391
72,800
703,557
167,192
121,201
122,547
65,135
43,214
68,000
11,898
599,187
Percentage of
Total Portfolio
at Cost
28.4 %
21.4
17.8
12.5
9.6
10.3
100.0 %
27.9 %
20.2
20.5
10.9
7.2
11.3
2.0
100.0 %
1
I-45 SLF LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loans to the UMM. The
portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests directly. See Note
16 for further discussion.
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4. FAIR VALUE MEASUREMENTS
Investment Valuation Process
The valuation process is led by the finance department in conjunction with the investment team. The process includes a monthly review of each
investment by our executive officers and investment teams. Valuations of each portfolio security are prepared quarterly by the finance department using
updated financial and other operational information collected by the investment teams. Each investment valuation is then subject to review by the
executive officers and investment teams. In conjunction with the internal valuation process, we have also engaged multiple independent consulting firms
specializing in financial due diligence, valuation, and business advisory services to provide third-party valuation reviews of certain investments. The third-
party valuation firms provide a range of values for selected investments, which is presented to CSWC’s executive officers and Board of Directors.
CSWC also uses a standard internal investment rating system in connection with its investment oversight, portfolio management, and investment
valuation procedures for its debt portfolio. This system takes into account both quantitative and qualitative factors of the portfolio company and the
investments held therein.
There is no single standard for determining fair value in good faith, as fair value depends upon the specific circumstances of each individual investment.
While management believes our valuation methodologies are appropriate and consistent with market participants, the recorded fair values of our
investments may differ significantly from fair values that would have been used had an active market for the securities existed. In addition, changes in the
market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments
to be different than the valuations currently assigned. The Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the
fair value of CSWC’s investments in accordance with the 1940 Act.
Fair Value Hierarchy
CSWC has established and documented processes for determining the fair values of portfolio company investments on a recurring basis in accordance
with the 1940 Act and ASC 820. As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level
within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For
example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized
appreciation and depreciation related to such investments categorized within the Level 3 tables below may include changes in fair value that are attributable
to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). CSWC conducts reviews of fair value hierarchy classifications on a quarterly
basis. We also use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement.
The three levels of valuation inputs established by ASC 820 are as follows:
• Level 1: Investments whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities.
• Level 2: Investments whose values are based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
• Level 3: Investments whose values are based on unobservable inputs that are significant to the overall fair value measurement.
As of March 31, 2021 and 2020, 100% of the CSWC investment portfolio consisted of privately held debt and equity instruments for which inputs falling
within the categories of Level 1 and Level 2 are generally not readily available. Therefore, CSWC determines the fair value of its investments (excluding
investments for which fair value is measured at net asset value ("NAV")) in good faith using Level 3 inputs, pursuant to a valuation policy and process that
is established by the management of CSWC with assistance from multiple third-party valuation advisors, which is subsequently approved by our Board of
Directors.
Investment Valuation Inputs
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date excluding transaction costs. Under ASC
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820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal
market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with
the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the
reporting entity has access to the market as of the measurement date.
The Level 3 inputs to CSWC’s valuation process reflect our best estimate of the assumptions that would be used by market participants in pricing the
investment in a transaction in the principal or most advantageous market for the asset.
The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:
•
Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most
recent period available as compared to budgeted numbers;
Current and projected financial condition of the portfolio company;
Current and projected ability of the portfolio company to service its debt obligations;
Type and amount of collateral, if any, underlying the investment;
Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio and net debt/EBITDA ratio) applicable to the investment;
Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);
Indicative dealer quotations from brokers, banks, and other market participants;
Pending debt or capital restructuring of the portfolio company;
Projected operating results of the portfolio company;
Current information regarding any offers to purchase the investment;
Current ability of the portfolio company to raise any additional financing as needed;
Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;
Contractual rights, obligations or restrictions associated with the investment; and
•
•
•
•
•
•
• Market yields on other securities of similar risk;
•
•
•
•
•
•
• Qualitative assessment of key management;
•
• Other factors deemed relevant.
CSWC uses several different valuation approaches depending on the security type including the Market Approach, the Income Approach, the Enterprise
Value Waterfall Approach, and the NAV Valuation Method.
Market Approach
Market Approach is a qualitative and quantitative analysis of the aforementioned unobservable inputs. It is a combination of the Enterprise Value
Waterfall Approach and Income Approach as described in detail below. For investments recently originated (within a quarterly reporting period) or where
the value has not departed significantly from its cost, we generally rely on our cost basis or recent transaction price to determine the fair value, unless a
material event has occurred since origination.
Income Approach
In valuing debt securities, CSWC typically uses an Income Approach model, which considers some or all of the factors listed above. Under the Income
Approach, CSWC develops an expectation of the yield that a hypothetical market participant would require when purchasing each debt investment (the
“Required Market Yield”). The Required Market Yield is calculated in a two-step process. First, using quarterly market data we estimate the current
market yield of similar debt securities. Next, based on the factors described above, we modify the current market yield for each security to produce a
unique Required Market Yield for each of our investments. The resulting Required Market Yield is the significant Level 3 input to the Income Approach
model. If, with respect to an investment, the unobservable inputs have not fluctuated significantly from the date the investment was made or have not
fluctuated significantly from CSWC’s expectations on the date the investment was made, and there have been no significant fluctuations in the market
pricing for such investments, we may conclude that the Required Market Yield for that investment is equal to the stated rate on the investment. In instances
where CSWC determines that the Required Market Yield is different from the stated rate on the investment, we discount the contractual cash flows on the
debt instrument using the Required Market Yield in order to estimate the fair value of the debt security.
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In addition, under the Income Approach, CSWC also determines the appropriateness of the use of third-party broker quotes, if any, as a significant Level
3 input in determining fair value. In determining the appropriateness of the use of third-party broker quotes, CSWC evaluates the level of actual
transactions used by the broker to develop the quote, whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes,
the source of the broker quotes, and the correlation of changes in broker quotes with underlying performance of the portfolio company and other market
indices. To the extent sufficient observable inputs are available to determine fair value, CSWC may use third-party broker quotes or other independent
pricing to determine the fair value of certain debt investments.
Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more of the inputs. A significant increase
(decrease) in the Required Market Yield for a particular debt security may result in a lower (higher) fair value for that security. A significant increase
(decrease) in a third-party broker quote for a particular debt security may result in a higher (lower) value for that security.
Enterprise Value Waterfall Approach
In valuing equity securities (including warrants), CSWC estimates fair value using an Enterprise Value Waterfall valuation model. CSWC estimates the
enterprise value of a portfolio company and then allocates the enterprise value to the portfolio company’s securities in order of their relative liquidation
preference. In addition, CSWC assumes that any outstanding debt or other securities that are senior to CSWC’s equity securities are required to be repaid at
par. Additionally, we may estimate the fair value of non-performing debt securities using the Enterprise Value Waterfall approach as needed.
To estimate the enterprise value of the portfolio company, CSWC uses a weighted valuation model based on public comparable companies, observable
transactions and discounted cash flow analyses. A main input into the valuation model is a measure of the portfolio company’s financial performance,
which generally is either earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”) or revenues. In addition, we
consider other factors, including but not limited to (1) offers from third parties to purchase the portfolio company, and (2) the implied value of recent
investments in the equity securities of the portfolio company. For certain non-performing assets, we may utilize the liquidation or collateral value of the
portfolio company’s assets in our estimation of its enterprise value.
The significant Level 3 inputs to the Enterprise Value Waterfall model are (1) an appropriate multiple derived from the comparable public companies and
transactions, (2) discount rate assumptions used in the discounted cash flow model and (3) a measure of the portfolio company’s financial performance,
which generally is either Adjusted EBITDA or revenues. Inputs can be based on historical operating results, projections of future operating results or a
combination thereof. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and may require
adjustments for certain non-recurring items. CSWC also may consult with the portfolio company’s senior management to obtain updates on the portfolio
company’s performance, including information such as industry trends, new product development, loss of customers and other operational issues. Fair
value measurements using the Enterprise Value Waterfall model can be sensitive to significant changes in one or more of the inputs. A significant increase
(decrease) in either the multiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher (lower) fair value for that security.
NAV Valuation Method
Under the NAV valuation method, for an investment in an investment fund that does not have a readily determinable fair value, CSWC measures the fair
value of the investment predominately based on the NAV of the investment fund as of the measurement date. However, in determining the fair value of the
investment, we may consider whether adjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions on
redemption of our investment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, expected future cash flows
available to equity holders, or other uncertainties surrounding CSWC’s ability to realize the full NAV of its interests in the investment fund.
Option Pricing Model Method
In certain situations, CSWC will acquire financial instruments which are most appropriately valued using an option pricing model. Typically, option
pricing models will use the Black Scholes model methodology and attempt to replicate the features of the underlying derivative instrument. The significant
Level 3 input to the Option Pricing Model is the assumed volatility of the underlying portfolio company cash flows. Other inputs into the model are the
current price of the security, the strike price of the security, and the time to maturity.
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The following fair value hierarchy tables set forth our investment portfolio by level as of March 31, 2021 and 2020 (in thousands):
Asset Category
First lien loans
Second lien loans
Subordinated debt
Preferred equity
Common equity & warrants
1
Investments measured at net asset value
Total Investments
Asset Category2
First lien loans
Second lien loans
Subordinated debt
Preferred equity
Common equity & warrants
1
Investments measured at net asset value
Total Investments
Fair Value Measurements
at March 31, 2021 Using
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
524,161
36,919
11,534
22,608
36,052
—
631,274
Fair Value Measurements
at March 31, 2020 Using
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
427,447
37,139
9,747
16,624
22,355
—
513,312
Total
524,161
36,919
11,534
22,608
36,052
57,158
688,432
Total
427,447
37,139
9,747
16,624
22,355
39,760
553,072
$
$
$
$
1
Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value
hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in Consolidated
Statements of Assets and Liabilities. For the investment valued at net asset value per share at March 31, 2021 and 2020, the redemption restrictions dictate that we
cannot withdraw our membership interest without unanimous approval. We are permitted to sell or transfer our membership interest and must deliver written
notice of such transfer to the other member no later than 60 business days prior to the sale or transfer.
The tables below present the Valuation Techniques and Significant Level 3 Inputs (ranges and weighted averages) used in the valuation of CSWC’s debt
and equity securities at March 31, 2021 and 2020. Significant Level 3 Inputs were weighted by the relative fair value of the investments. The tables are not
intended to be all inclusive, but instead capture the significant unobservable inputs relevant to our determination of fair value.
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Type
First lien loans
Valuation
Technique
Income Approach
Fair Value at
March 31, 2021
(in thousands)
Significant
Unobservable
Inputs
$
465,712 Discount Rate
Third Party Broker Quote
Market Approach
58,449 Cost
Exit Value
Second lien loans
Income Approach
36,864 Discount Rate
Subordinated debt
Preferred equity
Common equity & warrants
Market Approach
Income Approach
Enterprise Value
Waterfall Approach
Enterprise Value
Waterfall Approach
Third Party Broker Quote
55 Exit Value
11,534 Discount Rate
22,608 EBITDA Multiple
Discount Rate
34,013 EBITDA Multiple
Discount Rate
Total Level 3 Investments
Market Approach
2,039 Cost
Exit Value
$
631,274
Type
First lien loans
Second lien loans
Subordinated debt
Preferred equity
Common equity & warrants
Valuation
Technique
Income Approach
Market Approach
Income Approach
Income Approach
Enterprise Value
Waterfall Approach
Enterprise Value
Waterfall Approach
Financial instruments
Option Pricing Model
Fair Value at
March 31, 2020
(in thousands)
Significant
Unobservable
Inputs
$
401,266 Discount Rate
Third Party Broker Quote
26,181 Cost
37,139 Discount Rate
Third Party Broker Quote
9,747 Discount Rate
16,624 EBITDA Multiple
Discount Rate
22,355 EBITDA Multiple
Discount Rate
— Assumed Volatility
Total Level 3 Investments
$
513,312
Changes in Fair Value Levels
Range
6.3% - 28.8%
53.1 - 99.9
93.9 - 98.0
100.0 - 101.0
9.9% - 17.6%
96.5 - 97.8
2.4
6.2% - 29.3%
6.9x - 10.8x
12.7% - 22.4%
5.6x - 11.5x
12.9% - 29.8%
100.0
284.4
Range
7.0% - 52.5%
43.8 - 56.5
98.0 - 98.2
10.3% - 19.8%
37.5
13.3%
7.4x - 11.4x
17.2% - 22.9%
5.3x - 11.4x
15.4% - 22.7%
2.0%
Weighted
Average
10.9%
87.9
97.6
100.2
14.4%
96.6
2.4
13.4%
8.9x
19.3%
8.1x
20.0%
100.0
284.4
Weighted
Average
12.0%
49.9
98.1
12.7%
37.5
13.3%
9.3x
19.3%
8.2x
19.2%
2.0%
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy.
Changes in economic conditions or model based valuation techniques may require the transfer of financial instruments from one fair value hierarchy to
another. During the years ended March 31, 2021 and 2020, we had no transfers between levels.
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The following table provides a summary of changes in the fair value of investments measured using Level 3 inputs during the years ended March 31,
2021 and 2020 (in thousands):
Fair Value March
31, 2020
Realized &
Unrealized Gains
(Losses)
Purchases of
1
Investments
Repayments
PIK Interest
Capitalized
Divestitures
Conversion of
Security
Fair Value March 31,
2021
YTD Unrealized
Appreciation
(Depreciation) on
Investments held at
period end
First lien loans $
Second lien
loans
Subordinated
debt
Preferred equity
Common equity
& warrants
Total
Investments
$
427,447 $
(308) $
199,362 $
(98,567) $
5,919 $
— $
(9,692) $
524,161 $
(2,525)
37,139
9,747
16,624
22,355
(1,839)
179
9,730
2,082
192
546
3,915
4,881
(250)
—
—
—
899
1,062
—
—
—
(7,661)
778
—
—
—
(2,180)
8,914
36,919
11,534
22,608
36,052
513,312 $
9,844 $
208,896 $
(98,817) $
7,880 $
(9,841) $
— $
631,274 $
(1,839)
179
5,169
1,658
2,642
Fair Value March
31, 2019
Realized &
Unrealized Gains
(Losses)
Purchases of
1
Investments
Repayments
PIK Interest
Capitalized
Divestitures
Conversion of
Security from
Debt to Equity
Fair Value March 31,
2020
YTD Unrealized
Appreciation
(Depreciation) on
Investments held at
period end
317,544 $
(16,987) $
189,293 $
(51,133) $
1,360 $
(12,630) $
— $
427,447 $
(17,370)
First lien loans $
Second lien
loans
Subordinated
debt
Preferred equity
Common equity
& warrants
Financial
instruments
Total
Investments
$
35,896
14,287
17,936
72,665
(1,279)
(30)
555
(784)
—
(1,517)
2,121
47
4,563
1,003
1,517
(250)
651
—
(4,569)
—
—
—
12
55
—
—
—
—
1,596
—
(8,081)
(48,933)
(1,596)
37,139
9,747
16,624
22,355
(1,279)
(94)
1,000
2,291
—
—
—
(1,517)
458,328 $
(20,042) $
198,544 $
(55,952) $
2,078 $
(69,644) $
— $
513,312 $
(16,969)
1
Includes purchases of new investments, as well as discount accretion on existing investments.
5. BORROWINGS
In accordance with the 1940 Act, with certain limitations, effective April 25, 2019, the Company is only allowed to borrow amounts such that its asset
coverage (i.e., the ratio of assets less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940
Act, is at least 150% after such borrowing. The Board of Directors also approved a resolution which limits the Company’s issuance of senior securities
such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, which became effective April 25, 2019. As of
March 31, 2021, the Company’s asset coverage was 187%.
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The Company had the following borrowings outstanding as of March 31, 2021 and 2020 (amounts in thousands):
Credit Facility
December 2022 Notes
Less: Unamortized debt issuance costs and debt discount
Total December 2022 Notes
October 2024 Notes
Less: Unamortized debt issuance costs and debt discount
Total October 2024 Notes
January 2026 Notes
Less: Unamortized debt issuance costs and debt discount
Total January 2026 Notes
Total Borrowings
Credit Facility
March 31, 2021
March 31, 2020
$
120,000 $
154,000
—
—
—
125,000
(2,121)
122,879
140,000
(1,575)
138,425
77,136
(1,324)
75,812
75,000
(1,516)
73,484
—
—
—
$
381,304 $
303,296
In August 2016, CSWC entered into a senior secured credit facility (as amended, restated, supplemented or otherwise modified from time to time, the
“Credit Facility”) to provide additional liquidity to support its investment and operational activities, which included total commitments of $100 million.
The Credit Facility contained an accordion feature that allowed CSWC to increase the total commitments under the Credit Facility up to $150 million from
new and existing lenders on the same terms and conditions as the existing commitments. In August 2017, we increased our total commitments by $15
million through adding an additional lender using the accordion feature.
On November 16, 2017, CSWC entered into Amendment No. 1 (the “Amendment”) to its Credit Facility. Prior to the Amendment, borrowings under the
Credit Facility accrued interest on a per annum basis at a rate equal to the applicable LIBOR rate plus 3.25% with no LIBOR floor. CSWC paid unused
commitment fees of 0.50% to 1.50% per annum, based on utilization, on the unused lender commitments under the Credit Facility. The Amendment (1)
increased the total borrowing capacity under the Credit Facility to $180 million, with commitments from a diversified group of eight lenders, (2) increased
the Credit Facility’s accordion feature that allows for an increase in total commitments of up to $250 million under the Credit Facility from new and
existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.25% down
to LIBOR plus 3.00%, with a further step-down to LIBOR plus 2.75% at the time the Company’s net worth exceeds $325 million, (4) reduced unused
commitment fees from a utilization-based grid of 0.50% to 1.5% down to a range of 0.50% to 1.0% per annum, and (5) extended the Credit Facility’s
revolving period that ended on August 30, 2019 through November 16, 2020. Additionally, the final maturity of the Credit Facility was extended from
August 30, 2020 to November 16, 2021.
On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased the total commitments under the
Credit Facility by $20 million and $10 million, respectively. The increases were executed in accordance with the accordion feature of the Credit Facility,
increasing total commitments from $180 million to $210 million.
On December 21, 2018, CSWC entered into the Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit Agreement"), and a
related Amended and Restated Guarantee, Pledge and Security Agreement, to amend and restate its Credit Facility. The Credit Agreement (1) increased the
total commitments by $60 million from $210 million to an aggregate total of $270 million, provided by a diversified group of nine lenders, (2) increased
the Credit Facility's accordion feature to $350 million under the Credit Facility from new and existing lenders on the same terms and conditions as the
existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.00% to LIBOR plus 2.50%, subject to certain conditions as outlined
in the Credit Agreement, (4) reduced the minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% after the
date on which such minimum asset coverage is permitted to be reduced by the Company under applicable law, and (5) extended the Credit Facility's
revolving period from November 16, 2020 to December 21, 2022 and the final maturity was extended from November 16, 2021 to December 21, 2023.
The Credit Agreement modified certain covenants in the Credit Facility, including: (1) to provide for a minimum senior coverage ratio of 2-to-1
(in addition to the asset coverage ratio noted below), (2) to increase the minimum obligors’ net
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worth test from $160 million to $180 million, (3) to reduce the minimum consolidated interest coverage ratio from 2.50-to-1 to 2.25-to-1 as of the last day
of any fiscal quarter, and (4) to provide for the fact that the Company will not declare or pay a dividend or distribution in cash or other property unless
immediately prior to and after giving effect thereto the Company's asset coverage ratio exceeds 150% (and certain other conditions are satisfied). The
Credit Facility also contains certain affirmative and negative covenants, including but not limited to: (1) certain reporting requirements, (2) maintaining
RIC and BDC status, (3) maintaining a minimum shareholders’ equity, (4) maintaining a minimum consolidated net worth, and (5) at any time the
outstanding advances exceed 90% of the borrowing base, maintaining a minimum liquidity of not less than 10% of the covered debt amount.
