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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, 2022
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
8333 Douglas Avenue, Suite 1100,
Dallas, Texas
(Address of principal executive offices)
75-1072796
(I.R.S. Employer
Identification No.)
75225
(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, 2021 was $545,447,397 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 20, 2022 was 24,958,520.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for its 2022 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.
Item 9C.
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
[Reserved]
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
Disclosure Regarding Foreign Jurisdictions that Prevent Inspection
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 interest rate volatility, including the decommissioning of LIBOR, and inflation on our business and our portfolio companies;
• the impact of a protracted decline in the liquidity of credit markets on our business;
• our ability to operate as a business development company and to qualify and maintain our qualification as a regulated investment company,
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 a small business investment company;
• the dependence of our future success on the general economy and its impact on the industries in which we invest;
• the impact of supply chain disruptions and labor shortages on our portfolio companies;
• 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 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, as amended. 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 and second lien, 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, as amended, or the Code. As such, we generally will not be subject to U.S. federal income
tax at corporate rates 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.
CSWC has a direct wholly owned subsidiary that has elected to be treated as an association taxable as a corporation for U.S. federal income tax
purposes (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 subject to U.S.
federal income tax at normal corporate tax rates based on its 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.
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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 has an
investment strategy substantially similar to ours and makes similar types of investments in accordance with SBA regulations. SBIC I and its general partner
are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are 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 8333 Douglas Avenue, Suite 1100, Dallas, Texas 75225. 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 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. Our core business is to target senior debt investments and equity investments in LMM companies. We
also opportunistically target first and second lien loans in UMM companies. Our target LMM companies generally have annual earnings before interest,
taxes, depreciation and amortization, or EBITDA, between $3.0 million and $20.0 million, and our LMM investments generally range in size from $5.0
million to $35.0 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 $20.0 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 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 27, 2022, the Board of Directors declared a quarterly dividend of $0.48 per share and a special dividend of $0.15 per share for the quarter
ended June 30, 2022. The record date for the dividend is June 15, 2022. The payment date for the dividend is June 30, 2022.
On May 11, 2022, CSWC entered into Amendment No. 2 (the "Amendment") to the Credit Agreement. The Amendment changed the benchmark
interest rate from LIBOR to Term SOFR. In addition, on May 11, 2022, CSWC entered into an Incremental Commitment Agreement, pursuant to which the
total commitments under the Credit Agreement increased from $335 million to $380 million.
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 quarterly 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 effectively monitor 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.
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•
•
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.
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:
•
•
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.
• Competitive Advantages in Markets: 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 Ramona Rogers-Windsor, a member of the Board of Directors and a non-voting, observer of the investment committee.
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,
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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 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, as well as 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 of 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 quarter with senior management to review the performance
of our portfolio companies.
We utilize an internally developed investment rating system to rate the performance of 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.
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•
•
•
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. All new loans are initially rated 2.
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.
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 2022 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.
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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 would provide 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 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
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.
Our investment strategy depends heavily on the business owners, management teams, and financial sponsors of our portfolio companies and their
respective employees, contractors and service providers. In our investment process, the analysis of these individuals is a critical part of our overall
investment underwriting process and as a result we carefully review the qualifications and experience of the portfolio company’s business owners and
management team and their employment practices. We strive to partner with business owners, management teams, and financial sponsors whose business
practices reflect our core values.
We also 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 offer selected students investment analyst internships, which are expected to lead to permanent roles for high
performing and high potential interns. Through our internship program, interns who want to become investment analysts have the opportunity to see the
full investment process from origination to closing, as well as post-closing portfolio management activities. We routinely promote from within, promoting
current employees who have shown the technical ability, attitude, interest and the initiative to take on greater responsibility.
We have designed a compensation structure, including an array of benefit plans and programs, that we believe is attractive to our current and
prospective employees. For certain employees, our compensation strategy also includes an equity incentive plan, which we have structured to further align
the interests of our employees with our shareholders, and to cultivate a strong sense of ownership and commitment to our Company. Through our
performance review processes, our employees are annually evaluated by supervisors and our senior management team to ensure employees continue to
develop and advance as
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expected. We provide a workplace designed to enable our employees to balance work, family and family-related situations including flexible working
arrangements. Our employees have access to a parental leave program for birth, adoption placement or foster child placement. We are committed to
creating and maintaining an atmosphere where all employees feel welcomed, valued, respected and heard so that they feel motivated and encouraged to
contribute fully to their careers, our Company and our communities.
We are committed to fostering a workplace conducive to the open communication of any concerns regarding unethical, fraudulent or illegal
activities. We seek to promote a safe environment that is free of harassment or bullying. We do not tolerate discrimination or harassment of any kind,
including, but not limited to, sexual, gender identity, race, religion, ethnicity, age, or disability, among others. We seek feedback from employees on matters
related to their employment or our operations including its financial statement disclosures, accounting, internal accounting controls or auditing matters.
Under our Whistleblower Policy, each employee of the Company has the ability to confidentially report via a dedicated, confidential reporting hotline
questionable or improper accounting, internal controls, auditing matters, disclosure, or fraudulent business practices or other illegal or unethical behavior.
We seek to protect the confidentiality of those making reports of possible misconduct and our Whistleblower Policy prohibits retaliation against those who
report activities believed in good faith to be a violation of any law, rule, regulation or internal policy. Our Code of Business Conduct establishes applicable
policies, guidelines, and procedures that promote ethical practices and conduct by the Company and all its employees, officers, and directors. Our
Whistleblower Policy and Code of Business Conduct can be found on our website at www.capitalsouthwest.com/governance.
As of March 31, 2022, we had twenty-three 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.
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 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 August 11, 2021,
we received an exemptive order from the SEC to permit us to exclude the senior securities issued by SBIC I or any future SBIC subsidiary of the Company
from the definition of "senior securities" in the asset coverage requirement applicable to the Company under the 1940 Act.
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, 2022 for information regarding the Credit Facility and the issuance of
the 4.50% Notes due 2026 (the "January 2026 Notes") and the 3.375% Notes due 2026 (the "October 2026 Notes").
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, 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
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commission is reasonable in relation to the services provided. We did not pay any brokerage commissions during the fiscal years ended March 31, 2022,
2021 and 2020.
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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 subject to U.S. federal income tax only on
the portion of our taxable income we do not timely 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 subject to
U.S. federal income tax only on the portion of our taxable income and gains that 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. 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 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 2020 and 2019 and intend to meet the
minimum distribution requirements for tax year 2021. We continually monitor our distribution requirements with the goal of ensuring compliance with the
Code.
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 generally 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 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 U.S. federal income tax expense as a result of its ownership of the portfolio companies. This U.S. federal income
tax expense, if any, is reflected in our Consolidated Statements of Operations.
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• 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. On August 11, 2021, we received an exemptive
order from the SEC to permit us to exclude the senior securities issued by SBIC I or any future SBIC subsidiary of the Company from the definition of
senior securities in the asset coverage requirement applicable to the Company under the 1940 Act.
• 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 our 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 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
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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, the 1940 Act allows 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
under the 1940 Act 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 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 our
asset coverage requirement to 150%, our leverage capacity and usage, and risks related to leverage.
As of March 31, 2022, we had $205.0 million, $140.0 million and $150.0 million in total aggregate principal amount of debt outstanding under
our Credit Facility, the January 2026 Notes and the October 2026 Notes, respectively. As of March 31, 2022, our asset coverage for borrowed amounts was
193%.
In addition, while any preferred stock or publicly traded debt securities are outstanding, we may be prohibited from making distributions to our
shareholders or repurchasing 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
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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 then current NAV of our 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 2022 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, 8333 Douglas Avenue, Suite 1100, Dallas, Texas 75225.
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 we are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. We are
further required 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
The right to grant restricted stock awards under the 2010 Restricted Stock Award Plan (the "2010 Plan") terminated on July 18, 2021, ten years
after the date that the 2010 Plan was approved by the Company's shareholders pursuant to its terms.
In connection with the termination of the 2010 Plan, the Company’s Board of Directors and shareholders approved the Capital Southwest
Corporation 2021 Employee Restricted Stock Award Plan (the "2021 Employee Plan") as part of the compensation package for its employees, the terms of
which are, in all material respects, identical to the 2010 Plan. On July 19, 2021, we received an exemptive order that supersedes the prior exemptive order
relating to the 2010 Plan (the “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, the Company's Board of
Directors approved the Capital Southwest Corporation 2021 Non-Employee Director Restricted Stock Award Plan (the "Non-Employee Director Plan") as
part of the compensation package for non-employee
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directors of the Board of Directors. In connection therewith, on May 16, 2022, we received an exemptive order that supersedes the Order (the "Superseding
Order") and will cover both the employees and non-employee directors of the Board of Directors. The Non-Employee Director Plan will become effective
upon shareholder approval at our 2022 annual meeting of shareholders.
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;
• A corporation, or other entity treated as a corporation, created or organized in or under the laws of the United States or any state thereof or 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.
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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 U.S. federal income taxes on
any income that we timely 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 generally 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. In such case, we generally will be subject to U.S. federal income tax at corporate rates 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 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 (i) the securities, other than U.S. Government securities or securities of
other RICs, of one issuer, (ii) the securities, other than the securities of other RICs, 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 (iii) the
securities 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
dividends, interest or other income under the 90% Income Test. We may establish additional subsidiaries
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for the same purpose in the future. Any investments held through the 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 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 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 are not
advantageous from an investment standpoint.
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
U.S. federal income tax at corporate rates, 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
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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 for which the U.S. federal income tax treatment 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, such tax treatment 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. This 20% limitation has been temporarily reduced to 10% for distributions declared on or after November 1, 2021, and
on or before June 30, 2022. 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 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 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 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 U.S. federal tax at corporate rates or to dispose
of certain assets).
If we were unable to obtain tax treatment as a RIC, we would be subject to U.S. federal income 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 adjusted 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 U.S.
federal income tax at corporate rates on any built-in gain recognized during the succeeding five-year period, unless we made a special election to recognize
all built-in gain upon our re-qualification as a RIC and pay the U.S. federal income tax on such built-in gain.
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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, 2022 or 2021, or to our net deferred tax
assets as of March 31, 2022 or 2021.
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
governing 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 allows 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; rather, such funding 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 August 11, 2021, we received an exemptive order from the SEC to permit us to exclude the senior securities issued by SBIC I or any future
SBIC subsidiary of the Company from the definition of senior securities in the asset coverage requirement applicable to the Company under the 1940 Act.
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 has 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 has 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 depends
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
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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 it does 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
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, that, 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 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 results of 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.
•
•
•
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.
The interest rates of our loans to our portfolio companies, any LIBOR-linked securities, and other financial obligations that extend beyond 2021
might be subject to change based on recent regulatory changes, including the decommissioning of LIBOR.
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.
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•
•
•
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 January 2026 Notes and the October 2026 Notes are unsecured and therefore are effectively subordinated to any existing and future secured
indebtedness, including indebtedness under our Credit Facility.
• We may not be able to repurchase the January 2026 Notes and the October 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 January 2026 Notes and the October
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 may be 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 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 develop or maintain these relationships, as
well as the potential 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
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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 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 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, that, 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, 2022, the Credit Facility provides us with a revolving
credit line of up to $335.0 million of which $205.0 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, 2022, we had $205.0 million debt outstanding out of $335 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 2.15% with no LIBOR floor. 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 our financial obligations under the Credit Facility, the lenders under the Credit Facility
may exercise their remedies under the Credit Facility as the result of a default by us.
As of March 31, 2022, the carrying amount of the January 2026 Notes was $138.7 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. 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.
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As of March 31, 2022, the carrying amount of the October 2026 Notes was $146.5 million. The October 2026 Notes mature on October 1, 2026
and may be redeemed in whole or in part at any time prior to July 1, 2026, at par plus a "make-whole" premium, and thereafter at par. The October 2026
Notes bear interest at a rate of 3.375% per year, payable semi-annually on April 1 and October 1 of each year. The October 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)%
(27.99)%
(5.0)%
(16.42)%
0.0%
(4.85)%
5.0%
6.72%
10.0%
18.29%
(1) Assumes $974.0 million in total assets, $535.0 million in debt principal outstanding, $420.9 million in net assets and a weighted-average interest rate of 3.69% on our indebtedness based
on our financial data available on March 31, 2022. 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, 2022 total assets of at least 2.10%.
(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, 2022, 87.2% 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 inopportune or 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 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 U.S. federal income tax at corporate rates 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
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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 (i) the securities, other than U.S Government
securities or securities of other RICs, of one issuer; (ii) the securities, other than securities of other RICs, 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 (iii) the securities 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 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 have
unrealized gains, we would have to establish deferred tax liabilities, 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 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.
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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 results of 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 COVID-19 that began in December 2019 and the conflict between Russia and Ukraine that began
in late February 2022 (see "Terrorist attacks, acts of war or natural disasters may affect any market for our common stock, impact the business in which we
invest and harm our business, operating results and financial condition" for more information). 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, including new variants of COVID-19, such as the Delta and Omicron variants, 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 liquidity issues; and (iv) rapidly evolving proposals and/or actions by state and federal
governments to address problems being experienced in the markets and by businesses and the economy in general, which may 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 and
our ability to grow and could also 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 current market conditions (which are similar to those experienced from 2008 through 2009) continue for any substantial
length of time, it could make it difficult to refinance or extend the maturity of 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
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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
and financial condition.
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
the economies affected thereby, including the United States. With respect to U.S. and global credit markets and the economy in general, the COVID-19
pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, 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 disruptions, labor difficulties and shortages, commodity inflation and elements of economic and financial market instability in the United
States and globally. Such effects will likely continue for the duration of the pandemic, for some period thereafter, and may be reinstated in the future.
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 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.
The COVID-19 pandemic is continuing as of the filing date of this Annual Report, and its extended duration may have further adverse impacts on
our prospective companies after March 31, 2022, including for the reasons described herein.
Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies, which may, in turn, impact
the valuation of such portfolio companies.
Certain of our portfolio companies may be impacted by inflation, which may, in turn, impact the valuation of such portfolio companies. If such
portfolio companies are unable to pass any increases in their costs along to their customers, it could adversely affect their results and their ability to pay
interest and principal on our loans, particularly if interest rates rise in
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response to inflation. In March 2022, the Federal Reserve raised interest rates by 0.25%, the first increase since December 2018, and, most recently, in May
2022, raised interest rates by 0.50% and indicated that it would raise rates at each of the remaining meetings in 2022. (See “Changes in interest rates may
affect our cost of capital, the value of investments and net investment income” for a discussion of the risks associated with a rising interest rate
environment). In addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact the fair value
of those investments. Any decreases in the fair value of our investments could result in future unrealized losses and therefore reduce our net assets resulting
from operations.
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) could occur, potentially creating uncertainty and 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 other phenomena, including, 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 U.S. senate runoff elections, there has been a change in party 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 can 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 us and our portfolio companies and will, for at least some time, continue to impact us and our portfolio
companies; further, 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 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.
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The effect of global climate change may impact the operations of our portfolio companies, which may, in turn, impact the valuation of such
portfolio companies.
Climate change creates physical and financial risk and some of our portfolio companies may be adversely affected by climate change. For
example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent weather conditions
are affected by climate change, energy use could increase or decrease depending on the duration and magnitude of any changes. Increases in the cost of
energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to their business. A
decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition through, for example, decreased revenues,
which may, in turn, impact the valuation of such portfolio companies. Extreme weather conditions in general require more system backup, adding to costs,
and can contribute to increased system stresses, including service interruptions.
In December 2015, the United Nations, of which the United States is a member, adopted a climate accord (the “Paris Agreement”) with the long-
term goal of limiting global warming and the short-term goal of significantly reducing greenhouse gas emissions. On November 4, 2016, the past
administration announced that the United States would cease participation in the Paris Agreement with the withdrawal taking effect on November 4, 2020.
However, on January 20, 2021, President Joseph R. Biden signed an executive order to rejoin the Paris Agreement. As a result, some of our portfolio
companies may become subject to new or strengthened regulations or legislation, which could increase their operating costs and/or decrease their revenues,
which may, in turn, impact the valuation of such portfolio companies.
Environmental, social and governance factors may adversely affect our business or cause us to alter our business strategy.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and
reputation if we fail to act responsibly in a number of areas, such as environmental stewardship, corporate governance and transparency. Adverse incidents
with respect to ESG activities could impact the value of our brand, the cost of our operations and relationships with investors, all of which could adversely
affect our business and results of operations. Additionally, new regulatory initiatives related to ESG could adversely affect our business. For example, the
SEC has announced that it may require disclosure of certain ESG-related matters. At this time, there is uncertainty regarding the scope of such proposals or
when they would become effective (if at all). Compliance with any new laws or regulations increases our regulatory burden and could make compliance
more difficult and expensive, affect the manner in which we or our prospective portfolio companies conduct our businesses and adversely affect our
profitability.
Downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our liquidity, financial
condition, and results of operations.
U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a
recession in the U.S. Although U.S. lawmakers have passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have
lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S.
government’s sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic
conditions. These developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets
on favorable terms.
In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time resulting in, among
other things, inadequate funding for and/or the shutdown of certain government agencies, including the SEC and SBA, on which the operation of our
business may rely. Inadequate funding for and/or the shutdown of these government agencies prevents them from performing their normal business
functions, which could impact, among other things, (i) our and our portfolio companies’ ability to access the public markets and obtain necessary capital in
order to, among other things, properly capitalize, continue or expand operations, or, in the case of portfolio investments held by us, liquidate such
investments; (ii) the ability for SBIC I to originate loans; and (iii) the ability of other governmental agencies to timely review and process regulatory
submissions of our portfolio companies, as applicable. Continued adverse political and economic conditions, including a prolonged U.S. federal
government shutdown, could have a material adverse effect on our business, financial condition and results of operations.
Changes in the laws or regulations governing our business or the operations of our portfolio companies, changes in the interpretations thereof or
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
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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 such laws and regulations, or newly
enacted laws or regulations could require changes to certain business practices used by 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/or 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 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. In addition, on August 11, 2021,
we received an exemptive order from the SEC to permit us to exclude the senior securities issued
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by SBIC I or any future SBIC subsidiary of the Company from the definition of senior securities in the asset coverage requirement applicable to the
Company under the 1940 Act.
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.
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. In addition, on August 11, 2021, we received an exemptive order
from the SEC to permit us to exclude the senior securities issued by SBIC I or any future SBIC subsidiary of the Company from the definition
of senior
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securities in the asset coverage requirement applicable to the Company under the 1940 Act. 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 2022 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 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.
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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 2022 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.
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 governing 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 or regulations 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
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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 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 operating restrictions enacted by governments and private businesses in response to COVID-19,
which includes requiring employees to work from remote locations. Policies of extended periods of remote working could strain technology resources,
introduce operational risks and otherwise heighten the risks described above. Remote working environments may be less secure and more susceptible to
hacking attacks, including phishing and social engineering attempts that seek to exploit weaknesses in a remote work environment. Accordingly, the risks
described above are heightened under current conditions, which may continue for an unknown duration.
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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 affect 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.
The continued threat of global terrorism and the impact of military and other action will likely continue to cause volatility in the economies of
certain countries, contribute to increased market volatility and economic uncertainties or deterioration in the United States and worldwide and various
aspects thereof, including in prices of commodities. Our portfolio investments may involve significant strategic assets having a national or regional profile.
The nature of these assets could expose them to a greater risk of being the subject of a terrorist attack than other assets or businesses. In late February 2022,
Russia launched a large scale military attack on Ukraine. The invasion significantly amplified already existing geopolitical tensions among Russia,
Ukraine, Europe, NATO and the West, including the United States. In response to the military action by Russia, various countries, including the United
States, the United Kingdom, and European Union issued broad-ranging economic sanctions against Russia. Such sanctions included, among other things, a
prohibition on doing business with certain Russian companies, large financial institutions, officials and oligarchs; a commitment by certain countries and
the European Union to remove selected Russian banks from the Society for Worldwide Interbank Financial Telecommunications (“SWIFT”), the electronic
banking network that connects banks globally; and restrictive measures to prevent the Russian Central Bank from undermining the impact of the sanctions.
Additional sanctions may be imposed in the future. Such sanctions (and any future sanctions) and other actions against Russia may adversely impact,
among other things, the Russian economy and various sectors of the economy, including but not limited to, financials, energy, metals and mining,
engineering and defense and defense-related materials sectors; result in a decline in the value and liquidity of Russian securities; result in boycotts, tariffs,
and purchasing and financing restrictions on Russia’s government, companies and certain individuals; weaken the value of the ruble; downgrade the
country’s credit rating; freeze Russian securities and/or funds invested in prohibited assets and impair the ability to trade in Russian securities and/or other
assets; and have other adverse consequences on the Russian government, economy, companies and region.
The ramifications of the hostilities and sanctions, however, may not be limited to Russia and Russian companies but may spill over to and
negatively impact other regional and global economic markets (including Europe and the United States), companies in other countries (particularly those
that have done business with Russia) and on various sectors, industries and markets for securities and commodities globally, such as oil and natural gas.
Accordingly, the actions discussed above and the potential for a wider conflict could increase financial market volatility, cause severe negative effects on
regional and global economic markets, industries, and companies and have a negative effect on the Company’s investments and performance, which may,
in turn, impact the valuation of such portfolio companies. In addition, Russia may take retaliatory actions and other countermeasures, including
cyberattacks and espionage against other countries and companies around the world, which may negatively impact such countries and the companies in
which the Company invests. The extent and duration of the military action or future escalation of such hostilities, the extent and impact of existing and
future sanctions, market disruptions and volatility, and the result of any diplomatic negotiations cannot be predicted. These and any related events could
have a significant impact on the Company’s performance and the value of an investment in the Company.
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
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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:
•
•
•
•
•
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
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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 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 and could decrease the value of any investments we hold that earn
fixed interest rates, 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 affect 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
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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 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.
The interest rates of our loans to our portfolio companies, any LIBOR-linked securities, and other financial obligations that extend beyond 2021
might be subject to change based on recent regulatory changes, including the decommissioning of LIBOR.
The London Interbank Offered Rate (“LIBOR”) is an index rate that historically has been widely used in lending transactions and remains a
common reference rate for setting the floating interest rate on private loans. LIBOR typically has been the reference rate used in floating-rate loans
extended to our portfolio companies and, to some degree, is expected to continue to be used as a reference rate until such time that private markets have
fully transitioned to using the Secured Overnight Financing Rate (“SOFR”), or other alternative reference rates recommended by applicable market
regulators. Uncertainty relating to the LIBOR calculation process, the valuation of LIBOR alternatives, and other economic consequences from the phasing
out of LIBOR may adversely affect our results of operations, financial condition and liquidity.
On March 5, 2021, the United Kingdom's Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that it will not compel
panel banks to contribute to the overnight 1, 3, 6 and 12 months USD LIBOR tenors after June 30, 2023 and all other tenors after December 31, 2021. On
November 16, 2021, the FCA issued a statement confirming that starting January 1, 2022, entities supervised by the FCA will be prohibited from using
LIBORs, including USD LIBOR, that will be discontinued as of December 31, 2021 as well as, except in very limited circumstances, those tenors of USD
LIBOR that will be discontinued or declared non-representative after June 30, 2023. While LIBOR will cease to exist or be declared non-representative,
there continues to be uncertainty regarding the nature of potential changes to specific USD LIBOR tenors, the development and acceptance of alternative
reference rates and other reforms.
Central banks and regulators in a number of major jurisdictions (for example, United States, United Kingdom, European Union, Switzerland and
Japan) have convened working groups to find, and implement the transition to, suitable replacements for LIBORs and other interbank offered rates
("IBORs"). To identify a successor rate for USD LIBOR, the Alternative Reference Rates Committee (“ARRC”), U.S.-based group convened by the U.S.
Federal Reserve Board and the Federal Reserve Bank of New York, was formed. The ARRC has identified SOFR as its preferred alternative rate for
LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S.
Treasury-backed repurchase transactions. On July 29, 2021, the ARRC formally recommended SOFR as its preferred alternative replacement rate for
LIBOR. On July 29, 2021, the ARRC also recommended a forward-looking term rate based on SOFR published by CME Group. 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. Alternative reference rates
that may replace LIBOR, including SOFR for USD transactions, may not yield the same or similar economic results as LIBOR over the lives of such
transactions. There can be no guarantee that SOFR will become the dominant alternative to USD LIBOR or that SOFR will be widely used and other
alternatives may or may not be developed and adopted with additional consequences.
On April 6, 2021, legislation was signed into law in the state of New York that provides that contracts, securities and instruments governed by
New York law that reference USD LIBOR and that either lack benchmark fallback provisions or include ineffective benchmark fallback provisions in
connection with USD LIBOR no longer being published or becoming non-representative, will, by operation of law, refer to a replacement benchmark rate
based on SOFR. Despite the adoption of the New York legislation, successful legal challenges against the legislation may render it partially or wholly
unconstitutional or unenforceable, e.g., based on other federal or state law grounds.