On May 23, 2019, CSWC entered into an Incremental Assumption Agreement, which increased the total commitments under the Credit Facility by $25
million. The increase was executed under the accordion feature of the Credit Facility and increased total commitments from $270 million to $295 million.
On March 19, 2020, CSWC entered into an Incremental Assumption Agreement that increased the total commitments under the accordion feature
of the Credit Facility by $30 million, which increased total commitments from $295 million to $325 million.
On December 10, 2020, CSWC entered into Amendment No. 1 to the Credit Agreement, which expanded the accordion feature from $350 million
to $400 million. In addition, on December 10, 2020, the Company entered into an Incremental Commitment Agreement that increased the total
commitments under the Credit Agreement from $325 million to $340 million.
The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and
warranties in a material respect, breach of covenant, bankruptcy, and change of control, with customary cure and notice provisions. If the Company defaults
on its obligations under the Credit Facility, the lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their
security interests. There are no changes to the covenants or the events of default in the Credit Facility as a result of the Amendment.
The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Company and the guarantors and (2) 100% of
the equity interests in the Company’s wholly-owned subsidiary. As of March 31, 2021, substantially all of the Company’s assets were pledged as collateral
for the Credit Facility.
At March 31, 2021, CSWC had $120.0 million in borrowings outstanding under the Credit Facility. CSWC recognized interest expense related to the
Credit Facility, including unused commitment fees and amortization of deferred loan costs of $6.8 million and $8.3 million, respectively, for the years
ended March 31, 2021 and 2020. The weighted average interest rate on the Credit Facility was 3.05% and 4.82%, respectively, for the years ended March
31, 2021 and 2020. Average borrowings for the years ended March 31, 2021 and 2020 were $166.0 million and $134.7 million, respectively. As of March
31, 2021 and 2020, CSWC was in compliance with all financial covenants under the Credit Facility.
December 2022 Notes
In December 2017, the Company issued $57.5 million in aggregate principal amount, including the underwriters’ full exercise of their option to purchase
additional principal amounts to cover over-allotments, of 5.95% Notes due 2022 (the “December 2022 Notes”). The December 2022 Notes mature on
December 15, 2022 and may be redeemed in whole or in part at any time, or from time to time, at the Company’s option on or after December 15, 2019.
The December 2022 Notes bear interest at a rate of 5.95% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year,
beginning on March 15, 2018. The December 2022 Notes are an unsecured obligation, rank pari passu with our other outstanding and future unsecured
unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit
Facility.
On June 11, 2018, the Company entered into an ATM debt distribution agreement, pursuant to which it may offer for sale, from time to time, up to $50
million in aggregate principal amount of December 2022 Notes through B. Riley FBR, Inc., acting as its sales agent (the “2022 Notes Agent”). Sales of the
December 2022 Notes may be made in negotiated transactions or transactions that are deemed to be "at the market offerings" as defined in Rule 415 under
the Securities Act of 1933, as amended, including sales made directly on The Nasdaq Global Select Market, or similar securities exchanges or sales made
through a market maker other than on an exchange at prices related to prevailing market prices or at negotiated prices.
The 2022 Notes Agent receives a commission from the Company equal to up to 2% of the gross sales of any December 2022 Notes sold through the
2022 Notes Agent under the debt distribution agreement. The 2022 Notes Agent is not
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required to sell any specific principal amount of December 2022 Notes, but will use its commercially reasonable efforts consistent with its sales and trading
practices to sell the December 2022 Notes. The December 2022 Notes trade “flat,” which means that purchasers in the secondary market will not pay, and
sellers will not receive, any accrued and unpaid interest on the December 2022 Notes that is not reflected in the trading price. All issuances of December
2022 Notes rank equally in right of payment and form a single series of notes.
On September 29, 2020, the Company redeemed $20,000,000 in aggregate principal of the $77,136,175 in aggregate principal amount of issued and
outstanding December 2022 Notes. On December 10, 2020, the Company redeemed $20,000,000 in aggregate principal of the $57,136,175 in aggregate
principal amount of issued and outstanding December 2022 Notes. On January 21, 2021, the Company redeemed the remaining $37,136,175 in aggregate
principal amount of issued and outstanding December 2022 Notes. The December 2022 Notes were redeemed at 100% of their principal amount, plus the
accrued and unpaid interest thereon, through, but excluding each of the redemption dates. Accordingly, the Company recognized realized losses on
extinguishment of debt, equal to the write-off of the related unamortized debt issuance costs, of $1.0 million during the year ended March 31, 2021.
The Company recognized interest expense related to the December 2022 Notes, including amortization of deferred issuance costs, of $3.5 million and
$5.3 million for the years ended March 31, 2021 and 2020, respectively. Average borrowings for the years ended March 31, 2021 and 2020 were $53.8
million and $77.1 million, respectively. The December 2022 Notes had a weighted average effective yield of 5.93%.
The indenture governing the December 2022 Notes contains certain covenants including but not limited to (i) a requirement that the Company comply
with the asset coverage requirement of Section 18(a)(1)(A) of the 1940 Act as modified by Section 61(a) of the 1940 Act or any successor provisions
thereto, after giving effect to any exemptive relief granted to the Company by the SEC, (ii) a requirement, subject to limited exception, that the Company
will not declare any cash dividend, or declare any other cash distribution, upon a class of its capital stock, or purchase any such capital stock, unless, in
every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, the Company has the minimum
asset coverage required pursuant to Section 61(a) of the 1940 Act, or any successor provision thereto, after deducting the amount of such dividend,
distribution or purchase price, as the case may be, giving effect to any exemptive relief granted to the Company by the SEC and (iii) a requirement to
provide financial information to the holders of the December 2022 Notes and the trustee under the indenture if the Company should no longer be subject to
the reporting requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The indenture and supplement relating to the
December 2022 Notes also provides for customary events of default. As of March 31, 2021, the Company was in compliance with all covenants of the
December 2022 Notes.
October 2024 Notes
In September 2019, the Company issued $65.0 million in aggregate principal amount of 5.375% Notes due 2024 (the “Existing October 2024 Notes”). In
October 2019, the Company issued an additional $10.0 million in aggregate principal amount of the October 2024 Notes (the "Additional October 2024
Notes"). In August 2020, the Company issued an additional $50.0 million in aggregate principal amount of the October 2024 Notes (the "New Notes"
together with the Existing October 2024 Notes and the Additional October 2024 Notes, the "October 2024 Notes"). The Additional October 2024 Notes and
the New Notes are being treated as a single series with the Existing October 2024 Notes under the indenture and have the same terms as the Existing
October 2024 Notes. The October 2024 Notes mature on October 1, 2024 and may be redeemed in whole or in part at any time prior to July 1, 2024, at par
plus a “make-whole” premium, and thereafter at par. The October 2024 Notes bear interest at a rate of 5.375% per year, payable semi-annually on April 1
and October 1 of each year, beginning on April 1, 2020. The October 2024 Notes are the direct unsecured obligations of the Company and rank pari passu
with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured
indebtedness, including borrowings under our Credit Facility.
As of March 31, 2021, the carrying amount of the October 2024 Notes was $122.9 million on an aggregate principal amount of $125.0 million at a
weighted average effective yield of 5.375%. As of March 31, 2021, the fair value of the October 2024 Notes was $122.9 million. This is a Level 3 fair
value measurement under ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to
the October 2024 Notes, including amortization of deferred issuance costs, of $6.3 million and $2.2 million, respectively, for the years ended March 31,
2021 and 2020. For the year ended March 31, 2021, average borrowings were $106.1 million. Since the issuance of the October 2024 Notes through March
31, 2020, average borrowings were $74.4 million.
The indenture governing the October 2024 Notes contains certain covenants, including certain covenants requiring the Company to comply with
Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions,
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whether or not the Company continues to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to
the Company by the SEC, to comply with Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, after giving
effect to any exemptive relief granted to the Company by the SEC and subject to certain other exceptions, and to provide financial information to the
holders of the October 2024 Notes and the trustee under the indenture if the Company is no longer subject to the reporting requirements under the
Exchange Act. These covenants are subject to important limitations and exceptions that are described in the indenture and the second supplemental
indenture relating to the October 2024 Notes.
In addition, holders of the Notes can require the Company to repurchase some or all of the October 2024 Notes at a purchase price equal to 100% of their
principal amount, plus accrued and unpaid interest to, but not including, the repurchase date upon the occurrence of a “Change of Control Repurchase
Event,” as defined in the second supplemental indenture relating to the October 2024 Notes.
January 2026 Notes
In December 2020, the Company issued $75.0 million in aggregate principal amount of 4.50% Notes due 2026 (the "Existing January 2026
Notes"). In February 2021, the Company issued an additional $65.0 million in aggregate principal amount of the January 2026 Notes (the "Additional
January 2026 Notes" together with the Existing January 2026 Notes, the "January 2026 Notes"). The Additional January 2026 Notes were issued at a price
of 102.11% of the aggregate principal amount of the Additional January 2026 Notes, resulting in a yield-to-maturity of approximately 4.0% at issuance.
The January 2026 Notes mature on January 31, 2026 and may be redeemed in whole or in part at any time prior to October 31, 2025, at par plus a "make-
whole" premium, and thereafter at par. The January 2026 Notes bear interest at a rate of 4.50% per year, payable semi-annually on January 31 and July 31
of each year, beginning on July 31, 2021. The January 2026 Notes are the direct unsecured obligations of the Company and rank pari passu with our other
outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness,
including borrowings under our Credit Facility.
As of March 31, 2021, the carrying amount of the January 2026 Notes was $138.4 million on an aggregate principal amount of $140.0 million at a
weighted average effective yield of 4.46%. As of March 31, 2021, the fair value of the January 2026 Notes was $138.8 million. This is a Level 3 fair value
measurement under ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to the
January 2026 Notes, including amortization of deferred issuance costs, of $1.2 million for the year ended March 31, 2021. Since the issuance of the January
2026 Notes on December 29, 2020 through March 31, 2021, average borrowings were $99.5 million.
The indenture governing the January 2026 Notes contains certain covenants, including certain covenants requiring the Company to comply with
Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not the Company continues to be subject to
such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to the Company by the SEC, to comply with Section 18(a)
(1)(B) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, after giving effect to any exemptive relief granted to the Company by
the SEC and subject to certain other exceptions, and to provide financial information to the holders of the January 2026 Notes and the trustee under the
indenture if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to important limitations
and exceptions that are described in the indenture and the third supplemental indenture relating to the January 2026 Notes.
In addition, holders of the Notes can require the Company to repurchase some or all of the January 2026 Notes at a purchase price equal to 100%
of their principal amount, plus accrued and unpaid interest to, but not including, the repurchase date upon the occurrence of a “Change of Control
Repurchase Event,” as defined in the third supplemental indenture relating to the January 2026 Notes.
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Contractual Payment Obligations
A summary of the Company's contractual payment obligations for the repayment of outstanding indebtedness at March 31, 2021 is as follows:
2022
2023
$
$
— $
—
—
— $
Years Ending March 31,
2024
120,000 $
—
—
120,000 $
— $
—
—
— $
2025
2026
Thereafter
— $
125,000
—
125,000 $
— $
—
140,000
140,000 $
— $
—
—
— $
Total
120,000
125,000
140,000
385,000
Credit Facility
October 2024 Notes
January 2026 Notes
Total
6. INCOME TAXES
We have elected to be treated as a RIC under Subchapter M of the Code and have a tax year end of December 31. In order to qualify as a RIC, we must
annually distribute at least 90% of our investment company taxable income, as defined by the Code, to our shareholders in a timely manner. Investment
company income generally includes net short-term capital gains but excludes net long-term capital gains. A RIC is not subject to federal income tax on the
portion of its ordinary income and long-term capital gains that is distributed to its shareholders, including “deemed distributions” as discussed below. As
part of maintaining RIC tax treatment, undistributed taxable income, which is subject to a 4% non-deductible U.S. federal excise tax, pertaining to a given
fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of
(1) the filing of the U.S. federal income tax return for the applicable fiscal year or (2) the fifteenth day of the ninth month following the close of the year in
which such taxable income was generated.
For the tax years ended December 31, 2020, 2019 and 2018, CSWC qualified for RIC tax treatment. We intend to meet the applicable qualifications to
be taxed as a RIC in future periods. However, CSWC’s ability to meet certain portfolio diversification requirements of RICs in future years may not be
controllable by CSWC.
We have distributed or intend to distribute sufficient dividends to eliminate taxable income for our completed tax years. If we fail to satisfy the 90%
distribution requirement or otherwise fail to qualify as a RIC in any tax year, we would be subject to tax in that year on all of our taxable income, regardless
of whether we made any distributions to our shareholders. During the quarter ended March 31, 2021, CSWC declared regular dividends in the amount of
$10.9 million, or $0.52 per share ($0.42 per share in regular dividends and $0.10 in supplemental dividends). During the tax year ended December 31,
2020, we declared total dividends of $38.5 million or $2.04 per share ($1.64 per share in regular dividends and $0.40 per share in supplemental dividends).
We declared quarterly dividends of $0.51 per share in March 2020 ($0.41 per share in regular dividends and $0.10 per share in supplemental dividends),
$0.51 per share ($0.41 per share in regular dividends and $0.10 per share in supplemental dividends) in June 2020, $0.51 per share ($0.41 per share in
regular dividends and $0.10 per share in supplemental dividends) in September 2020, and $0.51 per share ($0.41 per share in regular dividends and $0.10
per share in supplemental dividends) in December 2020. For the tax year ended December 31, 2019, we declared total dividends of $49.2 million or $2.72
per share. We declared quarterly dividends of $0.48 per share ($0.38 per share in regular dividends and $0.10 per share in supplemental dividends) in
March 2019, $0.49 per share ($0.39 per share in regular dividends and $0.10 per share in supplemental dividends) in June 2019, $0.50 per share ($0.40 per
share in regular dividends and $0.10 per share in supplemental dividends) in September 2019, and $1.25 per share ($0.40 per share in regular dividends,
$0.10 per share in supplemental dividends and $0.75 in special dividends) in December 2019. For the tax year ended December 31, 2018, we declared total
dividends of $34.2 million, or $2.07 per share. We declared quarterly dividends of $0.28 per share in March 2018, $0.89 per share ($0.29 per share in
regular dividends and $0.60 per share in supplemental dividends) in June 2018, $0.44 per share ($0.34 per share in regular dividends and $0.10 per share in
supplemental dividends) in September 2018, and $0.46 per share ($0.36 per share in regular dividends and $0.10 per share in supplemental dividends) in
December 2018.
Book and tax basis differences relating to shareholder dividends and distributions and other permanent book and tax differences are typically reclassified
among the CSWC’s capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax
regulations that may differ from GAAP; accordingly, for the fiscal years ended March 31, 2021 and 2020, CSWC reclassified for book purposes amounts
arising from permanent book/tax differences related to the tax treatment of return of capital and/or deemed distributions, tax treatment of investments upon
disposition, and non-deductible expenses, as follows (amounts in thousands):
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Additional capital
Total distributable earnings
Year ended
March 31, 2021
Year ended
March 31, 2020
$
$
(3,981) $
3,981 $
10,808
(10,808)
The determination of the tax attributes of CSWC’s distributions is made after tax year end, based upon its taxable income for the full tax year and
distributions paid for the full tax year. Therefore, the determination of tax attributes made on an interim basis for fiscal year end may not be representative
of the actual tax attributes determined at tax year end.
For tax purposes, the 2020 dividends totaled $2.04 per share and were comprised entirely of ordinary income. Included in ordinary income per share is
approximately $0.167 per share of qualified dividend income. In addition, 91.74% of each of the ordinary distributions represent interest-related dividends
and 8.26% of the ordinary distribution paid on March 31, 2020 represents short-term capital gains dividends. 93.80% of total distributions represent the
portion of CSWC’s dividends received by non-U.S. residents and foreign corporation shareholders that are generally exempt from U.S. withholding tax. Of
the qualified dividends of $3.0 million, 8.0% are eligible for the dividends received deduction. For tax purposes, the 2019 dividends totaled $2.72 per share
and were comprised of (1) ordinary income totaling approximately $1.3033 per share and (2) long-term capital gains totaling approximately $1.4167 per
share. Included in ordinary income per share is approximately $0.189 per share of qualified dividend income. In addition, 88.73% of each of the ordinary
distributions represent interest-related dividends and 2.64% of the ordinary distribution paid on March 29, 2019 represents short-term capital gains
dividends. 95.07% of total distributions represent the portion of CSWC’s dividends received by non-U.S. residents and foreign corporation shareholders
that are generally exempt from U.S. withholding tax. Of the qualified dividends of $3.2 million, 14.5% are eligible for the dividends received deduction.
Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate (plus a 3.8% Medicare surtax, if applicable) on dividend
income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying
dividends from domestic corporations and qualified foreign corporations. The tax attributes for distributions will generally include both ordinary income
and capital gains, but may also include qualified dividends or return of capital.
The tax character of distributions paid for the tax years ended December 31, 2020 and 2019 was as follows (amounts in thousands):
Ordinary income
Distributions of long term capital gains
1
Distributions on tax basis
1
Includes only those distributions which reduce estimated taxable income.
Twelve Months Ended December 31,
2020
2019
$
$
37,517 $
—
37,517 $
22,405
25,703
48,108
As of March 31, 2021, CSWC estimates that it has cumulative undistributed taxable income of approximately $19.3 million, or $0.92 per share, that will
be carried forward toward distributions to be paid in future periods. We intend to meet the applicable qualifications to be taxed as a RIC in future periods.
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The following reconciles net increase (decrease) in net assets resulting from operations to estimated RIC distributable income for the years ended March
31, 2021, 2020 and 2019:
1
Reconciliation of RIC Distributable Income
Net increase (decrease) in net assets resulting from operations
Net change in unrealized (appreciation) depreciation on investments
(Expense/loss) income/gain recognized for tax on pass-through entities
Realized gain (loss) recognized for tax
2
Capital loss carryover
Net operating loss - management company and taxable subsidiary
Non-deductible tax expense
Other book tax differences
Estimated distributable income before deductions for distributions
3
Distributions :
Ordinary
Capital gains
Deemed distributions
3
Distributions payable
Estimated annual RIC undistributed taxable income
2021
Years ended March 31,
2020
2019
$
$
$
$
50,883 $
(28,755)
(11,000)
2,206
17,924
(378)
1,066
870
32,816 $
38,917 $
—
—
—
(6,101) $
(22,351) $
92,814
177
(2,302)
—
(587)
4,572
(304)
72,019 $
23,540 $
25,703
16,483
—
6,293 $
33,058
11,506
223
761
—
(256)
881
98
46,271
15,468
21,625
—
—
9,178
1
2
3
The calculation of distributable income for each period is an estimate and will not be finally determined until the Company files its tax return each year. Final
distributable income may be different than this estimate.
At March 31, 2021, the Company had short term capital loss carryforwards of $0.7 million and long term capital loss carryforwards of $17.2 million to offset
future capital gains. These capital loss carryforwards are not subject to expiration.
Includes only those distributions which reduce estimated distributable income.
As of March 31, 2021, 2020 and 2019, the components of estimated RIC accumulated earnings on a tax basis were as follows (amounts in thousands):
1
Components of RIC Accumulated Earnings on a Tax Basis
Undistributed ordinary income - tax basis
Undistributed net realized (loss) gain
Unrealized (depreciation) appreciation on investments
Other temporary differences
Components of distributable earnings at year-end
Years ended March 31,
2021
2020
2019
$
$
21,083 $
(17,924)
(766)
(663)
1,730 $
25,766 $
749
(47,487)
—
(20,972) $
19,532
384
45,724
(917)
64,723
1
The calculation of taxable income for each period is an estimate and will not be finally determined until the Company files its tax return each year. Final taxable
income may be different than this estimate.
A RIC may elect to retain all or a portion of its long-term capital gains by designating them as a “deemed distribution” to its shareholders and paying a
federal tax on the long-term capital gains for the benefit of its shareholders. Shareholders then report their share of the retained capital gains on their
income tax returns as if it had been received and report a tax credit for tax paid on their behalf by the RIC. Shareholders then add the amount of the
“deemed distribution” net of such tax to the basis of their shares.
For the tax year ended December 31, 2020, we distributed all long-term capital gains and therefore had no deemed distributions to our shareholders or
federal taxes incurred related to such items. For the tax year ended December 31, 2019, we had net long-term capital gains of $42.2 million, of which $25.7
million was distributed to shareholders as capital gains dividends. We elected to retain net long-term capital gains of $16.5 million and designate the
retained amount as a "deemed distribution" to our shareholders. As a result, we incurred federal taxes on the retained amount on behalf of our shareholders
in the amount of $3.5 million for the tax year ended December 31, 2019. For the tax year ended December 31, 2018, we
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distributed all long-term capital gains and therefore had no deemed distributions to our shareholders or federal taxes incurred related to such items.
In addition, we have a wholly-owned taxable subsidiary, or the Taxable Subsidiary, which holds a portion of one or more of our portfolio
investments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiary is consolidated for financial reporting purposes in
accordance with U.S. GAAP, so that our consolidated financial statements reflect our investments in the portfolio companies owned by the Taxable
Subsidiary. The purpose of the Taxable Subsidiary is to permit us to hold certain interests in portfolio companies that are organized as limited liability
companies, or LLCs (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross income for federal
income tax purposes must consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionate amount of any gross income of a
partnership or LLC (or other pass-through entity) portfolio investment would flow through directly to us. To the extent that our income did not consist of
investment income, it could jeopardize our ability to qualify as a RIC and therefore cause us to incur significant amounts of corporate-level U.S. federal
income taxes. Where interests in LLCs (or other pass-through entities) are owned by the Taxable Subsidiary, however, the income from those interests is
taxed to the Taxable Subsidiary and does not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages. The Taxable
Subsidiary is not consolidated for U.S. federal income tax purposes and may generate income tax expense as a result of their ownership of the portfolio
companies. This income tax expense, or benefit, and the related tax assets and liabilities, if any, are reflected in our Consolidated Statement of Operations.
As of March 31, 2021, the cost of investments held at the RIC for U.S. federal income tax purposes was $681.9 million, with such investments
having gross unrealized appreciation of $25.7 million and gross unrealized depreciation of $26.4 million, resulting in net unrealized depreciation of $0.7
million. As of March 31, 2021, the cost of investments held at the Taxable Subsidiary for U.S. federal income tax purposes was $18.9 million, with such
investments having gross unrealized appreciation of $14.5 million and gross unrealized depreciation of $0.9 million, resulting in net unrealized
appreciation of $13.6 million. On a consolidated basis, the total investment portfolio has net unrealized appreciation of $12.9 million for U.S. federal
income tax purposes.
CSMC, a former wholly-owned subsidiary of CSWC, was not a RIC, and was required to pay taxes at the current corporate rate. Effective
December 31, 2020, CSMC merged with and into CSWC, which is not subject to corporate federal income taxes. For tax purposes, CSMC had elected to
be treated as a taxable entity, and therefore was not consolidated for tax purposes and was taxed at normal corporate tax rates based on its taxable income
and, as a result of its activities, may generate income tax expense or benefit. The Taxable Subsidiary is not a RIC and is required to pay taxes at the current
corporate rate. For tax purposes, the Taxable Subsidiary has elected to be treated as a taxable entity, and therefore is not consolidated for tax purposes and
is taxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate income tax expense or benefit.
The taxable income, or loss, of CSMC and the Taxable Subsidiary may differ from book income, or loss, due to temporary book and tax timing
differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated
financial statements. CSMC recorded bonus accruals on a quarterly basis. Deferred taxes related to the changes in the restoration plan and bonus accruals
are also recorded on a quarterly basis. The Taxable Subsidiary records valuation adjustments related to its investments on a quarterly basis. Deferred taxes
related to the unrealized gain/loss on investments are also recorded on a quarterly basis. A valuation allowance is provided against deferred tax assets when
it is more likely than not that some portion or all of the deferred tax asset will not be realized. Establishing a valuation allowance of a deferred tax asset
requires management to make estimates related to expectations of future taxable income. As such, the deferred tax asset was written off. As of March 31,
2020, CSMC had a deferred tax asset of approximately $1.4 million. As of March 31, 2021 and 2020, the Taxable Subsidiary had a deferred tax liability of
$3.3 million and $1.0 million, respectively.
Based on our assessment of our unrecognized tax benefits, management believes that all benefits will be realized and they do not contain any
uncertain tax positions.
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The following table sets forth the significant components of the deferred tax assets and liabilities as of March 31, 2021 and 2020 (amounts in
thousands):
Deferred tax asset:
Net operating loss carryforwards
Compensation
Pension liability
Interest
Other
Total deferred tax asset
Deferred tax liabilities:
Net unrealized appreciation on investments
Net basis differences in portfolio investments
Total deferred tax liabilities
Total net deferred tax (liabilities) assets
Years ended
2021
2020
$
$
224 $
—
—
173
—
397
(2,931)
(811)
(3,742)
(3,345) $
—
776
647
—
(21)
1,402
(695)
(268)
(963)
439
The income tax expense, or benefit, and the related tax assets and liabilities generated by CSWC, CSMC and the Taxable Subsidiary, if any, are reflected
in CSWC’s consolidated financial statements. For the year ended March 31, 2021, we recognized total net income tax expense of $2.4 million, principally
consisting of a $0.6 million accrual for a 4% U.S. federal excise tax on our estimated undistributed taxable income and a provision for U.S. federal income
taxes relating to CSMC of $1.8 million (all of which is related to the write off of the deferred tax asset at CSMC). For the year ended March 31, 2020, we
recognized total net income tax expense of $2.1 million, principally consisting of a $1.1 million accrual for a 4% U.S. federal excise tax on our estimated
undistributed taxable income, a provision for U.S. federal income taxes relating to CSMC of $0.7 million (of which $0.3 million is current expense and
$0.4 million is deferred expense) and $0.3 million of deferred tax expense relating to the Taxable Subsidiary.
The following table sets forth the significant components of the income tax expense as of March 31, 2021, 2020 and 2019 (amounts in thousands):
Components of Income Tax Expense
Statutory federal income tax
162(m) limitation
Excise tax
Write-off of deferred tax asset
Tax related to Taxable Subsidiary
Prior year deferred tax true-up
Stock compensation benefits
Other
Total income tax expense
2021
Years ended March 31,
2020
2019
$
$
— $
122
637
1,837
50
—
(207)
3
2,442 $
270 $
1,488
1,110
—
315
—
(1,129)
8
2,062 $
73
476
880
—
(109)
—
(280)
8
1,048
Although we believe our tax returns are correct, the final determination of tax examinations could be different from what was reported on the
returns. In our opinion, we have made adequate tax provisions for years subject to examination. Generally, we are currently open to audit under the statute
of limitations by the Internal Revenue Service as well as state taxing authorities for the years ended December 31, 2017 through 2019.
7. SHAREHOLDERS’ EQUITY
On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to our executive officers and certain key
employees, or the Original Order. On August 22, 2017, we received the Exemptive Order that supersedes the Original Order and in addition to the relief
granted under the Original Order, allows us to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted
pursuant to the 2010 Restricted Stock Award Plan, or the 2010 Plan, and to pay the exercise price of options to purchase shares of our common stock
granted pursuant to the 2009 Stock Incentive Plan, or the 2009 Plan. During the year ended March 31, 2021, the Company repurchased 15,309
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shares at an aggregate cost of approximately $0.2 million and a weighted average price per share of $15.62 in connection with the vesting of restricted
stock awards. During the year ended March 31, 2020, the Company repurchased 19,865 shares at an aggregate cost of approximately $0.4 million and a
weighted average price per share of $21.04 in connection with the vesting of restricted stock awards.
On March 4, 2019, the Company established an "at-the-market" offering (the "Equity ATM Program") which the Company may offer and sell, from time
to time through sales agents, shares of its common stock having an aggregate offering price of up to $50,000,000. On February 4, 2020, the Company (i)
increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $100,000,000 from $50,000,000 and (ii)
added two additional sales agents to the Equity ATM Program.
During the year ended March 31, 2021, the Company sold 2,810,541 shares of its common stock under the Equity ATM Program at a weighted-
average price of $18.30 per share, raising $51.4 million of gross proceeds. Net proceeds were $50.4 million, after deducting commissions to the sales
agents on shares sold. During the year ended March 31, 2020, the Company sold 1,231,432 shares of its common stock under the Equity ATM Program at a
weighted-average price of $21.71 per share, raising $26.7 million of gross proceeds. Net proceeds were $26.2 million, after deducting commissions to the
sales agents on shares sold.
Cumulative to date, the Company has sold 4,305,629 shares of its common stock under the Equity ATM Program at a weighted-average price of
$19.47, raising $83.8 million of gross proceeds. Net proceeds were $82.2 million after commissions to the sales agents on shares sold. As of March 31,
2021, the Company has $16.2 million available under the Equity ATM Program.
On August 1, 2019, after receiving the requisite shareholder approval, the Company filed an amendment to its Amended and Restated Articles of
Incorporation to increase the amount of authorized shares of common stock from 25,000,000 to 40,000,000.
Share Repurchase Program
In January 2016, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $10 million of
its outstanding common stock in the open market at certain thresholds below its NAV per share, in accordance with guidelines specified in Rules 10b5-1(c)
(1)(i)(B) and 10b-18 under the Exchange Act. On March 1, 2016, the Company entered into a share repurchase agreement, which became effective
immediately and terminated on March 26, 2020 upon the Company's purchase of the aggregate gross dollar amount (inclusive of commission fees) of its
common stock under the share repurchase program meeting the threshold set forth in the share repurchase agreement.
During the year ended March 31, 2020, the Company repurchased a total of 794,180 shares at an average price of $11.57 per share, including
commissions paid. The following table summarizes the Company’s share repurchases under the program for the years ended March 31, 2021 and 2020:
Repurchases of Common Stock
Number of shares repurchased
Cost of shares repurchased, including commissions
Weighted average price per share
Net asset value per share at quarter end prior to repurchase
Weighted average discount to net asset value at quarter end prior to repurchase
8. EMPLOYEE STOCK BASED COMPENSATION PLANS
Stock Awards
Year Ended March 31,
2021
$
$
$
—
—
—
—
— %
$
$
$
2020
794,180
9,209,154
11.57
16.74
30.9 %
Under the 2010 Restricted Stock Award Plan, a restricted stock award is an award of shares of our common stock, which have full voting and dividend
rights but are restricted with regard to sale or transfer. Restricted stock awards are independent of stock grants and are generally subject to forfeiture if
employment terminates prior to these restrictions lapsing. Unless otherwise specified in the award agreement, these shares vest in equal annual installments
over a four-year period from the grant date and are expensed over the vesting period starting on the grant date.
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On August 22, 2017, we received the Exemptive Order from the SEC that supersedes the Original Order and, in addition to the relief granted under the
Original Order, allows the Company to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to
the 2010 Plan. The Third Amendment to the 2010 Plan, which became effective on August 22, 2017, reflects amendments relating to the Exemptive Order.
On August 2, 2018, the Fourth Amendment to the 2010 Plan increased the number of shares of Company common stock available for issuance by
850,000 shares. The Fourth Amendment also includes revisions regarding change in control provisions, minimum vesting periods, incorporation of a
clawback policy and other technical revisions.
The following table summarizes the restricted stock available for issuance for the year ended March 31, 2021:
Restricted stock available for issuance as of March 31, 2020
Additional restricted stock approved under the plan
Restricted stock granted during the year ended March 31, 2021
Restricted stock forfeited during the year ended March 31, 2021
Restricted stock available for issuance as of March 31, 2021
579,932
—
(239,574)
27,580
367,938
We expense the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stock award at the date of grant, on a
straight-line basis over the requisite service period. For these purposes, the fair value of the restricted stock award is determined based upon the closing
price of our common stock on the date of the grant.
For the fiscal years ended March 31, 2021, 2020, and 2019, we recognized total share based compensation expense of $2.9 million, $2.9 million and $2.2
million, respectively, related to the restricted stock issued to our employees and officers.
During the three months ended June 30, 2019, the Company modified restricted stock awards to accelerate vesting of the unvested awards as of the
retirement date for one employee. The Company accounted for this as a modification of awards and recognized incremental compensation cost of $0.2
million. The incremental compensation cost is measured as the excess of the fair value of the modified award over the fair value of the original award
immediately before its terms were modified and recognized as compensation cost on the date of modification for vested awards.
As of March 31, 2021, the total remaining unrecognized compensation expense related to non-vested restricted stock awards was $5.9 million, which
will be amortized over the weighted-average vesting period of approximately 2.5 years.
The following table summarizes the restricted stock outstanding as of March 31, 2021:
Restricted Stock Awards
Unvested at March 31, 2019
Granted
Vested
Forfeited
Unvested at March 31, 2020
Granted
Vested
Forfeited
Unvested at March 31, 2021
Number of Shares
Weighted Average
Fair Value Per
Share at grant date
Weighted Average
Remaining Vesting
Term (in Years)
454,027 $
97,845
(172,136)
(20,150)
359,586 $
239,574
(141,804)
(27,580)
429,776 $
17.33
21.11
16.58
18.78
18.64
15.18
17.61
18.63
17.05
2.8
3.6
—
—
2.4
3.2
1.8
—
2.5
9. OTHER EMPLOYEE COMPENSATION
We established a 401(k) plan (“401K Plan”) effective October 1, 2015. All full-time employees are eligible to participate in the 401K Plan. The 401K
Plan permits employees to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and
eligibility. We made contributions to the 401K Plan of up to
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4.5% of the Internal Revenue Service’s annual maximum eligible compensation, all of which is fully vested immediately. During the years ended March 31,
2021, 2020 and 2019, we made matching contributions of approximately $0.2 million, $0.2 million, and $0.1 million, respectively.
10. RETIREMENT PLANS
Until the Share Distribution, CSWC sponsored a qualified defined benefit pension plan that covered its employees and employees of certain of its
controlled affiliates. In connection with the Share Distribution, we entered into an Employee Matters Agreement with CSWI on September 8, 2015, which
was amended and restated on September 14, 2015. Under the Employee Matters Agreement, CSWC and CSMC withdrew as participating employers in the
qualified defined benefit pension plan and CSWI became the Sponsoring Employer of the Qualified Retirement Plan and assumed all the liabilities, assets
and future funding obligations for providing benefits for the covered Participants in the Qualified Retirement Plan.
Additionally, CSWC sponsors an unfunded Retirement Restoration Plan, which is a nonqualified plan that provides for the payment, upon retirement, of
the difference between the maximum annual payment permissible under the qualified retirement plan pursuant to federal limitations and the amount which
would otherwise have been payable under the qualified plan. The Company retained all liabilities associated with benefits accrued under the Retirement
Restoration Plan on behalf of individuals who remain employees of the Company or CSMC following September 30, 2015 or who terminated employment
prior to September 30, 2015 with vested benefits under the Retirement Restoration Plan. Unvested accrued benefits under the Retirement Restoration Plan
were forfeited as of September 30, 2015. The Retirement Restoration Plan is a frozen plan under which no new service cost is being accrued by plan
participants.
The following tables set forth the Retirement Restoration Plan’s net pension benefit and benefit obligation amounts at March 31, 2021, 2020 and 2019, as
well as amounts recognized in our Consolidated Statements of Assets and Liabilities at March 31, 2021 and 2020 (amounts in thousands):
Net pension cost
Interest cost on projected benefit obligation
Net amortization
Net pension cost from restoration plan
Change in benefit obligation
Benefit obligation at beginning of year
Interest cost
Actuarial loss
Benefits paid
Benefit obligation at end of year
Amounts recognized in our Consolidated Statements of Assets and Liabilities
Projected benefit obligation
Net actuarial loss recognized as a component of equity
Total
Accumulated benefit obligation
2021
Years ended March 31,
2020
2019
$
$
96 $
35
131 $
111 $
31
142 $
113
46
159
2021
Years ended March 31,
2020
2019
$
$
3,082 $
96
42
(241)
2,979 $
3,073 $
111
122
(224)
3,082 $
2,937
113
232
(209)
3,073
Years ended March 31,
2021
2020
$
$
$
(2,979) $
1,098
(1,881) $
(3,082)
1,091
(1,991)
(2,979) $
(3,082)
The corridor approach is used to amortize the actuarial gains or losses based on 10% of the projected benefit obligation.
The following assumptions were used in estimating the actuarial present value of the projected benefit obligations:
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Discount rate
The following assumptions were used in estimating the net periodic (income)/expense:
Discount rate
2021
Years ended March 31,
2020
2019
2.75 %
3.25 %
3.75 %
2021
Years ended March 31,
2020
2019
3.25 %
3.75 %
4.00 %
Following are the expected benefit payments for the next five years and in the aggregate for the years 2027-2031 (amounts in thousands):
Restoration Plan
11. COMMITMENTS AND CONTINGENCIES
Commitments
2022
2023
2024
2025
2026
2027-2031
$
245 $
241 $
236 $
230 $
224 $
1,012
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk, consisting primarily of unused
commitments to extend financing to the Company’s portfolio companies. Since commitments may expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements.
Portfolio Company
Acceleration Partners, LLC
AllOver Media, LLC
American Nuts Operations LLC
Broad Sky Networks LLC
Central Medical Supply LLC
Central Medical Supply LLC
CityVet Inc.
Clickbooth.com, LLC
Danforth Advisors, LLC
Dynamic Communities, LLC
Electronic Transaction Consultants LLC
Environmental Pest Service Management Company, LLC
ESCP DTFS Inc.
Fast Sandwich, LLC
GrammaTech, Inc.
Ian, Evan, & Alexander Corporation
ITA Holdings Group, LLC
Klein Hersh, LLC
Mako Steel LP
NinjaTrader, LLC
NinjaTrader, LLC
Roseland Management, LLC
RTIC Subsidiary Holdings LLC
Total unused commitments to extend financing
Investment Type
Delayed Draw Term Loan
Revolving Loan
Term Loan C
Revolving Loan
Revolving Loan
Delayed Draw Capex Term Loan
Delayed Draw Term Loan
Revolving Loan
Revolving Loan
Revolving Loan
Revolving Loan
Delayed Draw Term Loan
Delayed Draw Term Loan
Revolving Loan
Revolving Loan
Revolving Loan
Revolving Loan
Revolving Loan
Revolving Loan
Revolving Loan
Delayed Draw Term Loan
Revolving Loan
Revolving Loan
124
March 31,
March 31,
2021
2020
(amounts in thousands)
$
$
216 $
2,000
384
2,000
1,200
1,400
6,750
1,086
—
500
3,704
—
—
3,100
2,500
2,000
2,000
938
1,226
1,500
2,655
1,500
767
37,426 $
—
—
384
—
—
—
—
—
500
500
—
525
5,250
4,150
—
—
2,000
—
—
400
—
1,500
—
15,209
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As of March 31, 2021, total revolving and delayed draw loan commitments included commitments to issue letters of credit through a financial
intermediary on behalf of certain portfolio companies. As of March 31, 2021 and 2020, the Company had $3.5 million and $3.4 million, respectively, in
letters of credit issued and outstanding under these commitments on behalf of portfolio companies. For all of these letters of credit issued and outstanding,
the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. Of these
letters of credit, $3.1 million expire in May 2022 and $0.4 million expire in July 2021. As of March 31, 2021 and 2020, none of the letters of credit issued
and outstanding were recorded as a liability on the Company's balance sheet as such letters of credit are considered in the valuation of the investments in
the portfolio company.
Effective April 1, 2019, ASC 842 required that a lessee to evaluate its leases to determine whether they should be classified as operating or financing
leases. The Company identified one operating lease for its office space. The lease commenced on October 1, 2014 and expires February 28, 2022.
As CSWC classified this lease as an operating lease prior to implementation, ASC 842 indicates that a right-of-use asset and lease liability should be
recorded based on the effective date. CSWC adopted ASC 842 effective April 1, 2019 and recorded a right-of-use asset and a lease liability as of that date.
After this date, the Company has recorded lease expense on a straight-line basis, consistent with the accounting treatment for lease expense prior to the
adoption of ASC 842.