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 value of and/or transferability of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us,
valuation measurements used by us that include LIBOR as an input, our
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operational processes or our overall financial condition or results of operations. For instance, if the LIBOR reference rate of our LIBOR-linked securities,
loans, and other financial obligations is higher than an alternative reference rate, such as SOFR, on our alternative reference rate-linked portfolio
investments, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing
liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results. In addition, while the majority of
our LIBOR-linked loans contemplate that LIBOR may cease to exist and allow for amendment to a new alternative reference rate without the approval of
100% of the lenders, if LIBOR ceases to exist, we could be required, in such situations, to negotiate modifications to credit agreements governing such
instruments, in order to replace LIBOR with such alternative reference rate and to incorporate any conforming changes to applicable credit spreads or
margins. Following the replacement of LIBOR, some or all of these credit agreements may bear interest at a lower interest rate, which could have an
adverse impact on the value and liquidity of our investment in these portfolio companies and, as a result, on our results of operations. Such adverse impacts
and the uncertainty of the transition could result in disputes and litigation with counterparties and borrowers regarding the implementation of alternative
reference rates.
We generally will not control our portfolio companies.
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 will 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.
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Changes in healthcare laws and other regulations, or the enforcement or interpretation of such laws or regulations, applicable to some of our
portfolio companies’ businesses may constrain their ability to offer their products and services.
Changes in healthcare or other laws and regulations, or the enforcement or interpretation of such laws or regulations, applicable to the businesses
of some of our portfolio companies may occur that could increase their compliance and other costs of doing business, require significant systems
enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of
operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material
effect on the business and operations of some of our portfolio companies.
Additionally, because of the possibility of additional changes to healthcare laws and regulations under the current U.S. presidential administration,
we cannot quantify or predict with any certainty the likely impact on our portfolio companies, our business model, prospects, financial condition or results
of operations. We also anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery
and payment systems and may in the future propose and adopt legislation or policy changes or implementations effecting additional fundamental changes
in the healthcare delivery system. We cannot assure you as to the ultimate content, timing, or effect of changes, nor is it possible at this time to estimate the
impact of any such potential legislation on certain of our portfolio companies, our business model, prospects, financial condition or results of operations.
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:
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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;
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,
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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 January 2026 Notes and the October 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 January 2026 Notes and the October 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, 2022, we had $205.0 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 (except for the assets held in SBIC I) and (2) 100.0% of the equity interests in the
Company’s wholly owned subsidiaries.
The indenture under which the January 2026 Notes and the October 2026 Notes were issued contain limited protection for holders of the January
2026 Notes and the October 2026 Notes.
The respective indenture under which the January 2026 Notes and the October 2026 Notes were issued offer limited protection to holders of the
January 2026 Notes and the October 2026 Notes. The terms of the respective indenture and the January 2026 Notes and the October 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 January 2026 Notes and the October 2026 Notes, respectively. In particular, the
terms of the respective indenture and the January 2026 Notes and the October 2026 Notes will not place any restrictions on our or our subsidiaries’ ability
to:
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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 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
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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;
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create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
In addition, the respective indenture governing the January 2026 Notes and the October 2026 Notes will require us to make an offer to purchase
the January 2026 Notes and the October 2026 Notes in connection with a change of control or any other event, respectively.
Furthermore, the terms of the respective indenture and the January 2026 Notes and the October 2026 Notes do not protect holders of the January
2026 Notes and the October 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 January 2026 Notes and the October 2026
Notes), and take a number of other actions that are not limited by the terms of each of the January 2026 Notes and the October 2026 Notes may have
important consequences for you as a holder of the January 2026 Notes and the October 2026 Notes, including making it more difficult for us to satisfy our
obligations with respect to the January 2026 Notes and the October 2026 Notes or negatively affecting the market value of the January 2026 Notes and the
October 2026 Notes.
Other debt we issue or incur in the future could contain more protections for its holders than the respective indenture and the January 2026 Notes
and the October 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 January 2026 Notes and the October 2026 Notes.
We may not be able to repurchase the January 2026 Notes and the October 2026 Notes upon a Change of Control Repurchase Event.
Upon a Change of Control Repurchase Event (as defined in the relevant indenture), holders of the January 2026 Notes and the October 2026 Notes
may require us to repurchase for cash some or all of the January 2026 Notes and the October 2026 Notes, respectively, at a repurchase price equal to 100%
of the aggregate principal amount of the January 2026 Notes and the October 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 January 2026 Notes and/or the October 2026 Notes upon a
Change of Control Repurchase Event because we may not have sufficient funds. Before making any such repurchase of the January 2026 Notes or the
October 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 January 2026
Notes and/or the October 2026 Notes to require the mandatory purchase of the January 2026 Notes and/or the October 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 January 2026 Notes or the October 2026 Notes upon the occurrence of such Change of Control Repurchase Event would
cause an event of default under the respective indenture governing the January 2026 Notes or the October 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 January 2026 Notes or the October 2026 Notes
exercise their respective right to require us to repurchase the
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January 2026 Notes or the October 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.
While a trading market developed after issuing the January 2026 Notes and the October 2026 Notes, we cannot assure you that an active trading
market for the January 2026 Notes and the October 2026 Notes will be maintained.
While a trading market developed after issuing the January 2026 Notes and the October 2026 Notes, we cannot assure you that an active and
liquid market for the January 2026 Notes and the October 2026 Notes will be maintained. We do not intend to list the January 2026 Notes or the October
2026 Notes on any securities exchange or for quotation of the January 2026 Notes or the October 2026 Notes on any automated dealer quotation system. If
the January 2026 Notes or the October 2026 Notes are traded after their initial issuance, they may trade at a discount to their public offering price
depending on prevailing interest rates, the market for similar securities, our credit ratings, our financial condition, performance and prospects, general
economic conditions, including the impact of COVID-19, or other relevant factors. The underwriters may discontinue any market-making in the January
2026 Notes or the October 2026 Notes at any time at their sole discretion. In addition, any market-making activity will be subject to limits imposed by law.
Accordingly, we cannot assure you that a liquid trading market will be maintained for the January 2026 Notes and the October 2026 Notes, that holders will
be able to sell their respective January 2026 Notes or October 2026 Notes at a particular time or that the price the holder receive when he or she sell will be
favorable. To the extent an active trading market is not maintained, the liquidity and trading price for the January 2026 Notes and the October 2026 Notes
may be adversely affected.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the January 2026 Notes and the October
2026 Notes.
Any default under the agreements governing our indebtedness, including a default under our Credit Facility, the respective indenture governing the
January 2026 Notes and the October 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 January
2026 Notes and the October 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 January 2026 Notes and the October 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 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 January 2026 Notes and the October 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 January 2026 Notes and the October 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 January 2026 Notes and the October 2026 Notes, the Credit Facility or under any future
credit facility is accelerated, we may be unable to repay or finance the amounts due.
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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 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. The October 2026 Notes are redeemable, in whole or in part, at any time at our option prior to July 1, 2026 at par plus a
"make-whole" premium, and thereafter at par. We may choose to redeem the January 2026 Notes or the October 2026 Notes at times when prevailing
interest rates are lower than the interest rate paid on the January 2026 Notes or the October 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. This 20% limitation has been temporarily reduced to 10% for distributions declared on or after November 1, 2021, and on or before June 30,
2022. 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.
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 8333 Douglas Avenue, Suite 1100, Dallas, Texas 7525,
where we lease approximately 13,000 square feet of office space pursuant to a lease agreement expiring in September 2032. 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.
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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, 2022, 2021, 2020 2019, 2018 and 2017. The
report of RSM US LLP, our independent registered public accountants for the fiscal years ended March 31, 2022, 2021, 2020, 2019 and 2018, on the senior
securities table as of March 31, 2022, 2021, 2020, 2019 and 2018 is attached as an exhibit to this Annual Report on Form 10-K.
Class and Year
Credit Facility
2022
2021
2020
2019
2018
2017
December 2022 Notes
2022
2021
2020
2019
2018
2017
October 2024 Notes
2022
2021
2020
2019
2018
2017
January 2026 Notes
2022
2021
2020
2019
2018
2017
October 2026 Notes
2022
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)
$
$
$
$
$
205,000
120,000
154,000
141,000
40,000
25,000
—
—
77,136
77,136
57,500
—
—
125,000
75,000
—
—
—
140,000
140,000
—
—
—
—
150,000
1.93
1.87
1.89
2.49
4.16
12.40
—
—
1.89
2.49
4.16
—
—
1.87
1.89
—
—
—
1.93
1.87
—
—
—
—
1.93
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
N/A
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
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. On August 11, 2021, we received an
exemptive order from the SEC to permit us to exclude the senior
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securities issued by SBIC I or any future SBIC subsidiary of CSWC from the definition of senior securities in the asset coverage requirement applicable to CSWC under the 1940 Act.
(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, January 2026 Notes and October 2026 Notes is not applicable because these are not registered for public
trading.
PRICE RANGE OF COMMON STOCK AND HOLDERS
Market Information
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, 2023
First Quarter (through May 20, 2022)
*
$
24.40 $
Year ended March 31, 2022
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year ended March 31, 2021
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
$
16.86 $
16.19
16.36
16.58
16.01 $
15.74
15.36
14.95
26.61 $
28.41
28.33
28.10
22.75 $
17.98
15.20
16.02
21.21
22.78
23.75
23.28
22.16
17.55
12.63
12.32
8.76
*
*
57.83 %
75.48
73.17
69.48
42.10 %
14.23
(1.04)
7.16
35.11 %
46.70
42.30
33.66
9.62 %
(19.76)
(19.79)
(41.40)
(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 20, 2022, there were approximately 340
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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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 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 January 2026 Notes and our October 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.
On July 28, 2021, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $20
million of its outstanding shares of 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 August 31, 2021, the Company entered into a share repurchase agreement, which
became effective immediately, and the Company will cease purchasing its common stock under the share repurchase program upon the earlier of, among
other things: (1) the date on which the aggregate purchase price for all shares equals $20 million including, without limitation, all applicable fees, costs and
expenses; or (2) upon written notice by the Company to the broker that the share repurchase agreement is
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terminated. During the year ended March 31, 2022, the Company did not repurchase any shares under the share repurchase program.
The following table provides information regarding purchases of our common stock during the year ended March 31, 2022.
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, 2021 (1)
May 1 through May 31, 2021
June 1 through June 30, 2021 (1)
July 1 through July 31, 2021
August 1 through August 31, 2021 (1)
September 1 through September 30, 2021
October 1 through October 31, 2021
November 1 through November 30, 2021 (1)
December 1 through December 31, 2021
January 1 through January 31, 2022
February 1 through February 28, 2022
March 1 through March 31, 2022
Total
6,056 $
—
14,394
—
182
—
—
31,492
—
—
—
—
52,124 $
23.60
—
27.63
—
26.40
—
—
27.38
—
—
—
—
27.01
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 July 28, 2021, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $20 million of its
outstanding shares of 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 August 31, 2021 the Company entered into a share repurchase agreement, which became effective immediately, and
the Company shall cease purchasing its common stock under the share repurchase program upon the earlier of, among other things: (1) the date on which the
aggregate purchase price for all shares equals $20 million including, without limitation, all applicable fees, costs and expenses; or (2) upon written notice by the
Company to the broker that the share repurchase agreement is terminated. During the year ended March 31, 2022, the Company did not repurchase any shares under
the share repurchase program.
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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. The graph assumes initial investment of $100 on March 31, 2017 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.
Performance Graph
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. [Reserved]
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.
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, and opportunistically
target 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 $35.0
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 $20.0 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, 2022, our exited investments resulted in total proceeds received of
approximately $694.4 million and a weighted average internal rate of return to the Company of approximately 14.4% (based on original cash invested of
approximately $639.2 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
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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, 2022, 2021 and 2020, the ratio of our last twelve months ("LTM")
operating expenses, excluding interest expense, as a percentage of our LTM average total assets was 2.20%, 2.42% and 2.76%, respectively.
Recent COVID-19 Developments
We have been closely monitoring, and will continue to monitor, the impact of the COVID-19 pandemic (including new variants of COVID-19)
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 continued fluidity of the pandemic, we cannot estimate the long-term impact of COVID-19 on 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 restrictions
imposed by state and local governments and other private businesses, including developing liquidity plans supported by internal cash reserves, and
shareholder support. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause,
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 disruptions, labor difficulties and shortages, commodity inflation and elements of economic and
financial market instability in the United States and globally. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for
some period thereafter.
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, 2022 and 2021, our investment portfolio at fair value represented
approximately 96.2% and 93.6% 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, 2022 and 2021 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
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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. 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 improves regarding ability to service debt or other obligations, it will be restored to
accrual basis. As of March 31, 2022, we had three investments on non-accrual status, which represent approximately 1.5% of our total investment
portfolio's fair value and approximately 2.6% of its cost. As of March 31, 2021, we did not have any investments on non-accrual status.
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 under our Credit Facility (as
described in Note 5) and the I-45 SLF LLC credit facility (as described in Note 13). Many of these agreements (including the credit agreements relating to
the Credit Facility and the I-45 credit facility) include an alternative successor rate or 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 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 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 adopted the
Amendments for the year ended March 31, 2022 and there were no material changes to the consolidated financial statement or its disclosures.
INVESTMENT PORTFOLIO COMPOSITION
The total value of our investment portfolio was $936.6 million as of March 31, 2022, as compared to $688.4 million as of March 31, 2021. As of
March 31, 2022, we had investments in 73 portfolio companies with an aggregate cost of $938.3 million. As of March 31, 2021, we had investments in 55
portfolio companies with an aggregate cost of $703.6 million.
As of March 31, 2022 and 2021, approximately $772.7 million, or 97.3%, and $546.6 million, or 95.5%, respectively, of our debt investment
portfolio (at fair value) bore interest at floating rates, of which 100.0% were subject to contractual minimum interest rates. As of March 31, 2022 and 2021,
the weighted average contractual minimum interest rate is 1.08% and 1.30%, respectively. As of March 31, 2022 and 2021, approximately $21.1 million, or
2.7%, and $26.0 million, or 4.5%, respectively, of our debt investment portfolio (at fair value) bore interest at fixed rates.
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The following tables provide a summary of our investments in portfolio companies as of March 31, 2022 and 2021 (excluding our investment in I-
45 SLF LLC):
Number of portfolio companies (a)
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)
Weighted average EBITDA (c)
Weighted average leverage through CSWC security (c)(d)
March 31, 2022
March 31, 2021
(dollars in thousands)
72
879,011
862,303
$
$
90.3 %
9.7 %
84.2 %
9.3 %
20,889
$
4.0x
54
631,274
630,757
90.7 %
9.3 %
83.0 %
10.8 %
16,960
4.1x
$
$
$
At March 31, 2022 and 2021, we had equity ownership in approximately 56.9% and 53.7%, respectively, of our investments.
(a)
The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March 31, 2022 and 2021,
(b)
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, 2022, there were three investments on non-accrual status. As of March 31, 2021, we did not have any 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)
Includes CSWC debt investments only. Weighted average EBITDA metric is calculated using investment cost basis weighting. For the year ended March 31, 2022,
three portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the year ended March 31,
2021, six 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, 2022, three portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not
meaningful. For the year ended March 31, 2021, six portfolio companies are excluded from this calculation.
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. All new loans are initially rated 2.
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 assess and manage
potential risks across our debt investment portfolio. We have also increased oversight 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,
2022 and 2021:
Investment Rating
1
2
3
4
Total
Investment Rating
1
2
3
4
Total
As of March 31, 2022
Debt
Investments at
Fair Value
Percentage of
Debt Portfolio
(dollars in thousands)
124,192
632,675
36,648
319
793,834
15.6 %
79.7
4.6
0.1
100.0 %
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
10.2 %
80.6
9.2
—
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, 2022, we had three debt investments on non-accrual status, which represents approximately 1.5% of our total investment
portfolio's fair value and approximately 2.6% of its cost. As of March 31, 2021, we did not have any investments on non-accrual status.
Investment Activity
During the year ended March 31, 2022, we made new debt investments in 34 portfolio companies totaling $412.2 million, follow-on debt
investments in fourteen portfolio companies totaling $46.2 million, and equity investments in 15 new and six existing portfolio companies totaling $15.0
million. We also funded $3.2 million on our existing equity commitment to I-45 SLF LLC. We received contractual principal repayments totaling
approximately $16.0 million and full prepayments of approximately $241.2 million. We funded $22.6 million on revolving loans and received $9.1 million
in repayments on revolving loans. In addition, we received proceeds from sales of equity investments totaling $11.9 million.
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.
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Total portfolio investment activity for the years ended March 31, 2022 and 2021 was as follows (in thousands):
Year ended March 31, 2022
Fair value, beginning of period
New investments
Proceeds from sales of investments
Principal repayments received
Conversion of security
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, 2021
Fair value, beginning of period
New investments
Proceeds from sales of investments
Principal repayments received
Conversion of security
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
524,161 $
462,032
—
(247,538)
(4,683)
2,455
2,726
(67)
786
739,872 $
Second Lien
Loans
Subordinated
Debt
Preferred &
Common
Equity &
Warrants
Financial
Instruments
I-45 SLF LLC
36,919 $
18,669
(53)
(7,223)
5,208
1,217
233
(2,274)
(51)
52,645 $
11,534 $
318
—
(11,521)
—
518
46
46
376
1,317 $
58,660 $
14,999
(11,881)
—
(525)
—
—
8,845
15,079
85,177 $
— $
—
—
—
—
—
—
—
—
— $
57,158 $
3,200
—
—
—
—
—
—
(2,755)
57,603 $
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 $
Total
688,432
499,218
(11,934)
(266,282)
—
4,190
3,005
6,550
13,435
936,614
9.30 %
9.01 %
Total
553,072
219,349
(9,841)
(106,817)
—
7,880
2,347
(8,549)
30,991
688,432
10.76 %
10.22 %
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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,” 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, net of 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, net of 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 loss on
extinguishment of debt,” which is the difference between the principal amount due at maturity adjusted for any unamortized debt issuance costs and any
"make-whole" premium payable at the time of the debt extinguishment.
Set forth below is a comparison of the results of operations for the years ended March 31, 2022 and 2021. For the comparison of the results of
operations for the years ended March 31, 2021 and 2020, see the Company's Annual Report on Form 10-K for the year ended March 31, 2021, which was
filed with the SEC on May 26, 2021, 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, 2022 and March 31, 2021
Total investment income
Interest expense
Other operating expenses
Income before taxes
Income tax provision
Net investment income
Net realized gain (loss) on investments, net of tax
Net unrealized appreciation on investments, net of tax
Realized loss on extinguishment of debt
Realized loss on disposal of fixed assets
Net increase in net assets from operations
Investment Income
Year ended March 31,
Net Change
2022
2021
Amount
%
(in thousands)
$
$
82,215 $
(19,924)
(18,989)
43,302
615
42,687
5,834
11,467
(17,087)
(86)
42,815 $
68,062 $
(17,941)
(16,008)
34,113
2,442
31,671
(8,536)
28,755
(1,007)
—
50,883 $
14,153
(1,983)
(2,981)
9,189
(1,827)
11,016
14,370
(17,288)
(16,080)
(86)
(8,068)
20.8 %
11.1 %
18.6 %
26.9 %
(74.8)%
34.8 %
168.3 %
(60.1)%
1,596.8 %
100.0 %
(15.9)%
Total investment income consisted of interest, dividend, fee and other income for each applicable period. For the year ended March 31, 2022, total
investment income was $82.2 million, a $14.2 million, or 20.8%, increase as compared to total investment income of $68.1 million for the year ended
March 31, 2021. The increase was primarily due to a $12.2 million, or 21.6%, increase in interest income generated from our debt investments, which was
a result of a 37.8% increase in the cost basis of debt investments held from $582.2 million to $802.3 million year-over-year, and an increase of $2.1 million
in prepayment fees received in the current year.
Operating Expenses
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.
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Interest and Fees on our Borrowings
For the year ended March 31, 2022, total interest expense was $19.9 million, an increase of $2.0 million, as compared to the total interest expense
of $17.9 million for the year ended March 31, 2021. The increase was primarily attributable to an increase in average borrowings outstanding, partially
offset by a decrease in the weighted average interest rate on our total debt to 3.58% from 4.41% for the years ended March 31, 2022 and 2021, respectively.
The decrease in the weighted average interest rate on our total debt was primarily due to the full redemption of the $140 million in aggregate principal
amount of the October 2024 Notes, which had an interest rate of 5.375%, and the issuance of the $150 million in aggregate principal amount of the October
2026 Notes, which have an interest rate of 3.375%.
Salaries, General and Administrative Expenses
For the year ended March 31, 2022, total employee compensation expense (including both cash and share-based compensation) was $12.4 million,
a $1.7 million, or 16.1%, increase over total employee compensation expense of $10.7 million for the year ended March 31, 2021. The increase was
primarily due to an increase in accrued bonus compensation for the current year based on the Company's performance compared to its plan. For the year
ended March 31, 2022, our total general and administrative expense was $6.6 million, an increase of $1.3 million as compared to the total general and
administrative expense of $5.3 million for the year ended March 31, 2021. The increase was primarily due to an increase in director compensation and the
addition of a new independent board member. In addition, the increase was attributable to increased costs related to insurance, valuation and employee
recruiting during the current year.
Net Investment Income
For the year ended March 31, 2022, net investment income increased from the prior year by $11.0 million, or 34.8%, to $42.7 million as a result of
a $14.2 million increase in total investment income and a $1.8 million decrease in income tax provision, offset by a $2.0 million increase in interest
expense.
Net Realized and Unrealized Gains (Losses) on Investments
During the fiscal year ended March 31, 2022, we recognized net realized and unrealized gains totaling $17.3 million, which primarily consisted of
net realized and unrealized gains on equity investments of $24.0 million, partially offset by net realized and unrealized losses on I-45 SLF LLC of $2.8
million and on debt investments of $0.5 million. These realized and unrealized gains and losses were due to changes in fair value based on the overall
EBITDA performance and cash flows of each investment, as well as exits of investments. We also recorded an income tax provision related to realized
gains on investments of $1.4 million and net unrealized depreciation related to deferred tax of $2.0 million associated with the Taxable Subsidiary.
During the fiscal year ended March 31, 2021, we recognized net realized and unrealized gains totaling $20.2 million, which primarily consisted of
net realized and unrealized gains on I-45 SLF LLC of $12.6 million and on equity investments of $11.8 million, partially offset by realized and unrealized
losses on debt investments of $2.0 million. These realized and unrealized gains and losses were due to changes in fair value based on the overall EBITDA
performance and cash flows of each investment, as well as exits of investments. We also recorded net unrealized depreciation related to deferred tax
associated with the Taxable Subsidiary of $2.2 million.
Realized Losses on Extinguishment of Debt
During the fiscal years ended March 31, 2022 and 2021, we recognized losses on extinguishment of debt of $17.1 million and $1.0 million,
respectively, due to the full redemption of the October 2024 Notes and the December 2022 Notes, respectively.
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, advances from the Credit Facility, and our continued access to SBA Debentures. 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 (including the Equity ATM Program, as described below). Our primary uses of funds will be investments in portfolio
companies and operating expenses. Due to the diverse capital sources available to us at
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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. This “Financial
Liquidity and Capital Resources” section should be read in conjunction with “Recent COVID-19 Developments” above, as well as with the notes of our
consolidated financial statements.
Cash Flows
At March 31, 2022, the Company had cash and cash equivalents of approximately $11.4 million. For the year ended March 31, 2022, we
experienced a net decrease in cash and cash equivalents in the amount of $20.2 million. During that period, our operating activities used $182.7 million in
cash, consisting primarily of new portfolio investments of $499.2 million, partially offset by $259.2 million of repayments received from debt investments
in portfolio companies and $11.9 million of proceeds from sales of equity investments. In addition, our financing activities increased cash by $164.5
million, consisting primarily of net borrowings under the Credit Facility of $85.0 million, net proceeds from the issuance of the October 2026 Notes of
$146.4 million, net proceeds from the issuance of SBA Debentures of $39.0 million and net proceeds from the offering of our common stock of $98.1
million, partially offset by the redemption of the October 2024 Notes of $125.0 million and cash dividends paid in the amount of $58.6 million.
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 proceeds from the issuance of additional October 2024 Notes of $49.0 million, net proceeds from the issuance of the January
2026 Notes of $138.6 million and net 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, net repayments under the Credit Facility of $34.0 million and cash dividends paid in the amount of $39.9 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 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%, which became effective April 25, 2019. On August
11, 2021, we received an exemptive order from the SEC to permit us to exclude the senior securities issued by SBIC I or any future SBIC subsidiary of the
Company from the definition of senior securities in the asset coverage requirement applicable to the Company under the 1940 Act. As of March 31, 2022,
the Company’s asset coverage was 193%.
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. The Credit Facility contains an accordion feature
that allows CSWC to increase the total commitments under the Credit Facility up to $400 million from new and existing lenders on the same terms and
conditions as the existing commitments.
On August 9, 2021, CSWC entered into the Second Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit
Agreement"). Prior to the Credit Agreement, (1) borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicable
LIBOR rate plus 2.50% with no LIBOR floor, and (2) the total borrowing capacity was $340 million with commitments from a diversified group of eleven
lenders. The Credit Agreement (1) decreased the total borrowing capacity under the Credit Facility to $335 million with commitments from a diversified
group of ten lenders, (2) reduced the interest rate on borrowings to LIBOR plus 2.15% with no LIBOR floor and removed conditions related thereto as
previously set forth in the Amended and Restated Senior Secured Revolving Credit Agreement, and (3) extended the end of the Credit Facility's revolver
period from December 21, 2022 to August 9, 2025 and extended the final maturity from December 21, 2023 to August 9, 2026. The Credit Agreement also
modified certain covenants in the Credit Facility, including, among other things, to increase the minimum obligors’ net worth test from $180 million to
$200 million.