Total lease expense incurred for each of the three years ended March 31, 2021, 2020 and 2019 was $0.2 million. As of March 31, 2021, the asset related
to the operating lease was $0.2 million and the lease liability was $0.2 million. As of March 31, 2021, the remaining lease term was 0.8 years and the
discount rate was 2.69%.
The following table shows future minimum payments under the Company's operating lease as of March 31, 2021 (in thousands):
Year ending March 31,
2022
2023
2024
2025
2026
Thereafter
Total
Rent Commitment
248
—
—
—
—
—
248
$
$
In March 2021, the Company executed an agreement to lease new office space, which is expected to commence during the third quarter of fiscal
year 2022. The office space will be approximately 13,373 square feet. This lease will be classified as an operating lease and has a term of approximately 10
years.
Contingencies
We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third
parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. We have no currently pending material legal
proceedings to which we are part or to which any of our assets is subject.
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12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents a summary of the unaudited quarterly consolidated financial information for the years ended March 31, 2021 and 2020 (in
thousands except per share amounts):
2021
Net investment income
Net realized (loss) gain on investments, net of tax
Net change in unrealized appreciation (depreciation) on
investments, net of tax
Realized losses on extinguishment of debt
Net increase in net assets from operations
Pre-tax net investment income per share
Net investment income per share
Net increase (decrease) in net assets from operations per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
6,819 $
(5,547)
8,319 $
(1,279)
8,517 $
(127)
8,016 $
(1,583)
7,605
—
8,877
0.40
0.38
0.49
9,636
(286)
16,390
0.44
0.45
0.88
7,271
(262)
15,399
0.52
0.45
0.80
4,243
(459)
10,217
0.44
0.39
0.50
2020
Net investment income
Net realized gain (loss) on investments
Net change in unrealized depreciation on investments, net of tax
Net increase (decrease) in net assets from operations
Pre-tax net investment income per share
Net investment income per share
Net increase (decrease) in net assets from operations per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
7,360 $
1,217
(1,864)
6,713
0.44
0.42
0.38
6,815 $
283
(4,369)
2,729
0.42
0.38
0.15
7,114 $
40,818
(54,765)
(6,833)
0.44
0.39
(0.38)
6,943 $
(87)
(31,816)
(24,960)
0.40
0.37
(1.34)
Total
31,671
(8,536)
28,755
(1,007)
50,883
1.79
1.66
2.67
Total
28,232
42,231
(92,814)
(22,351)
1.68
1.57
(1.24)
13. RELATED PARTY TRANSACTIONS
As a BDC, we are obligated under the 1940 Act to make available to our portfolio companies significant managerial assistance. “Making available
significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management, operations,
or business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companies that we
control, either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us will vary according to
the particular needs of each portfolio company.
During the year ended March 31, 2021, we did not receive any management fees from our portfolio companies. During the years ended March 31, 2020
and 2019, we received management and other fees from certain of our portfolio companies totaling $0.2 million and $0.3 million, respectively, which were
recognized as fees and other income on the Consolidated Statements of Operations. During the year ended March 31, 2020, we received a transaction fee of
$1.2 million in connection with the sale of Media Recovery, Inc. Additionally, as of March 31, 2021 and 2020, we had dividends receivable from I-45 SLF
LLC of $1.5 million and $2.1 million, respectively, which were included in dividends and interest receivables on the Consolidated Statements of Assets and
Liabilities.
14. SUBSEQUENT EVENTS
On April 21, 2021, the Board of Directors declared a total dividend of $0.53 per share, comprised of a regular dividend of $0.43 and a supplemental
dividend of $0.10, for the quarter ended June 30, 2021. The record date for the dividend is June 15, 2021. The payment date for the dividend is June 30,
2021.
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15. SELECTED PER SHARE DATA AND RATIOS
The following presents a summary of the selected per share data for the years ended March 31, 2017 through 2021 (in thousands except per share
amounts):
Per Share Data:
1
Investment income
1
Operating expenses
1
Income taxes
1
Net investment income
1
Net realized (loss) gain, net of tax
Net change in unrealized appreciation (depreciation) on
1
investments, net of tax
1
Realized losses on extinguishment of debt
Total increase (decrease) from investment operations
Dividends to shareholders
Spin-off Compensation Plan distribution, net of tax
2
Exercise of employee stock options
3
(Issuance) forfeiture of restricted stock
Accretive (dilutive) effect of share issuances and repurchases
Share based compensation expense
Common stock withheld for payroll taxes upon vesting of
restricted stock
Repurchase of common stock
Net change in pension plan funded status
4
Other
Increase (decrease) in net asset value
Net asset value
Beginning of year
End of year
Ratios and Supplemental Data
Ratio of operating expenses to average net assets
Ratio of net investment income to average net assets
Portfolio turnover
5
Total investment return
6
Total return based on change in NAV
Per share market value at end of year
Weighted-average basic shares outstanding
Weighted-average fully diluted shares outstanding
Common shares outstanding at end of year
2021
2020
Years Ended March 31,
2019
2018
2017
$
$
$
$
$
$
3.57
(1.78)
(0.13)
1.66
(0.45)
1.51
(0.05)
2.67
(2.05)
—
—
(0.16)
0.30
0.14
—
—
—
(0.02)
0.88
15.13
16.01
11.51 %
10.74 %
18.81 %
118.56 %
19.37 %
22.16
19,060
19,060
21,005
$
$
$
3.45
(1.76)
(0.12)
1.57
2.35
(5.16)
—
(1.24)
(2.75)
—
—
(0.06)
0.45
0.16
—
0.15
(0.01)
(0.19)
(3.49)
18.62
15.13
9.87 %
8.77 %
22.76 %
(37.52)%
(3.97)%
11.42
18,000
18,000
17,998
$
$
$
3.10
(1.62)
(0.06)
1.42
1.24
(0.68)
—
1.98
(2.27)
—
(0.12)
(0.23)
0.06
0.13
(0.01)
—
(0.01)
0.01
(0.46)
19.08
18.62
8.61 %
7.53 %
23.38 %
38.34 %
9.49 %
21.04
16,727
16,734
17,503
$
$
$
2.18
(1.16)
(0.01)
1.01
0.10
1.34
—
2.45
(0.99)
(0.03)
0.01
(0.18)
(0.04)
0.11
(0.01)
—
(0.05)
0.01
1.28
17.80
19.08
6.35 %
5.51 %
25.42 %
6.61 %
12.75 %
17.02
16,074
16,139
16,162
1.48
(0.87)
(0.11)
0.50
0.50
0.49
—
1.49
(0.79)
(0.08)
(0.09)
(0.15)
—
0.08
—
—
—
—
0.46
17.34
17.80
4.95 %
2.83 %
23.57 %
27.88 %
7.21 %
16.91
15,825
15,877
16,011
1
2
3
4
5
6
Based on weighted-average basic shares outstanding for the period.
Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value.
Reflects impact of the different share amounts as a result of issuance or forfeiture of restricted stock during the period.
Includes the impact of the different share amounts as a result of calculating certain per share data based on the weighted-average basic shares outstanding during
the period and certain per share data based on the shares outstanding as of a period end. The balance increases with the increase in variability of shares outstanding
throughout the year due to share issuance and repurchase activity.
Total investment return based on purchase of stock at the current market price on the first day and a sale at the current market price on the last day of each period
reported on the table and assumes reinvestment of dividends at prices obtained by CSWC’s dividend reinvestment plan during the period. The return does not
reflect any sales load that may be paid by an investor.
Total return based on change in NAV was calculated using the sum of ending NAV plus dividends to shareholders and other non-operating changes during the
period, as divided by the beginning NAV.
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16. SIGNIFICANT SUBSIDIARIES
I-45 SLF LLC
In September 2015, we entered into a limited liability company agreement with Main Street Capital Corporation ("Main Street") to form I-45 SLF LLC
(the "Initial I-45 LLC Agreement"). I-45 SLF LLC began investing in UMM syndicated senior secured loans during the quarter ended December 31, 2015.
The initial equity capital commitment to I-45 SLF LLC totaled $85.0 million, consisting of $68.0 million from CSWC and $17.0 million from Main
Street. On April 30, 2020, pursuant to the terms of the Initial I-45 LLC Agreement, each of CSWC and Main Street made an additional equity capital
commitment of $12.8 million and $3.2 million, respectively, which resulted in a total equity capital commitment to I-45 SLF LLC of $80.8 million and
$20.2 million, respectively. On March 25, 2021, I-45 SLF LLC declared a return of capital dividend to its members in the amount of $10.0 million. As of
March 31, 2021, total funded equity capital totaled $91.0 million, consisting of $72.8 million from CSWC and $18.2 million from Main Street. CSWC
owns 80% of I-45 SLF LLC and has a profits interest of 76.2625% as of March 31, 2021, while Main Street owns 20% and currently has a profits interest
of 23.7375% as of March 31, 2021. I-45 SLF LLC’s Board of Managers makes all investment and operational decisions for the fund, and consists of equal
representation from CSWC and Main Street.
On March 11, 2021, the Company and Main Street entered into the Second Amended and Restated Limited Liability Company Operating
Agreement (the "Amendment"), which increased the current profits interest that is allocated to the Company on a pro rata basis from (a) 75.6% to (b) an
amount equal to: (i) 76.26250% as of the date of the Amendment through the quarter ended March 31, 2021; (ii) 76.9250% for quarter ended June 30,
2021; (iii) 77.58750% for the quarter ended September 30, 2021; and (iv) 78.250% for the quarter ended December 31, 2021 and periods thereafter.
As of March 31, 2021 and 2020, I-45 SLF LLC had total assets of $177.8 million and $177.8 million, respectively. I-45 SLF LLC had approximately
$164.4 million and $170.9 million of credit investments at fair value as of March 31, 2021 and 2020, respectively. The portfolio companies in I-45 SLF
LLC are in industries similar to those in which CSWC may invest directly. As of March 31, 2021, approximately $13.1 million of the credit investments
were unsettled trades. As of March 31, 2020, none of the credit investments were unsettled trades. For the years ended March 31, 2021 and 2020, I-45 SLF
LLC declared total dividends of $18.7 million, $10 million of which was the return of capital dividend described above, and $12.7 million, respectively.
Additionally, I-45 SLF LLC closed on a $75.0 million 5-year senior secured credit facility (the “I-45 credit facility”) in November 2015. The I-45 credit
facility includes an accordion feature which will allow I-45 SLF LLC to achieve leverage of approximately 2x debt-to-equity. Borrowings under the I-45
credit facility are secured by all of the assets of I-45 SLF LLC and bear interest at a rate equal to LIBOR plus 2.5% per annum. During the year ended
March 31, 2017, I-45 SLF LLC increased debt commitments outstanding by an additional $90.0 million by adding three additional lenders to the syndicate,
bringing total debt commitments to $165.0 million. In July 2017, the I-45 credit facility was amended to extend the maturity to July 2022 and to reduce the
interest rate on borrowings to LIBOR plus 2.4% per annum. In November 2019, the I-45 credit facility was amended to extend the maturity to November
2024 and to reduce the interest rate on borrowings to LIBOR plus 2.25% per annum. On April 30, 2020, the I-45 credit facility was amended to
permanently reduce the facility amount through a prepayment of $15.0 million and to change the minimum utilization requirements. In March 2021, the I-
45 credit facility was amended to extend the maturity to March 25, 2026 and to reduce the interest rate on borrowings to LIBOR plus 2.15%. Under the I-
45 credit facility, $91.0 million has been drawn as of March 31, 2021.
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Table of Contents
At March 31, 2021, our investment in I-45 SLF LLC exceeded the 10% threshold in at least one of the tests under Rule 4-08(g) and exceeded the 20%
threshold in at least one of the tests under Rule 3-09 of Regulation S-X. Accordingly, we have included as an exhibit to our Annual Report on Form 10-K
for the fiscal year ended March 31, 2021 the financial statements of I-45 SLF LLC. Below is certain summarized financial information for I-45 SLF LLC
as of March 31, 2021 and 2020 and for the years ended March 31, 2021, 2020 and 2019 (amounts in thousands):
Selected Balance Sheet Information:
Investments, at fair value (cost $170,791 and $207,768)
Cash and cash equivalents
Due from broker
Deferred financing costs
Interest receivable
Total assets
Senior credit facility payable
Payable for unsettled transactions
Other liabilities
Total liabilities
Members’ equity
Total liabilities and net assets
March 31, 2021
March 31, 2020
$
$
$
$
$
164,351 $
10,419
152
2,301
553
177,776 $
91,000 $
13,072
2,131
106,203 $
71,573
177,776 $
170,860
3,739
38
2,095
1,076
177,808
125,000
—
3,029
128,029
49,779
177,808
Selected Statement of Operations Information:
Total revenues
Total expenses
Net investment income
Net unrealized appreciation (depreciation)
Net realized (losses) gains
Net increase (decrease) in members’ equity resulting from operations
2021
Years Ended March 31,
2020
2019
$
$
13,930 $
(4,565)
9,365
30,467
(15,313)
24,519 $
20,300 $
(8,045)
12,255
(32,394)
603
(19,536) $
21,397
(8,759)
12,638
(6,647)
400
6,391
129
Table of Contents
Below is a listing of the individual loans in I-45 SLF LLC’s portfolio as of March 31, 2021 and 2020:
I-45 SLF LLC Loan Portfolio as of March 31, 2021
Portfolio Company
Industry
AAC New Holdco Inc.
Healthcare services
Investment
Type
Maturity Date
First Lien
304,075 shares
common stock
Warrants
(Expiration -
December 11,
2025)
6/25/2025
—
—
ADS Tactical
Aerospace & defense
First Lien
3/19/2026
American Teleconferencing
Services, Ltd.
Telecommunications
First Lien
6/8/2023
ATX Canada Acquisitionco Inc.
Technology products &
components
First Lien
12/31/2023
California Pizza Kitchen, Inc.
Restaurants
First Lien
11/23/2024
First Lien
Rolled Up
11/23/2024
Second Lien
67,841 shares
common stock
First Lien
5/23/2025
—
7/2/2026
First Lien
12/19/2025
Corel
Geo Parent Corporation
Software & IT services
Building & infrastructure
products
Go Wireless Holdings, Inc.
Consumer products & retail
First Lien
12/22/2024
Hunter Defense Technologies, Inc. Aerospace & defense
First Lien
3/29/2023
InfoGroup Inc.
Software & IT services
First Lien
4/3/2023
Integro Parent Inc.
Business services
First Lien
10/28/2022
Intermedia Holdings, Inc.
Software & IT services
First Lien
7/21/2025
Inventus Power, Inc.
Technology Products &
Components
First Lien
3/29/2024
Isagenix International, LLC
Consumer products & retail
First Lien
6/14/2025
130
Current
1
Interest Rate
10.00%,
8.00% PIK $
Principal
2
Cost
3
Fair Value
1,752 $
1,752 $
1,743
—
—
1,449
1,449
—
L+5.75%
(Floor
1.00%)
L+6.50%
(Floor
1.00%)
L+6.25%,
1.50% PIK
(Floor
1.00%)
L+10.00%
(Floor
1.50%)
1.00%,
L+11.00%
PIK
(Floor
1.50%)
1.00%,
L+12.50%
PIK
(Floor
1.50%)
—
L+5.00%
L+5.25%
L+6.50%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.75%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.75%
(Floor
1.00%)
—
482
482
6,731
6,596
6,697
6,759
6,698
3,590
4,464
4,462
4,084
937
913
936
1,039
1,035
1,033
1,141
—
7,030
4,900
1,141
1,845
6,834
4,867
1,115
1,845
7,008
4,888
6,848
6,816
6,839
6,122
6,049
6,091
2,880
2,870
2,741
3,253
3,226
3,201
5,735
5,712
5,748
7,000
6,930
6,930
1,823
1,812
1,376
Table of Contents
Portfolio Company
KORE Wireless Group Inc.
Industry
Telecommunications
Investment
Type
First Lien
Maturity Date
12/20/2024
Lab Logistics, LLC
Healthcare services
First Lien
9/25/2023
Lift Brands, Inc.
Consumer services
Lightbox Intermediate, L.P.
Software & IT services
Tranche A
Tranche B
Tranche C
1,051 shares
common stock
First Lien
6/29/2025
6/29/2025
6/29/2025
—
5/9/2026
LOGIX Holdings Company, LLC
Telecommunications
First Lien
12/23/2024
Lulu's Fashion Lounge, LLC
Consumer products & retail
First Lien
8/26/2022
Mills Fleet Farm Group LLC
Consumer products & retail
First Lien
10/24/2024
NBG Acquisition, Inc.
Wholesale
First Lien
4/26/2024
Novetta Solutions, LLC
Software & IT services
PaySimple, Inc.
Software & IT services
First Lien
Delayed Draw
Term Loan
First Lien
10/17/2022
8/23/2025
8/23/2025
Pet Supermarket, Inc.
Consumer products & retail
First Lien
7/5/2022
PT Network, LLC
Healthcare products
First Lien
11/30/2023
Research Now Group, Inc.
Business Services
First Lien
12/20/2025
Signify Health, LLC
Healthcare services
First Lien
12/23/2024
Tacala, LLC
Consumer products & retail
Second Lien
2/7/2028
TestEquity, LLC
Capital equipment
First Lien
4/28/2022
First Lien -
Term Loan B
4/28/2022
TGP Holdings III LLC
Durable consumer goods
Second Lien
9/25/2025
Time Manufacturing Acquisition
Capital equipment
First Lien
2/3/2023
Current
1
Interest Rate
L+5.50%
L+7.25%
(Floor
1.00%)
L+7.5%
(Floor
1.00%)
9.50% PIK
—
—
L+5.00%
L+5.75%
(Floor
1.00%)
L+7.00%,
2.50% PIK
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.50%
L+5.50%
L+5.50%
(Floor
1.00%)
L+5.50%,
2.00% PIK
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+4.50%
(Floor
1.00%)
L+7.50%
(Floor
0.75%)
L+6.25%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+8.50%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
Principal
2
Cost
3
Fair Value
4,706
4,680
4,700
6,305
6,255
6,305
2,521
531
565
—
3,453
2,521
531
565
749
3,418
2,370
424
452
749
3,419
5,890
5,863
5,683
3,686
3,633
3,152
4,625
4,570
4,533
2,738
2,714
2,468
4,845
1,369
4,220
4,795
1,346
4,174
4,836
1,365
4,209
4,760
4,750
4,641
4,465
4,465
4,465
4,987
4,987
4,950
5,044
5,017
5,064
5,000
4,989
5,002
3,816
3,808
3,358
949
947
835
2,500
2,479
2,483
5,802
5,785
5,824
131
Table of Contents
Portfolio Company
Industry
Investment
Type
Maturity Date
UniTek Global Services, Inc.
Telecommunications
First Lien
8/20/2024
U.S. TelePacific Corp.
Vida Capital, Inc.
Telecommunications
Financial services
First Lien
First Lien
5/2/2023
10/1/2026
YS Garments, LLC
Total Investments
Consumer products & retail
First Lien
8/9/2024
Current
1
Interest Rate
L+5.50%,
1.00% PIK
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+6.00%
L+6.00%
(Floor
1.00%)
Principal
2
Cost
3
Fair Value
2,736
2,721
2,480
5,200
3,805
5,172
3,760
4,829
3,672
4,634
4,608
170,791 $
4,287
164,351
$
1
2
3
Represents the interest rate as of March 31, 2021. All interest rates are payable in cash, unless otherwise noted. The majority of investments bear interest at a rate
that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”) which reset daily, monthly, quarterly, or
semiannually. For each the Company has provided the spread over LIBOR or Prime in effect at March 31, 2021. Certain investments are subject to a LIBOR or
Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind ("PIK") interest.
Represents amortized cost.
Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is
determined by the Board of Managers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.
132
Table of Contents
I-45 SLF LLC Loan Portfolio as of March 31, 2020
Portfolio Company
Industry
AAC Holdings, Inc.
Healthcare services
Investment
Type
First Lien -
Priming
Facility
3/31/2020
Maturity Date
Current
1
Interest Rate
Principal
Cost
2
Fair Value
5
First Lien
6/30/2023
ADS Tactical
Aerospace & defense
First Lien
7/26/2023
ALKU, LLC
Business services
First Lien
7/29/2026
American Teleconferencing
Services, Ltd.