CSWC pays 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 contains certain affirmative and negative covenants, including but
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not limited to: (1) certain reporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum senior coverage ratio of 2 to 1, (4)
maintaining a minimum shareholders’ equity, (5) maintaining a minimum consolidated net worth, (6) maintaining a regulatory asset coverage of not less
than 150%, (7) maintaining an interest coverage ratio of at least 2.25 to 1.0, and (8) 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.
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.
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, 2022, substantially all of the Company’s assets were pledged as
collateral for the Credit Facility, except for assets held in SBIC I.
At March 31, 2022, CSWC had $205.0 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 $6.2 million, $6.8 million and $8.3 million respectively,
for the years ended March 31, 2022, 2021 and 2020. The weighted average interest rate on the Credit Facility was 2.50% and 3.05%, respectively, for the
years ended March 31, 2022 and 2021. Average borrowings for the years ended March 31, 2022 and 2021 were $173.5 million and $166.0 million,
respectively. As of March 31, 2022 and 2021, 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 bore
interest at a rate of 5.95% per year.
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 Company issued an
additional $19.6 million in aggregate principal amount of the December 2022 Notes under this agreement. All issuances of December 2022 Notes ranked
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 a realized loss 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 were treated as a single series with the Existing October 2024 Notes under the indenture and had the same terms as the
Existing October 2024 Notes. The maturity date of the October 2024 Notes was October 1, 2024 and were redeemable 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 bore interest at a rate of 5.375% per year.
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On September 24, 2021, the Company redeemed $125,000,000 in aggregate principal amount of the issued and outstanding October 2024 Notes.
The October 2024 Notes were redeemed at 100% of their principal amount, plus (i) the accrued and unpaid interest thereon, through, but excluding the
redemption date, and (ii) a "make-whole" premium. Accordingly, the Company recognized a realized loss on extinguishment of debt, equal to the write-off
of the related unamortized debt issuance costs of $1.8 million and the "make-whole" premium of $15.2 million during the three months ended September
30, 2021.
The Company recognized interest expense related to the October 2024 Notes, including amortization of deferred issuance costs, of $3.6 million,
$6.3 million and $2.2 million, respectively, for the years ended March 31, 2022, 2021 and 2020. From April 1, 2021 through September 24, 2021 (the
redemption date of the October 2024 Notes), average borrowings were $125.0 million. For the year ended March 31, 2021, average borrowings were
$106.1 million. The October 2024 Notes had a weighted average effective yield of 5.375%.
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"). The Existing January 2026 Notes were issued at par. 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 Additional January 2026 Notes are treated as a single series with the Existing January 2026 Notes
under the indenture and had the same terms as the Existing January 2026 Notes. 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. 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 or structurally
subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility and the SBA Debentures.
As of March 31, 2022, the carrying amount of the January 2026 Notes was $138.7 million on an aggregate principal amount of $140.0 million at a
weighted average effective yield of 4.46%. As of March 31, 2022, the fair value of the January 2026 Notes was $129.2 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 $6.7 million and $1.2 million, respectively, for the years ended March 31, 2022
and 2021. For the year ended March 31, 2022, average borrowings were $140.0 million. 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 Securities Exchange Act of 1934, as amended (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 January 2026 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.
October 2026 Notes
In August 2021, the Company issued $100.0 million in aggregate principal amount of 3.375% Notes due 2026 (the "Existing October 2026
Notes"). The Existing October 2026 Notes were issued at a price of 99.418% of the aggregate principal amount of the Existing October 2026 Notes,
resulting in a yield-to-maturity of 3.5%. In November 2021, the Company issued an additional $50.0 million in aggregate principal amount of the October
2026 Notes (the "Additional October 2026 Notes"
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together with the Existing October 2026 Notes, the "October 2026 Notes"). The Additional October 2026 Notes were issued at a price of 99.993% of the
aggregate principal amount, resulting in a yield-to-maturity of approximately 3.375% at issuance. The Additional October 2026 Notes are treated as a
single series with the Existing October 2026 Notes under the indenture and had the same terms as the Existing October 2026 Notes. The October 2026
Notes mature on October 1, 2026 and may be redeemed in whole or in part at any time prior to July 1, 2026, at par plus a "make-whole" premium, and
thereafter at par. The October 2026 Notes bear interest at a rate of 3.375% per year, payable semi-annually in arrears on April 1 and October 1 of each year.
The October 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 or structurally subordinated to all of our existing and future secured indebtedness, including borrowings
under our Credit Facility and the SBA Debentures.
As of March 31, 2022, the carrying amount of the October 2026 Notes was $146.5 million on an aggregate principal amount of $150.0 million at a
weighted average effective yield of 3.5%. As of March 31, 2022, the fair value of the October 2026 Notes was $139.1 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 2026 Notes, including amortization of deferred issuance costs, of $3.1 million for the year ended March 31, 2022. Since the issuance of the
October 2026 Notes on August 27, 2021 through March 31, 2022, average borrowings were $132.9 million.
The indenture governing the October 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 October 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 fourth supplemental indenture relating to the October 2026 Notes.
In addition, holders of the October 2026 Notes can require the Company to repurchase some or all of the October 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 fourth supplemental indenture relating to the October 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 allows SBIC I to obtain leverage by issuing SBA 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. Interest on SBA Debentures is payable semi-annually on March 1
and September 1. Current statutes and regulations permit SBIC I to borrow up to $175 million in SBA Debentures with at least $87.5 million in regulatory
capital (as defined in the SBA regulations).
On May 25, 2021, SBIC I received a leverage commitment from the SBA in the amount of $40.0 million to be issued on or prior to September 30,
2025. On January 28, 2022, SBIC I received an additional leverage commitment in the amount of $40.0 million to be issued on or prior to September 30,
2026. As of March 31, 2022, SBIC I had regulatory capital of $40.0 million and approved and unused SBA Debenture commitments of $40.0 million. The
SBA may limit the amount that may be drawn each year under these commitments, and each issuance of leverage is conditioned on the Company’s full
compliance, as determined by the SBA, with the terms and conditions set forth in the SBA regulations.
As of March 31, 2022, the carrying amount of SBA Debentures was $38.4 million on an aggregate principal amount of $40.0 million. As of March
31, 2022, the fair value of the SBA Debentures was $38.6 million. The fair value of the SBA Debentures is estimated by discounting the remaining
payments using current market rates for similar instruments and considering such factors as the legal maturity date and the ability of market participants to
prepay the SBA Debentures, which are Level 3 inputs under ASC Topic 820. The Company recognized interest expense and related fees related to SBA
Debentures of $0.3 million for the year ended March 31, 2022. The weighted average interest rate on the SBA Debentures was 1.30% for the year ended
March 31, 2022. For the year ended March 31, 2022, average borrowings were $17.0 million.
As of March 31, 2022, the Company's issued and outstanding SBA Debentures mature as follows:
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Pooling Date
9/22/21
3/23/22
Maturity Date
9/1/2031
3/1/2032
Fixed Interest Rate
March 31, 2022
1.575 % $
3.209 %
$
15,000,000
25,000,000
40,000,000
(1) The SBA has two scheduled pooling dates for SBA Debentures (in March and in September). Certain SBA Debentures funded during the reporting periods may
not be pooled until the subsequent pooling date.
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 shares of 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.
On July 28, 2021, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $20
million of its outstanding shares of 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 August 31, 2021, the Company entered into a share repurchase agreement, which
became effective immediately, and the Company will cease purchasing its common stock under the share repurchase program upon the earlier of, among
other things: (1) the date on which the aggregate purchase price for all shares equals $20 million including, without limitation, all applicable fees, costs and
expenses; or (2) upon written notice by the Company to the broker that the share repurchase agreement is terminated.
During the year ended March 31, 2022, the Company did not repurchase any shares under the share repurchase program. Cumulative to date, we
have repurchased a total of 840,543 shares of our common stock in the open market under a share 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"), pursuant to 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. On May 26, 2021, the Company (i) increased the maximum amount of
shares of its common stock to be sold through the Equity ATM Program to $250,000,000 from $100,000,000 and (ii) reduced the commission paid to the
sales agents for the Equity ATM Program to 1.5% from 2.0% of the gross sales price of shares of the Company's common stock sold through the sales
agents pursuant to the Equity ATM Program on and after May 26, 2021.
During the year ended March 31, 2022, the Company sold 3,872,031 shares of its common stock under the Equity ATM Program at a weighted-
average price of $25.73 per share, raising $99.6 million of gross proceeds. Net proceeds were $98.1 million, after deducting commissions to the sales
agents on shares sold. Cumulative to date, the Company has sold 8,177,660 shares of its common stock under the Equity ATM Program at a weighted-
average price of $22.44, raising $183.5 million of gross proceeds. Net proceeds were $180.3 million after commissions to the sales agents on shares sold.
As of March 31, 2022, the Company has $66.5 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.
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. Because commitments may expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements. Additionally, our commitment to fund delayed draw term loans is generally triggered upon
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the satisfaction of certain pre-negotiated terms and conditions, such as meeting certain financial performance hurdles or financial covenants, which may
limit a borrower's ability to draw on such delayed draw term loans.
At March 31, 2022 and 2021, we had a total of approximately $134.3 million and $45.4 million, respectively, in currently unfunded commitments
(as discussed in Note 11 to the Consolidated Financial Statements). As of March 31, 2022, 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, 2022 and 2021, we had $4.0 million and $3.5
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, $0.3 million expire in August 2022, $0.4 million expire in February 2023, $0.2 million expire in April 2023, and $3.1
million expire in May 2023. As of March 31, 2022 and March 31, 2021, 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, 2022, the Company had
cash and cash equivalents of $11.4 million and $126.3 million in available borrowings under the Credit Facility.
Contractual Obligations
As shown below, we had the following contractual obligations as of March 31, 2022. 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)
January 2026 Notes (2)
October 2026 Notes (2)
Total
Payments Due By Period
(In thousands)
Total
4,430 $
225,972
165,200
175,791
571,393 $
$
$
Less than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
167 $
4,811
6,300
5,541
16,819 $
822 $
9,636
12,600
12,656
35,714 $
863 $
211,525
146,300
157,594
516,282 $
2,578
—
—
—
2,578
(1) Amounts include interest payments calculated at an average rate of 2.50% of outstanding Credit Facility borrowings, which were $205.0 million as
of March 31, 2022.
(2) Includes interest payments.
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RECENT DEVELOPMENTS
On April 21, 2021, the Board of Directors declared a quarterly dividend of $0.48 per share and a special dividend of $0.15 per share for the quarter
ended June 30, 2022. The record date for the dividend is June 15, 2022. The payment date for the dividend is June 30, 2022.
On May 11, 2022, CSWC entered into Amendment No. 2 (the "Amendment") to the Credit Agreement. The Amendment changed the benchmark
interest rate from LIBOR to Term SOFR. In addition, on May 11, 2022, CSWC entered into an Incremental Commitment Agreement, pursuant to which the
total commitments under the Credit Agreement increased from $335 million to $380 million.
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 and any new variants 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 volatility, including the decommissioning of LIBOR.
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 the decommissioning of LIBOR and changes in alternate rates and prime rates, to the extent our debt
investments include floating interest rates. A large portion of our portfolio is comprised of floating rate investments that utilize LIBOR or an alternative
rate. 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. Conversely, in a rising interest rate environment, such difference could potentially
increase thereby increasing our gross investment income as indicated below. In March 2022, the Federal Reserve raised interest rates by 0.25%, the first
increase since December 2018, and, most recently, in May 2022, raised interest rates by 0.50% and indicated that it would raise rates at each of the
remaining meetings in 2022. See “Risk Factors — Changes in interest rates may affect our cost of capital the value of investments and net investment
income,” “Risk Factors — The interest rates of our loans to our portfolio companies, any LIBOR-linked securities, and other financial obligations that
extend beyond 2021 might be subject to change based on recent regulatory changes, including the decommissioning of LIBOR” and “Risk Factors — The
interest rates of our loans to our portfolio companies, any LIBOR-linked securities, and other financial obligations that extend beyond 2021 might be
subject to change based on recent regulatory changes, including the decommissioning of LIBOR” for more information.
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 2026 Notes, the January 2026 Notes and SBA Debentures 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,
2022, we were not a party to any hedging arrangements.
As of March 31, 2022, approximately 97.3% 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, 2022, a hypothetical 100 basis point increase in interest rates could
increase our net investment income by a maximum of $5.2 million, or $0.21 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 $2.5 million, or $0.10 per share, on an annual basis. Our Credit Facility bears
interest on a per annum basis equal to the applicable LIBOR rate plus 2.15%. We pay unused commitment fees of 0.50% to 1.00% per annum, based on
utilization.
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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, 2022 and 2021
Consolidated Statements of Operations for Years Ended March 31, 2022, 2021 and 2020
Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for Years Ended March 31, 2022, 2021 and 2020
Consolidated Schedules of Investments as of March 31, 2022 and 2021
Notes to Consolidated Financial Statements
67
Page
68
70
71
72
73
74
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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, 2022 and 2021, 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, 2022, and 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, 2022 (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,
2022 and 2021, and the results of their operations, changes in net assets, and cash flows for each of the three years in the period ended March 31, 2022, 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 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, 2022 and 2021, 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, 2022, the fair value of the Company’s investments categorized as Level 3 investments within the fair value hierarchy (Level 3 investments)
totaled $936.614 million. 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 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
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measurements of such investments. Changes in these techniques, inputs and assumptions could have a significant impact on the fair value of investments.
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 24, 2022
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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: $721,392 and $540,556, respectively)
Affiliate investments (Cost: $140,911 and $90,201, respectively)
Control investments (Cost: $76,000 and $72,800, respectively)
Total investments (Cost: $938,303 and $703,557, respectively)
Cash and cash equivalents
Receivables:
Dividends and interest
Escrow
Other
Income tax receivable
Debt issuance costs (net of accumulated amortization of $4,573 and $3,582, respectively)
Other assets
Total assets
Liabilities
SBA Debentures (Par value: $40,000 and $0, respectively)
October 2024 Notes (Par value: $0 and $125,000, respectively)
January 2026 Notes (Par value: $140,000 and $140,000, respectively)
October 2026 Notes (Par value: $150,000 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, 27,298,032 shares at March 31, 2022 and
23,344,836 shares at March 31, 2021
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 (24,958,520 shares outstanding at March 31, 2022 and 21,005,324 shares outstanding at
March 31, 2021)
March 31,
2022
March 31,
2021
747,132 $
131,879
57,603
936,614
11,431
12,106
1,344
2,238
158
4,038
6,028
973,957 $
38,352 $
—
138,714
146,522
205,000
14,808
2,707
1,240
5,747
553,090 $
6,825 $
448,235
(10,256)
(23,937)
420,867
973,957 $
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
16.86 $
16.01
$
$
$
$
$
$
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
70
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
Years Ended March 31,
2022
2021
2020
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Investment income:
Interest income:
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Payment-in-kind interest income:
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Dividend income:
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Fee income:
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Other income
Total investment income
Operating expenses:
Compensation
Share-based compensation
Interest
Professional fees
General and administrative
Total operating expenses
Income before taxes
$
58,136 $
7,122
—
42,880 $
6,126
—
2,051
1,160
—
1,654
28
6,720
4,833
494
—
17
82,215
8,838
3,585
19,924
2,489
4,077
38,913
43,302
181
434
615
42,687 $
7,136 $
140
—
—
(1,442)
5,834
20,940
(4,750)
(2,755)
(1,968)
11,467
17,301
(17,087)
(86)
42,815 $
1.90 $
1.87 $
1.87 $
$
$
$
$
$
$
4,268
3,018
—
1,752
33
6,609
3,233
122
—
21
68,062
7,756
2,944
17,941
2,193
3,115
33,949
34,113
637
1,805
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 $
36,843
7,708
265
1,251
851
—
166
141
12,136
1,090
143
1,359
86
62,039
7,310
2,853
15,836
2,029
3,717
31,745
30,294
1,380
682
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)
22,839,835
19,060,131
17,999,836
Federal income, excise and other taxes
Deferred taxes
Total income tax provision (benefit)
Net investment income
Realized gain (loss)
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Taxes on deemed distribution of long-term capital gains
Income tax provision
Total net realized gain (loss) 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 loss on extinguishment of debt
Realized loss on disposal of fixed assets
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 and diluted
The accompanying Notes are an integral part of these Consolidated Financial Statements.
71
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(In thousands)
Operations:
Net investment income
Net realized gain (loss) on investments
Taxes on deemed distribution of long-term capital gains
Net unrealized appreciation (depreciation) on investments, net of tax
Realized loss on extinguishment of debt
Realized loss on disposal of fixed assets
Net increase (decrease) in net assets from operations
Dividends to shareholders
Capital share transactions:
Change in restoration plan liability
Issuance of common stock
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
$
$
2022
2021
2020
Years Ended March 31,
42,687 $
5,834
—
11,467
(17,087)
(86)
42,815
(58,624)
141
98,107
3,585
(1,408)
—
84,616
336,251
420,867 $
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
The accompanying Notes are an integral part of these Consolidated Financial Statements.
72
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
Payment of accrued payment-in-kind interest
Depreciation and amortization
Net pension benefit
Realized (gain) loss on investments before income tax
Realized loss on extinguishment of debt
Realized loss on disposal of fixed assets
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
(Increase) decrease in escrow receivables
(Increase) decrease in tax receivable
(Increase) decrease in other receivables
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Increase (decrease) in payable for unsettled transaction
Increase (decrease) in taxes payable
Net cash used in operating activities
Cash flows from investing activities
Acquisition of fixed assets
Net cash used in investing 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 SBA Debentures
Proceeds from issuance of October 2024 Notes
Proceeds from issuance of January 2026 Notes
Proceeds from issuance of October 2026 Notes
Redemption of December 2022 Notes
Redemption of October 2024 Notes
Payment for debt extinguishment costs
Dividends to shareholders
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,
2022
2021
2020
$
42,815 $
50,883 $
(22,351)
(499,218)
259,158
11,881
3,692
3,485
2,230
(132)
(6,617)
17,103
86
—
(13,435)
(3,005)
(4,190)
3,585
2,402
(1,539)
(159)
(4)
(2,067)
(3,090)
3,153
—
1,191
(182,675)
(1,995)
(1,995)
(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)
—
—
98,141
—
315,000
(230,000)
(3,865)
39,026
—
—
146,414
—
(125,000)
(15,196)
(58,624)
(1,408)
—
164,488
(20,182)
31,613
11,431 $
50,410
—
182,000
(216,000)
(540)
—
49,000
138,571
—
(77,136)
—
—
(39,945)
(239)
—
86,121
17,869
13,744
31,613 $
(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)
(3142)
(47,947)
—
—
26,084
(105)
132,000
(119,000)
(742)
—
73,500
—
—
—
—
—
(50,343)
(418)
(9,209)
51,767
3,820
9,924
13,744
461 $
18,404
1,464 $
11,738
4,524
13,944
$
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
73
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
Non-control/Non-affiliate
5
Investments
AAC NEW HOLDCO INC.
ACCELERATION PARTNERS,
LLC
8,13
ACE GATHERING, INC.
ALLIANCE SPORTS GROUP,
L.P.
First Lien
374,543 shares
common stock
Warrants (Expiration -
December 11, 2025)
First Lien
9
1,000 Preferred Units
1,000 Class A
9
Common Units
15
Second Lien
Unsecured convertible
note
3.88% preferred
membership interest
Healthcare services
10.00%, 8.00%
PIK
12/11/2020
6/25/2025
$
8,653 $
8,653 $
8,350
—
—
12/11/2020
12/11/2020
—
—
—
—
Media, marketing &
entertainment
L+8.17% (Floor
1.00%)/Q, Current
Coupon 9.17%
—
12/1/2020
12/1/2020
12/1/2025
—
11,875
—
1,785
1,785
2,198
12,636
11,600
1,000
2,198
12,333
11,875
1,153
Energy services
(midstream)
Consumer products &
retail
—
12/1/2020
—
—
—
—
12,600
13,028
L+8.50% (Floor
2.00%)/Q, Current
Coupon 10.50%
12/13/2018
12/13/2023
7,948
7,881
7,765
6.00% PIK
7/15/2020
9/30/2024
—
8/1/2017
—
173
—
173
2,500
2,673
495
3,681
4,176
AMERICAN NUTS
OPERATIONS LLC
13
First Lien - Term Loan
A
Food, agriculture and
beverage
First Lien - Term Loan
B
3,000,000 units of
Class A common
9
stock
AMERICAN
TELECONFERENCING
SERVICES, LTD. (DBA
PREMIERE GLOBAL
SERVICES, INC.)
Revolving Loan
10,16
Telecommunications
First Lien
16
AMWARE FULFILLMENT
LLC
First Lien
Distribution
SOFR+6.75%
(Floor 1.00%)/Q,
Current Coupon
7.75%
SOFR+8.75%
(Floor 1.00%)/Q,
Current Coupon
9.75%
3/11/2022
4/10/2026
12,450
12,388
12,450
3/11/2022
4/10/2026
12,450
12,388
12,450
—
4/10/2018
—
—
3,000
27,776
4,195
29,095
9/17/2021
6/30/2022
899
890
9/21/2016
6/8/2023
4,899
4,858
5,748
49
269
318
7/29/2016
4/15/2022
16,376
16,375
16,376
P+5.50%/Q,
Current Coupon
9.00%
P+5.50%/Q,
Current Coupon
9.00%
L+9.00% (Floor
1.00%)/M, Current
Coupon 10.00%
74
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
Type of
2
Investment
ARBORWORKS, LLC
Revolving Loan
10
Industry
Environmental
services
First Lien
100 Class A Units
ASC ORTHO
MANAGEMENT COMPANY,
LLC
13
9
2,156 Common Units Healthcare services
ATS OPERATING, LLC
13
Revolving Loan
10
Consumer products
& retail
First Lien - Term
Loan A
First Lien - Term
Loan B
1,000,000 Preferred
9
units
BINSWANGER HOLDING
CORP.
First Lien
900,000 shares of
common stock
Distribution
BLASCHAK ANTHRACITE
CORPORATION (FKA
BLASCHAK COAL CORP.)
Second Lien- Term
Loan
15
Commodities &
mining
Second Lien- Term
Loan B
15
BROAD SKY NETWORKS
LLC (DBA EPIC IO
TECHNOLOGIES)
1,131,579 Series A
Preferred units
Telecommunications
CADMIUM, LLC
Revolving Loan
10
Software & IT
services
First Lien
Current Interest
3
Rate
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
—
—
SOFR+6.50%
(Floor 1.00%)/Q,
Current Coupon
7.50%
SOFR+5.50%
(Floor 1.00%)/Q,
Current Coupon
6.50%
SOFR+7.50%
(Floor 1.00%)/Q,
Current Coupon
8.50%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
11/17/2021
11/9/2026
—
(56)
—
11/17/2021
11/17/2021
11/9/2026
—
12,903
—
12,660
100
12,704
12,657
100
12,757
8/31/2018
—
—
801
584
1/18/2022
1/18/2027
1,000
952
952
1/18/2022
1/18/2027
9,250
9,071
9,071
1/18/2022
1/18/2027
9,250
9,071
9,071
—
1/18/2022
—
—
1,000
20,094
1,000
20,094
L+8.50% (Floor
1.00%)/M,
Current Coupon
9.50%
3/9/2017
3/10/2023
10,121
10,105
10,121
—
3/9/2017
—
—
900
11,005
924
11,045
L+11.00%, 3.00%
PIK (Floor
1.00%)/Q, Current
Coupon 15.00%
L+11.00%, 3.00%
PIK (Floor
1.00%)/Q, Current
Coupon 15.00%
—
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
7/30/2018
7/30/2023
9,064
9,005
8,793
3/30/2020
7/30/2023
2,149
2,130
11,135
2,084
10,877
12/11/2020
—
—
1,132
1,420
1/7/2022
12/22/2026
308
302
302
1/7/2022
12/22/2026
7,385
7,313
7,615
1,317
7,314
7,616
2,090
CALIFORNIA PIZZA
KITCHEN, INC.
48,423 shares of
common stock
Restaurants
—
11/23/2020
—
—
75
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
Type of
2
Investment
Industry
CAMIN CARGO CONTROL,
INC.
First Lien
Energy services
(midstream)
CITYVET, INC.
13
10
Delayed Draw Term
Loan
271,739 Class A
9
units
Healthcare services
Current Interest
3
Rate
L+6.50% (Floor
1.00%)/Q, Current
Coupon 7.50%
L+6.50% (Floor
1.00%)/Q, Current
Coupon 7.50%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
6/2/2021
6/4/2026
5,752
5,702
5,700
3/5/2021
3/5/2026
13,000
12,656
13,247
—
3/5/2021
—
—
500
13,156
1,757
15,004
8
CRAFTY APES, LLC
First Lien
DUNN PAPER, INC.
EVEREST
TRANSPORTATION
SYSTEMS, LLC
Second Lien
First Lien
Media, marketing &
entertainment
Paper & forest
products
Transportation &
logistics
FAST SANDWICH, LLC
Revolving Loan
10
Restaurants
First Lien
FLIP ELECTRONICS, LLC
13
Technology
products &
components
First Lien
Delayed Draw Term
Loan
2,000,000 Common
Units
9,11
10
L+6.21% (Floor
1.00%)/Q, Current
Coupon 7.21%
L+9.25% (Floor
1.00%)/M, Current
Coupon 10.25%
L+8.00% (Floor
1.00%)/M, Current
Coupon 9.00%
L+9.00% (Floor
1.00%)
L+9.00% (Floor
1.00%)/Q,Current
Coupon 10.00%
SOFR+7.50%
(Floor 1.00%)/M,
Current Coupon
8.50%
SOFR+7.50% (Floor
1.00%)
6/9/2021
11/1/2024
10,000
9,921
10,000
9/28/2016
8/26/2023
3,000
2,984
2,208
11/9/2021
8/26/2026
8,938
8,853
8,848
5/24/2018
5/23/2023
—
(22)
—
5/24/2018
5/23/2023
3,277
3,262
3,240
3,277
3,277
1/4/2021
1/2/2026
17,755
17,443
17,755
3/24/2022
1/2/2026
—
1/4/2021
—
—
—
(56)
—
2,000
19,387
6,373
24,128
FOOD PHARMA
SUBSIDIARY HOLDINGS,
LLC
13
First Lien
Food, agriculture &
beverage
10
Delayed Draw Term
Loan
9
75,000 Class A Units
L+6.50% (Floor
1.00%)/M, Current
Coupon 7.50%
L+6.50% (Floor
1.00%)/M, Current
Coupon 7.50%
—
76
6/1/2021
6/1/2026
5,000
4,914
5,000
6/1/2021
6/1/2021
6/1/2026
—
2,030
—
1,971
750
7,635
2,030
750
7,780
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
Type of
2
Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
GS OPERATING, LLC
Revolving Loan
10
Distribution
First Lien
Delayed Draw Term
Loan
10
HYBRID APPAREL, LLC
Second Lien
15
INFOLINKS MEDIA BUYCO,
LLC
13
First Lien
Delayed Draw Term
Loan
1.68% LP interest
10
9,10
Consumer products
& retail
Media, marketing &
entertainment
ISI ENTERPRISES, LLC
Revolving Loan
10
Software & IT
services
First Lien
1,000,000 Series A
Preferred units
JVMC HOLDINGS CORP.
First Lien
Financial services
KLEIN HERSH, LLC
Revolving Loan
10
Business services
First Lien
KMS, LLC
15
First Lien
Delayed Draw Term
Loan
10
Distribution
SOFR+6.00%(Floor
0.75%)/M, Current
Coupon 6.75%
SOFR+6.00%
(Floor 0.75%)/M,
Current Coupon
6.75%
SOFR+6.00%
(Floor 0.75%)/M,
Current Coupon
6.75%
L+8.25% (Floor
1.00%)/Q, Current
Coupon 9.25%
L+6.00% (Floor
1.00%)/M, Current
Coupon 7.01%
L+6.00% (Floor
1.00%)
—
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
1/3/2022
1/3/2028
183
150
187
1/3/2022
1/3/2028
8,534
8,367
8,704
1/3/2022
1/3/2028
2,516
2,406
10,923
2,566
11,457
6/30/2021
6/30/2026
15,750
15,473
15,246
11/1/2021
10/30/2026
7,731
11/1/2021
10/29/2021
10/30/2026
—
—
—
7,587
(21)
588
8,154
7,615
—
588
8,203
10/1/2021
10/1/2026
800
764
800
10/1/2021
10/1/2026
—
10/1/2021
—
5,000
—
4,908
1,000
6,672
5,000
1,000
6,800
2/28/2019
2/28/2024
6,589
6,558
6,589
11/13/2020
11/13/2025
—
(13)
—
11/13/2020
11/13/2025
23,821
23,415
23,402
24,298
24,298
10/4/2021
10/2/2026
15,920
15,773
15,920
10/4/2021
10/2/2026
—
(41)
15,732
—
15,920
L+7.00% (Floor
1.00%)/M, Current
Coupon 8.00%
L+7.00% (Floor
0.75%)
L+7.00% (Floor
0.75%)/Q, Current
Coupon 7.85%
L+7.25% (Floor
1.00%)/Q, Current
Coupon 8.25%
L+7.25% (Floor
1.00%)
77
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
Type of
2
Investment
LASH OPCO, LLC
Revolving Loan
10
Industry
Consumer products &
retail
First Lien
Delayed Draw Term
Loan
10
LGM PHARMA, LLC
13
First Lien
Healthcare products
Delayed Draw Term
Loan
Unsecured convertible
9
note
142,278.89 units of
Class A common
9
stock
LLFLEX, LLC
First Lien
15
Containers &
packaging
MAKO STEEL LP
Revolving Loan
10
Business services
First Lien
MERCURY ACQUISITION
2021, LLC (DBA TELE-
TOWN HALL)
13
First Lien
Telecommunications
Second Lien
2,089,599 Series A
9
units
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/M,
Current Coupon
8.01%
L+7.00% (Floor
1.00%)/M,
Current Coupon
8.01%
L+8.50% (Floor
1.00%), 2.00%
PIK/Q, Current
Coupon 11.50%
L+10.00% (Floor
1.00%), 2.00%
PIK/Q, Current
Coupon 13.00%
12/29/2021
9/18/2025
—
(10)
—
12/29/2021
3/18/2026
6,484
6,345
6,341
12/29/2021
3/18/2026
4,154
4,034
10,369
4,063
10,404
11/15/2017
11/15/2023
11,422
11,346
10,851
7/24/2020
11/15/2023
2,488
2,463
2,388
25.00% PIK
12/21/2021
12/31/2024
—
11/15/2017
—
88
—
88
88
1,600
15,497
376
13,703
L+9.00% (Floor
1.00%)/Q, Current
Coupon 10.00%
L+7.25% (Floor
(0.75%)/Q, Current
Coupon 8.23%
L+7.25% (Floor
(0.75%)/Q, Current
Coupon 8.38%
L+8.00% (Floor
1.00%)/Q, Current
Coupon 9.00%
L+11.00% (Floor
1.00%)/Q, Current
Coupon 12.00%
8/16/2021
8/14/2026
10,945
10,723
10,671
3/15/2021
3/13/2026
943
913
910
3/15/2021
3/13/2026
8,032
7,900
8,813
7,751
8,661
12/6/2021
12/7/2026
12,469
12,232
12,232
12/6/2021
12/7/2026
3,292
3,229
3,229
—
12/6/2021
—
—
—
15,461
1,536
16,997
78
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
MUENSTER MILLING
COMPANY, LLC
Type of
2
Investment
Revolving Loan
10
Industry
Food, agriculture &
beverage
First Lien
Delayed Draw Term
Loan
10
NATIONAL CREDIT CARE,
LLC
13
First Lien - Term Loan
A
Consumer services
First Lien - Term Loan
B
191,049.33 Class A-3
9
Preferred units
NEUROPSYCHIATRIC
HOSPITALS, LLC
Revolving Loan
10
Healthcare services
First Lien
Delayed Draw Term
Loan
10
NINJATRADER, INC.
13
Revolving Loan
10
Financial services
First Lien
Delayed Draw Term
Loan
2,000,000 Preferred
Units
9,11
10
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
L+7.25% (Floor
1.00%)
L+7.25% (Floor
1.00%)/Q, Current
Coupon 8.25%
L+7.25% (Floor
1.00%)
L+6.50% (Floor
1.00%)/Q, Current
Coupon 7.50%
L+7.50% (Floor
1.00%)/Q, Current
Coupon 8.50%
8/10/2021
8/10/2026
—
(87)
—
8/10/2021
8/10/2026
12,000
11,785
12,000
8/10/2021
8/10/2026
—
(52)
11,646
—
12,000
12/23/2021
12/23/2026
11,250
11,035
11,171
12/23/2021
12/23/2026
11,250
11,035
11,171
—
3/17/2022
—
—
2,000
24,070
2,000
24,342
L+8.00% (Floor
1.00%)/Q, Current
Coupon 9.00%
L+8.00% (Floor
1.00%)/Q, Current
Coupon 9.00%
L+8.00% (Floor
1.00%)
L+6.25% (Floor
1.00%)
L+6.25% (Floor
1.00%)/Q,
Current Coupon
7.25%
L+6.25% (Floor
1.00%)
5/14/2021
5/14/2026
4,400
4,317
4,299
5/14/2021
5/14/2026
14,913
14,657
14,569
5/14/2021
5/14/2026
12/18/2019
12/18/2024
—
—
(82)
18,892
—
18,868
(4)
—
12/18/2019
12/18/2024
23,150
22,719
23,150
12/31/2020
12/18/2024
—
12/18/2019
—
—
—
(45)
—
2,000
24,670
9,566
32,716
NWN PARENT HOLDINGS,
LLC
Revolving Loan
10
Software & IT
services
First Lien
RESEARCH NOW GROUP,
INC.
Second Lien
Business services
L+6.50% (Floor
1.00%)/Q,
Current Coupon
7.50%
L+6.50% (Floor
1.00%)/Q,
Current Coupon
7.50%
L+9.50% (Floor
1.00%)/M,
Current Coupon
10.50%
79
5/7/2021
5/7/2026
420
390
412
5/7/2021
5/7/2026
13,066
12,844
13,234
12,818
13,230
12/8/2017
12/20/2025
10,500
10,066
10,217
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
ROOF OPCO, LLC
Revolving Loan
10
Consumer services
First Lien
Delayed Draw Term
Loan
10
RTIC SUBSIDIARY
HOLDINGS, LLC
Revolving Loan
Consumer products
& retail
First Lien
8
SCRIP, INC.
First Lien
100 shares of common
stock
Healthcare products
SHEARWATER RESEARCH,
9
INC.
Revolving Loan
10
Consumer products
& retail
10
First Lien
Delayed Draw Term
Loan
1,200,000 Class A
Preferred Units
40,000 Class A
Common Units
SIB HOLDINGS, LLC
13
Revolving Loan
10
Business services
First Lien
Delayed Draw Term
Loan
238,095.24 Common
9
Units
10
L+6.00% (Floor
1.00%)
L+6.00% (Floor
1.00%)/Q, Current
Coupon 7.00%
L+6.00% (Floor
1.00%)/Q, Current
Coupon 7.00%
L+7.75% (Floor
1.25%)/Q, Current
Coupon 9.00%
L+7.75% (Floor
1.25%)/Q, Current
Coupon 9.00%
L+9.43% (Floor
2.00%)/M,
Current Coupon
11.43%
8/27/2021
8/27/2026
—
(53)
—
8/27/2021
8/27/2026
11,000
10,802
10,791
8/27/2021
8/27/2026
7,578
7,394
18,143
7,578
18,369
9/1/2020
9/1/2025
1,370
1,357
1,370
9/1/2020
9/1/2025
6,933
6,870
8,227
6,933
8,303
3/21/2019
3/21/2024
16,750
16,521
16,750
—
3/21/2019
—
4/30/2021
4/30/2026
—
—
1,000
17,521
1,601
18,351
(40)
—
4/30/2021
4/30/2026
13,794
13,561
13,545
L+6.25% (Floor
1.00%)
L+6.25% (Floor
1.00%)/Q, Current
Coupon 7.25%
L+6.25% (Floor
1.00%)
L+6.00% (Floor
1.00%)/M, Current
Coupon 7.00%
L+6.00% (Floor
1.00%)/M, Current
Coupon 7.00%
L+6.00% (Floor
1.00%)
4/30/2021
4/30/2026
—
—
4/30/2021
4/30/2021
—
—
10/29/2021
10/29/2026
10/29/2021
10/29/2026
—
10/29/2021
—
80
—
—
—
47
(27)
978
33
—
979
33
14,505
14,557
37
46
—
—
(9)
500
7,852
—
500
7,869
10/29/2021
10/29/2026
7,427
7,324
7,323
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
SOUTH COAST TERMINALS,
LLC
Revolving Loan
10
Specialty chemicals
First Lien
SPOTLIGHT AR, LLC
13
Revolving Loan
10
Business services
First Lien
9
750 Common Units
STUDENT RESOURCE
CENTER LLC
13
Revolving Loan
10
Education
First Lien
9
2,000 Preferred Units
SYSTEC CORPORATION
(DBA INSPIRE
AUTOMATION)
Revolving Loan
10
Business services
First Lien
Delayed Draw Term
Loan
10
THE PRODUCTO GROUP,
LLC
13
First Lien
1,500,000 Class A
9
units
Industrial products
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
L+6.25% (Floor
1.00%)
L+6.25% (Floor
1.00%)/M, Current
Coupon 7.25%
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
—
L+8.00% (Floor
1.00%)
L+8.00% (Floor
1.00%)/Q, Current
Coupon 9.01%
—
L+7.50% (Floor
1.00%)/Q, Current
Coupon 8.50%
L+7.50% (Floor
1.00%)/Q, Current
Coupon 8.50%
L+7.50% (Floor
1.00%)
L+9.00% (Floor
1.00%)/Q, Current
Coupon 10.00%
12/13/2021
12/11/2026
—
(36)
—
12/13/2021
12/11/2026
18,019
17,676
17,640
17,749
17,749
12/8/2021
6/8/2026
—
(37)
—
12/8/2021
12/8/2021
6/8/2026
—
7,500
—
6/25/2021
6/25/2026
—
6/25/2021
6/25/2021
6/25/2026
—
18,823
—
7,359
750
8,072
(23)
18,489
2,000
20,466
7,358
750
8,108
—
18,597
1,819
20,416
8/13/2021
8/13/2025
850
816
833
8/13/2021
8/13/2025
8/13/2021
8/13/2025
9,000
—
8,844
(25)
9,635
8,820
—
9,653
12/31/2021
12/31/2026
12,644
12,401
12,391
—
12/31/2021
—
—
1,500
13,901
1,500
13,891
Technology products
& components
L+7.75% (Floor
1.00%)/Q, Current
Coupon 8.75%
9/30/2020
9/30/2025
9,875
9,764
9,835
TRAFERA, LLC (FKA
TRINITY 3, LLC)
13
15
First Lien
Unsecured convertible
9
note
896.43 Class A units
9,11
10.00% PIK
—
2/7/2022
11/15/2019
3/31/2026
—
84
—
84
1,205
11,053
84
3,000
12,919
L+5.75% (Floor
1.00%)/M, Current
Coupon 6.75%
2/25/2020
9/8/2026
11,614
11,451
11,614
—
4/3/2019
—
—
1,874
9,273
81
USA DEBUSK, LLC
VISTAR MEDIA INC.
First Lien
171,617 shares of
Series A preferred
stock
Industrial services
Media, marketing &
entertainment
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
VTX HOLDINGS, INC. (DBA
VERTEX ONE)
1,597,707 Series A
Preferred units
Software & IT
services
WALL STREET PREP, INC.
Revolving Loan
10
Education
First Lien
1,000,000 Class A-1
Preferred Shares
WELL-FOAM, INC.
Revolving Loan
10
Energy services
(upstream)
First Lien
WINTER SERVICES
OPERATIONS, LLC
Revolving Loan
10
Business services
First Lien
Delayed Draw Term
Loan
10
ZENFOLIO INC.
Revolving Loan
10
Business services
First Lien
ZIPS CAR WASH, LLC
Delayed Draw Term
Loan - A
Consumer services
Delayed Draw Term
10
Loan - B
Total Non-control/Non-affiliate Investments (177.5% of net assets at fair
value)
L+8.50 (Floor
1.00%)
L+8.50 (Floor
1.00%)/Q,
Current Coupon
9.50%
L+7.00% (Floor
1.00%)/Q,
Current Coupon
8.00%
L+7.00% (Floor
1.00%)/Q,
Current Coupon
8.00%
L+7.00% (Floor
1.00%)
L+9.00% (Floor
1.00%)/Q,
Current Coupon
10.00%
L+9.00% (Floor
1.00%)/Q,
Current Coupon
10.00%
L+7.25% (Floor
1.00%)/Q, Current
Coupon 8.25%
L+7.25% (Floor
1.00%)/Q, Current
Coupon 8.26%
82
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
—
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q,
Current Coupon
8.00%
7/23/2019
—
7/19/2021
7/20/2026
—
—
1,598
2,082
(17)
—
7/19/2021
7/20/2026
10,863
10,670
10,656
—
7/19/2021
—
9/9/2021
9/9/2026
—
—
1,000
11,653
1,000
11,656
(83)
—
9/9/2021
9/9/2026
17,910
17,583
17,500
17,910
17,910
11/19/2021
11/19/2026
2,444
2,362
2,386
11/19/2021
11/19/2026
20,000
19,624
19,520
11/19/2021
11/19/2026
—
(41)
21,945
—
21,906
7/17/2017
7/17/2023
1,000
996
995
7/17/2017
7/17/2023
18,915
18,785
19,781
18,820
19,815
2/11/2022
3/1/2024
16,000
15,691
15,691
2/11/2022
3/1/2024
199
159
15,850
159
15,850
$
721,392 $
747,132
Table of Contents
Portfolio Company
1,18
6
Affiliate Investments
AIR CONDITIONING
SPECIALIST, INC.
13
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Type of
2
Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
Revolving Loan
10
Consumer services
First Lien
623,693.55 Preferred
9
Units
L+7.25% (Floor
1.00%)
L+7.25% (Floor
1.00%)/Q,
Current Coupon
8.25%
11/9/2021
11/9/2026
$
— $
(18) $
—
11/9/2021
11/9/2026
12,778
12,535
12,535
—
11/9/2021
—
10/15/2021
10/15/2026
—
—
624
13,141
634
13,169
(73)
—
CATBIRD NYC, LLC
13
Revolving Loan
10
Consumer products
& retail
First Lien
1,000,000 Class A
9
units
500,000 Class B
units
9,10
CENTRAL MEDICAL
SUPPLY LLC
13
Revolving Loan
10
Healthcare services
First Lien
Delayed Draw Capex
10
Term Loan
1,380,500 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
Protective Advance
1,681.04 Common
Units
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q,
Current Coupon
8.00%
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% PIK
(Floor 1.00%)/Q,
Current Coupon
10.50%
L+9.00% PIK
(Floor 1.00%)/Q,
Current Coupon
10.00%
L+11.50% PIK
(Floor 1.00%)/Q,
Current Coupon
12.50%
10/15/2021
10/15/2026
15,900
15,606
15,884
—
—
10/15/2021
10/15/2021
—
—
—
—
1,000
1,221
500
17,033
572
17,677
5/22/2020
5/22/2025
300
281
290
5/22/2020
5/22/2025
7,500
7,398
7,260
5/22/2020
5/22/2025
—
5/22/2020
—
—
1/4/2016
100
—
81
976
8,736
97
641
8,288
—
1,500
924
4/8/2020
4/7/2023
1,541
1,541
1,402
4/8/2020
4/7/2023
1,732
1,732
1,472
8/31/2021
4/7/2023
—
4/8/2020
—
83
526
—
526
3,615
7,414
526
2,460
5,860
Table of Contents
Portfolio Company
1,18
DYNAMIC COMMUNITIES,
LLC
13
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Type of
2
Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
Revolving Loan
10
Business services
First Lien
Senior subordinated
debt
2,000,000 Preferred
9
Units
L+8.50% (Floor
1.00%)
L+8.50% (Floor
1.00%)/Q,
Current Coupon
9.51%
7/17/2018
7/17/2023
—
(1)
—
7/17/2018
7/17/2023
11,221
11,147
10,323
25% PIK
12/4/2020
1/16/2024
—
7/17/2018
—
650
—
650
650
2,000
13,796
1,274
12,247
GRAMMATECH, INC.
Revolving Loan
10
Software & IT
services
First Lien
1,000 Class A units
56.259 Class A-1
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
Membership
Interest
9,11
10
16
Revolving Loan
First Lien
Second Lien
208,333.3333 Series
9
A Preferred units
203,124.9999
9
Common units
LIGHTING RETROFIT
INTERNATIONAL, LLC
(DBA ENVOCORE)
13
11/1/2019
11/1/2024
—
(22)
—
11/1/2019
11/1/2019 —
11/1/2024
—
11,500
—
11,384
1,000
—
1/10/2022
—
—
56
9,775
674
38
12,418
10,487
2/14/2018
2/14/2023
750
733
750
2/14/2018
2/14/2023
10,071
10,041
10,041
L+9.50% (Floor
2.00%)
L+9.50% (Floor
2.00%)/Q,
Current Coupon
11.50%
—
L+9.00% (Floor
1.00%)/Q,
Current Coupon
10.00%
L+8.00% (Floor
1.00%)/Q,
Current Coupon
9.00%
L+11.00% (Floor
1.00%)/Q,
Current Coupon
12.00%
6/5/2018
2/14/2023
Environmental
services
10.00% PIK
3/29/2019
2/14/2023
10.00% PIK
3/29/2019
2/14/2023
3/29/2019
2/14/2018
12/31/2021
12/31/2021
12/31/2021
12/31/2021
12/31/2021
—
—
12/31/2025
12/31/2025
12/31/2026
—
—
—
—
7.50%
7.50%
10.00% PIK
—
—
84
5,036
2,959
117
—
—
—
5,195
5,208
—
—
5,010
2,721
117
538
5,061
2,959
117
3,199
1,500
20,660
3,063
25,190
—
5,195
5,208
—
—
—
4,780
3,104
—
—
10,403
7,884
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
Type of
2
Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
Fair
4
Value
ROSELAND
MANAGEMENT, LLC
Revolving Loan
10
Healthcare services
First Lien
16,084 Class A Units
SIMR, LLC
Healthcare services
16
First Lien
9,374,510.2 Class B
Common Units
904,903.31 Class W
Units
13
SONOBI, INC.
Total Affiliate Investments (31.3% of net assets at fair
value)
500,000 Class A
9
Common Units
7
Control Investments
9,10,11
I-45 SLF LLC
Total Control Investments (13.7% of net assets at fair
value)
80% LLC equity
interest
TOTAL INVESTMENTS (222.5% of net assets at fair
value)
Media, marketing,
& entertainment
Multi-sector
holdings
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%, 7.00%
PIK (Floor
2.00%)/M,
Current Coupon
19.00%
11/9/2018
11/9/2023
575
564
575
11/9/2018
11/9/2018
11/9/2023
—
14,125
—
14,021
1,517
16,102
14,125
1,905
16,605
9/7/2018
9/7/2023
13,235
13,101
10,588
—
—
—
9/7/2018
2/4/2021
9/17/2020
—
—
—
—
—
—
6,107
—
—
—
19,208
10,588
500
2,960
$
140,911 $
131,879
—
10/20/2015
—
— $
76,000 $
57,603
$
76,000 $
57,603
$
938,303 $
936,614
1
2
3
4
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 and the investments of SBIC I (as defined below), unless otherwise noted, are pledged as collateral for the Company’s senior secured
credit facility or in support of the SBA-guaranteed debentures to be issued by Capital Southwest SBIC I, LP, our wholly-owned subsidiary that operates as a small
business investment company ("SBIC I"), respectively.
The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”), Secured Overnight
Financing Rate ("SOFR") or Prime (“P”) and reset daily (D), monthly (M), quarterly (Q), or semiannually (S). For each investment, the Company has provided the
spread over LIBOR, SOFR or Prime and the current contractual interest rate in effect at March 31, 2022. Certain investments are subject to an interest rate floor.
Certain investments, as noted, accrue payment-in-kind ("PIK") interest.
The Company's investment portfolio is comprised entirely of debt and equity securities of privately held companies for which quoted prices falling within the
categories of Level 1 and Level 2 inputs are not readily 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.
85
Table of Contents
5
6
7
8
9
10
11
12
13
14
15
16
17
18
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, 2022, approximately 79.8% 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 177.5%.
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, 2022, approximately 14.1% of the Company’s investment assets were affiliate investments. The fair value of these
investments as a percent of net assets is 31.3%.
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, 2022,
approximately 6.2% of the Company’s investment assets were control investments. The fair value of these investments as a percent of net assets is 13.7%.
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, 2022, approximately 12.8% of the Company's assets are non-qualifying assets.
The investment has an unfunded commitment as of March 31, 2022. Refer to Note 11 - Commitments and Contingencies for further discussion.
Income producing through dividends or distributions.
As of March 31, 2022, the cumulative gross unrealized appreciation for U.S. federal income tax purposes is approximately $67.8 million; cumulative gross unrealized
depreciation for federal income tax purposes is $61.7 million. Cumulative net unrealized appreciation is $6.1 million, based on a tax cost of $852.4 million.
Investment is held through a wholly-owned taxable subsidiary.
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, 2022 represented 222.5% of the Company's net assets or 96.2% 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.
Investment is on non-accrual status as of March 31, 2022, meaning the Company has ceased to recognize interest income on the investment.
Represents amortized cost. Negative cost in this column represents the original issue discount of certain undrawn revolvers and delayed draw term loans.
Equity ownership may be held in shares or units of a company that is either wholly owned by the portfolio company or under common control by the same parent
company to the portfolio company.
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, 2022 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
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
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
1,000 Preferred
9
Units
1,000 Class A
9
Common Units
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
12/1/2025
2,965
—
—
12/1/2020
12/1/2020
—
—
—
—
2,889
1,000
—
12,389
2,965
1,000
—
12,715
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
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
ALLOVER MEDIA, LLC
Revolving Loan
10
Media, marketing &
entertainment
First Lien
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%
87
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
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
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
BINSWANGER HOLDING CORP.