Telecommunications
First Lien
6/8/2023
ATX Canada Acquisitionco Inc.
Technology products &
components
First Lien
6/11/2021
5
California Pizza Kitchen, Inc.
Corel
Geo Parent Corporation
Restaurants
Software & IT services
Building & infrastructure
products
First Lien
First Lien
8/23/2022
7/2/2026
First Lien
12/19/2025
Go Wireless Holdings, Inc.
Consumer products & retail
First Lien
12/22/2024
Hunter Defense Technologies, Inc. Aerospace & defense
First Lien
3/29/2023
Imagine! Print Solutions, LLC
Media, marketing &
entertainment
Second Lien
6/21/2023
InfoGroup Inc.
Software & IT services
First Lien
4/3/2023
Integro Parent Inc.
Business services
First Lien
10/31/2022
Intermedia Holdings, Inc.
Software & IT services
First Lien
7/21/2025
Isagenix International, LLC
Consumer products & retail
First Lien
6/14/2025
JAB Wireless, Inc.
KORE Wireless Group Inc.
Telecommunications
Telecommunications
First Lien
First Lien
5/2/2023
12/20/2024
Lab Logistics, LLC
Healthcare services
First Lien
9/25/2023
Lift Brands, Inc.
Consumer services
First Lien
4/16/2023
133
P+13.50%
(Floor
1.00%)
L+ 6.75%
(Floor
1.00%),
4.00% PIK
L+6.25%
(Floor
0.75%)
L+5.50%
(Floor
1.00%)
L+6.50%
(Floor
1.00%)
L+7.00%
(Floor
1.00%),
1.0% PIK
L+6.00%
(Floor
1.00%)
L+5.00%
L+5.25%
L+6.50%
(Floor
1.00%)
L+7.00%
(Floor
1.00%)
L+8.75%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.75%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.75%
(Floor
1.00%)
L+8.00%
(Floor
1.00%)
L+5.50%
L+6.50%
(Floor
1.00%)
L+7.00%
(Floor
1.00%),
1.0% PIK
$
1,598 $
1,598 $
1,598
7,371
7,264
3,225
4,948
4,928
4,735
3,000
2,972
2,820
6,771
6,623
3,825
4,573
4,561
3,796
6,760
4,969
4,950
6,741
4,720
4,909
3,418
4,410
4,678
6,213
6,170
5,042
5,856
5,772
5,870
3,000
2,976
413
2,910
2,895
2,610
3,301
3,256
3,252
5,794
5,765
5,301
1,953
1,939
728
7,840
4,754
7,791
4,721
7,703
4,398
5,402
5,361
4,971
4,810
4,785
3,689
Table of Contents
Portfolio Company
Lightbox Intermediate, L.P.
Industry
Software & IT services
Investment
Type
First Lien
Maturity Date
5/9/2026
LOGIX Holdings Company, LLC
Telecommunications
First Lien
12/23/2024
LSF9 Atlantis Holdings, LLC
Telecommunications
First Lien
5/1/2023
Lulu's Fashion Lounge, LLC
Consumer products & retail
First Lien
8/26/2022
Mills Fleet Farm Group LLC
Consumer products & retail
First Lien
10/24/2024
NBG Acquisition, Inc.
Nomad Buyer, Inc.
Wholesale
Healthcare services
First Lien
First Lien
4/26/2024
8/1/2025
Novetta Solutions, LLC
3
PaySimple - Delayed Draw
PaySimple, Inc.
Software & IT services
Software & IT services
Software & IT services
First Lien
First Lien
First Lien
10/17/2022
8/23/2025
8/23/2025
Peraton Corp. (fka MHVC
Acquisition Corp.)
Aerospace & defense
First Lien
4/29/2024
Pet Supermarket, Inc.
Consumer products & retail
First Lien
7/5/2022
PT Network, LLC
Healthcare products
First Lien
11/30/2023
Signify Health, LLC
Tacala, LLC
Healthcare services
Consumer products & retail
First Lien
Second Lien
12/23/2024
2/7/2028
TestEquity, LLC
TestEquity, LLC - Term Loan B
Capital equipment
Capital equipment
First Lien
First Lien
4/28/2022
4/28/2022
TGP Holdings III LLC
Durable consumer goods
Second Lien
9/25/2025
The Hoover Group, Inc.
Energy services (midstream)
First Lien
1/28/2021
Time Manufacturing Acquisition
Capital equipment
First Lien
2/3/2023
UniTek Global Services, Inc.
Telecommunications
First Lien
8/26/2024
U.S. TelePacific Corp.
Telecommunications
First Lien
5/2/2023
Current
1
Interest Rate
L+5.00%
L+5.75%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+9.00%
(Floor
1.00%)
L+6.25%
(Floor
1.00%),
0.75% PIK
L+5.50%
(Floor
1.00%)
L+5.00%
L+5.00%
(Floor
1.00%)
L+5.50%
L+5.50%
L+5.25%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+5.50%
(Floor
1.00%),
2.0% PIK
L+4.50%
(Floor
1.00%)
L+7.50%
L+5.50%
(Floor
1.00%)
L+5.50%
L+8.50%
(Floor
1.00%)
L+7.25%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.50%
(Floor
1.00%),
1.0% PIK
L+6.00%
(Floor
1.00%)
Principal
Cost
2
Fair Value
2,978
2,938
2,933
5,953
5,918
4,911
6,519
6,485
5,382
3,778
3,707
3,231
4,958
4,883
4,214
2,813
2,955
4,896
934
4,263
2,780
2,819
4,813
920
4,206
1,598
2,748
4,365
850
3,879
6,329
6,310
5,918
4,810
4,792
4,425
4,418
4,418
4,024
5,096
4,500
3,816
959
5,061
4,492
3,800
955
4,281
3,521
3,186
801
2,500
2,474
1,838
6,370
6,306
5,892
4,848
4,825
4,436
2,970
2,949
2,687
5,200
5,158
4,056
134
Table of Contents
Portfolio Company
Vida Capital, Inc.
Industry
Financial services
VIP Cinema Holdings, Inc.
Hotel, gaming & leisure
Investment
Type
First Lien
First Lien -
Superiority
5
DIP
5
First Lien
3/1/2023
4
Wireless Vision Holdings, LLC
YS Garments, LLC
Telecommunications
Consumer products & retail
First Lien
First Lien
9/29/2022
8/9/2024
Total Investments
Maturity Date
10/1/2026
Current
1
Interest Rate
L+6.00%
Principal
Cost
2
Fair Value
3,965
3,910
3,668
5/20/2020
L+8.00%
P+7.00%
(Floor
1.00%)
L+8.91%
(Floor
1.00%),
1.0% PIK
P+6.00%
719
708
4,375
4,364
129
788
7,327
4,813
7,253
4,777
207,768 $
6,264
4,355
170,860
$
1
2
3
4
5
Represents the interest rate as of March 31, 2020. All interest rates are payable in cash, unless otherwise noted. The majority of investments bear interest at a rate
that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”) which reset daily, monthly, quarterly, or
semiannually. For each the Company has provided the spread over LIBOR or Prime in effect at March 31, 2020. Certain investments are subject to a LIBOR or
Prime interest rate floor.
Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is
determined by the Board of Managers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.
The investment has approximately $0.5 million in an unfunded delayed draw commitment as of March 31, 2020.
The investment is structured as a first lien last out term loan and may earn interest in addition to the stated rate.
Investment was on non-accrual as of March 31, 2020, meaning the Company has ceased to recognize interest income on the investment.
135
Table of Contents
SCHEDULE 12-14
Schedule of Investments in and Advances to Affiliates
(In thousands)
Portfolio Company
Control Investments
I-45 SLF LLC
Total Control Investments
Type of Investment (1)
80% LLC equity
interest
Affiliate Investments
Central Medical Supply LLC Revolving loan
Chandler Signs, LLC
Delphi Behavioral Health
Group, LLC
First lien
Delayed Draw Term
Loan
875,000 Preferred
Units
1,500,000 units of
Class A-1 common
stock
First lien
First lien
1,681.04 Common
Units
Dynamic Communities, LLC Revolving loan
GrammaTech, Inc.
First lien
Senior subordinated
debt
2,000,000 Preferred
units
Revolving loan
First lien
1,000 Class A Units
Amount of
Interest or
Dividends
Credited in
Income (2)
Fair Value at
March 31,
2020
Gross
Additions (3)
Gross
Reductions
(4)
Amount of
Realized
Gain/(Loss)
(5)
Amount of
Unrealized
Gain/(Loss)
Fair Value at
March 31,
2021
$
$
$
$
$
$
6,609 $
6,609 $
39,760 $
39,760 $
12,800 $
12,800 $
(8,000)
(8,000)
23 $
612
— $
—
275 $
7,371
75
875
—
1,414
1,581
3,615
1
465
372
—
9
35
—
16
—
—
163
153
—
4
1,235
—
—
3,110
—
—
—
—
9,928
29
—
—
200
1,142
—
1,850
2,460
11,316
1,000
136
—
—
—
—
—
—
—
—
—
(140)
—
—
(2,500)
—
—
— $
— $
12,598 $
12,598 $
57,158
57,158
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1 $
(463)
17
(234)
276
6,908
92
641
(1,767)
1,343
(16)
(81)
—
(1)
(287)
—
(576)
31
69
208
1,398
1,500
3,615
—
9,966
372
1,274
—
11,420
1,208
Table of Contents
Portfolio Company
ITA Holdings Group, LLC
Type of Investment (1)
Revolving loan
First lien - Term
Loan
First lien - Term B
Loan
First Lien - PIK Note
A
First Lien - PIK Note
B
Warrants
9.25% Class A
membership interest
Roseland Management, LLC Revolving loan
SIMR, LLC
Sonobi, Inc.
Zenfolio Inc.
First lien
10,000 Class A Units
First lien
9,374,510.2 Class B
Common units
First lien
500,000 Class A
Common Units
Revolving loan
First lien
190 shares of
common stock
Amount of
Interest or
Dividends
Credited in
Income (2)
Fair Value at
March 31,
2020
66
965
636
337
10
—
33
15
244
—
2,410
—
447
—
53
384
—
9,900
5,136
2,233
88
2,762
2,099
500
10,369
1,334
11,190
1,742
—
—
1,888
13,127
Gross
Additions (3)
2,207
Gross
Reductions
(4)
(2,200)
86
43
333
9
—
—
2
7
—
2,005
—
8,344
500
1
21
—
—
—
—
—
—
(500)
(10,368)
(1,334)
—
—
—
—
(1,844)
(12,821)
Amount of
Realized
Gain/(Loss)
(5)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Amount of
Unrealized
Gain/(Loss)
(7)
75
(78)
64
6
206
433
(2)
(8)
—
(1,092)
(1,742)
156
735
(45)
(327)
Fair Value at
March 31,
2021
—
10,061
5,101
2,630
103
2,968
2,532
—
—
—
12,103
—
8,500
1,235
—
—
Total Affiliate Investments
Total Control & Affiliate
Investments
$
$
—
9,177 $
—
92,032 $
—
29,646 $
(272)
(31,979) $
(1,628)
(1,628) $
1,900
(2,825) $
—
85,246
15,786 $
131,792 $
42,446 $
(39,979) $
(1,628) $
9,773 $
142,404
This schedule should be read in conjunction with our Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to
Consolidated Financial Statements.
1) The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.
2) Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in the Control or Affiliate categories,
respectively.
3) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments, accrued PIK interest, and accretion of
OID. Gross additions also include movement of an existing portfolio company into this category and out of a different category.
4) Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for
one or more new securities. Gross reductions also include movement of an existing portfolio out of this category and into a different category.
5) The schedule does not reflect realized gains or losses on escrow receivables for investments which were previously exited and were not held during the period presented.
Gains and losses on escrow receivables are classified in the Consolidated Statements of Operations according to the control classification at the time the investment was
exited.
137
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to provide
reasonable assurance that information required to be disclosed in our filings and submissions under the Exchange Act is recorded, processed, summarized
and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding the required
disclosure.
We completed an evaluation under the supervision and with participation of management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2021. Based upon this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2021, our disclosure controls and procedures were effective to
provide the reasonable assurance described above. We note that the design of any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goals under all potential future conditions.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-
15(f). Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in the 2013 Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in
the 2013 Internal Control — Integrated Framework, management concluded that our internal control over financial reporting was effective as of March 31,
2021.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13(a)-15(f) of the Exchange Act) during the three months
ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Limitations on Controls
Because of its inherent limitations, management does not expect that our disclosure controls and our internal controls over financial reporting will
prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate. Any control system, no matter
how well designed and operated, is based upon certain assumptions and can only provide reasonable, not absolute, assurance that its objectives will be met.
Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will not occur or that all control issues and
instances of fraud, if any within the Company, have been detected.
138
Table of Contents
Item 9B. Other Information
FEES AND EXPENSES
The following table is intended to assist you in understanding the costs and expenses you will bear directly or indirectly. We caution you that some of
the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever there is a reference to fees
or expenses paid by “you,” “us” or “CSWC,” or that “we” will pay fees or expenses, you will indirectly bear such fees or expenses as investors in us.
Shareholder Transaction Expenses:
Sales load (as a percentage of offering price)
Offering expenses (as a percentage of offering price)
Dividend reinvestment plan expenses
Total shareholder transaction expenses (as a percentage of offering price)
Annual Expenses (as a percentage of net assets attributable to common stock for
the fiscal year ended March 31, 2021):
Operating expenses
Interest payments on borrowed funds
Income tax expense
Acquired fund fees and expenses
Total annual expenses
—
—
—
—
4.76
5.41
0.73
1.54
12.44
%
%
%
%
%
%
%
%
%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
In the event that our securities are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.
In the event that we conduct an offering of our securities, a corresponding prospectus supplement will disclose the estimated offering expenses.
(1)
(2)
(3) The expenses of administering our dividend reinvestment plan (“DRIP”) are included in operating expenses. The DRIP does not allow shareholders to sell shares through the DRIP. If
a shareholder wishes to sell shares they would be required to select a broker of their choice and pay any fees or other costs associated with the sale.
(5)
(4) Operating expenses in this table represent the estimated annual operating expenses of CSWC and its consolidated subsidiaries based on actual operating expenses for the year ended
March 31, 2021. We do not have an investment adviser and are internally managed by our executive officers under the supervision of our board of directors. As a result, we do not pay
investment advisory fees, but instead we pay the operating costs associated with employing investment management professionals including, without limitation, compensation
expenses related to salaries, discretionary bonuses and restricted stock grants.
Interest payments on borrowed funds represents our estimated annual interest payments based on actual interest rate terms under our Credit Facility, our anticipated drawdowns from
our Credit Facility, the 5.375% Notes due 2024 (the “October 2024 Notes”) and the 4.50% Notes due 2026 (the "January 2026 Notes"). As of March 31, 2021, we had $120.0 million
outstanding under our Credit Facility, $125.0 million in aggregate principal of our October 2024 Notes outstanding and $140.0 million in aggregate principal of our January 2026
Notes outstanding. Any future issuances of debt securities will be made at the discretion of management and our board of directors after evaluating the investment opportunities and
economic situation of the Company and the market as a whole.
Income tax expense relates to the accrual of (a) deferred and current tax provision (benefit) for U.S. federal income taxes and (b) excise, state and other taxes. Deferred taxes are non-
cash in nature and may vary significantly from period to period. We are required to include deferred taxes in calculating our annual expenses even though deferred taxes are not
currently payable or receivable. Income tax expense represents the estimated annual income tax expense of CSWC and its consolidated subsidiaries based actual income tax expense
for the year ended March 31, 2021. Effective December 31, 2020, Capital Southwest Management Corporation, a wholly owned subsidiary of and management company for CSWC
("CSMC"), merged with and into CSWC, with CSWC continuing as the surviving entity of the merger. As a result of the foregoing, the calendar year ended December 31, 2020 is the
last year in which CSWC will incur tax expense or benefit relating to CSMC. As such, the deferred tax asset of $1.8 million was written off for the fiscal year ended March 31, 2021
and we recognized a U.S. federal income tax expense relating thereto.
(6)
(7) Acquired fund fees and expenses represent the estimated indirect expense incurred due to our investment in the I-45 Senior Loan Fund based upon the actual amount incurred for the
fiscal year ended March 31, 2021.
Example
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional
leverage and that our annual operating expenses would remain at the levels set forth in the table above.
You would pay the following expenses on a $1,000 investment, assuming
5.0% annual return
$
124 $
346 $
536 $
900
1 Year
3 Years
5 Years
10 Years
Table of Contents
The example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses may
be greater or less than those shown. While the example assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result
in a return greater or less than 5.0%. In addition, while the example assumes reinvestment of all dividends at NAV, participants in our DRIP will receive a
number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the average purchase
price of all shares of common stock purchased by the administrator of the DRIP in the event that shares are purchased in the open market to satisfy the
share requirements of the DRIP, which may be at, above or below NAV. See "Business - Dividend Reinvestment Plan” included in Item I of Part I of this
Annual Report on Form 10-K for additional information regarding our DRIP.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item 10 will be contained in the definitive proxy statement relating to our 2021 annual meeting of shareholders to be
filed with the SEC no later than 120 days after the close of our fiscal year ended March 31, 2021, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item 11 will be contained in the definitive proxy statement relating to our 2021 annual meeting of shareholders to be
filed with the SEC no later than 120 days after the close of our fiscal year ended March 31, 2021, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this Item 12 will be contained in the definitive proxy statement relating to our 2021 annual meeting of shareholders to be
filed with the SEC no later than 120 days after the close of our fiscal year ended March 31, 2021, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 will be contained in the definitive proxy statement relating to our 2021 annual meeting of shareholders under
the headings of “Certain Relationships and Related Transactions” and “Corporate Governance” to be filed with the Securities and Exchange Commission
no later than 120 days after the close of our fiscal year ended March 31, 2021, and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 will be contained in the definitive proxy statement relating to our 2021 annual meeting of shareholders under
the heading of “Ratification and Appointment of Independent Registered Public Accounting Firm for the Year Ended March 31, 2021” to be filed with the
Securities and Exchange Commission no later than 120 days after the close of our fiscal year ended March 31, 2021, and is incorporated herein by
reference.
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Table of Contents
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed or incorporated by reference as part of this Annual Report:
1. Consolidated Financial Statements
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Assets and Liabilities as of March 31, 2021 and 2020
Consolidated Statements of Operations for Years Ended March 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for Years Ended March 31, 2021, 2020 and 2019
Consolidated Schedules of Investments as of March 31, 2021 and 2020
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule of Investments in and Advances to Affiliates for the Year Ended March 31, 2021
3. Exhibits
Page
70
72
73
74
75
76
95
Page
136
Exhibit No.
2.1
Description
Distribution Agreement, dated September 8, 2015, between the Company and CSW Industrials, Inc. (incorporated by reference to Exhibit 2.1 to
Form 8-K (File No. 814-00061) filed on September 14, 2015).
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
Articles of Incorporation, dated April 19, 1961, including amendments dated June 30, 1969, July 20, 1987, April 23, 2007 and July 15, 2013
(incorporated by reference to Exhibit (a) to Registration Statement on Form N-2 (Reg. No. 333-220385) filed on September 8, 2017).
Certificate of Amendment to the Articles of Incorporation, dated August 1, 2019 (Incorporated by reference to Exhibit 3.1 to Form 8-K (File No.
814-00061) filed on August 1, 2019).
Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-Q (File No. 814-00061) filed on November 7,
2017).
Amendment to Second Amended and Restated Bylaws of Capital Southwest Corporation (Incorporated by reference to Exhibit 3.1 to Form 8-K
(File No. 814-00061) filed April 25, 2019).
Specimen of Common Stock certificate (incorporated by reference to Exhibit 4.1 to Form 10-K (File No. 811-01056) filed on June 14, 2002).
Indenture, dated October 23, 2017, between the Company and U.S. Bank National Association, Trustee (incorporated by reference to Exhibit (d)
(2) to Registration Statement on Form N-2 (Reg. No. 333-220385) filed on October 23, 2017).