First Lien
900,000 shares of
common stock
Distribution
BLASCHAK COAL CORP.
Second Lien Term
Loan
15
Commodities &
mining
Second Lien- Term
Loan B
15
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
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
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
8/31/2023
12/1/2023
—
8/31/2018
—
8,854
4,237
—
8,756
4,191
750
15,182
8,322
3,822
356
13,910
L+8.50% (Floor
1.00%)/M, Current
Coupon 9.50%
3/9/2017
3/9/2022
10,942
10,890
10,942
—
3/9/2017
—
—
900
11,790
924
11,866
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%
88
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
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
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
CAPITAL PAWN HOLDINGS, LLC First Lien
Consumer products &
retail
CHEMISTRY RX HOLDINGS,
LLC
First Lien
Specialty chemicals
CITYVET, INC.
13
10
Delayed Draw Term
Loan
271,739 Class A
9
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
Current
Interest
3
Rate
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
Fair
4
Value
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
11/23/2020
5/23/2025
—
11/23/2020
—
814
—
814
1,317
3,522
796
1,317
3,518
12/21/2017
7/8/2023
8,854
8,840
8,854
3/15/2021
3/13/2026
8,000
7,841
7,841
3/5/2021
3/5/2026
3,250
—
3/5/2021
—
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
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%
L+7.25% (Floor
1.00%)/Q, Current
Coupon 8.25%
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
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%
89
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
DUNN PAPER, INC.
ELECTRONIC TRANSACTION
CONSULTANTS LLC
13
Second Lien
Revolving Loan
10
Industry
Paper & forest
products
Software & IT
services
ESCP DTFS, INC.
Industrial services
First Lien
9
1,000 Class A units
First Lien - Term
Loan A
First Lien - Term
Loan B
Delayed Draw Term
Loan B1
Delayed Draw Term
Loan B2
FAST SANDWICH, LLC
Revolving Loan
10
Restaurants
FLIP ELECTRONICS, LLC
8,13
First Lien
First Lien
2,000,000 Common
9
Units
Current
Interest
3
Rate
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%
L+9.00% (Floor
1.00%)
L+9.00% (Floor
1.00%)/Q,Current
Coupon 10.00%
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
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
1/31/2020
1/31/2025
500
500
491
466
491
11,521
466
10,904
5/24/2018
5/23/2023
—
(32)
—
5/24/2018
5/23/2023
3,359
3,332
3,300
3,023
3,023
Technology products
& components
L+8.05% (Floor
1.00%)/M, Current
Coupon 9.05%
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
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
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%
90
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
Current
Interest
3
Rate
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%
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
Fair
4
Value
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
11/15/2017
11/15/2023
11,424
11,315
11,424
7/24/2020
11/15/2023
2,488
2,448
2,487
1
Portfolio Company
Type of
2
Investment
Industry
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
LGM PHARMA, LLC
13
First Lien
Healthcare products
LIGHTING RETROFIT
INTERNATIONAL, LLC (DBA
ENVOCORE)
Delayed Draw Term
Loan
142,278.89 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
—
11/15/2017
—
—
1,600
15,363
2,309
16,220
Environmental
services
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
MAKO STEEL LP
Revolving Loan
10
Business services
First Lien
03/15/2021
03/13/2026
660
623
647
03/15/2021
03/13/2026
8,113
7,952
8,575
7,952
8,599
L+7.25% (Floor
(0.75%)/Q, Current
Coupon 8.00%
L+7.25% (Floor
(0.75%)/Q, Current
Coupon 8.00%
91
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
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
First Lien
13,811 Class A
Units
RTIC SUBSIDIARY HOLDINGS,
LLC
Revolving Loan
10
Consumer products &
retail
8
SCRIP, INC.
First Lien
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
Technology products
& components
15
First Lien
896.43 Class A
9
units
USA DEBUSK, LLC
First Lien
Industrial services
Current
Interest
3
Rate
L+6.75% (Floor
1.50%)
L+6.75% (Floor
1.50%)/Q, Current
Coupon 8.25%
L+6.75% (Floor
1.50%)/Q
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
12/18/2019
12/18/2024
—
(6)
—
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%
L+7.00% (Floor
2.00%)/Q, Current
Coupon 9.00%
12/8/2017
12/20/2025
10,500
9,980
10,132
11/9/2018
11/9/2023
500
482
500
11/9/2018
11/9/2023
14,270
14,108
14,270
—
11/9/2018
—
—
1,381
15,971
1,720
16,490
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%
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
—
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
—
—
—
—
1,000
17,422
541
967
17,717
1,539
9/30/2020
9/30/2025
9,975
9,838
9,975
—
11/15/2019
—
—
1,205
11,043
3,204
13,179
2/25/2020
10/22/2024
7,900
7,782
7,892
L+5.75% (Floor
1.00%)/M, Current
Coupon 6.75%
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Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
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
Current
Interest
3
Rate
L+7.50%, 2.50%
PIK (Floor
2.00%)/M, Current
Coupon 12.00%
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
2/17/2017
4/3/2023
11,481
10,920
11,481
Media, marketing &
entertainment
—
—
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
22,579
1,654
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 Term Loan
875,000 Preferred
9
Units
10
1,500,000 units of
Class A-1 common
9
stock
Business services
CHANDLER SIGNS, LLC
13
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
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%
—
—
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Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2021
1
Portfolio Company
Type of
2
Investment
Industry
DELPHI BEHAVIORAL HEALTH
GROUP, LLC
First Lien
Healthcare services
First Lien
1,681.04 Common
Units
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 - March
9
29, 2029)
9.25% Class A
Membership
9
Interest
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
4/8/2020
4/7/2023
1,414
1,414
1,398
4/8/2020
4/7/2023
1,580
—
4/8/2020
—
7/17/2018
7/17/2023
1,580
3,615
6,609
(2)
—
—
7/17/2018
7/17/2023
11,061
10,950
25% PIK
12/4/2020
1/16/2024
—
7/17/2018
—
372
—
372
2,000
13,320
1,500
3,615
6,513
—
9,966
372
1,274
11,612
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
Current
Interest
3
Rate
L+9.50% (Floor
1.00%)/M, Current
Coupon 10.50%
L+7.50% (Floor
1.00%)/M, Current
Coupon 8.50%
L+3.75%, 7.75%
PIK (Floor 1.00%)
L+3.75%, 7.75%
PIK (Floor
1.00%)/Q, Current
Coupon 12.50%
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%
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
2/14/2018
—
—
—
—
94
5,036
2,678
106
—
—
4,984
2,282
106
5,101
2,630
103
538
2,968
1,500
19,383
2,532
23,395
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
9,374,510.2 Class B
Common Units
Healthcare services
Current
Interest
3
Rate
L+17.00% PIK
(Floor 2.00%)/M,
Current Coupon
19.00%
Acquisition
Date
14
Maturity
Principal
Cost
Fair
4
Value
9/7/2018
9/7/2023
13,661
13,527
12,103
—
9/7/2018
—
—
6,107
19,634
—
12,103
First Lien
500,000 Class A
9
Common Units
Media, marketing, &
entertainment
L+8.00% (Floor
1.00%)/Q, Current
Coupon 9.00%
9/17/2020
9/16/2025
—
9/17/2020
—
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 $
72,800 $
57,158
57,158
703,557 $
688,432
SIMR, LLC
SONOBI, INC.
13
Total Affiliate Investments
7
Control Investments
I-45 SLF LLC
9,11
Total Control Investments
TOTAL INVESTMENTS
12
1
2
3
4
5
6
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 flo or. 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%.
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Table of Contents
7
8
9
10
11
12
13
14
15
16
17
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.
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.
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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.
CSWC 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. Our core business is to target senior debt investments and equity investments in lower middle market
(“LMM”) companies. We also opportunistically target 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 $35.0 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 $20.0 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, as amended. SBIC I has an
investment strategy substantially similar to ours and makes similar types of investments in accordance with SBA regulations. SBIC I and its general partner
are consolidated for U.S. GAAP reporting purposes, and the portfolio investments held by it are included in the consolidated financial statements.
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.
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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, 2022, the Company has 87.2% 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 8.0% 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, 2022 and 2021, cash
balances totaling $10.2 million and $30.4 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 and SBIC I. 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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Table of Contents
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, 2022, we had three investments on non-accrual
status, which represent approximately 1.5% of our total investment portfolio's fair value and approximately 2.6% of its cost. As of March 31, 2021, we did
not have any investments on non-accrual status.
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, 2022, approximately 3.7% 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, 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.
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, 2022 and 2021, we have not written off any
accrued and uncollected PIK interest from prior periods. For the year ended March 31, 2022, we had two investments for which we stopped accruing PIK
interest. For the year ended March 31, 2021, we did not have any investments for which we stopped accruing PIK interest. For the years ended March 31,
2022 and 2021, approximately 3.9% and 10.7%, respectively, of CSWC’s total investment income was attributable to non-cash PIK interest income.
Fee Income Fee income, generally collected in advance, includes fees for administration and valuation services rendered by the Company. These
fees are typically charged annually and are amortized into income over the year. The Company recognizes nonrecurring fees, including prepayment
penalties, waiver fees and amendment fees, as fee income when earned. In addition, the Company may also be entitled to an exit fee that is amortized into
income over the life of the loan. Loan exit fees to be paid at the termination of the loan are accreted into fee income over the contractual life of the loan.
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, its unsecured
notes (as discussed further in Note 5) and the debentures guaranteed by the SBA (the "SBA Debentures"). 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 and the
SBA Debentures are a direct deduction from the related debt liability and amortized into interest expense over the term of the January 2026 Notes (as
defined below), the October 2026 Notes (as defined below) and the SBA Debentures.
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,
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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.
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 and any "make-whole" premium payment (as discussed in Note 5)) 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 10.5 years. 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 was the last year in which the
Company incurred a tax provision 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 an
income tax provision 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 provision, 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,
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may generate an income tax provision 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 provision, 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 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 provision. No interest or penalties expense was recorded during the years ended March 31, 2022,
2021 and 2020.
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 share-based compensation using the fair value method, as prescribed by ASC Topic 718,
Compensation – Stock Compensation. Accordingly, we recognize share-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.
The right to grant restricted stock awards under the 2010 Plan terminated on July 18, 2021, ten years after the date that the 2010 Restricted Stock
Award Plan (the “2010 Plan”) was approved by the Company’s shareholders pursuant to its terms. In connection with the termination of the 2010 Plan, the
Company’s Board of Directors and shareholders approved the Capital Southwest Corporation 2021 Employee Restricted Stock Award Plan (the "2021
Employee Plan") as part of the compensation package for its employees, the terms of which are, in all material respects, identical to the 2010 Plan. On July
19, 2021, we received an exemptive order that supersedes the prior exemptive order relating to the 2010 Plan (the “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, the Company's Board of Directors approved the Capital Southwest Corporation 2021 Non-
Employee Director Restricted Stock Plan (the "Non-Employee Director Plan") as part of the compensation package for non-employee directors of the
Board of Directors. In connection therewith, on May 16, 2022, we received an exemptive order that supersedes the Order (the "Superseding Order") and
will cover both employees and non-employee directors of the Board of Directors. The Non-Employee Director Plan will become effective upon shareholder
approval at our 2022 annual meeting of shareholders.
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.
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
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continuation of existing contracts. The standard is effective as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by
the amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging
transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging
relationship. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the year ended March 31, 2022.
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 adopted the
Amendments for the year ended March 31, 2022 and there were no material changes to the consolidated financial statement or its disclosures.
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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, 2022 and 2021:
March 31, 2022:
1
First lien loans
2
Second lien loans
Subordinated debt
Preferred equity
Common equity & warrants
3
I-45 SLF LLC
March 31, 2021:
1
First lien loans
2
Second lien loans
Subordinated debt
Preferred equity
Common equity & warrants
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
$
$
$
$
739,872
52,645
1,317
44,663
40,514
57,603
936,614
524,161
36,919
11,534
22,608
36,052
57,158
688,432
79.0 %
5.6
0.1
4.8
4.3
6.2
100.0 %
76.1 %
5.4
1.7
3.3
5.2
8.3
100.0 %
175.8 % $
12.5
0.3
10.6
9.6
13.7
222.5 % $
155.9 % $
11.0
3.4
6.7
10.7
17.0
204.7 % $
745,290
55,976
994
25,544
34,499
76,000
938,303
530,366
40,198
11,588
15,378
33,227
72,800
703,557
79.4 %
6.0
0.1
2.7
3.7
8.1
100.0 %
75.4 %
5.7
1.6
2.2
4.7
10.4
100.0 %
1
2
3
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, 2022 and 2021, the fair value of the first lien last out loans are $38.6 million and $85.6 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, 2022 and 2021, the fair value of the split lien term loans included
in first lien loans is $36.4 million and $25.9 million, respectively. As of March 31, 2022 and 2021, the fair value of the split lien term loans included in second lien
loans is $33.9 million and $19.1 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.
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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, 2022 and 2021:
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, 2022:
Business Services
Consumer Products & Retail
Healthcare Services
Consumer Services
1
I-45 SLF LLC
Distribution
Food, Agriculture & Beverage
Media, Marketing & Entertainment
Financial Services
Technology Products & Components
Transportation & Logistics
Software & IT Services
Education
Healthcare Products
Environmental Services
Telecommunications
Energy Services (Upstream)
Specialty Chemicals
Industrial Products
Energy Services (Midstream)
Industrial Services
Commodities & Mining
Containers & Packaging
Aerospace & Defense
Restaurants
Paper & Forest Products
$
$
123,697
90,457
88,131
71,730
57,603
54,798
48,876
43,463
39,305
37,047
34,038
33,414
32,072
32,054
20,641
18,736
17,910
17,749
13,891
13,465
11,614
10,877
10,671
6,800
5,367
2,208
936,614
13.2 %
9.7
9.4
7.7
6.2
5.9
5.2
4.6
4.2
4.0
3.6
3.6
3.4
3.4
2.2
2.0
1.9
1.9
1.5
1.4
1.2
1.2
1.1
0.7
0.6
0.2
100.0 %
105
29.4 % $
21.5
21.0
17.0
13.7
13.0
11.6
10.3
9.3
8.8
8.1
7.9
7.6
7.6
4.9
4.5
4.3
4.2
3.3
3.2
2.8
2.6
2.5
1.6
1.3
0.5
222.5 % $
124,860
88,375
96,946
71,203
76,000
54,035
47,057
33,049
31,229
30,440
29,513
34,866
32,119
33,018
23,108
22,341
17,500
17,640
13,901
13,582
11,451
11,135
10,723
6,672
4,556
2,984
938,303
13.3 %
9.4
10.3
7.6
8.1
5.8
5.0
3.5
3.3
3.3
3.1
3.7
3.4
3.5
2.5
2.4
1.9
1.9
1.5
1.5
1.2
1.2
1.1
0.7
0.5
0.3
100.0 %
Table of Contents
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
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of
Net Assets
(dollars in thousands)
Cost
Percentage of
Total Portfolio
at Cost
$
$
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 %
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 %
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, 2022 and 2021:
March 31, 2022:
Northeast
Southwest
West
Southeast
Midwest
1
I-45 SLF LLC
International
March 31, 2021:
Southwest
Northeast
Southeast
West
Midwest
1
I-45 SLF LLC
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of
Net Assets
(dollars in thousands)
$
$
$
$
225,578
206,057
163,924
136,588
132,308
57,603
14,556
936,614
196,956
153,761
120,168
90,910
69,479
57,158
688,432
24.1 %
22.0
17.5
14.6
14.1
6.1
1.6
100.0 %
28.6 %
22.3
17.5
13.2
10.1
8.3
100.0 %
53.6 % $
49.0
38.9
32.5
31.4
13.7
3.4
222.5 % $
58.6 % $
45.7
35.7
27.0
20.7
17.0
204.7 % $
Percentage of
Total Portfolio
at Cost
23.6 %
21.8
16.3
14.9
13.8
8.1
1.5
100.0 %
28.4 %
21.4
17.8
12.5
9.6
10.3
100.0 %
Cost
221,780
204,443
153,292
138,929
129,354
76,000
14,505
938,303
200,091
150,595
125,317
87,363
67,391
72,800
703,557
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 quarterly review of each
investment by our executive officers and investment team. Valuations of each portfolio security are prepared quarterly by the finance department using
updated financial and other operational information collected by the investment team. Each investment valuation is then subject to review by the executive
officers and investment team. 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 then subsequently to the 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.
Rule 2a-5 under the 1940 Act was recently adopted by the SEC and establishes requirements for determining fair value in good faith for purposes
of the 1940 Act. We intend to comply with the new rule's requirements on or before the compliance date on September 8, 2022.
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, 2022 and 2021, 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.
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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 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
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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.
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.
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The following fair value hierarchy tables set forth our investment portfolio by level as of March 31, 2022 and 2021 (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, 2022 Using
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
— $
—
—
—
—
—
— $
739,872
52,645
1,317
44,663
40,514
—
879,011
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
Total
739,872
52,645
1,317
44,663
40,514
57,603
936,614
Total
524,161
36,919
11,534
22,608
36,052
57,158
688,432
$
$
$
$
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, 2022 and 2021, 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, 2022 and 2021. 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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Table of Contents
Type
First lien loans
Valuation
Technique
Income Approach
Fair Value at
March 31, 2022
(in thousands)
Significant
Unobservable
Inputs
$
645,034 Discount Rate
Third Party Broker Quote
Market Approach
94,838 Cost
Exit Value
Second lien loans
Income Approach
49,541 Discount Rate
Third Party Broker Quote
Subordinated debt
Preferred equity
Common equity & warrants
Enterprise Value
Waterfall Approach
Income Approach
Market Approach
Enterprise Value
Waterfall Approach
Enterprise Value
Waterfall Approach
Market Approach
Enterprise Value
Waterfall Approach
Market Approach
Income Approach
3,104 EBITDA Multiple
Discount Rate
650 Discount Rate
172 Cost
495 EBITDA Multiple
Discount Rate
41,563 EBITDA Multiple
Discount Rate
3,100 Cost
36,667 EBITDA Multiple
Discount Rate
1,757 Exit Value
2,090 Third Party Broker Quote
Total Level 3 Investments
$
879,011
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
Total Level 3 Investments
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
Market Approach
2,039 Cost
Exit Value
$
631,274
112
Range
7.3% - 30.6%
5.5 - 96.5
80.2 - 99.0
100.0 - 102.0
10.3% - 37.8%
97.3 - 97.3
8.3x - 8.3x
22.1% - 22.1%
27.4% - 27.4%
100.0 - 100.0
8.1x - 8.1x
20.5% - 20.5%
6.9x - 18.8x
12.5% - 40.8%
100.0 - 100.0
4.2x - 11.4x
10.1% - 32.2%
351.4 - 351.4
158.7 - 158.7
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
Weighted
Average
10.7%
93.2
98.1
101.8
15.4%
97.3
8.3x
22.1%
27.4%
100
8.1x
20.5%
10.6x
17.8%
100
8.5x
18.1%
351.4
158.7
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
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Changes in Fair Value Levels
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 level
to another. During the years ended March 31, 2022 and 2021, we had no transfers between levels.
The following tables provide a summary of changes in the fair value of investments measured using Level 3 inputs during the years ended March
31, 2022 and 2021 (in thousands):
Fair Value March
31, 2021
Realized &
Unrealized Gains
(Losses)
Purchases of
1
Investments
Repayments
PIK Interest
Capitalized
Divestitures
Conversion of
Security
Fair Value March 31,
2022
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
$
524,161 $
719 $
464,758 $
(247,538) $
2,455 $
— $
(4,683) $
739,872 $
(960)
36,919
11,534
22,608
36,052
(2,325)
18,902
(7,223)
1,217
422
11,889
364
10,691
(11,521)
—
12,035
4,308
—
518
—
—
(53)
—
—
(11,881)
5,208
—
(525)
—
52,645
1,317
44,663
40,514
(2,699)
322
11,363
7,401
631,274 $
22,740 $
499,023 $
(266,282) $
4,190 $
(11,934) $
— $
879,011 $
15,427
Fair Value March
31, 2020
Realized &
Unrealized Gains
(Losses)
Purchases of
1
Investments
Repayments
PIK Interest
Capitalized
Divestitures
Conversion of
Security from
Debt to Equity
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
Financial
instruments
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
—
(1,839)
179
5,169
1,658
—
513,312 $
9,844 $
208,896 $
(98,817) $
7,880 $
(9,841) $
— $
631,274 $
2,642
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 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%, which became effective April 25, 2019. On August
11,
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2021, we received an exemptive order from the SEC to permit us to exclude the senior securities issued by SBIC I or any future SBIC subsidiary of the
Company from the definition of senior securities in the asset coverage requirement applicable to the Company under the 1940 Act. As of March 31, 2022,
the Company’s asset coverage was 193%.
The Company had the following borrowings outstanding as of March 31, 2022 and 2021 (amounts in thousands):
March 31, 2022
SBA Debentures
Credit Facility
January 2026 Notes
October 2026 Notes
March 31, 2021
Credit Facility
October 2024 Notes
January 2026 Notes
Credit Facility
Outstanding Balance
Unamortized Debt Issuance Costs
and Debt Discount/Premium
Recorded Value
$
$
$
$
40,000 $
205,000
140,000
150,000
535,000 $
120,000 $
125,000
140,000
385,000 $
(1,648) $
—
(1,286)
(3,478)
(6,412) $
— $
(2,121)
(1,575)
(3,696) $
38,352
205,000
138,714
146,522
528,588
120,000
122,879
138,425
381,304
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. The Credit Facility contains an accordion feature
that allows CSWC to increase the total commitments under the Credit Facility up to $400 million from new and existing lenders on the same terms and
conditions as the existing commitments.
On August 9, 2021, CSWC entered into the Second Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit
Agreement"). Prior to the Credit Agreement, (1) borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicable
LIBOR rate plus 2.50% with no LIBOR floor, and (2) the total borrowing capacity was $340 million with commitments from a diversified group of eleven
lenders. The Credit Agreement (1) decreased the total borrowing capacity under the Credit Facility to $335 million with commitments from a diversified
group of ten lenders, (2) reduced the interest rate on borrowings to LIBOR plus 2.15% with no LIBOR floor and removed conditions related thereto as
previously set forth in the Amended and Restated Senior Secured Revolving Credit Agreement, and (3) extended the end of the Credit Facility's revolver
period from December 21, 2022 to August 9, 2025 and extended the final maturity from December 21, 2023 to August 9, 2026. The Credit Agreement also
modified certain covenants in the Credit Facility, including, among other things, to increase the minimum obligors’ net worth test from $180 million to
$200 million.
CSWC pays 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 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 senior coverage ratio of 2 to 1, (4) maintaining a minimum shareholders’ equity, (5)
maintaining a minimum consolidated net worth, (6) maintaining a regulatory asset coverage of not less than 150%, (7) maintaining an interest coverage
ratio of at least 2.25 to 1.0, and (8) 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.
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.
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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, 2022, substantially all of the Company’s assets were pledged as
collateral for the Credit Facility, except for assets held in SBIC I.
At March 31, 2022, CSWC had $205.0 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 $6.2 million, $6.8 million and $8.3 million respectively,
for the years ended March 31, 2022, 2021 and 2020. The weighted average interest rate on the Credit Facility was 2.50% and 3.05%, respectively, for the
years ended March 31, 2022 and 2021. Average borrowings for the years ended March 31, 2022 and 2021 were $173.5 million and $166.0 million,
respectively. As of March 31, 2022 and 2021, 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 bore
interest at a rate of 5.95% per year.
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 Company issued an
additional $19.6 million in aggregate principal amount of the December 2022 Notes under this agreement. All issuances of December 2022 Notes ranked
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 a realized loss 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 were treated as a single series with the Existing October 2024 Notes under the indenture and had the same terms as the
Existing October 2024 Notes. The maturity date of the October 2024 Notes was October 1, 2024 and were redeemable 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 bore interest at a rate of 5.375% per year.
On September 24, 2021, the Company redeemed $125,000,000 in aggregate principal amount of the issued and outstanding October 2024 Notes.
The October 2024 Notes were redeemed at 100% of their principal amount, plus (i) the accrued and unpaid interest thereon, through, but excluding the
redemption date, and (ii) a "make-whole" premium. Accordingly, the Company recognized a realized loss on extinguishment of debt, equal to the write-off
of the related unamortized debt issuance costs of $1.8 million and the "make-whole" premium of $15.2 million during the three months ended September
30, 2021.
The Company recognized interest expense related to the October 2024 Notes, including amortization of deferred issuance costs, of $3.6 million,
$6.3 million and $2.2 million, respectively, for the years ended March 31, 2022, 2021 and 2020. From April 1, 2021 through September 24, 2021 (the
redemption date of the October 2024 Notes), average borrowings were
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$125.0 million. For the year ended March 31, 2021, average borrowings were $106.1 million. The October 2024 Notes had a weighted average effective
yield of 5.375%.
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"). The Existing January 2026 Notes were issued at par. 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 Additional January 2026 Notes are treated as a single series with the Existing January 2026 Notes
under the indenture and had the same terms as the Existing January 2026 Notes. 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. 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 or structurally
subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility and the SBA Debentures.