Second Supplemental Indenture, dated as of September 27, 2019, relating to the 5.375% Notes due 2024, by and between the Company and U.S.
Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 of Form 8-K (File No. 814-00061) filed on September 27, 2019).
Form of 5.375% Notes due 2024 (incorporated by reference to Exhibit 4.3 of Form 8-K (File No. 814-00061) filed on September 27, 2019).
Third Supplemental Indenture, dated as of December 29, 2020, relating to the 4.50% Notes due 2026, by and between the Company and U.S.
Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on December 29, 2020).
141
Table of Contents
Exhibit No.
4.6
Description
Form of Global Note with respect to the 4.50% Notes due 2026 (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on
December 29, 2020).
4.7
4.8
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15
10.16+
10.17+
10.18+
Dividend Reinvestment Plan (incorporated by reference Exhibit (e) to Registration Statement on Form N-2 (Reg. No. 333-220385) filed on
September 8, 2017).
Description of Capital Southwest Corporation's Securities Registered pursuant to Section 12 of the Securities Exchange Act of 1934
(incorporated by reference to Exhibit 4.8 to Form 10-K (File No. 814-00061) filed on June 2, 2021).
Capital Southwest Corporation and Its Affiliates 2009 Restoration of Retirement Income Plan as amended and restated effective January 1, 2008
(incorporated by reference to Exhibit 10.3 to Form 10-K (File No. 814-00061) filed on May 29, 2009).
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to Form 10-Q (File No. 814-00061) filed on
November 7, 2017).
Severance Pay Agreement with William M. Ashbaugh (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 811-01056) filed on July
19, 2005).
Retirement Plan for Employees of Capital Southwest Corporation and its Affiliates as amended and restated effective April 1, 2011 (incorporated
by reference to Exhibit 10.15 to Form 10-K (File No. 814-00061) filed on June 1, 2012).
Amendment One to Retirement Plan for Employees of Capital Southwest Corporation and its Affiliates as amended and restated effective April
1, 2011 (incorporated by reference to Exhibit 10.16 to Form 10-K (File No. 814-00061) filed on May 31, 2013).
Amendment Four to Retirement Plan for Employees of Capital Southwest Corporation and its Affiliates as amended and restated effective
April 1, 2011 (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on August 6, 2015).
Joseph B. Armes Revised Offer Letter (incorporated by reference to Exhibit 99.2 to Form 8-K (File No. 814-00061) filed on May 17, 2013).
Capital Southwest Corporation 2010 Restricted Stock Award Plan (incorporated by reference to Exhibit 10.2 to Form 10-Q (File No. 814-00061)
filed on August 5, 2011).
First Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (incorporated by reference to Exhibit 10.2 to Form
10-Q (File No. 814-00061) filed on November 7, 2014).
Second Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (incorporated by reference to Exhibit 10.2 to Form
8-K (File No. 814-00061) filed August 12, 2015).
Third Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (incorporated by reference to Exhibit 10.3 to Form
10-Q (File No. 814-00061) filed on November 7, 2017).
Capital Southwest Corporation Amended and Restated 2010 Restricted Stock Award Plan (incorporated by reference to Exhibit 99.1 to Form S-8
(File No. 333-227117) filed on August 30, 2018).
Form of Restricted Stock Award Agreement under the 2010 Restricted Stock Award Plan, as amended (incorporated by reference to Exhibit 10.3
to Form 10-Q (File No. 814-00061) filed on November 7, 2014).
Form of Cash Incentive Award Agreement (incorporated by reference to Exhibit 10.5 to Form 10-Q (File No. 814-00061) filed on November 7,
2014).
Tax Matters Agreement, dated September 8, 2015, between the Company and CSW Industrials, Inc. (incorporated by reference to Exhibit 10.1 to
Form 8-K (File No. 814-00061) filed on September 14, 2015).
Amended and Restated Employee Matters Agreement, dated September 4, 2015, between the Company and CSW Industrials, Inc. (incorporated
by reference to Exhibit 10.2 to Form 8-K (File No. 814-00061) filed on September 14, 2015).
Form of Amended and Restated Non-Qualified Stock Option Agreement (Executive Compensation Plan – CSWC Employee Form)
(incorporated by reference to Exhibit 10.7 to Form 10-Q (File No. 814-00061) filed on November 9, 2015).
Form of Amended and Restated Non-Qualified Stock Option Agreement (Executive Compensation Plan – CSWI Employee Form) (incorporated
by reference to Exhibit 10.8 to Form 10-Q (File No. 814-00061) filed on November 9, 2015).
142
Table of Contents
Exhibit No.
10.19+
Description
Form of Restricted Stock Agreement under the 2010 Restricted Stock Award Plan (CSWC Employee Form) (incorporated by reference to
Exhibit 10.9 to Form 10-Q (File No. 814-00061) filed on November 9, 2015).
10.20+
10.21+
10.22+
10.23+
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
Form of Amended and Restated Restricted Stock Agreement under the 2010 Restricted Stock Award Plan (CSWI Employee Form) (incorporated
by reference to Exhibit 10.10 to Form 10-Q (File No. 814-00061) filed on November 9, 2015).
Form of Amended and Restated Restricted Stock Award (Executive Compensation Plan – CSWC Employee Form) (incorporated by reference to
Exhibit 10.11 to Form 10-Q (File No. 814-00061) filed on November 9, 2015).
Form of Amended and Restated Restricted Stock Award (Executive Compensation Plan – CSWI Employee Form) (incorporated by reference to
Exhibit 10.12 to Form 10-Q (File No. 814-00061) filed on November 9, 2015).
Form of Amended and Restated Cash Incentive Award Agreement (Executive Compensation Plan) (incorporated by reference to Exhibit 10.13 to
Form 10-Q (File No. 814-00061) filed on November 9, 2015).
Limited Liability Company Operating Agreement of I-45 SLF LLC, dated September 9, 2015 (incorporated by reference to Exhibit 10.14 to
Form 10-Q (File No. 814-00061) filed on November 9, 2015).
Second Amended and Restated Limited Liability Company Operating Agreement of I-45 SLF LLC, dated March 11, 2021 (incorporated by
reference to Exhibit 1.1 to Form 8-K (File No. 814-00061) filed March 12, 2021).
Guarantee, Pledge and Security Agreement dated August 30, 2016, among the Company, the subsidiary guarantors thereto, ING Capital LLC,
and each financing agent and designated indebtedness holder thereto (incorporated by reference to Exhibit 10.2 to Form 8-K (File No. 814-
00061) filed on September 2, 2016).
Amended and Restated Guarantee, Pledge and Security Agreement dated as of December 21, 2018 among Capital Southwest Corporation, as
Borrower, the Subsidiary Guarantors party hereto, ING Capital LLC, as Revolving Administrative Agent for the Revolving Lenders, each
Financing Agent and Designated Indebtedness Holder party hereto and ING Capital, LLC, as Collateral Agent (incorporated by reference to
Exhibit 10.2 to Form 8-K (File No. 814-00061) filed on December 21, 2018).
Senior Secured Revolving Credit Agreement dated August 30, 2016, among the Company, the lenders party thereto, ING Capital LLC and Texas
Capital Bank, N.A. (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on September 2, 2016).
Amended and Restated Senior Secured Revolving Credit Agreement dated as of December 21, 2018 among Capital Southwest Corporation, as
Borrower, the Lenders party hereto, ING Capital LLC, as Administrative Agent, Arranger and Bookrunner and Texas Capital Bank, N.A., as
Documentation Agent (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on December 21, 2018).
Amendment No. 1 to the Amended and Restated Senior Secured Revolving Credit Agreement, dated as of December 10, 2020, by and among
Capital Southwest Corporation, as Borrower, the lenders from time to time party thereto and ING Capital LLC, as Administrative Agent, and
Texas Capital Bank, N.A., as Documentation Agent (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on
December 10, 2020).
Incremental Assumption Agreement, dated August 18, 2017, among the Company, ING Capital LLC and LegacyTexas Bank (incorporated by
reference to Exhibit 10.2 to Form 10-Q (File No. 814-00061) filed on November 7, 2017).
Amendment No. 1 to the Senior Secured Revolving Credit Agreement, dated November 16, 2017, among the Company, the lenders party
thereto, ING Capital LLC and the subsidiary guarantors thereto (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061)
filed on November 17, 2017).
Incremental Assumption Agreement, dated April 16, 2018, among the Company, ING Capital LLC and Hitachi Capital America Corp.
(incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on April 17, 2018).
Incremental Assumption Agreement, dated as of May 11, 2018 among Capital Southwest Corporation, as Borrower, and ING Capital LLC, as
Administrative Agent and Increasing Lender (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on May 14,
2018).
Incremental Assumption Agreement dated as of May 23, 2019 among Capital Southwest Corporation, as Borrower, ING Capital LLC, as
Administrative Agent, and Mutual of Omaha Bank, as Assuming Lender (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-
00061) filed on May 23, 2019).
Incremental Assumption Agreement dated as of March 19, 2020 among Capital Southwest Corporation, as Borrower, ING Capital LLC, as
Administrative Agent, and Hancock Whitney Bank, as Assuming Lender (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-
00061) filed on March 19, 2020).
143
Table of Contents
Exhibit No.
10.37
Description
Incremental Commitment Agreement, dated as of December 10, 2020, by and among Capital Southwest Corporation, ING Capital LLC, and
Texas Capital Bank (incorporated by reference to Exhibit 10.2 to Form 8-K (File No. 814-00061) filed on December 10, 2020).
10.38
10.39
10.40
10.41
10.42
10.43
10.44
14
21.1*
23.1*
23.2*
31.1*
31.2*
32.1*^
32.2*^
99.1*
99.2*
99.3
Master Reimbursement Agreement, dated as of May 9, 2018, by and between Capital Southwest Corporation, as Borrower, and ING Capital
LLC, as Issuer (incorporated by reference to Exhibit 10.40 to Form 10-K (File No. 814-00061) filed on June 5, 2018).
Amended and Restated Administration Agreement, dated March 9, 2017, between the Company and Capital Southwest Management
Corporation (incorporated by reference to Exhibit (k)(3) to Registration Statement on Form N-2 (Reg. No. 333-220385) filed on September 8,
2017).
Custody Agreement, dated August 30, 2016, between the Company and U.S. Bank National Association (incorporated by reference to Exhibit (j)
(1) to Registration Statement on Form N-2 (Reg. No. 333-220385) filed on September 8, 2017).
Custody Control Agreement, dated August 30, 2016, between the Company, ING Capital LLC and U.S. Bank National Association
(incorporated by reference to Exhibit (j)(2) to Registration Statement on Form N-2 (Reg. No. 333-220385) filed on September 8, 2017).
Document Custody Agreement, dated August 30, 2016, between the Company, ING Capital LLC and U.S. Bank National Association
(incorporated by reference to Exhibit (j)(3) to Registration Statement on Form N-2 (Reg. No. 333-220385) filed on September 8, 2017).
Form of Second Amended and Restated Equity Distribution Agreement, dated February 4, 2020, between the Company and each of Jefferies
LLC and Raymond James & Associates, Inc., respectively (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-00061) filed on
February 4, 2020).
Form of Equity Distribution Agreement, dated February 4, 2020, between the Company and each of JMP Securities LLC and B. Riley FBR, Inc.,
respectively (incorporated by reference to Exhibit 10.2 to Form 8-K (File No. 814-00061) filed on February 4, 2020).
Code of Ethics (incorporated by reference to Exhibit (r) to Registration Statement on Form N-2 (Reg. No 333-220385) filed on September 8,
2017).
List of subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm – RSM US LLP (relating to the Company Consolidated Financial Statements).
Consent of Independent Auditor – RSM US LLP (relating to I-45 SLF LLC).
Certification of President and Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
Certification of President and Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of
Chapter 63 of Title 18 of the United States Code.
Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
Audited Consolidated Financial Statements of I-45 SLF LLC as of March 31, 2021 and 2020 and for the years ended March 31, 2021, 2020 and
2019.
Report of RSM US LLP on Senior Securities Table for years ended March 31, 2021, 2020, 2019 and 2018.
Report of Grant Thornton on Senior Securities Table for the year ended March 31, 2017 (Incorporated by reference to Exhibit (n)(6) to
Registration Statement on Form N-2 (File No. 333-232492) filed on July 1, 2019).
* Filed herewith.
+ Indicates management contract or compensatory plan or arrangement.
^ The certifications attached as Exhibit 32.1 and 32.2 accompany this Annual Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act, and are not to be incorporated by reference
into any of the registrant’s filings under the Securities Act or the Exchange Act, whether made before or after the date of this Annual Report, irrespective of any general
incorporation language contained in any such filing.
144
Table of Contents
Item 16. Form 10-K Summary
None.
145
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CAPITAL SOUTHWEST CORPORATION
By:
/s/ Bowen S. Diehl
Bowen S. Diehl
President and Chief Executive Officer
Date: May 26, 2021
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears below hereby constitutes and appoints Bowen S. Diehl and
Michael Sarner, and each or either of them, acting individually, as his true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report, and to file the
same, with all exhibits thereto and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, and each of them,
full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents
and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or any of them, or their or his
substitutes, may lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature
/s/ David R. Brooks
David R. Brooks
/s/ Christine S. Battist
Christine S. Battist
/s/ Jack D. Furst
Jack D. Furst
/s/ T. Duane Morgan
T. Duane Morgan
/s/ Ramona Rogers-Windsor
Ramona Rogers-Windsor
/s/ William R. Thomas
William R. Thomas
/s/ Bowen S. Diehl
Bowen S. Diehl
/s/ Michael S. Sarner
Michael S. Sarner
Title
Chairman of the Board
Director
Director
Director
Director
Director
Date
May 26, 2021
May 26, 2021
May 26, 2021
May 26, 2021
May 26, 2021
May 26, 2021
President and Chief Executive Officer
May 26, 2021
Chief Financial Officer
(Chief Financial/Accounting Officer)
May 26, 2021
146
CAPITAL SOUTHWEST CORPORATION
List of Subsidiaries
Exhibit 21.1
Name of Subsidiary
State of Incorporation
I-45 SLF LLC
Capital Southwest Equity Investments, Inc.
Capital Southwest SBIC I, LP
Capital Southwest SBIC I GP, LLC
Delaware
Delaware
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement on Form N-2 (No. 333-232492) and on Form S-8 (Nos. 333-227117, 333-
207296, 333-177433, 333-177432, 333-118681) of Capital Southwest Corporation and Subsidiaries (collectively, the Company) of our report dated May
26, 2021, relating to the consolidated financial statements, and the schedule of investments in and advances to affiliates of the Company listed in Schedule
12-14 attached as an exhibit to the Company’s Annual Report on Form 10-K for the year ended March 31, 2021 (the Form 10-K), and of our report dated
March 26, 2021 on the financial information set forth in Part II, Item 5 of the Form 10-K under the heading “Senior Securities,” which is attached as an
exhibit to the Form 10-K. We also consent to the references to us under the headings “Senior Securities” in the Form 10-K.
/s/ RSM US LLP
Chicago, Illinois
May 26, 2021
CONSENT OF INDEPENDENT AUDITOR
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statement on Form N-2 (No. 333-232492) and on Form S-8 (Nos. 333-227117, 333-
207296, 333-177433, 333-177432, 333-118681) of Capital Southwest Corporation of our report dated May 19, 2021, relating to the financial statements of
I-45 SLF LLC and its subsidiary, included as an exhibit to this Annual Report on Form 10-K of Capital Southwest Corporation for the year ended March
31, 2021.
/s/ RSM US LLP
Chicago, Illinois
May 26, 2021
I, Bowen S. Diehl, certify that:
CERTIFICATIONS
1
I have reviewed this annual report on Form 10-K of Capital Southwest Corporation (the “registrant”);
Exhibit 31.1
2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3 Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: May 26, 2021
By:
/s/ Bowen S. Diehl
Bowen S. Diehl
President and Chief Executive Officer
I, Michael S. Sarner, certify that:
CERTIFICATIONS
1
I have reviewed this annual report on Form 10-K of Capital Southwest Corporation (the “registrant”);
Exhibit 31.2
2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3 Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: May 26, 2021
By:
/s/ Michael S. Sarner
Michael S. Sarner
Chief Financial Officer
Certification of the President and Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1
I, Bowen S. Diehl, President and Chief Executive Officer of Capital Southwest Corporation, certify that, to my knowledge:
1
2
The Form 10-K for the year ended March 31, 2021, filed with the Securities and Exchange Commission on May 26, 2021 (“accompanied report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the accompanied report fairly presents, in all material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: May 26, 2021
By:
/s/ Bowen S. Diehl
Bowen S. Diehl
President and Chief Executive Officer
Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2
I, Michael S. Sarner, Chief Financial Officer of Capital Southwest Corporation, certify that, to my knowledge:
1
2
The Form 10-K for the year ended March 31, 2021, filed with the Securities and Exchange Commission on May 26, 2021 (“accompanied report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the accompanied report fairly presents, in all material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: May 26, 2021
By:
/s/ Michael S. Sarner
Michael S. Sarner
Chief Financial Officer
I-45 SLF LLC
and Subsidiary
Consolidated Financial Statements
and
Independent Auditor’s Report
As of March 31, 2021 and 2020 and for the years ended
March 31, 2021, 2020 and 2019
Table of Contents
Independent Auditor's Report
Consolidated Statements of Assets, Liabilities and Members' Equity
Consolidated Schedules of Investments
Consolidated Statements of Operations
Consolidated Statements of Changes in Members' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
1
2
3
9
10
11
12
Independent Auditor's Report
Board of Managers
I-45 SLF LLC
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of I-45 SLF LLC and its subsidiary, which comprise the consolidated statements of
assets, liabilities, and members’ equity, including the consolidated schedules of investments, as of March 31, 2021 and 2020, and the related consolidated
statements of operations, changes in members’ equity and cash flows for each of the three years in the period ended March 31, 2021, and the related notes
to the consolidated financial statements (collectively, the financial statements).
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally
accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected
depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements
in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of I-45 SLF LLC and its subsidiary as
of March 31, 2021 and 2020, and the results of their operations, changes in members' equity and their cash flows for each of the three years in the period
ended March 31, 2021 in accordance with accounting principles generally accepted in the United States of America.
/s/ RSM US LLP
Chicago, Illinois
May 19, 2021
1
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Assets, Liabilities
and Members’ Equity
Assets
Investments, at fair value (cost $170,791,497 and $207,767,577, respectively)
Cash and cash equivalents
Due from broker
Deferred financing costs (net of accumulated amortization of $2,964,542 and $2,030,445,
respectively)
Interest receivable
Other assets
Liabilities and Members' Equity
Liabilities
Credit facility
Payable for securities purchased
Distributions payable
Interest payable
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies (Note 8)
Members' equity
$
$
$
March 31,
2021
2020
164,351,186 $
10,418,599
152,449
2,245,255
552,962
55,472
170,859,875
3,739,104
38,307
2,095,078
1,076,350
—
177,775,923 $
177,808,714
91,000,000 $
13,071,599
1,920,085
39,203
171,695
106,202,582
125,000,000
—
2,808,471
95,503
125,294
128,029,268
71,573,341
49,779,446
$
177,775,923 $
177,808,714
See accompanying notes to consolidated financial statements.
2
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2021
Portfolio Company
Industry
Investment
Type(1)
Maturity
Date
AAC New Holdco Inc. Healthcare services
First Lien
304,075
shares
common
stock
Warrants
(Expiration
- December
11, 2025)
6/25/2025
—
—
ADS Tactical, Inc.
American
Teleconferencing
Services, Ltd.
Aerospace &
defense
First Lien
3/19/2026
Telecommunications First Lien
6/8/2023
ATX Canada
Acquisitionco Inc.
Technology products
& components
First Lien
12/31/2023
California Pizza
Kitchen, Inc.
Restaurants
First Lien
11/23/2024
First Lien
Rolled Up
11/23/2024
5/23/2025
Second
Lien
67,841
shares
common
stock
First Lien
12/19/2025
Corel, Inc.
Geo Parent
Corporation
Software & IT
services
Building &
infrastructure
products
Go Wireless Holdings,
Inc.