As of March 31, 2022, the carrying amount of the January 2026 Notes was $138.7 million on an aggregate principal amount of $140.0 million at a
weighted average effective yield of 4.46%. As of March 31, 2022, the fair value of the January 2026 Notes was $129.2 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 $6.7 million and $1.2 million, respectively, for the years ended March 31, 2022
and 2021. For the year ended March 31, 2022, average borrowings were $140.0 million. 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 Securities Exchange Act of 1934, as amended (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 January 2026 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.
October 2026 Notes
In August 2021, the Company issued $100.0 million in aggregate principal amount of 3.375% Notes due 2026 (the "Existing October 2026
Notes"). The Existing October 2026 Notes were issued at a price of 99.418% of the aggregate principal amount of the Existing October 2026 Notes,
resulting in a yield-to-maturity of 3.5%. In November 2021, the Company issued an additional $50.0 million in aggregate principal amount of the October
2026 Notes (the "Additional October 2026 Notes" together with the Existing October 2026 Notes, the "October 2026 Notes"). The Additional October 2026
Notes were issued at a price of 99.993% of the aggregate principal amount, resulting in a yield-to-maturity of approximately 3.375% at issuance. The
Additional October 2026 Notes are treated as a single series with the Existing October 2026 Notes under the indenture and had the same terms as the
Existing October 2026 Notes. The October 2026 Notes mature on October 1, 2026 and may be redeemed in whole or in part at any time prior to July 1,
2026, at par plus a "make-whole" premium, and thereafter at par. The October 2026 Notes bear interest at a rate of 3.375% per year, payable semi-annually
in arrears on April 1 and October 1 of each year. The October 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 or structurally subordinated to all of our existing and future secured
indebtedness, including borrowings under our Credit Facility and the SBA Debentures.
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As of March 31, 2022, the carrying amount of the October 2026 Notes was $146.5 million on an aggregate principal amount of $150.0 million at a
weighted average effective yield of 3.5%. As of March 31, 2022, the fair value of the October 2026 Notes was $139.1 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 2026 Notes, including amortization of deferred issuance costs, of $3.1 million for the year ended March 31, 2022. Since the issuance of the
October 2026 Notes on August 27, 2021 through March 31, 2022, average borrowings were $132.9 million.
The indenture governing the October 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 October 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 fourth supplemental indenture relating to the October 2026 Notes.
In addition, holders of the October 2026 Notes can require the Company to repurchase some or all of the October 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 fourth supplemental indenture relating to the October 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 allows SBIC I to obtain leverage by issuing SBA 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. Interest on SBA Debentures is payable semi-annually on March 1
and September 1. Current statutes and regulations permit SBIC I to borrow up to $175 million in SBA Debentures with at least $87.5 million in regulatory
capital (as defined in the SBA regulations).
On May 25, 2021, SBIC I received a leverage commitment from the SBA in the amount of $40.0 million to be issued on or prior to September 30,
2025. On January 28, 2022, SBIC I received an additional leverage commitment in the amount of $40.0 million to be issued on or prior to September 30,
2026. As of March 31, 2022, SBIC I had regulatory capital of $40.0 million and approved and unused SBA Debenture commitments of $40.0 million. The
SBA may limit the amount that may be drawn each year under these commitments, and each issuance of leverage is conditioned on the Company’s full
compliance, as determined by the SBA, with the terms and conditions set forth in the SBA regulations.
As of March 31, 2022, the carrying amount of SBA Debentures was $38.4 million on an aggregate principal amount of $40.0 million. As of March
31, 2022, the fair value of the SBA Debentures was $38.6 million. The fair value of the SBA Debentures is estimated by discounting the remaining
payments using current market rates for similar instruments and considering such factors as the legal maturity date and the ability of market participants to
prepay the SBA Debentures, which are Level 3 inputs under ASC Topic 820. The Company recognized interest expense and related fees related to SBA
Debentures of $0.3 million for the year ended March 31, 2022. The weighted average interest rate on the SBA Debentures was 1.30% for the year ended
March 31, 2022. For the year ended March 31, 2022, average borrowings were $17.0 million.
As of March 31, 2022, the Company's issued and outstanding SBA Debentures mature as follows:
Pooling Date
9/22/21
3/23/22
Maturity Date
9/1/2031
3/1/2032
Fixed Interest Rate
March 31, 2022
1.575 % $
3.209 %
$
15,000,000
25,000,000
40,000,000
(1) The SBA has two scheduled pooling dates for SBA Debentures (in March and in September). Certain SBA Debentures funded during the reporting periods may
not be pooled until the subsequent pooling date.
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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, 2022 is as follows:
Years Ending March 31,
2023
2024
2025
2026
2027
Thereafter
Total
$
$
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
140,000
—
140,000 $
— $
205,000
—
150,000
355,000 $
40,000 $
—
—
—
40,000 $
40,000
205,000
140,000
150,000
535,000
SBA Debentures
Credit Facility
January 2026 Notes
October 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 extended due date 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, 2021, 2020 and 2019, 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, 2022, CSWC declared a quarterly dividend in the
amount of $11.8 million, or $0.48 per share. Our distributions for the tax years ended December 31, 2021 and 2020 were as follows:
Payment Date
Tax Year Ended December 31, 2021
1
March 31, 2021
1
June 30, 2021
1
September 30, 2021
2
December 31, 2021
Tax Year Ended December 31, 2020
1
March 31, 2020
1
June 30, 2020
1
September 30, 2020
1
December 31, 2020
118
Cash Dividend
$
$
$
$
0.52
0.53
0.54
0.97
2.56
0.51
0.51
0.51
0.51
2.04
Table of Contents
Tax Year Ended December 31, 2019
1
March 31, 2019
1
June 30, 2019
1
September 30, 2019
3
December 31, 2019
$
$
0.48
0.49
0.50
1.25
2.72
1
2
3
On each of these dates, the cash dividend paid included a supplemental dividend of $0.10 per share.
On December 31, 2021, CSWC paid a regular dividend of $0.47 per share and a supplemental dividend of $0.50 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.
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, 2022 and 2021, CSWC reclassified for book purposes
amounts arising from permanent book/tax differences related to the tax treatment of return of capital, distributions from wholly-owned subsidiaries and/or
deemed distributions, tax treatment of investments upon disposition, and non-deductible expenses, as follows (amounts in thousands):
Additional capital
Total distributable earnings
Year ended
March 31, 2022
Year ended
March 31, 2021
$
$
(7,648) $
7,648 $
(3,981)
3,981
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 2021 dividends totaled $2.56 per share and were comprised entirely of ordinary income. In addition, 87.40% of each of the
ordinary distributions represent interest-related dividends. 87.40% 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. 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.
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, 2021 and 2020 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.
119
Twelve Months Ended December 31,
2021
2020
$
$
56,633 $
—
56,633 $
37,517
—
37,517
Table of Contents
As of March 31, 2022, CSWC estimates that it has cumulative undistributed taxable income of approximately $11.8 million, or $0.47 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.
The following reconciles net increase (decrease) in net assets resulting from operations to estimated RIC distributable income for the years ended
March 31, 2022, 2021 and 2020:
1
Reconciliation of RIC Distributable Income
Net increase (decrease) in net assets resulting from operations
Net change in unrealized (appreciation) depreciation on investments
Income/gain (expense/loss) recognized for tax on pass-through entities
Realized gain (loss) recognized for tax
2
Capital loss carryover
Net operating income - wholly-owned subsidiaries
Income on wholly-owned subsidiaries
Non-deductible tax expense
Loss on extinguishment of debt
Non-deductible compensation
Compensation-related book/tax differences
Interest on non-accrual loans
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
2022
Years ended March 31,
2021
2020
$
$
$
$
42,815 $
(11,467)
3,753
152
(878)
(10,757)
4,000
65
12,268
3,679
36
4,171
1,530
49,367 $
57,518 $
—
—
—
(8,151) $
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
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, 2022, the Company had long term capital loss carryforwards of $17.3 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, 2022, 2021 and 2020, 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,
2022
2021
2020
$
$
12,682 $
(17,252)
(20,126)
—
(24,696) $
21,083 $
(17,924)
(766)
(663)
1,730 $
25,766
749
(47,487)
—
(20,972)
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
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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 years ended December 31, 2021 and 2020, there were no 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.
In addition, the Taxable Subsidiary 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 an
income tax provision as a result of their ownership of the portfolio companies. This income tax provision, or benefit, and the related tax assets and
liabilities, if any, are reflected in our Consolidated Statement of Operations.
As of March 31, 2022, the cost of investments held at the RIC for U.S. federal income tax purposes was $826.5 million, with such investments
having gross unrealized appreciation of $39.7 million and gross unrealized depreciation of $59.8 million, resulting in net unrealized depreciation of
$20.1 million. As of March 31, 2022, the cost of investments held at the Taxable Subsidiary for U.S. federal income tax purposes was $25.9 million, with
such investments having gross unrealized appreciation of $28.1 million and gross unrealized depreciation of $1.9 million, resulting in net unrealized
appreciation of $26.2 million. On a consolidated basis, the total investment portfolio has net unrealized appreciation of $6.1 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 an income tax provision 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 an income tax provision 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 provision, or benefit, if any, and the related tax assets and liabilities, are reflected in our
consolidated financial statements. CSMC recorded deferred taxes related to the changes in the restoration plan and bonus accruals 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 of March 31, 2022 and 2021, the Taxable Subsidiary had a deferred tax liability of $5.7
million and $3.3 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, 2022 and 2021 (amounts in
thousands):
Deferred tax asset:
Net operating loss carryforwards
Interest
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
2022
2021
$
$
— $
185
185
(4,899)
(1,033)
(5,932)
(5,747) $
224
173
397
(2,931)
(811)
(3,742)
(3,345)
The income tax provision, 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, 2022, we recognized a total net income tax provision of $0.6 million,
principally consisting of a $0.1 million accrual for U.S. federal excise tax and a $0.5 million tax provision relating to the Taxable Subsidiary. For the year
ended March 31, 2021, we recognized total net income tax provision of $2.4 million, principally consisting of a $0.6 million accrual for U.S. federal excise
tax 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).
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, 2018 through 2020.
The following table sets forth the significant components of the income tax provision as of March 31, 2022, 2021 and 2020 (amounts in
thousands):
Components of Income Tax Provision
Statutory federal income tax
162(m) limitation
Excise tax
Write-off of deferred tax asset
Tax related to Taxable Subsidiary
Stock compensation benefits
Other
Total income tax provision
7. SHAREHOLDERS’ EQUITY
2022
Years ended March 31,
2021
2020
— $
—
65
—
550
—
—
615 $
— $
122
637
1,837
50
(207)
3
2,442 $
270
1,488
1,110
—
315
(1,129)
8
2,062
$
$
The right to grant restricted stock awards under the Capital Southwest Corporation Restricted Stock Award Plan (the "2010 Plan") terminated on
July 18, 2021, ten years after the date that the 2010 Plan was approved by the Company’s shareholders pursuant to its terms. In connection with the
termination of the 2010 Plan, the Company’s Board of Directors and shareholders approved the Capital Southwest Corporation 2021 Employee Restricted
Stock Award Plan (the "2021 Employee Plan") as part of the compensation package for its employees, the terms of which are, in all material respects,
identical to the 2010 Plan. On July 19, 2021, we received an exemptive order that supersedes the prior exemptive order relating to the 2010 Plan (the
“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.
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In addition, the Company's Board of Directors approved the Capital Southwest Corporation 2021 Non-Employee Director Restricted Stock Plan
(the "Non-Employee Director Plan") as part of the compensation package for non-employee directors of the Board of Directors. In connection therewith, on
May 16, 2022, we received an exemptive order that supersedes the Order (the "Superseding Order") and will cover both employees and non-employee
directors of the Board of Directors. The Non-Employee Director Plan will become effective upon shareholder approval at our 2022 annual meeting of
shareholders. The following table summarizes certain information relating to shares repurchased in connection with the vesting of restricted stock awards:
Number of shares repurchased
Aggregate cost of shares repurchased (in thousands)
Weighted average price per share
Year Ended March 31,
2022
2021
$
$
52,124
1,408 $
27.01 $
15,309
239
15.62
On March 4, 2019, the Company established an "at-the-market" offering (the "Equity ATM Program"), pursuant to 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. On May 26, 2021, the Company (i) increased the maximum amount of
shares of its common stock to be sold through the Equity ATM Program to $250,000,000 from $100,000,000 and (ii) reduced the commission paid to the
sales agents for the Equity ATM Program to 1.5% from 2.0% of the gross sales price of shares of the Company's common stock sold through the sales
agents pursuant to the Equity ATM Program on and after May 26, 2021.
During the year ended March 31, 2022, the Company sold 3,872,031 shares of its common stock under the Equity ATM Program at a weighted-
average price of $25.73 per share, raising $99.6 million of gross proceeds. Net proceeds were $98.1 million, after deducting commissions to the sales
agents on shares sold. 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. Of these proceeds, $1.7 million remained receivable and is included in Other Receivables in the Consolidated Statement of
Assets and Liabilities as of March 31, 2022. The cash proceeds were received subsequent to year end on April 1 and April 4, 2022.
Cumulative to date, the Company has sold 8,177,660 shares of its common stock under the Equity ATM Program at a weighted-average price of
$22.44, raising $183.5 million of gross proceeds. Net proceeds were $180.3 million after commissions to the sales agents on shares sold. As of March 31,
2022, the Company has $66.5 million available under the Equity ATM Program.
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 shares of 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.
On July 28, 2021, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $20
million of its outstanding shares of 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 August 31, 2021, the Company entered into a share repurchase agreement, which
became effective immediately, and the Company will cease purchasing its common stock under the share repurchase program upon the earlier of, among
other things: (1) the date on which the aggregate purchase price for all shares equals $20 million including, without limitation, all applicable fees, costs and
expenses; or (2) upon written notice by the Company to the broker that the share repurchase agreement is terminated.
During both the years ended March 31, 2022 and 2021, the Company did not repurchase any shares under the share repurchase agreement.
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8. EMPLOYEE STOCK BASED COMPENSATION PLANS
Stock Awards
Under the 2010 Plan and the 2021 Employee 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.
The right to grant restricted stock awards under the 2010 Plan terminated on July 18, 2021, ten years after the date that the 2010 Plan was
approved by the Company’s shareholders pursuant to its terms.
In connection with the termination of the 2010 Plan, the Company’s Board of Directors and shareholders approved the 2021 Employee Plan as
part of the compensation package for its employees, the terms of which are, in all material respects, identical to the 2010 Plan. The 2021 Employee Plan
makes available for issuance 1,200,000 shares of common stock. As of March 31, 2022, there are 1,200,000 shares of common stock available for issuance
under the 2021 Employee Plan.
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, 2022, 2021, and 2020, we recognized total share based compensation expense of $3.6 million, $2.9 million
and $2.9 million, respectively, related to the restricted stock issued to our employees and officers.
During the three months ended June 30, 2021, the Company modified restricted stock awards to accelerate vesting of the unvested awards as of
the separation date for one employee. The Company accounted for this as a modification of awards and recognized incremental compensation cost of $0.6
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. 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, 2022, the total remaining unrecognized compensation expense related to non-vested restricted stock awards was $6.5 million,
which will be amortized over the weighted-average vesting period of approximately 2.4 years.
As of March 31, 2022, there are no restricted stock awards outstanding under the 2021 Employee Plan. The following table summarizes the
restricted stock awards outstanding under the 2010 Plan as of March 31, 2022:
Restricted Stock Awards
Unvested at March 31, 2020
Granted
Vested
Forfeited
Unvested at March 31, 2021
Granted
Vested
Forfeited
Unvested at March 31, 2022
Number of Shares
Weighted Average Fair Value
per Share at Grant Date
Weighted Average Remaining
Vesting Term (in Years)
359,586 $
239,574
(141,804)
(27,580)
429,776 $
172,945
(167,072)
(39,656)
395,993 $
18.64
15.18
17.61
18.63
17.05
27.60
17.71
16.07
21.48
2.4
—
—
—
2.5
—
—
—
2.4
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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 4.5% of the Internal Revenue Service’s annual maximum eligible compensation, all of which
is fully vested immediately. During each of the years ended March 31, 2022, 2021 and 2020, we made matching contributions of approximately $0.2
million.
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, 2022, 2021 and
2020, as well as amounts recognized in our Consolidated Statements of Assets and Liabilities at March 31, 2022 and 2021 (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
Years ended March 31,
2022
2021
2020
$
$
79 $
37
116 $
96 $
35
131 $
111
31
142
Years ended March 31,
2022
2021
2020
$
$
2,979 $
79
(104)
(247)
2,707 $
3,082 $
96
42
(241)
2,979 $
3,073
111
122
(224)
3,082
Years ended March 31,
2022
2021
$
$
$
(2,707) $
957
(1,750) $
(2,979)
1,098
(1,881)
(2,707) $
(2,979)
Table of Contents
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:
Discount rate
The following assumptions were used in estimating the net periodic (income)/expense:
Discount rate
Years ended March 31,
2022
2021
2020
3.50 %
2.75 %
3.25 %
Years ended March 31,
2022
2021
2020
2.75 %
3.25 %
3.75 %
Following are the expected benefit payments for the next five years and in the aggregate for the years 2028-2032 (amounts in thousands):
Restoration Plan
11. COMMITMENTS AND CONTINGENCIES
Commitments
2023
2024
2025
2026
2027
2028-2032
$
245 $
240 $
234 $
229 $
222 $
991
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. Because commitments may expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. Additionally, our commitment to fund delayed draw term loans is generally
triggered upon the satisfaction of certain pre-negotiated terms and conditions, such as meeting certain financial performance hurdles or financial covenants,
which may limit a borrower's ability to draw on such delayed draw term loans.
Portfolio Company
Revolving Loans
Air Conditioning Specialist, Inc.
AllOver Media, LLC
American Teleconferencing Services, Ltd. (DBA Premiere Global Services, Inc.)
ArborWorks, LLC
ATS Operating, LLC
Broad Sky Networks LLC
Cadmium, LLC
Catbird NYC, LLC
Central Medical Supply LLC
Clickbooth.com, LLC
Dynamic Communities, LLC
Electronic Transaction Consultants LLC
Fast Sandwich, LLC
GrammaTech, Inc.
GS Operating, LLC
Ian, Evan, & Alexander Corporation (DBA EverWatch)
ISI Enterprises, LLC
ITA Holdings Group, LLC
Klein Hersh, LLC
126
$
March 31,
2022
March 31,
2021
(amounts in thousands)
1,000 $
—
117
3,000
1,500
—
308
4,000
1,200
—
500
—
3,100
2,500
1,540
—
1,200
1,250
938
—
2,000
—
—
—
2,000
—
—
1,200
1,086
500
3,704
3,100
2,500
—
2,000
—
2,000
938
Table of Contents
Lash OpCo, LLC
Lighting Retrofit International, LLC (DBA Envocore)
Mako Steel LP
Muenster Milling Company, LLC
NeuroPsychiatric Hospitals, LLC
NinjaTrader, LLC
NWN Parent Holdings, LLC
Roof OpCo, LLC
Roseland Management, LLC
RTIC Subsidiary Holdings LLC
Shearwater Research, Inc.
SIB Holdings, LLC
South Coast Terminals LLC
Spotlight AR, LLC
Student Resource Center LLC
Systec Corporation (DBA Inspire Automation)
Wall Street Prep, Inc.
Well-Foam, Inc.
Winter Services Operations, LLC
Zenfolio Inc.
Total Revolving Loans
Delayed Draw Term Loans
Acceleration Partners, LLC
Central Medical Supply LLC
CityVet Inc.
Flip Electronics, LLC
Food Pharma Subsidiary Holdings, LLC
GS Operating, LLC
Infolinks Media Buyco, LLC
KMS, LLC
Lash OpCo, LLC
Muenster Milling Company, LLC
NeuroPsychiatric Hospitals, LLC
NinjaTrader, LLC
Roof OpCo, LLC
Shearwater Research, Inc.
SIB Holdings, LLC
Systec Corporation (DBA Inspire Automation)
Winter Services Operations, LLC
Zips Car Wash, LLC - B
Total Delayed Draw Term Loans
Other
American Nuts Operations LLC
Catbird NYC, LLC
Infolinks Media Buyco, LLC
I-45 SLF LLC
Total Other
Total unused commitments to extend financing
$
127
481
2,083
943
5,000
600
2,500
1,380
3,056
1,425
—
2,446
655
1,935
2,000
1,333
1,150
1,000
4,500
2,000
1,000
57,640
—
1,400
7,000
2,818
5,470
3,205
2,250
4,571
2,846
6,000
10,000
4,692
4,644
3,262
1,871
3,000
4,444
3,801
71,274
—
125
412
4,800
5,337
134,251 $
—
—
1,226
—
—
1,500
—
—
1,500
767
—
—
—
—
—
—
—
—
—
—
26,021
216
1,400
6,750
—
—
—
—
—
—
—
—
2,655
—
—
—
—
—
—
11,021
384
—
—
8,000
8,384
45,426
Table of Contents
As of March 31, 2022, 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, 2022 and 2021, the Company had $4.0 million and $3.5 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, $0.3 million expire in August 2022, $0.4 million expire in February 2023, $0.2 million expire in April 2023, and $3.1 million expire in
May 2023. As of March 31, 2022 and 2021, 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 had a previous operating lease for its office space. The lease commenced October 1, 2014 and expired February 28, 2022.
In March 2021, the Company executed an agreement to lease new office space. The Company identified this as an operating lease. The lease commenced
on February 1, 2022 and expires September 30, 2032.
ASC 842 indicates that a right-of-use asset and lease liability should be recorded based on the effective date. As such, CSWC recorded a right-of-
use asset, which is included in other assets on the Consolidated Statements of Assets and Liabilities, and a lease liability, which is included in other
liabilities on the Consolidated Statements of Assets and Liabilities, as of February 1, 2022. The Company has recorded lease expense on a straight-line
basis.
Total lease expense incurred for the three years ended March 31, 2022, 2021 and 2020 was $0.3 million, $0.2 million and $0.2 million,
respectively. As of March 31, 2022 and 2021, the asset related to the operating lease was $1.8 million and $0.2 million, respectively, and the lease liability
was $2.7 million and $0.2 million, respectively. As of March 31, 2022, the remaining lease term was 10.5 years and the discount rate was 3.11%.
The following table shows future minimum payments under the Company's operating lease as of March 31, 2022 (in thousands):
Year ending March 31,
2023
2024
2025
2026
2027
Thereafter
Total
Contingencies
Rent Commitment
167
406
416
426
437
2,578
4,430
$
$
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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Table of Contents
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following presents a summary of the unaudited quarterly consolidated financial information for the years ended March 31, 2022 and 2021 (in
thousands except per share amounts):
2022
Net investment income
Net realized (loss) gain on investments, net of tax
Net change in unrealized appreciation (depreciation) on investments,
net of tax
Realized loss on extinguishment of debt
Realized loss on disposal of fixed assets
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
Total
$
9,043 $
(952)
9,726 $
3,496
11,899 $
2,715
12,019 $
575
42,687
5,834
7,051
—
—
15,142
0.45
0.43
0.71
(691)
(17,087)
—
(4,556)
0.45
0.43
(0.20)
(2,054)
—
—
12,560
0.51
0.51
0.54
7,161
—
(86)
19,669
0.50
0.50
0.81
2021
Net investment income
Net realized (loss) gain on investments
Net change in unrealized appreciation on investments, net of tax
Realized loss 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)
7,605
—
8,877
0.40
0.38
0.49
8,319 $
(1,279)
9,636
(286)
16,390
0.44
0.45
0.88
8,517 $
(127)
7,271
(262)
15,399
0.52
0.45
0.80
8,016 $
(1,583)
4,243
(459)
10,217
0.44
0.39
0.50
11,467
(17,087)
(86)
42,815
1.90
1.87
1.86
Total
31,671
(8,536)
28,755
(1,007)
50,883
1.79
1.66
2.67
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 years ended March 31, 2022 and 2021, we did not receive any management fees from our portfolio companies. During the year ended
March 31, 2020, we received management and other fees from certain of our portfolio companies totaling $0.2 million, 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, 2022 and 2021, we had dividends receivable from I-45 SLF LLC of $1.9
million and $1.5 million, respectively, which were included in dividends and interest receivables on the Consolidated Statements of Assets and Liabilities.
14. SUBSEQUENT EVENTS
On April 27, 2022, the Board of Directors declared a quarterly dividend of $0.48 per share and a special dividend of $0.15 per share for the quarter
ended June 30, 2022. The record date for the dividend is June 15, 2022. The payment date for the dividend is June 30, 2022.
On May 11, 2022, CSWC entered into Amendment No. 2 (the "Amendment") to the Credit Agreement. The Amendment changed the benchmark
interest rate from LIBOR to Term SOFR. In addition, on May 11, 2022, CSWC entered
129
Table of Contents
into an Incremental Commitment Agreement, pursuant to which the total commitments under the Credit Agreement increased from $335 million to $380
million.