Consumer products
& retail
First Lien
12/22/2024
Hunter Defense
Technologies, Inc.
Aerospace &
defense
First Lien
3/29/2023
InfoGroup Inc.
Software & IT
services
First Lien
4/3/2023
3
Current
Interest
Rate(2)
10.00%,
Principal
Amount
Cost
Fair Value
8.00% PIK $1,751,766 $ 1,751,766 $ 1,743,007
Percentage
of Members'
Equity
2.44 %
—
—
1,449,127
1,449,127
2.02 %
—
L+5.75%
(Floor
1.00%)
L+6.50%
(Floor
1.00%)
L+6.25%,
1.50% PIK
(Floor
1.00%)
L+10.00%
(Floor
1.50%)
1.00%,
L+11.00%
PIK
(Floor
1.50%)
1.00%,
L+12.50%
PIK
(Floor
1.50%)
—
482,412
482,412
0.67 %
6,730,769
6,596,154
6,697,115
9.36 %
6,758,587
6,698,359
3,590,499
5.02 %
4,463,810
4,461,904
4,084,386
5.71 %
936,826
912,937
935,655
1.31 %
1,038,669
1,035,244
1,033,475
1.44 %
1,140,568
1,140,568
1,114,911
1.56 %
—
—
—
1,844,670
1,844,670
2.58 %
First Lien
7/2/2026
L+5.00%
7,029,540
6,834,530
7,008,452
9.79 %
L+5.25%
L+6.50%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
4,900,000
4,866,831
4,887,750
6.83 %
6,847,794
6,816,260
6,839,234
9.56 %
6,121,915
6,048,680
6,091,305
8.51 %
2,880,000
2,870,351
2,740,622
3.83 %
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2021
Portfolio Company
Industry
Investment
Type(1)
Maturity
Date
Integro Parent Inc.
Business services
First Lien
10/28/2022
Intermedia Holdings,
Inc.
Inventus Power, Inc.
Isagenix International,
LLC
KORE Wireless Group
Inc.
Software & IT
services
Technology
Products &
Components
First Lien
7/21/2025
First Lien
3/29/2024
Consumer products
& retail
First Lien
6/14/2025
Telecommunications First Lien
12/20/2024
Lab Logistics, LLC
Healthcare services
First Lien
9/25/2023
Lift Brands, Inc.
Consumer services
Tranche A
Tranche B
Tranche C
1,051
shares
common
stock
6/29/2025
6/29/2025
6/29/2025
Current
Interest
Rate(2)
L+5.75%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.75%
(Floor
1.00%)
L+5.50%
L+7.25%
(Floor
1.00%)
L+7.5%
(Floor
1.00%)
9.50% PIK
—
Principal
Amount
Cost
Fair Value
Percentage
of Members'
Equity
3,253,315
3,226,461
3,200,612
4.47 %
5,735,180
5,711,791
5,747,740
8.03 %
7,000,000
6,930,192
6,930,192
9.68 %
1,822,867
1,812,039
1,375,809
1.92 %
4,705,974
4,679,768
4,700,092
6.57 %
6,305,398
6,255,332
6,305,398
8.81 %
2,520,949
530,548
564,693
2,520,949
530,548
564,693
2,369,692
424,438
451,754
3.31 %
0.59 %
0.63 %
—
—
—
748,600
748,600
1.05 %
Lightbox Intermediate,
L.P.
Software & IT
services
First Lien
5/9/2026
LOGIX Holdings
Company, LLC
Telecommunications First Lien
12/23/2024
Lulu's Fashion Lounge,
LLC
Consumer products
& retail
First Lien
8/26/2022
Mills Fleet Farm Group
LLC
Consumer products
& retail
First Lien
10/24/2024
NBG Acquisition, Inc. Wholesale
First Lien
4/26/2024
Novetta Solutions,
LLC
Software & IT
services
PaySimple, Inc.
Software & IT
services
First Lien
Delayed
Draw Term
Loan
First Lien
10/17/2022
8/23/2025
8/23/2025
Pet Supermarket, Inc.
Consumer products
& retail
First Lien
7/5/2022
L+5.00%
L+5.75%
(Floor
1.00%)
L+7.00%,
2.50% PIK
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.50%
L+5.50%
L+5.50%
(Floor
1.00%)
3,453,072
3,418,085
3,418,541
4.78 %
5,889,503
5,862,627
5,683,370
7.94 %
3,686,458
3,633,574
3,151,922
4.40 %
4,625,000
4,570,478
4,532,500
6.33 %
2,737,500
2,713,620
2,468,308
3.45 %
4,844,600
4,794,921
4,835,541
6.76 %
1,368,765
4,219,897
1,345,921
4,174,090
1,365,343
4,209,348
1.91 %
5.88 %
4,760,225
4,750,204
4,641,219
6.48 %
4
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2021
Portfolio Company
Industry
Investment
Type(1)
Maturity
Date
PT Network, LLC
Healthcare products First Lien
11/30/2023
Research Now
Group, Inc.
Business Services
First Lien
12/20/2025
Signify Health, LLC Healthcare services
First Lien
12/23/2024
Tacala, LLC
Consumer products
& retail
Second
Lien
TestEquity, LLC
Capital equipment
First Lien
First Lien -
Term Loan
B
TGP Holdings III
LLC
Durable consumer
goods
Second
Lien
2/7/2028
4/28/2022
4/28/2022
9/25/2025
Time Manufacturing
Acquisition
Capital equipment
First Lien
2/3/2023
UniTek Global
Services, Inc.
U.S. TelePacific
Corp.
Vida Capital, Inc.
Telecommunications First Lien
8/20/2024
Telecommunications First Lien
First Lien
Financial services
5/2/2023
10/1/2026
YS Garments, LLC
Consumer products
& retail
First Lien
8/9/2024
Current
Interest
Rate(2)
L+5.50%,
2.00% PIK
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+4.50%
(Floor
1.00%)
L+7.50%
(Floor
0.75%)
L+6.25%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+8.50%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.50%,
1.00% PIK
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+6.00%
L+6.00%
(Floor
1.00%)
Principal
Amount
Cost
Fair Value
Percentage
of Members'
Equity
4,464,917
4,464,916
4,464,917
6.24 %
4,987,113
4,987,113
4,950,333
6.92 %
5,044,000
5,016,857
5,063,596
7.07 %
5,000,000
4,989,074
5,002,100
6.99 %
3,815,993
3,807,756
3,358,074
4.69 %
949,133
946,991
835,237
1.17 %
2,500,000
2,478,913
2,482,813
3.47 %
5,802,043
5,785,401
5,823,800
8.14 %
2,736,317
2,720,753
2,479,651
3.46 %
5,200,139
3,805,000
5,171,710
3,760,016
4,829,005
3,671,825
6.75 %
5.13 %
4,634,374
4,608,311
4,286,796
5.99 %
Total Investments
$170,791,497 $164,351,186
229.63 %
(1) Corporate bank loans and common stock and warrants represent 223.3% and 6.3%, respectively, of Members' Equity as of March 31, 2021.
(2) Represents the interest rate as of March 31, 2021. All interest rates are payable in cash, unless otherwise noted. The majority of investments bear interest at a rate
that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”) which reset daily, monthly, quarterly, or
semiannually. For each the Company has provided the spread over LIBOR or Prime in effect at March 31, 2021. Certain investments are subject to a LIBOR or
Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind ("PIK") interest.
See accompanying notes to consolidated financial statements.
5
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2020
Portfolio Company
Industry
AAC Holdings, Inc.
Healthcare services
Investment TypeMaturity Date
First Lien -
Priming
Facility
3/31/2021
ADS Tactical
Aerospace & defense
First Lien
7/26/2023
First Lien(4)
6/30/2023
ALKU, LLC
American Teleconferencing
Business services
Services, Ltd.
Telecommunications
ATX Canada Acquisitionco
Technology products &
components
California Pizza Kitchen,
Inc.
Inc.(4)
Corel
Geo Parent Corporation
Restaurants
Software & IT services
Building & infrastructure
products
First Lien
7/29/2026
First Lien
6/8/2023
First Lien
6/11/2021
First Lien
First Lien
8/23/2022
7/2/2026
First Lien
12/19/2025
Go Wireless Holdings, Inc.Consumer products & retail First Lien
Hunter Defense
12/22/2024
3/29/2023
First Lien
Imagine! Print Solutions,
Technologies, Inc. Aerospace & defense
Media, marketing &
entertainment
LLC
Second Lien
6/21/2023
InfoGroup Inc.
Software & IT services
First Lien
4/3/2023
Integro Parent Inc.
Business services
First Lien
10/31/2022
Intermedia Holdings, Inc.Software & IT services
First Lien
7/21/2025
Isagenix International, LLCConsumer products & retail First Lien
6/14/2025
JAB Wireless, Inc.
Telecommunications
First Lien
5/2/2023
6
6.48 %
9.51 %
5.66 %
7.68 %
7.62 %
6.87 %
8.86 %
9.40 %
Principal
Amount
Cost
Fair Value
Percentage of
Members'
Equity
1,597,752 $
1,597,752 $
1,597,752
3.21 %
Current Interest
Rate(1)
P+13.50% (Floor
1.00%)$
L+ 6.75% (Floor
1.00%),
4.00% PIK 7,370,773
7,264,031
3,224,713
L+6.25% (Floor
0.75%)
L+5.50% (Floor
1.00%)
L+6.50% (Floor
1.00%)
4,947,537
4,928,495
4,734,793
3,000,000
2,971,923
2,820,000
6,770,762
6,622,685
3,825,480
L+7.00% (Floor
1.00%),
1.0% PIK
L+6.00% (Floor
1.00%)
L+5.00%
L+5.25%
L+6.50% (Floor
1.00%)
L+7.00% (Floor
1.00%)
L+8.75% (Floor
1.00%)
L+5.00% (Floor
1.00%)
L+5.75% (Floor
1.00%)
L+6.00% (Floor
1.00%)
L+5.75% (Floor
1.00%)
L+8.00% (Floor
1.00%)
4,573,072
4,560,879
3,795,650
6,759,837
4,968,750
6,740,537
4,720,313
3,417,943
4,409,766
4,950,000
4,909,365
4,677,750
6,212,500
6,170,181
5,042,469
10.13 %
5,855,755
5,772,233
5,870,395
11.79 %
3,000,000
2,975,680
412,500
2,910,000
2,895,349
2,610,270
3,301,120
3,255,919
3,251,603
0.83 %
5.24 %
6.53 %
5,793,852
5,764,737
5,301,375
10.65 %
1,953,321
1,938,866
727,612
1.46 %
7,840,000
7,791,185
7,702,800
15.47 %
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2020
Current Interest
Principal
Portfolio Company
Industry
KORE Wireless Group Inc.Telecommunications
Investment TypeMaturity Date
12/20/2024
First Lien
Amount
4,754,117
Cost
4,720,532
Fair Value
4,397,558
Lab Logistics, LLC
Healthcare services
First Lien
9/25/2023
1.00%)
0.75% PIK 4,957,991
4,882,891
4,214,293
Rate(1)
L+5.50%
L+6.50% (Floor
L+7.00% (Floor
1.00%),
1.0% PIK
L+5.00%
L+5.75% (Floor
1.00%)
L+6.00% (Floor
1.00%)
L+9.00% (Floor
1.00%)
L+6.25% (Floor
1.00%),
L+5.50% (Floor
1.00%)
L+5.00%
L+5.00% (Floor
1.00%)
L+5.50%
L+5.50%
L+5.25% (Floor
1.00%)
L+5.50% (Floor
1.00%)
L+5.50% (Floor
1.00%),
2.0% PIK
L+4.50% (Floor
1.00%)
L+7.50%
Percentage of
Members'
Equity
8.83 %
9.99 %
7.41 %
5.89 %
9.87 %
8.47 %
3.21 %
5.52 %
8.77 %
1.71 %
7.79 %
5,401,756
5,360,681
4,971,150
4,810,104
2,977,500
4,784,674
2,938,297
3,689,292
2,932,838
5,953,001
5,917,748
4,911,226
6,518,750
6,485,032
5,382,043
10.81 %
3,778,409
3,706,876
3,230,539
6.49 %
2,812,500
2,955,000
2,779,876
2,818,702
1,597,500
2,748,150
4,895,734
4,813,041
4,364,841
933,880
4,262,739
919,845
4,205,957
849,831
3,879,092
6,329,280
6,309,704
5,917,877
11.89 %
4,810,070
4,791,909
4,425,265
8.89 %
4,418,280
4,418,279
4,024,169
5,096,000
4,500,000
5,061,228
4,492,489
4,280,640
3,521,250
8.08 %
8.60 %
7.07 %
Lift Brands, Inc.
Lightbox Intermediate, L.P.Software & IT services
LOGIX Holdings Company,
Consumer services
LLC
Telecommunications
First Lien
First Lien
4/16/2023
5/9/2026
First Lien
12/23/2024
LSF9 Atlantis Holdings,
LLC
Lulu's Fashion Lounge,
LLC
Mills Fleet Farm Group
LLC
Telecommunications
First Lien
5/1/2023
Consumer products & retail First Lien
8/26/2022
Consumer products & retail First Lien
10/24/2024
NBG Acquisition, Inc. Wholesale
Nomad Buyer, Inc.
Healthcare services
First Lien
First Lien
4/26/2024
8/1/2025
Novetta Solutions, LLC Software & IT services
PaySimple, Inc.(2)
Software & IT services
First Lien
Delayed Draw
10/17/2022
Term Loan 8/23/2025
8/23/2025
First Lien
Peraton Corp. (fka MHVC
Acquisition Corp.) Aerospace & defense
First Lien
4/29/2024
Pet Supermarket, Inc. Consumer products & retail First Lien
7/5/2022
PT Network, LLC
Healthcare services
First Lien
11/30/2023
Signify Health, LLC
Tacala, LLC
Healthcare services
Consumer products & retail Second Lien
First Lien
12/23/2024
2/7/2028
7
Portfolio Company
Industry
TestEquity, LLC
Capital equipment
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2020
Investment TypeMaturity Date
Rate(1)
Current Interest
Principal
Amount
Cost
Fair Value
Percentage of
Members'
Equity
4/28/2022
L+5.50% (Floor
1.00%)
3,815,993
3,800,086
3,186,354
6.40 %
First Lien
First Lien -
Term Loan
B
4/28/2022
TGP Holdings III LLC Durable consumer goods
Second Lien
9/25/2025
The Hoover Group, Inc.Energy services (midstream)First Lien
Time Manufacturing
Acquisition
Capital equipment
First Lien
1/28/2021
2/3/2023
UniTek Global Services,
Inc.
Telecommunications
U.S. TelePacific Corp. Telecommunications
Vida Capital, Inc.
Financial services
VIP Cinema Holdings, Inc.Hotel, gaming & leisure
First Lien
8/26/2024
First Lien
First Lien
First Lien -
Superiority
DIP(4)
5/2/2023
10/1/2026
5/20/2020
First Lien(4)
3/1/2023
Wireless Vision Holdings,
LLC(3)
YS Garments, LLC
Total Investments
Telecommunications
First Lien
Consumer products & retailFirst Lien
9/29/2022
8/9/2024
L+5.50%
L+8.50% (Floor
1.00%)
L+7.25% (Floor
1.00%)
L+5.00% (Floor
1.00%)
959,034
954,854
800,793
2,500,000
2,474,215
1,837,500
1.61 %
3.69 %
6,369,996
6,306,165
5,892,246
11.84 %
4,847,569
4,825,207
4,435,525
8.91 %
L+5.50% (Floor
1.00%),
1.0% PIK
L+6.00% (Floor
1.00%)
L+6.00%
L+8.00%
P+7.00% (Floor
1.00%)
L+8.91% (Floor
1.00%),
1.0% PIK
P+6.00%
2,970,169
2,949,235
2,687,409
5,200,139
3,965,000
5,158,075
3,909,608
4,056,108
3,667,625
719,367
707,617
129,486
4,375,000
4,364,343
787,500
7,326,695
4,812,500
7,252,903
4,777,378
6,263,591
4,355,313
$207,767,577.00 $170,859,875.00
5.40 %
8.15 %
7.37 %
0.26 %
1.58 %
12.58 %
8.75 %
343.23 %
(1) The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”). For each the Company has
provided the spread over LIBOR or Prime and the current contractual interest rate in effect at March 31, 2020. Certain investments are subject to a LIBOR or Prime interest rate floor.
Certain investments, as noted, accrue payment-in-kind ("PIK") interest.
(2) The investment has approximately $0.5 million in an unfunded delayed draw commitment as of March 31, 2020.
(3) The investment is structured as a first lien last out term loan.
(4)
Investment was on non-accrual status as of March 31, 2020, meaning the Company has ceased to recognize interest income on the investment. The current interest rate and terms
disclosed on investments on non-accrual reflect the terms at the time of placement on non-accrual status.
See accompanying notes to consolidated financial statements.
8
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Operations
2021
Years Ended March 31,
2020
2019
$
13,503,215 $
426,418
13,929,633
19,885,861 $
414,445
20,300,306
20,808,110
588,778
21,396,888
4,236,991
118,416
209,783
4,565,190
7,684,904
140,469
220,051
8,045,424
8,369,602
153,400
236,224
8,759,226
9,364,443
12,254,882
12,637,662
Investment income
Interest
Fees and other income
Total investment income
Expenses
Interest expense
Administrative fee
Professional fees and other
Total expenses
Net investment income
Realized and unrealized gain (loss) on investments
Net realized (loss) gain on investments
Net change in unrealized appreciation (depreciation) on investments
Net gain (loss) on investments
(15,312,952)
30,467,391
15,154,439
603,240
(32,393,964)
(31,790,724)
399,954
(6,647,036)
(6,247,082)
Net increase (decrease) in members' equity resulting from operations
$
24,518,882 $
(19,535,842) $
6,390,580
See accompanying notes to consolidated financial statements.
9
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Changes in Members' Equity
2021
Years Ended March 31,
2020
2019
Members' equity beginning balance
$
Contributions
Distributions
Net increase in members' equity resulting from operations:
Net investment income
Net realized (loss) gain on investments
Net change in unrealized appreciation (depreciation) on investments
49,779,446 $
16,000,000
(18,724,987)
47,054,459
82,001,122 $
—
(12,685,834)
69,315,288
9,364,443
(15,312,952)
30,467,391
12,254,882
603,240
(32,393,964)
Net increase (decrease) in members' equity resulting from operations
24,518,882
(19,535,842)
84,046,081
4,000,000
(12,435,539)
75,610,542
12,637,662
399,954
(6,647,036)
6,390,580
Members' equity ending balance
$
71,573,341 $
49,779,446 $
82,001,122
See accompanying notes to consolidated financial statements.
10
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Cash Flows
Cash flows from operating activities
Net increase (decrease) in members' equity resulting from operations
Adjustments to reconcile net increase (decrease) in members' equity
resulting from operations to net cash provided by (used in) operating
activities:
Net realized loss (gain) on investments
Net change in unrealized (appreciation) depreciation on investments
Amortization of premiums and discounts on investments
Amortization of deferred financing costs
Purchases of investments
Proceeds from sales / paydowns of investments
Payment-in-kind interest and dividends
Changes in operating assets and liabilities:
Due from broker
Interest receivable
Other Assets
Payable for securities purchased
Interest payable
Accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Cash flows from financing activities
Borrowings under credit facility
Repayments of credit facility
Deferred financing costs paid
Capital contributions
Distributions
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information
Cash paid during the period for interest
Supplemental disclosure of noncash financing activities
Distributions payable
2021
Years Ended March 31,
2020
2019
$
24,518,882 $
(19,535,842) $
6,390,580
15,312,952
(30,467,391)
(502,920)
934,097
(40,196,036)
62,539,176
(177,092)
(114,142)
523,388
(36,981)
13,071,599
(56,300)
46,401
45,395,633
18,000,000
(52,000,000)
(1,102,765)
16,000,000
(19,613,373)
(38,716,138)
(603,240)
32,393,964
(638,807)
(479,832)
(49,770,814)
85,306,393
—
(38,307)
(97,446)
—
(940,346)
(61,639)
(68,414)
(399,954)
6,647,036
(671,016)
496,799
(95,262,272)
72,945,680
—
329,987
(165,804)
—
(2,272,472)
55,067
67,497
45,465,670
(11,838,872)
23,363,635
(58,363,636)
—
—
(13,132,163)
(48,132,164)
55,000,000
(38,000,000)
(1,500)
4,000,000
(12,071,214)
8,927,286
(2,911,586)
9,317,184
6,405,598
6,679,495
3,739,104
10,418,599 $
(2,666,494)
6,405,598
3,739,104 $
3,357,055 $
7,129,754 $
7,797,256
1,920,085 $
2,808,471 $
3,254,800
$
$
$
See accompanying notes to consolidated financial statements.
11
I-45 SLF LLC
and Subsidiary
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
I-45 SLF LLC and Subsidiary (the “Company”) was organized as a Delaware limited liability company on September 3, 2015 by the filing of a
certificate of formation (the “Certificate”) with the Office of the Secretary of State of the State of Delaware under and pursuant to the Delaware Limited
Liability Company Act (the “Act”). The Company is a joint venture between Main Street Capital Corporation and Capital Southwest Corporation. Capital
Southwest Corporation owns 80.0% of the Company and has a profits interest of 75.6%, while Main Street Capital Corporation owns 20.0% and has a
profits interest of 24.4%. The initial equity capital commitment to the Company totaled $85 million, consisting of $68 million from Capital Southwest
Corporation and $17 million from Main Street Capital Corporation. On April 30, 2020, each of Capital Southwest Corporation and Main Street Capital
Corporation made an additional equity capital commitment of $12.8 million and $3.2 million, respectively, which resulted in a total equity capital
commitment to the Company of $80.8 million and $20.2 million, respectively. On March 25, 2021, the Company declared a return of capital dividend to its
members in the amount of $10 million. As of March 31, 2021, total funded equity capital totaled $91.0 million, consisting of $72.8 million from Capital
Southwest Corporation and $18.2 million from Main Street Capital Corporation. The Company's Board of Managers makes all investment and operational
decisions for the fund, and consists of equal representation from Capital Southwest Corporation and Main Street Capital Corporation.
On March 11, 2021, Capital Southwest Corporation and Main Street Capital Corporation entered into the Second Amended and Restated Limited
Liability Company Operating Agreement (the "Amendment"), which increased Capital Southwest Corporation's profits interest from (a) 75.6% to (b) an
amount equal to: (i) 76.26250% as of the date of the Amendment through the quarter ended March 31, 2021; (ii) 76.9250% for the quarter ending June 30,
2021; (iii) 77.58750% for the quarter ending September 30, 2021; and (iv) 78.250% for the quarter ending December 31, 2021 and periods thereafter.
On September 18, 2015, the Company’s wholly-owned and consolidated subsidiary, I-45 SPV LLC (the “SPV”) was organized as a Delaware
limited liability company by the filing of a certificate of formation with the Office of the Secretary of State of the State of Delaware. The Company is the
sole equity member of the SPV. All intercompany balances and transactions have been eliminated in consolidation.
The registered agent and office of the Company required by the Act to be maintained in the State of Delaware is The Corporation Trust Company,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The principal office of the Company shall be located at such place within or
without the State of Delaware, and the Company shall maintain such records, as the Members shall determine from time to time.
BASIS OF PRESENTATION
The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles (“U.S. GAAP”) as detailed in
the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). The Company is an investment company and follows
the accounting and reporting guidance in FASB Topic 946 - Financial Services - Investment Companies (“ASC Topic 946”). Financial statements prepared
on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements
and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the
amounts reported and disclosed herein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Investment transactions are accounted for on a trade-date basis. Premiums and discounts are amortized over the lives of the respective debt
securities using the effective interest method. Investments that are held by the Company are stated at fair value in accordance with ASC Topic 820 - Fair
Value Measurements and Disclosures (“ASC Topic 820”).
12
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment and the cost basis
of the investment, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the year net
of recoveries and realized gains or losses from in-kind redemptions. Net change in unrealized appreciation or depreciation reflects the net change in the fair
value of the investment portfolio and the reclassification of any prior period unrealized appreciation or depreciation on exited investments and financial
instruments to realized gains or losses.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist of cash and highly liquid investments with an original maturity of three months or less at the date of
purchase, are carried at cost, which approximates fair value.
In the normal course of business, the Company maintains its cash and cash equivalent balances in financial institutions, which at times may exceed
federally insured limits. The Company is subject to credit risk to the extent any financial institution with which it conducts business is unable to fulfill
contractual obligations on its behalf. Management monitors the financial condition of such financial institutions and does not anticipate any losses from
these counterparties.
DEFERRED FINANCING COSTS
Deferred financing costs include commitment fees and other costs related to the Company’s credit facility (the “Credit Facility”, as discussed
further in Note 4). These costs have been capitalized and are amortized into interest expense over the term of the individual instrument.
INTEREST INCOME
Interest income is recorded as earned on the accrual basis and includes amortization of premiums or accretion of discounts. In accordance with the
Company’s valuation policy, accrued interest receivables are evaluated periodically for collectability. When the Company does not expect the debtor to be
able to service all of its debt or other obligations, the Company will generally establish a reserve against interest income receivable, thereby placing the
loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the
ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding the ability to service debt or other
obligations, it will be restored to accrual basis. As of March 31, 2021, the Company did not have any investments on non-accrual status. As of March 31,
2020, the Company had two investments on non-accrual status.
EXPENSES
Unless otherwise voluntarily or contractually assumed by the Board of Managers or another party, the Company bears all expenses incurred in its
business including, but not limited to, the following: all costs and expenses related to investment transactions and positions for the Company, legal fees,
accounting, auditing and tax preparation fees, recordkeeping and custodial fees, costs of computing the Company’s members’ equity, research expenses,
costs of registration expenses, all costs with respect to communications with members, and other types of expenses as may be approved from time to time.
INCOME TAXES
The Company is organized and operates as a limited liability company and is not subject to income taxes as a separate entity. Such taxes are the
responsibility of the individual members. Accordingly, no provision for income taxes has been made in the Company’s financial statements. Investments in
foreign securities may result in foreign taxes being withheld by the issuer of such securities.
For the current open tax year and for all major jurisdictions, management of the Company has evaluated the tax positions taken or expected to be
taken in the course of preparing the Company’s tax returns to determine whether the tax positions will “more-likely-than-not” be sustained by the Company
upon challenge by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold and that would result in a tax benefit or
expense to the Company would be recorded as a tax benefit or expense in the current year. For each of the three tax years ended December 31, 2020, 2019
and 2018 the Company determined that it did not have any uncertain tax positions. Generally, the Company is subject to income tax examinations by major
taxing authorities during the three years ended December 31, 2017 through 2019.
13
RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
In March 2020, the FASB issued ASU 2020-04, "Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial
reporting." The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging
relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance
for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and certain lenders. Many of these
agreements include language for choosing an alternative successor rate when LIBOR reference is no longer considered to be appropriate. With respect to
other agreements, the Company intends to work with its portfolio companies and lenders to modify agreements to choose an alternative successor rate.
Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the
continuation of existing contracts. The standard is effective as of March 12, 2020 through December 31, 2022 and the Company plans to apply the
amendments in this update to account for contract modifications due to changes in reference rates. The Company does not believe that it will have a
material impact on its consolidated financial statements and disclosures.
3. FAIR VALUE MEASUREMENTS
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s investments is
determined as of the close of business at the end of each reporting period (“Valuation Date”) in conformity with the guidance on fair value measurements
and disclosures under U.S. GAAP.
The inputs used to determine the fair value of the Company’s investments are summarized in the three broad levels listed below:
•
•
•
Level 1- unadjusted quoted prices in active markets for identical investments
Level 2- investments with other significant observable inputs (including quoted prices for similar securities, interest rates, prepayments speeds,
credit risk, etc.)
Level 3- investments with significant unobservable inputs (including the Company’s own assumptions in determining the fair value of
investments)
The Company establishes valuation processes and procedures to ensure the valuation methodologies for investments categorized within Level 3 of
the fair value hierarchy are fair, consistent, and verifiable. The Company designates the Board of Managers to oversee the entire valuation process of Level
3 investments. The Board of Managers is responsible for developing the Company’s valuation processes and procedures, conducting periodic reviews of
the valuation policies, and evaluating the overall fairness and consistent application of the valuation policies. Additionally, the Board of Managers is
responsible for reviewing and approving the valuation determinations and any information provided by U.S. Bancorp Fund Services, LLC (the
“Administrator”), as well as determining the levels of the fair value hierarchy in which the investments fall.
The Board of Managers meets on a quarterly basis, or more frequently as needed, to determine the valuations of Level 3 investments. Valuations
determined by the Board of Managers are required to be supported by market data, third-party pricing sources, industry accepted pricing models,
counterparty prices, or other methods the Board of Managers deems to be appropriate, including the use of internal proprietary pricing models. The
Company, along with the Board of Managers, periodically reviews the valuations of Level 3 investments, and if necessary, recalibrates its valuation
procedures.
Investments currently held by the Company are generally valued as follows:
Securities that are listed on a recognized exchange are valued at their last available public sales price. Securities that are listed on more than one
national securities exchange are valued at the last quoted sales price on the primary exchange on which the security is listed. If a security was not traded on
the primary exchange on the valuation date, such security is valued at the last quoted sales price on the next most active market, if the Board of Managers
determines the price to be representative of fair value. Investments that are not listed on an exchange but are traded over-the-counter are generally valued
using independent pricing services. These pricing services may use the broker quotes or models that consider such factors as issue type, coupon rate,
maturity, rating, prepayment speed, yield, or prices of comparable quality, when pricing securities.
In the case of investments not priced by independent pricing services, the Board of Managers will endeavor to obtain market maker quotes. For
both long and short positions, the average of all “bid” and “asked” quotations is generally used.
14
The fair value determination of the Company’s investments consists of a combination of observable inputs in non-active markets and unobservable
inputs. The observable inputs are not always sufficient to determine the fair value of these investments. As a result, all investments currently held by the
Company are categorized as Level 3 under ASC 820.
The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s investments that are
categorized within Level 3 of the fair value hierarchy as of March 31, 2021 and 2020:
Type of Investment
Fair Value at March 31,
2021
Valuation Technique
Unobservable Input
Range
Corporate bank loans
$
Common stock and warrants
$
127,674,525
25,221,661
6,930,192
4,524,808
164,351,186
Income Approach
Income Approach
Market Approach
Enterprise Value
Waterfall Analysis
Broker Quotes
Discount Rate
Cost
53.1 - 100.4
7.1% - 20.6%
99.0 - 99.0
Discount Rate
13.9% - 21.4%
Type of Investment
Fair Value at March 31,
2020
Valuation Technique
Unobservable Input
Range
Corporate bank loans
132,080,010
38,779,865
170,859,875
$
Income Approach
Income Approach
Broker Quotes
Discount Rate
13.8 - 100.3
9.0% - 19.8%
The Board of Managers will evaluate the valuation hierarchy and make changes when necessary. The Company discloses transfers between levels
based on valuations at the end of the reporting period. There were no transfers between levels for the years ended March 31, 2021 and 2020. The inputs or
methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments.
The following is a summary categorization, as of March 31, 2021, of the Company’s investments based on the level of inputs utilized in
determining the value of such investments:
Level 1
Level 2
Level 3
Total
Investments (at fair value)
Corporate bank loans
Common stock and warrants
Total investments
$
— $
—
—
Cash equivalents - money market fund
9,633,673
— $
—
—
—
159,826,378 $
4,524,808
164,351,186
159,826,378
4,524,808
164,351,186
—
9,633,673
$
9,633,673 $
— $
164,351,186 $
173,984,859
15
The following is a summary categorization, as of March 31, 2020, of the Company’s investments based on the level of inputs utilized in
determining the value of such investments:
Investments (at fair value)
Corporate bank loans
Total investments
Level 1
Level 2
Level 3
Total
$
— $
—
— $
—
170,859,875 $
170,859,875
170,859,875
170,859,875
Cash equivalents - money market fund
2,572,876
—
—
2,572,876
$
2,572,876 $
— $
170,859,875 $
173,432,751
Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3
category. As a result, the unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both
observable and unobservable inputs. For the years ended March 31, 2021 and 2020, the Company purchased $40,196,036 and $48,830,468, respectively, of
new investments of corporate bank loans classified as Level 3 investments in the fair value hierarchy.
4. CREDIT FACILITY
The Company closed on a $75.0 million 5-year senior secured credit facility with Deutsche Bank AG (the “Credit Facility”) in the period ended March
31, 2016. The Company maintains the Credit Facility to provide additional liquidity to support its investment and operational activities. This facility
includes an accordion feature which allows the Company to achieve leverage of up to 2x debt-to-equity. The Credit Facility initially bore interest on a per
annum basis at a rate equal to the applicable LIBOR rate plus 2.50%. During the year ended March 31, 2017, the Company increased credit facility
commitments outstanding by an additional $90.0 million by adding three additional lenders to the syndicate, bringing total debt commitments to $165.0
million. In July 2017, the Credit Facility was amended to extend the maturity to July 2022 and to reduce the interest rate on borrowings to LIBOR plus
2.40%. In November 2019, the Credit Facility was further amended to extend the maturity to November 2024 and to reduce the interest rate on borrowings
to LIBOR rate plus 2.25%.
On April 30, 2020, the Credit Facility was amended to permanently reduce the Credit Facility amount through a prepayment of $15.0 million and
to change the minimum utilization requirements. On March 25, 2021, the Credit Facility was amended to extend the maturity to March 25, 2026 and to
reduce the interest rate on borrowings to LIBOR plus 2.15%.
The Company pays an administrative agent fee of 0.25% per annum and unused fees of 0.35% per annum on the unused lender commitments under the
Credit Facility. The Credit Facility is secured by a first lien on the assets of the Company. The Credit Facility contains certain affirmative and negative
covenants, including but not limited to maintenance of a borrowing base.
At March 31, 2021 and 2020, the Company had $91.0 million and $125.0 million, respectively, in borrowings outstanding under the Credit Facility. The
Company recognized interest expense related to the Credit Facility, including unused commitment fees, administrative agent fees and amortization of
deferred loan costs, of approximately $4.2 million and $7.7 million, respectively, for the years ended March 31, 2021 and 2020. The weighted average
interest rate on the Credit Facility was 2.65% and 4.61%, respectively, for the years ended March 31, 2021 and 2020. Average borrowings for the years
ended March 31, 2021 and 2020 were $104.2 million and $143.6 million, respectively.
A summary of the Company's contractual payment obligations for the repayment of outstanding indebtedness at March 31, 2021 is as follows:
Credit Facility
—
—
—
— $
91,000
— $
91,000
2022
2023
Years Ending March 31,
2024
2025
2026
Thereafter
Total
16
5. ALLOCATION OF PROFITS AND LOSSES
For each fiscal year, profits or net losses of the Company are allocated among and credited to or debited against the capital accounts of the members as
of the last day of each fiscal year in accordance with the Limited Liability Company Agreement (the “LLC Agreement”). Net profits or net losses are
allocated after giving effect for any initial or additional applications for interests or any repurchases of interests. Net investment income, realized gains
and losses, and unrealized gains or losses are allocated to the members pro rata in accordance with their profit percentages, as defined in the LLC
Agreement. Net profits or net losses are measured as the net change in the value of the members’ equity in the Company, including any change in
unrealized appreciation or depreciation of investments and income, net of expenses, and realized gains or losses during a fiscal year.
Each quarter a cash distribution may be made to the members, which is generally equivalent to estimated taxable income less non-cash revenue
(such as original issue discount amortization). The estimated taxable income distributions are generally made up of taxable net investment income
(excluding non-cash revenue). Estimated taxable income and distributions made to the members therefore may be materially different than GAAP net
investment income. The distribution policy is subject to change by the Board of Managers based on business and market conditions at any time.
Distributions are recorded on the declaration date and are generally paid to the members subsequent to each quarter end.
6. DUE FROM BROKERS
The Company conducts business with brokers for its investment activities. The clearing and depository operations for the investment activities are
performed pursuant to agreements with the brokers. The Company is subject to credit risk to the extent any broker with whom the Company conducts
business is unable to deliver cash balances or securities, or clear security transactions on the Company’s behalf. The Company monitors the financial
condition of the brokers with which the Company conducts business and believes the likelihood of loss under the aforementioned circumstances is remote.
At March 31, 2021 and 2020, the balance in due from brokers is cash of approximately $152 thousand and $38 thousand, respectively.
7. ADMINISTRATION AGREEMENT
In consideration for administrative, accounting, and recordkeeping services, the Company pays the Administrator a quarterly administration fee. This fee
is calculated based on the quarter end invested assets. For the year ended March 31, 2021, the Company had incurred $118 thousand in administration fees,
of which $29 thousand were payable at the end of the year. For the year ended March 31, 2020, the Company had incurred $140 thousand in administration
fees, of which $30 thousand were payable at the end of the year. For the period ended March 31, 2019, the Company had incurred $153 thousand in
administration fees, of which $78 thousand were payable at the end of the year.
The Administrator is affiliated with a broker, U.S. Bank, through which the Company transacts operations. At March 31, 2021, cash and cash equivalents
in the amount of $10.4 million are held with U.S. Bank. At March 31, 2020, cash and cash equivalents in the amount of $3.7 million are held by U.S. Bank.
8. COMMITMENTS AND CONTINGENCIES
The Company entered into various trades during the periods ended March 31, 2021 and 2020. As of March 31, 2021, there were outstanding trades
in the amount of approximately $13.1 million that remained unsettled. This is shown as payable for securities purchased on the Consolidated Statements of
Assets, Liabilities and Members’ Equity. As of March 31, 2020, there were no unsettled trades.
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk, consisting primarily of unused
commitments to extend financing to the Company’s portfolio companies. Since commitments may expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements. The following table lists the outstanding commitments as of March 31, 2021 and 2020:
Portfolio Company
PaySimple, Inc.
Total unused commitments to extend financing
Investment Type
Delayed Draw Term Loan
March 31,
2021
March 31,
2020
— $
— $
448,526
448,526
17
The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise. Furthermore,
third parties may try to seek to impose liability on the Company in connection with the activities of its portfolio companies. The Company has no currently
pending material legal proceedings to which it is a party or to which any of its assets is subject.
9. FINANCIAL HIGHLIGHTS
Financial highlights are as follows:
Net investment income to average members' equity
Expenses to average members' equity
(2)
Internal Rate of Return, end of year
(1)
(1)
2021
Years Ended March 31,
2020
2019
13.42 %
(6.54)%
10.25 %
16.88 %
(11.08)%
4.87 %
15.37 %
(10.65)%
14.15 %
(1)
(2)
Ratios are calculated by dividing the indicated amount by average members' equity measured as of the end of each quarter during the period.
The internal rate of return since inception ("IRR") of the members is computed based on the actual dates of cash inflows, outflows and the ending net
assets at the end of the year of the members' equity account as of each measurement date. The IRR includes actual cash payments and does not include
distributions declared but not yet paid.
Financial highlights are calculated for the members’ class taken as a whole. An individual member’s return and ratios may vary. Financial
highlights disclosed may not be indicative of future performance of the Company.
10. SUBSEQUENT EVENTS
Management has evaluated the need for additional disclosures and/or adjustments resulting from subsequent events through May 19, 2021, the
date the consolidated financial statements were available to be issued.
18
Report of Independent Registered Public Accounting Firm
Exhibit 99.2
Board of Directors and Shareholders
Capital Southwest Corporation and Subsidiaries
Our audit of the consolidated financial statements referred to in our report dated May 26, 2021, appearing in Capital Southwest Corporation’s annual report
on Form 10-K also included an audit of the senior securities table of Capital Southwest Corporation and Subsidiaries (collectively, the Company) as of
March 31, 2021, 2020, 2019 and 2018, included in Part II, Item 5 of the Company’s annual report on Form 10-K for the year ended March 31, 2021. This
table is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audit of the consolidated financial
statements.
In our opinion, the senior securities table, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ RSM US LLP
Chicago, Illinois
May 26, 2021