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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, 2018 through 2022 (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 gain (loss), net of tax
Net change in unrealized appreciation (depreciation) on
1
investments, net of tax
1
Realized loss 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 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 rate
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
$
Years Ended March 31,
2022
3.60
(1.70)
(0.03)
1.87
0.26
0.50
(0.75)
1.88
(2.52)
—
—
(0.10)
1.45
0.14
(0.03)
—
0.01
0.02
0.85
$
2021
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
$
2020
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)
$
2019
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)
$
2018
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
$
2017
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
16.01
16.86
$
15.13
16.01
$
18.62
15.13
$
19.08
18.62
$
17.80
19.08
$
17.34
17.80
$
10.31 %
11.31 %
33.91 %
18.10 %
21.05 %
23.73
22,840
22,840
24,959
11.51 %
10.74 %
18.81 %
118.56 %
19.37 %
22.16
19,060
19,060
21,005
$
$
9.87 %
8.77 %
22.76 %
(37.52)%
(3.97)%
11.42
18,000
18,000
17,998
8.61 %
7.53 %
23.38 %
38.34 %
9.49 %
21.04
16,074
16,139
17,503
6.35 %
5.51 %
25.42 %
6.61 %
12.75 %
17.02
16,074
16,139
16,162
4.95 %
2.83 %
23.57 %
27.88 %
7.21 %
16.91
15,825
15,877
16,011
$
$
$
$
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Table of Contents
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 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.
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, 2022,
total funded equity capital totaled $95.0 million, consisting of $76.0 million from CSWC and $19.0 million from Main Street. CSWC owns 80% of I-45
SLF LLC and has a current profits interest of 78.25%, while Main Street owns 20% and has a current profits interest of 21.75%. 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.
As of March 31, 2022 and 2021, I-45 SLF LLC had total assets of $189.1 million and $177.8 million, respectively. I-45 SLF LLC had
approximately $176.7 million and $164.4 million of credit investments at fair value as of March 31, 2022 and 2021, 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. For the years ended March 31, 2022 and 2021, I-45 SLF LLC declared total dividends of $8.6 million and $18.7 million,
$10 million of which was the return of capital dividend described above, 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, $114.5 million has been drawn as of March 31, 2022.
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At March 31, 2022, our investment in I-45 SLF LLC did not exceed the 10% threshold in at least one of the tests under Rule 4-08(g) and did not
exceed the 20% threshold in at least one of the tests under Rule 3-09 of Regulation S-X. However, at March 31, 2021, our investment in I-45 SLF LLC
exceeded the 10% and 20% thresholds 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, 2022 the financial statements of I-45 SLF LLC. Below is certain summarized financial
information for I-45 SLF LLC as of March 31, 2022 and 2021 and for the years ended March 31, 2022, 2021 and 2020 (amounts in thousands):
Selected Balance Sheet Information:
Investments, at fair value (cost $187,714 and $170,791)
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, 2022
March 31, 2021
$
$
$
$
$
176,704 $
9,949
123
1,518
850
189,144 $
114,500 $
—
2,596
117,096 $
72,048
189,144 $
164,351
10,419
152
2,301
553
177,776
91,000
13,072
2,131
106,203
71,573
177,776
Selected Statement of Operations Information:
Total revenues
Total expenses
Net investment income
Net unrealized (depreciation) appreciation
Net realized gains (losses)
Net increase (decrease) in members’ equity resulting from operations
2022
Years Ended March 31,
2021
2020
$
$
12,804 $
(4,166)
8,638
(4,569)
1,047
5,116 $
13,930 $
(4,565)
9,365
30,467
(15,313)
24,519 $
20,300
(8,045)
12,255
(32,394)
603
(19,536)
134
Table of Contents
Below is a listing of the individual loans in I-45 SLF LLC’s portfolio as of March 31, 2022 and 2021:
I-45 SLF LLC Loan Portfolio as of March 31, 2022
Portfolio Company
Industry
Investment
Type
Maturity Date
AAC New Holdco Inc.
Healthcare services
ADS Tactical, Inc.
American Teleconferencing
4
Services, Ltd.
Aerospace & defense
Telecommunications
ATX Networks (Toronto)
Corporation
Technology products &
components
Burning Glass Intermediate Holding
Company, Inc.
Software & IT services
First Lien
304,075 shares
common stock
Warrants
(Expiration -
December 11,
2025)
First Lien
Revolving
Loan
First Lien
First Lien
Senior
Subordinated
Debt
196 Class A
units
Revolving
5
Loan
6/25/2025
—
—
3/19/2026
6/30/2022
6/8/2023
9/1/2026
—
6/10/2028
Corel, Inc.
Software & IT services
First Lien
First Lien
6/10/2028
7/2/2026
Emerald Technologies (U.S.)
Acquisitionco, Inc.
Technology products &
components
First Lien
12/29/2027
Evergreen AcqCo 1 LP
Consumer products & retail
First Lien
4/26/2028
Evergreen North America
Acquisitions, LLC
Geo Parent Corporation
Industrial services
Building & infrastructure
products
First Lien
8/13/2026
First Lien
12/19/2025
GS Operating, LLC
Distribution
First Lien
1/3/2028
Infogain Corporation
Software & IT services
First Lien
7/28/2028
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
135
Current
1
Interest Rate
10.00%,
8.00% PIK $
Principal
2
Cost
3
Fair Value
1,899 $
1,899 $
1,833
—
—
1,449
1,449
—
L+5.75%
(Floor
1.00%)
P+5.50%
P+5.50%
L+7.50%,
(Floor
1.00%)
—
482
482
6,394
1,027
5,598
6,283
1,021
5,566
6,133
64
308
2,617
2,610
2,499
9/1/2028
10.00% PIK
1,081
1,081
—
L+5.00%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.00%
SOFR
+6.25%
(Floor
1.00%)
L+5.50%
(Floor
0.75%)
L+6.75%
(Floor
1.00%)
L+5.25%
SOFR
+6.00%
(Floor
0.75%)
L+5.75%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.75%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
—
74
—
67
729
—
67
3,189
6,803
3,140
6,650
3,189
6,805
3,125
3,063
3,078
4,179
4,142
4,158
6,740
6,840
6,623
6,809
6,740
6,806
4,988
4,891
4,988
4,784
4,719
4,769
2,850
2,845
2,704
3,217
3,209
3,043
5,677
5,659
5,638
Table of Contents
Portfolio Company
Industry
Investment
Type
Maturity Date
Inventus Power, Inc.
Technology products &
components
First Lien
3/29/2024
INW Manufacturing, LLC
Food, agriculture, & beverage
First Lien
3/25/2027
Isagenix International, LLC
KORE Wireless Group Inc.
Consumer products & retail
Telecommunications
First Lien
First Lien
6/14/2025
12/20/2024
Lab Logistics, LLC
Healthcare services
First Lien
9/25/2023
Lash OpCo, LLC
Consumer products & retail
First Lien
3/18/2026
Lift Brands, Inc.
Consumer services
Lightbox Intermediate, L.P.
Software & IT services
Delayed Draw
6
Term Loan
3/18/2026
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
Mills Fleet Farm Group LLC
Consumer products & retail
First Lien
10/24/2024
National Credit Care, LLC
Consumer services
First Lien -
Term Loan A
First Lien -
Term Loan B
12/23/2026
12/23/2026
NBG Acquisition, Inc.
Wholesale
First Lien
4/26/2024
NinjaTrader, Inc.
Financial services
First Lien
12/18/2024
NorthStar Group Services, Inc.
Environmental services
First Lien
11/9/2026
Research Now Group, Inc.
Business services
First Lien
12/20/2024
Retail Services WIS Corporation
Business services
First Lien
5/20/2025
SIB Holdings, LLC
Business services
First Lien
10/29/2026
Stellant Midco, LLC
Aerospace & defense
First Lien
10/2/2028
Tacala, LLC
Consumer products & retail
Second Lien
2/7/2028
Current
1
Interest Rate
SOFR
+5.00%
(Floor
1.00%)
L+5.75%
(Floor
0.75%)
L+5.75%
(Floor
1.00%)
L+5.50%
L+7.25%
(Floor
1.00%)
L+7.00%
(Floor
1.00%)
L+7.00%
(Floor
1.00%)
L+7.50%
(Floor
1.00%)
9.50% PIK
—
—
L+5.00%
L+5.75%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+6.50%
(Floor
1.00%)
L+7.50%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+7.75%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.50%
(Floor
0.75%)
L+7.50%
(Floor
0.75%)
Principal
2
Cost
3
Fair Value
6,930
6,884
6,791
2,925
2,867
2,867
1,685
4,658
1,677
4,639
1,088
4,640
6,242
6,213
6,242
4,988
4,881
4,878
1,187
1,152
1,161
2,502
583
565
—
4,948
2,502
583
564
749
4,914
2,252
437
423
749
4,874
5,826
5,807
5,491
4,623
4,584
4,623
2,500
2,453
2,483
2,500
2,453
2,483
2,663
2,647
1,807
5,000
4,908
5,000
2,961
2,948
2,950
4,936
4,936
4,861
2,959
2,912
2,914
3,000
2,945
2,958
2,289
2,267
2,254
5,000
4,991
4,944
136
Table of Contents
Portfolio Company
Industry
Investment
Type
Maturity Date
TEAM Services Group, LLC
Healthcare services
First Lien
12/20/2027
TestEquity, LLC
Capital equipment
First Lien
4/28/2022
First Lien -
Term Loan B
4/28/2022
UniTek Global Services, Inc.
Telecommunications
First Lien
8/20/2024
U.S. TelePacific Corp.
Telecommunications
First Lien
5/1/2026
Veregy Consolidated, Inc.
Vida Capital, Inc.
Environmental services
Financial services
First Lien
First Lien
11/3/2027
10/1/2026
Wahoo Fitness Acquisition, LLC
Consumer products & retail
First Lien
8/14/2028
YS Garments, LLC
Total Investments
Consumer products & retail
First Lien
8/9/2024
Current
1
Interest Rate
L+5.00%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+5.50%,
2.00% PIK
(Floor
1.00%)
L+1.00%,
7.25% PIK
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+6.00%
L+5.75%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
Principal
2
Cost
3
Fair Value
6,687
6,644
6,637
3,805
3,804
3,805
942
942
942
2,814
2,802
2,627
5,239
5,239
3,714
1,975
3,565
1,970
3,531
1,936
3,283
4,969
4,833
4,869
4,282
4,265
187,714 $
4,239
176,704
$
1
2
3
4
5
6
Represents the interest rate as of March 31, 2022. 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”), Secured Overnight Financing Rate ("SOFR") or Prime (“Prime”)
which reset daily, monthly, quarterly, or semiannually. For each, the Company has provided the spread over LIBOR, SOFR or Prime in effect at March 31,
2022. Certain investments are subject to an 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 I-45 SLF LLC. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.
Investment is on non-accrual status as of March 31, 2022, meaning the Company has ceased to recognize interest income on the investment.
The investment has approximately $0.3 million in an unfunded revolving loan commitment as of March 31, 2022.
The investment has approximately $0.8 million in an unfunded delayed draw term loan commitment as of March 31, 2022.
137
Table of Contents
Portfolio Company
Industry
AAC New Holdco Inc.
Healthcare services
I-45 SLF LLC Loan Portfolio as of March 31, 2021
Investment
Type
Maturity Date
Current
1
Interest Rate
10.00%,
Principal
2
Cost
3
Fair Value
6/25/2025
8.00% PIK $
1,752 $
1,752 $
1,743
First Lien
304,075 shares
common stock
Warrants
(Expiration -
December 11,
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 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
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
KORE Wireless Group Inc.
Consumer products & retail
Telecommunications
First Lien
First Lien
6/14/2025
12/20/2024
138
—
—
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%)
L+5.50%
—
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
4,706
1,812
4,680
1,376
4,700
Table of Contents
Portfolio Company
Industry
Investment
Type
Maturity Date
Current
1
Interest Rate
Principal
2
Cost
3
Fair Value
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
UniTek Global Services, Inc.
Telecommunications
First Lien
8/20/2024
L+7.25%
(Floor
1.00%)
L+7.50%
(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%)
L+5.50%,
1.00% PIK
(Floor
1.00%)
139
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
2,736
2,721
2,480
Table of Contents
Portfolio Company
Industry
Investment
Type
Maturity Date
Current
1
Interest Rate
Principal
2
Cost
3
Fair Value
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
L+5.50%
(Floor
1.00%)
L+6.00%
L+6.00%
(Floor
1.00%)
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.
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 I-45 SLF LLC. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.
140
Table of Contents
SCHEDULE 12-14
Portfolio Company
Type of Investment (1)
Control Investments
I-45 SLF LLC
Total Control Investments
80% LLC equity
interest
Affiliate Investments
Air Conditioning Specialist,
Inc.
Catbird NYC, LLC
Central Medical Supply
LLC
Chandler Signs, LLC
Delphi Behavioral Health
Group, LLC
Dynamic Communities,
LLC
Revolving Loan
First Lien
623,693.55 Preferred
Units
Revolving Loan
First Lien
1,000,000 Class A
Units
500,000 Class B
Units
Revolving loan
First lien
Delayed Draw Term
Loan
1,380,500 Preferred
Units
1,500,000 units of
Class A-1 common
stock
First lien
First lien
Protective Advance
1,681.04 Common
Units
Revolving loan
First lien
Senior subordinated
debt
Schedule of Investments in and Advances to Affiliates
(In thousands)
March 31,
2022
Principal
Amount -
Debt
Investments
Amount of
Interest or
Dividends
Credited in
Income (2)
Fair Value at
March 31,
2021
Gross
Additions (3)
Gross
Reductions
(4)
Amount of
Realized
Gain/(Loss)
(5)
Amount of
Unrealized
Gain/(Loss)
Fair Value at
March 31,
2022
$
$
$
— $
— $
6,720 $
6,720 $
57,158 $
57,158 $
3,200 $
3,200 $
—
—
— $
3 $
12,778
—
—
15,900
—
—
300
7,500
100
—
—
1,541
1,732
526
—
359
—
17
635
—
—
45
844
24
—
—
164
164
13
—
—
11,221
4
1,297
— $
—
—
—
—
—
—
276
6,908
92
641
1,343
1,398
1,500
—
3,615
—
9,966
650
129
372
141
(18) $
12,558
624
(73)
15,706
1,000
500
6
27
6
101
—
127
151
526
—
1
477
278
—
(22)
—
—
(100)
—
—
—
—
—
—
—
—
—
—
—
—
(280)
—
$
$
$
— $
— $
(2,755) $
(2,755) $
57,603
57,603
— $
—
18 $
(1)
—
12,535
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10
73
278
221
72
8
325
(1)
(101)
(419)
(123)
(179)
—
634
—
15,884
1,221
572
290
7,260
97
641
924
1,402
1,472
526
(1,155)
2,460
(1)
160
—
—
10,323
650
Table of Contents
Portfolio Company
Type of Investment (1)
GrammaTech, Inc.
2,000,000 Preferred
units
Revolving loan
First lien
1,000 Class A Units
ITA Holdings Group, LLC 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
Lighting Retrofit
International, LLC (DBA
Envocore)
Roseland Management,
LLC
SIMR, LLC
Sonobi, Inc.
Revolving Loan
First Lien
Second Lien
208,333.3333 Series
A Preferred units
203,124.9999
Common units
Revolving loan
First lien
16,084 Class A Units
First lien
9,374,510.2 Class B
Common units
904,903.31 Class W
units
First lien
500,000 Class A
Common Units
Total Affiliate Investments
Total Control & Affiliate
Investments
March 31,
2022
Principal
Amount -
Debt
Investments
Amount of
Interest or
Dividends
Credited in
Income (2)
Fair Value at
March 31,
2021
Gross
Additions (3)
Gross
Reductions
(4)
Amount of
Realized
Gain/(Loss)
(5)
Amount of
Unrealized
Gain/(Loss)
Fair Value at
March 31,
2022
—
—
11,500
—
750
10,071
5,036
2,959
117
—
—
—
5,195
5,208
—
—
575
14,125
—
13,235
—
—
—
—
$ 121,019 $
—
21
1,320
—
23
889
600
447
10
—
28
6
99
—
—
—
48
673
—
3
—
—
445
1,274
—
11,420
1,208
—
10,061
5,101
2,630
103
2,968
2,532
—
—
—
—
—
—
—
—
12,103
—
—
8,500
—
9
37
56
757
44
26
439
13
—
—
456
5,208
5,208
—
—
1,178
14,227
2,041
224
—
—
15
—
—
—
—
—
—
—
—
—
—
—
(456)
(12)
—
—
—
(600)
(73)
—
(649)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,500)
—
140
—
(9)
(1,682)
(552)
(7)
(64)
(66)
(110)
1
231
531
—
(416)
(2,104)
—
—
(3)
(29)
(136)
(1,090)
—
—
(155)
1,274
—
9,775
712
750
10,041
5,061
2,959
117
3,199
3,063
—
4,780
3,104
—
—
575
14,125
1,905
10,588
—
—
—
—
8,310 $
1,235
85,246 $
—
61,935 $
—
(10,692)
—
140 $
1,725
(4,750) $
2,960
131,879
140 $
(7,505) $
189,482
$
$
$ 121,019 $
15,030 $
142,404 $
65,135 $
(10,692)
142
Table of Contents
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.
143
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, 2022. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2022, 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, 2022.
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, 2022 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.
144
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, 2022):
Operating expenses
Interest payments on borrowed funds
Income tax provision
Acquired fund fees and expenses
Total annual expenses
— % (1)
— % (2)
— % (3)
— %
4.51 % (4)
5.31 % (5)
0.15 % (6)
1.02 % (7)
10.99 %
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, 2022. 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 and our anticipated drawdowns
from our Credit Facility, our actual interest rate terms under the SBA Debentures and our anticipated drawdowns of the SBA Debentures, the 4.50% Notes due 2026 (the "January
2026 Notes") and the 3.375% Notes due 2026 (the "October 2026 Notes"). As of March 31, 2022, we had $205.0 million outstanding under our Credit Facility, $40.0 million
outstanding under the SBA Debentures, $140.0 million in aggregate principal of our January 2026 Notes outstanding and $150.0 million in aggregate principal of our October 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 provision 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 provision represents the estimated annual income tax expense of CSWC and its consolidated subsidiaries based on actual income tax
expense for the year ended March 31, 2022.
(6)
(7) Acquired fund fees and expenses represent the estimated indirect expense incurred due to our investment in I-45 SLF LLC, a joint venture with Main Street Capital Corporation, based
upon the actual amount incurred for the fiscal year ended March 31, 2022.
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
$
110 $
310 $
487 $
845
1 Year
3 Years
5 Years
10 Years
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
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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 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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 2022 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, 2022, 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 2022 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, 2022, 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 2022 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, 2022, 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 2022 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, 2022, 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 2022 annual meeting of shareholders
under the heading of “Ratification and Appointment of Independent Registered Public Accounting Firm for the Year Ended March 31, 2023” to be filed
with the Securities and Exchange Commission no later than 120 days after the close of our fiscal year ended March 31, 2022, and is incorporated herein by
reference.
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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, 2022 and 2021
Consolidated Statements of Operations for Years Ended March 31, 2022, 2021 and 2020
Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for Years Ended March 31, 2022, 2021 and 2020
Consolidated Schedules of Investments as of March 31, 2022 and 2021
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule of Investments in and Advances to Affiliates for the Year Ended March 31, 2022
3. Exhibits
Page
68
70
71
72
73
74
97
Page
141
Exhibit No.
3.1
Description
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 (File No. 333-220385) filed on September 8, 2017).
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
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 Annual Report on 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 (File No. 333-220385) filed on October 23, 2017).
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 (File No. 814-00061) filed on
December 29, 2020).
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 (File
No. 814-00061) filed on December 29, 2020).
Fourth Supplemental Indenture, dated as of August 27, 2021, relating to the 3.375% 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 (File No. 814-00061) filed on
August 27, 2021).
Form of Global Note with respect to the 3.375% Notes due 2026 (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K (File
No. 814-00061) filed on August 27, 2021).
147
Table of Contents
Exhibit No.
4.7
Description
Form of Capital Southwest SBIC I, LP SBIC debentures guaranteed by the Small Business Administration (incorporated by reference to Exhibit
(f) to Registration Statement on Form N-2 (File No. 333-259455) filed on September 10, 2021).
4.8
4.9
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
Dividend Reinvestment Plan (incorporated by reference Exhibit (e) to Registration Statement on Form N-2 (File 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).
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).
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).
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).
Capital Southwest Corporation 2021 Employee Restricted Stock Award Plan (incorporated by reference to Exhibit 4.5 to Form S-8 (File No.
333-258899) filed on August 28, 2021).
Form of Restricted Stock Award Agreement under the Capital Southwest Corporation 2021 Employee Restricted Stock Award Plan
(incorporated by reference to Exhibit 4.6 to Form S-8 (File No. 333-258899) filed on August 28. 2021).
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).
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 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).
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).
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).
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).
Second Amended and Restated Senior Secured Revolving Credit Agreement dated as of August 9, 2021 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 August 9, 2021).
148
Table of Contents
Exhibit No.
10.17
Description
Limited Consent and Amendment No. 1 to Second Amended and Restated Senior Secured Revolving Credit Agreement, dated as of September
10, 2021, by and among Capital Southwest Corporation, as Borrower, Capital Southwest Equity Investments, Inc., as Subsidiary Guarantor, the
lenders party thereto, and ING Capital LLC, as Administrative Agent (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-
00061) filed on September 10, 2021).
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
14*
21.1*
23.1*
23.2*
31.1*
31.2*
32.1*^
32.2*^
99.1*
Amendment No. 2 to the Second Amended and Restated Senior Secured Revolving Credit Agreement, dated as of May 11, 2022, by and among
Capital Southwest Corporation, as Borrower, the guarantor party thereto, the lenders from time to time party thereto and ING Capital LLC, as
Administrative Agent, and Texas Capital Bank, as Documentation Agent (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 814-
00061) filed on May 12, 2022).
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 (File 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 (File 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 (File 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 (File No. 333-220385) filed on September 8, 2017).
Form of Third Amended and Restated Equity Distribution Agreement, dated May 26, 2021, 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 May 26,
2021).
Form of Second Amendment, dated November 2, 2021, to Third Amended and Restated Equity Distribution Agreement 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 November 2, 2021).
Form of Amended and Restated Equity Distribution Agreement, dated May 26, 2021, 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 May 26, 2021).
Form of Second Amendment, dated November 2, 2021, to Amended and Restated Equity Distribution Agreement between the Company and
each of JMP Securities LLC and B. Riley Securities, Inc., respectively (incorporated by reference to Exhibit 10.2 to Form 8-K (File No. 814-
00061) filed on November 2, 2021).
Code of Ethics.
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, 2022 and 2021 and for the years ended March 31, 2022, 2021 and
2020.
149
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Exhibit No.
99.2*
99.3
Description
Report of RSM US LLP on Senior Securities Table
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.
150
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Item 16. Form 10-K Summary
None.
151
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
Date: May 24, 2022
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
CAPITAL SOUTHWEST CORPORATION
By:
/s/ Bowen S. Diehl
Bowen S. Diehl
President and Chief Executive Officer
Title
Chairman of the Board
Director
Director
Director
Director
Director
Date
May 24, 2022
May 24, 2022
May 24, 2022
May 24, 2022
May 24, 2022
May 24, 2022
President and Chief Executive Officer
May 24, 2022
Chief Financial Officer
(Chief Financial/Accounting Officer)
May 24, 2022
152
Exhibit 14
CAPITAL SOUTHWEST CORPORATION
BACKGROUND
CODE OF ETHICS PURSUANT TO RULE 17J-1
This Code of Ethics has been adopted by the Board of Directors of Capital Southwest Corporation (the "Company") in accordance with
Rule 17j-1(c) under the Investment Company Act of 1940 (the “Act”). Rule 17j-1 (the “Rule”) generally prohibits fraudulent or manipulative
practices by access persons of investment companies, including business development companies, including with respect to purchases or
sales of securities held or to be acquired by such companies.
The purpose of this Code of Ethics is to reflect the following: (1) the duty at all times to place the interests of shareholders of the
Company first; (2) the requirement that all personal securities transactions be conducted consistent with the Code of Ethics and in such a
manner as to avoid any actual or potential conflict of interest or any abuse of an individual’s position of trust and responsibility; and (3) the
fundamental standard that Company personnel should not take inappropriate advantage of their position.
Rule 17j-1(b) provides that it is unlawful for any Affiliated Person (as defined in the Act) or principal underwriter for a registered
investment company or any Affiliated Person of an investment adviser or principal underwriter for a registered investment company in
connection with the purchase or sale, directly or indirectly, by such person of a security held or the be acquired, as defined in this section, by
such registered investment company:
a. To employ any device, scheme or artifice to defraud such registered investment company;
a. To make to such registered investment company any untrue statement of a material fact or omit to state to such registered investment
company any material fact necessary in order to make the statements, in light of the circumstances under which they are made, not
misleading;
a. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any such registered
investment company; or
b. To engage in any manipulative practice with respect to such registered investment company.
Section 59 of the Act makes these provisions applicable to business development companies.
Rule 17j-1 (c) requires the Company adopt a code of ethics containing provisions reasonably necessary to prevent its “Access Persons”
(as defined below) from engaging in any of the conduct referred to above.
APPLICATION
This Code of Ethics applies to the “Access Persons” of the Company. Currently, this includes each employee, officer and director of the
Company. Each Access Person must receive, read, acknowledge receipt of, make certain reports under, periodically certify compliance with
and retain this Code of Ethics.
ADMINISTRATION
This Code of Ethics is administered by the Company’s Chief Compliance Officer and any questions should be directed to that
individual.
DEFINITIONS
For purposes of this Code of Ethics, the following definitions shall apply:
(a) "Access Person" means any director, officer, general partner or Advisory Person of the Company. The term includes any entity or
account in which an Access Person (together with immediate family members) has a 25% or greater beneficial interest or where multiple
Access Persons have a 50% or greater beneficial interest.
(b) "Advisory Person" of the Company means (1) any employee of the Company or of any company in a control relationship to the
Company who, in connection with his regular functions or duties, makes, participates in, or obtains information regarding the purchase or
sale of Covered Securities by the Company, or whose functions related to the making of any recommendations with respect to such purchases
or sales; and (2) any other natural person in a control relationship to the Company who obtains information reasonably contemporaneously
concerning any recommendation made to the Company with regard to the purchase or sale of Covered Securities.
(c) "Affiliated Person" means, in reference to the Company, (1) any person owning or holding with the power to vote 5% or more of
the outstanding voting securities of the Company or of which the Company owns or holds with power to vote 5% or more of the outstanding
voting securities, (2) any director, officer or employee of the Company or (3) any person controlling, controlled by or under common control
with the Company.
(d) A Covered Security is "Being Considered for Purchase or Sale" when:
(1) A decision has been made to accomplish the purchase or sale of a security by the Company and such purchase or sale has not been
completed;
(2) Any Access Person has proposed or recommended the purchase or sale of a security by the Company and such proposal or
recommendation is still under consideration; or
(3) Any Access Person is seriously considering or has discussed with one or more Access Persons the proposed purchase or sale of a
security by the Company and such proposed purchase or sale is still under consideration; provided, however, any security which is being
reviewed as part of a general industry survey or other broad monitoring of the securities markets and which has not become a probable target
for purchase or sale by the Company is not deemed as "Being Considered for Purchase or Sale."
(e) “Beneficial Ownership,” “Beneficially Own,” and derivations thereof, mean that you directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise, have or share in the opportunity, directly or indirectly, to profit or share in any profit
derived from a transaction in a security.
Without limiting the foregoing, you are presumed to have Beneficial Ownership in all of the following, as applicable:
(1) securities held by members of your immediate family sharing the same household with you, although the presumption of Beneficial
Ownership may be rebutted;
(2) your interest in securities held by a trust, which may include both trustees with investment control and, in some instances, trust
beneficiaries;
(3) your right to acquire securities through the exercise or conversion of any derivative security, whether or not presently exercisable;
(4) your proportionate interest as a general partner in the portfolio securities held by any general or limited partnership;
(5) certain performance-related fees other than an asset-based fee, received by any broker, dealer, bank, insurance company, investment
company, investment adviser, investment manager, trustee or person or entity performing a similar function; and
(6) any right you may have to dividends that is separated or separable from the underlying securities. Otherwise, the right to dividends
alone shall not represent Beneficial Ownership in the securities.
You are not deemed to have Beneficial Ownership in the portfolio securities held by a corporation or similar entity in which
you own securities if you are not a controlling shareholder of the entity and you do not have or share investment control over the entity’s
portfolio.
(f) "Chief Compliance Officer" means the individual appointed to that position by the Board of Directors; provided that, for purposes
of determinations under this Code of Ethics, in the absence of the Chief Compliance Officer, either the Chief Operating Officer or the Chief
Financial Officer may be treated as the Chief Compliance Officer and that, for purposes of determinations regarding the Chief Compliance
Officer, one of such other individuals shall be treated as the Chief Compliance Officer.
(g) "Control" means the power to exercise a controlling influence over the management or policies of a company; however, control
does not include such power arising solely as the result of an official position with such company.
(h) “Covered Security” means a security as defined in Section 2(a)(36) of the Act. A Covered Security does not include direct
obligations of the Government of the United States; banker’s acceptances, bank certificates of deposit, commercial paper and high quality
short-term debt instruments, including repurchase agreements; and shares issued by open-end funds.
(i) "Independent Director" means a director of the Company who is not an “interested person” of the Company within the meaning of
Section 2(a)(19) of the Act. A director is not deemed an interested person of the Company solely by reason of his being a member of the
Board of Directors or an owner of less than 5% of the voting securities of the Company.
(j) "Insider Trading" generally means trading in a security on the basis of Material Non-Public Information in violation of a duty to the
marketplace, the issuer, the person’s employer or client or the like. Passing Material Non-Public Information to another person in violation of
such a duty may also be treated as Insider Trading. The circumstances in which such a duty exists are not easily defined. An Access Person of
the Company who has Material Non-Public Information about a security should assume that he or she has such a duty unless the Chief
Compliance Officer makes a contrary determination.
(k) "Interested Persons" of the Company means any Affiliated Person of the Company, any such Affiliated Person’s immediate family
member, any legal counsel or partner or employee thereof that has performed legal services for the Company during the preceding two fiscal
years, any person or associated person or direct or indirect shareholders therein that has performed securities transactions for, or loaned
money or property to, the Company during the preceding six months, or anyone the SEC determines to have a material professional
relationship with the Company or its chief executive officer, or any interested person of any investment adviser or principal underwriter of
the Company. However, the term does not include any person solely by reason of his being a director of the Company or his ownership or
anyone the SEC deems to have a material professional relationship of less than 5% of the voting securities issued by the Company.
(l) "Material Non-Public Information" is information that is both material and non-public. For this purpose, information is considered
material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to act. If the information
has influenced a person’s investment decision, it would be very likely to be considered material. In addition, information that, when
disclosed, is likely to have a direct effect on the stock’s price should be treated as material. Examples include information concerning
impending mergers, sales of subsidiaries, significant revenue or earnings swings, dividend changes, impending securities offerings, awards of
patents, technological developments, impending product announcements, impending financial news and other major corporate events.
Information is non-public when it has not been disseminated in a manner making it available to investors generally. Information is public
once it has been publicly disseminated, such as when it is reported in widely disseminated news services and /or publications, and investors
have had a reasonable time to react to the information. Once the information has become public, it may be traded on freely.
(m) "Purchase or Sale of a Covered Security" includes, among other things, the purchase or sale of an option to purchase or sell a
Covered Security or entering into a contract such as a swap the value or payout of which varies with the value of such Covered Security.
(n) "Security Held or To Be Acquired" by the Company means any Covered Security which, within the most recent 15 days (i) is or has
been held by the Company, or (ii) is being or has been considered by the Company for purchase. A Covered Security includes any option to
purchase or sell, and any security convertible into or exchangeable for a Covered Security.
COMPLIANCE WITH RULE 17J-1
Affiliated Persons of the Company and others subject to paragraph (a) of the attached Rule 17j-1 shall comply with the requirements of
paragraph (a) of the Rule in connection with the purchase or sale, directly or indirectly, by such person of any Security Held or To Be
Acquired by the Company. Every Access Person of the Company shall comply with the applicable reporting requirements of paragraph (d) of
the Rule.
PRIOR APPROVAL REQUIREMENTS
Except as permitted by the Exempted Transaction provisions or with prior approval from the Chief Compliance Officer in the Star
Compliance system, no Advisory Person shall purchase, directly or indirectly, any Covered Securities in which he or she by reason of such
transaction acquires any direct or indirect Beneficial Ownership pursuant to an initial public offering or any private offering.
Note that the term Advisory Person generally does not include Independent Directors, who may accordingly generally acquire
securities in initial public offerings and private offerings without prior written approval.
Advisory Persons shall report its securities holdings in the Star Compliance system. Pre-clearances will be effective for three business
days, subject to termination at any time by the Chief Compliance Officer. The Chief Compliance Officer shall maintain a record of each pre-
clearance approval or disapproval, and the reasons underlying the decision, for at least five years after the end of the fiscal year in which the
approval is granted. In determining whether such prior approval shall be granted, the Chief Compliance Officer shall take into account
whether the opportunity to purchase such Covered Securities is being offered to such Advisory Person because of his or her position with the
Company, and whether the opportunity to purchase such Covered Security should be reserved for the Company.
RESTRICTIONS ON PERSONAL INVESTING ACTIVITY
a. No Access Person shall reveal to any other person (except in the normal course of his duties on behalf of the Company) any
information regarding Covered Securities being considered for purchase or sale by the Company.
a. No Access Person shall engage in Insider Trading whether for his own benefit or the benefit of the Company or others.
a. No Access Person shall make or participate in the formation of recommendations concerning the purchase or sale by the Company of
any Covered Security if such Access Person has Beneficial Ownership of any Covered Securities of the same issuer or has any other
business relationship with such issuer, without disclosing to the Chief Compliance Officer any interest such Access Person has in
such Covered Securities or issuer.
a. No Access Person of the Company shall participate in any Covered Securities transaction on a joint basis with the Company without
the prior written approval of the Chief Compliance Officer.
a. No Access Person may sell short any security issued by the Company or by a portfolio company or take a short equivalent position in
any related security.
PROHIBITED TRANSACTIONS BY ACCESS PERSONS
(a) No Access Person shall purchase, directly or indirectly, any security in which, by reason of such transaction, he would acquire any
direct or indirect beneficial ownership, if to his knowledge, any security of the same issuer:
(1) Is Being Considered for Purchase (as defined in 1(c) above) by the Company;
(2) Is being purchased by the Company;
(3) Is being sold by the Company;
(4) Has been sold by the Company within the most recent 15 days; or
(5) Is owned by the Company and any security of such issuer which would be purchased by such Access Person would be restricted as
to resale under applicable securities laws.
(b) No Access Person shall sell, directly or indirectly, any security in which he has any direct or indirect beneficial ownership, if to his
knowledge any security of the same issuer:
(1) Is Being Considered for Sale (as defined in 1(c) above) by the Company;
(2) Is being sold by the Company;
(3) Is being purchased by the Company;
(4) Has been purchased by the Company within the most recent 15 days; or
(5) Is being registered or is to be registered by the issuer for sale under applicable securities laws pursuant to a request made to the
issuer by or on behalf of the Company.
EXEMPTED TRANSACTIONS
The prohibited transaction provisions of the Code of Ethics shall not apply to:
a. Purchases or sales effected in any account in which the Access Person does not have direct or indirect Beneficial Ownership of the
holdings of such account (such as open-end mutual funds).
a. Purchases or sales effected in any account over which the Access Person has no direct or indirect influence or control.
a. Purchases or sales which are non-volitional on the part of the Access Person (such as a merger).
a. Purchases which are part of an automatic dividend reinvestment plan.
a. Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer.
a. Sale of shares pursuant to a 10b5-1 trading plan approved by the Chief Compliance Officer.
REPORTING
(a) Pursuant to paragraph (d)(1) of the Rule, every Access Person shall report to the Chief Compliance Officer of the Company the
following:
(1) Initial Holding Reports No later than 10 days of being designated an Access Person shall make a written report to the Chief
Compliance Officer containing: (i) each Covered Security in which he or she has any direct or indirect Beneficial Ownership, (ii) the name of
the broker, dealer or bank with whom he or she maintains an account in which any Covered Securities were held for his or her direct or
indirect benefit, and (iii) the date that the report is submitted.
(2) Quarterly Transactions Reports No later than 30 days after the end of each calendar quarter each Access Person shall make a
written report to the Chief Compliance Officer of all transactions in any Covered Security occurring in the quarter by which he or she has any
direct or indirect Beneficial Ownership. Such report must contain the following information with respect to each reportable transaction: (i)
date and nature of the transaction (purchase, sale or any other type of acquisition or disposition), (ii) title, interest rate and maturity date (if
applicable), number of shares or principal amount of each Covered Securities and the price at which the transaction was effected, (iii) name
of broker, dealer, bank or other similar intermediary through which the transaction was effected, and (iv) the date that the report is submitted.
If an Access Person has opened a brokerage account during the quarter, such report shall also identify the name of the broker, dealer or bank
and the date the account was established.
The broker through which the transaction was effected shall be directed by the Access Person to supply the Chief Compliance
Officer, on a timely basis, duplicate confirmations and monthly brokerage statements for all Covered Securities accounts. The Access Person
need not make a quarterly transaction report if the report would duplicate information contained in the broker trade confirmations or account
statements received by the Company with respect to the Access Person in the time period required by this Policy, if all of the information
required by the Policy is contained in the broker trade confirmations or account statements.
(3) Annual Holding Reports No later than 45 days after the calendar year-end each Access Person shall make a written report to the
Chief Compliance Officer containing: (i) the title, number of shares and principal amount of each Covered Security in which he or she has
any direct or indirect Beneficial Ownership, (ii) the name of any broker, dealer or bank with whom he or she maintains an
account in which any Covered Securities are held for his or her direct or indirect benefit, and (iii) the date that the report is submitted.
(4) Annual Certifications Each Access Person must annually certify that such person has read this Code of Ethics, understands its
requirements regarding such person and his immediate family and has complied with such requirements throughout the period during which
such person was an Access Person during the previous year. Such certification shall be submitted to the Chief Compliance Officer within 20
days after the receipt of the certification request from the Company.
(5) Company Reports No less frequently than annually, the Company must furnish to the Board of Directors and the Board of Directors
must consider, a written report that: (i) describes any issues arising under the Code of Ethics or procedures since the last report to the Board
of Directors, including but not limited to, information about material violations of the code or procedures and sanctions imposed in response
to the material violations; and (ii) certifies that the Company has adopted procedures reasonable necessary to prevent Access Persons from
violating the Code.
(6) Disclaimer of Beneficial Ownership Any report required under this Code of Ethics may contain a statement that the report shall not
be construed as an admission by the person submitting such duplicate confirmation or account statement or making such report that he or she
has any direct or indirect Beneficial Ownership in the Covered Securities to which the report relates.
(7) Review of Reports The reports, certifications, duplicate confirmations and account statements required to be submitted under this
Code of Ethics shall be delivered to the Chief Compliance Officer. The Chief Compliance Officer shall review such reports, duplicate
confirmations and account statements to determine whether any transactions recorded therein appear to constitute a violation of the Code of
Ethics. Before making any determination that a violation has been committed by any Access Person, such Access Person shall be given an
opportunity to supply additional explanatory material.
(8) The Chief Compliance Officer shall maintain copies of the reports, confirmations and account statements as required by Rule 17j-
1(f). The Chief Compliance Officer will be responsible for maintaining the following records at the Company’s principal place of business:
a. A copy of all codes of ethics adopted by the Company, and its affiliates, as the case may be, pursuant to Rule 17j-1 that have been in
effect at any time during the past five (5) years;
a. A record of each violation of such codes of ethics and of any action taken as a result of such violation for at least five (5) years after
the end of the fiscal year in which the violation occurs;
a. A copy of each report made by an Access Person for at least two (2) years after the end of the fiscal year in which the report is made,
and for an additional three (3) years in a place that need not be easily accessible;
a. A copy of each report made by the Chief Compliance Officer to the Board for two (2) years from the end of the fiscal year of the
Company in which such report is made or issued and for an additional three (3) years in a place that need not be easily accessible;
b. A list of all persons who are, or within the past five (5) years have been, required to make reports pursuant to this Code of Ethics, or
who are or were responsible for reviewing such reports;
a. A copy of each annual report describing issues arising under the Code of Ethics and certifying the implementation of adequate
enforcement provisions for at least two (2) years after the end of the fiscal year in which it is made, and for an additional three (3)
years in a place that need not be easily accessible; and
a. A record of any decision, and the reasons supporting the decision, to approve the acquisition by Investment Personnel of securities in
an Initial Public Offering or Limited Offering for at least five (5) years after the end of the fiscal year in which the approval is
granted.
(9) Confidentiality All reports of security transactions, duplicate confirmations, account statements and any other information filed
with the Company pursuant to the this Code of Ethics shall be treated as confidential, but are subject to review as provided herein and
representatives of the SEC.
(b) Notwithstanding the foregoing, pursuant to paragraph (d)(2) of the Rule, a director who is not an Interested Person shall not be
required to make such reports outlined in (a)(1), (2) and (3) above, unless with respect to a quarterly transaction report the director knew or
should have known that the Company purchased or sold (or was considering purchasing or selling) a Covered Security in the 15 days before
or after the director’s transaction.
(c) Any Access Person who proposes or recommends that the Company purchase or sell the securities of any issuer in which such
Access Person also has any investment holding (including a short sale position) shall simultaneously disclose to the Company's president (or
in the case of the Company's president, disclose to the Company's Board of Directors) a complete description of his holdings of any such
Covered Securities including the amounts and type of Covered Securities owned by the Access Person and the acquisition dates and prices of
such Covered Securities.
(d) The Company shall identify and notify all Access Persons who are under a duty to make reports to it pursuant to this Code.
SURVEILLANCE
(a) The Chief Compliance Officer of the Company shall review all reports made by Access Persons (other than the President) pursuant
to this Code (dating and initialing each reviewed report). The President of the Company shall review all reports made by the Chief
Compliance Officer pursuant to this Code (dating and initialing each reviewed report.)
(b) Prior to the consummation of any transaction in which the Company proposes to participate, the President or any Vice President of
the Company shall make reasonable inquiry necessary to ensure that such transaction conforms to the requirements of Section 17 or Section
57 (whichever is applicable) of the Act with respect to the possible involvement in activities covered by the rules under Section 17(a) and
Rule 17(d)-1 of persons described in subsections (b) and (e) of Section 57. A memorandum confirming the results of such inquiry shall be
executed by the President or any Vice President and filed with the closing documents for each transaction.
ENFORCEMENT
Upon discovering a violation of this Code of Ethics, the Board of Directors of the Company shall impose such sanctions as it deems
appropriate, including, among other things, a reprimand, a letter of censure, the suspension or termination of employment of the violator, and
the initiation of legal action to recover damages sustained by the Company.
All material violations of this Code of Ethics and any sanctions imposed with respect thereto shall be reported periodically to the Board
of Directors of the Company.
EXEMPTIVE PROCEDURE
The Chief Compliance Officer and the President of the Company (collectively, the “Waiver and Exemption Committee”) may jointly
grant exemptions from the requirements in this Code of Ethics in appropriate circumstances. In addition, violations of the provisions
regarding personal trading will
presumptively be subject to being reversed in the case of a violative purchase, and to disgorgement of any profit realized from the position by
payment of the profit to any client disadvantaged by the transaction, or to a charitable organization, as determined by the Waiver and
Exemption Committee, unless the violator establishes to the satisfaction of the Waiver and Exemption Committee that under the particular
circumstances disgorgement would be an unreasonable remedy for the violation.
AMENDMENT
This Code of Ethics may not be amended or modified except in a written form that is specifically approved by the Board of Directors,
including a majority of the Independent Directors.
This Code of Ethics was adopted and approved by the Board of Directors, including a majority of the Independent Directors on January
26, 2022.
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. 333-259455) and Registration Statement on Form S-8 (No
333-258899) of Capital Southwest Corporation and its subsidiaries (collectively, the Company) of our report dated May 24, 2022, 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, 2022 (the Form 10-K), and of our report dated May 24, 2022 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 24, 2022
CONSENT OF INDEPENDENT AUDITOR
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statement on Form N-2 (No. 333-259455) and on Registration Statement on Form S-8 (No
333-258899) of Capital Southwest Corporation of our report dated May 16, 2022, relating to the consolidated 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, 2022.
/s/ RSM US LLP
Chicago, Illinois
May 24, 2022
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 financial 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 24, 2022
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 financial 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 24, 2022
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
In connection with the Annual Report on Form 10-K of Capital Southwest Corporation (the "Company") for the year ended March 31, 2022 (the
“Report”), I, Bowen S. Diehl, President and Chief Executive Officer of Capital Southwest Corporation, certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1
2
the 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 Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 24, 2022
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
In connection with the Annual Report on Form 10-K of Capital Southwest Corporation (the "Company") for the year ended March 31, 2022 (the
“Report”), I, Michael S. Sarner, Chief Financial Officer of Capital Southwest Corporation, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1
2
the 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 Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 24, 2022
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, 2022 and 2021 and for the years ended
March 31, 2022, 2021 and 2020
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
4
5
12
13
14
15
Independent Auditor's Report
Board of Managers
I-45 SLF LLC
Opinion
We have audited the consolidated financial statements of I-45 SLF LLC and its subsidiary (the Company), which comprise the consolidated statements of
assets, liabilities and members’ equity, including the consolidated schedules of investments, as of March 31, 2022 and 2021, 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, 2022, and the related notes
to the consolidated financial statements (collectively, the financial statements).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022
and 2021, 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,
2022 in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be
independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted
in the United States of America, and for 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.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise
substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued or
available to be issued.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and
therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually
or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
2
In performing an audit in accordance with GAAS, we:
•
•
Exercise professional judgment and maintain professional skepticism throughout the audit.
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit
procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements.
• Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Accordingly, no such opinion is expressed.
•
•
Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well
as evaluate the overall presentation of the financial statements.
Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s
ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant
audit findings, and certain internal control-related matters that we identified during the audit.
/s/ RSM US LLP
Chicago, Illinois
May 16, 2022
3
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Assets, Liabilities
and Members’ Equity
Assets
Investments, at fair value (cost $187,713,768 and $170,791,497, respectively)
Cash and cash equivalents
Due from broker
Deferred financing costs (net of accumulated amortization of $3,784,559 and $2,964,542,
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,
2022
2021
176,704,213 $
9,948,554
123,016
1,451,953
850,342
65,972
189,144,050 $
164,351,186
10,418,599
152,449
2,245,255
552,962
55,472
177,775,923
114,500,000 $
—
2,374,444
66,878
154,621
117,095,943
91,000,000
13,071,599
1,920,085
39,203
171,695
106,202,582
72,048,107
71,573,341
$
189,144,050 $
177,775,923
See accompanying notes to consolidated financial statements.
4
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2022
6
Portfolio Company
Industry
Investment
1
Type
Maturity
Date
AAC New Holdco Inc. Healthcare services
First Lien
304,075
shares
common
stock
Warrants
(Expiration -
December
11, 2025)
6/25/2025
—
—
Aerospace &
defense
First Lien
3/19/2026
ADS Tactical, Inc.
American
Teleconferencing
5
Services, Ltd.
Telecommunications
ATX Networks
7
(Toronto) Corporation
Technology
products &
components
Revolving
Loan
First Lien
First Lien
Senior
Subordinated
Debt
196 Class A
units
6/30/2022
6/8/2023
9/1/2026
—
Burning Glass
Intermediate Holding
Company, Inc.
Software & IT
services
Revolving
3
Loan
6/10/2028
7
Corel, Inc.
Software & IT
services
Emerald Technologies
(U.S.) Acquisitionco,
Inc.
Technology
products &
components
First Lien
6/10/2028
First Lien
7/2/2026
First Lien
12/29/2027
Consumer products
& retail
First Lien
4/26/2028
First Lien
8/13/2026
Evergreen AcqCo 1
LP
Evergreen North
America Acquisitions,
LLC
Geo Parent
Corporation
Industrial services
Building &
infrastructure
products
Current
Interest
2
Rate
10.00%,
Principal
Amount
Cost
Fair Value
8.00% PIK $1,899,255 $ 1,899,255 $ 1,832,781
Percentage
of Members'
Equity
2.54 %
—
—
1,449,127
1,449,127
2.01 %
—
L+5.75%
(Floor
1.00%)
P+5.50%
P+5.50%
L+7.50%,
(Floor
1.00%)
—
482,412
482,412
0.67 %
6,394,231
6,283,162
6,133,122
8.51 %
1,027,491
5,597,579
1,020,896
5,565,782
63,855
307,867
0.09 %
0.43 %
2,616,688
2,610,076
2,498,937
3.47 %
—
L+5.00%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.00%
SOFR
+6.25%
(Floor
1.00%)
L+5.50%
(Floor
0.75%)
L+6.75%
(Floor
1.00%)
—
—
—
— %
73,973
67,463
67,463
0.09 %
3,189,452
3,139,669
3,189,452
4.43 %
6,802,781
6,649,975
6,804,924
9.44 %
3,125,000
3,063,410
3,078,125
4.27 %
4,179,000
4,142,649
4,158,105
5.77 %
6,740,323
6,622,570
6,740,323
9.36 %
9/1/2028
10.00% PIK
1,080,726
1,080,726
729,490
1.01 %
First Lien
12/19/2025
L+5.25%
6,839,744
6,809,224
6,805,545
9.45 %
5
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2022
6
Portfolio Company
Industry
Investment
1
Type
Maturity
Date
GS Operating, LLC
Distribution
First Lien
1/3/2028
Infogain Corporation
InfoGroup Inc.
Software & IT
services
Software & IT
services
First Lien
7/28/2028
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
INW Manufacturing,
LLC
Food, agriculture, &
beverage
First Lien
3/25/2027
Isagenix International,
LLC
KORE Wireless Group
Inc.
Consumer products
& retail
First Lien
6/14/2025
Telecommunications First Lien
12/20/2024
Lab Logistics, LLC
Healthcare services
First Lien
9/25/2023
4
Lash OpCo, LLC
Consumer products
& retail
Lift Brands, Inc.
Consumer services
First Lien
Delayed
Draw Term
Loan
Tranche A
Tranche B
Tranche C
1,051 shares
common
stock
3/18/2026
3/18/2026
6/29/2025
6/29/2025
6/29/2025
Current
2
Interest Rate
SOFR
+6.00%
(Floor
0.75%)
L+5.75%
(Floor
1.00%)
L+5.00%
(Floor
1.00%)
L+5.75%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
SOFR
+5.00%
(Floor
1.00%)
L+5.75%
(Floor
0.75%)
L+5.75%
(Floor
1.00%)
L+5.50%
L+7.25%
(Floor
1.00%)
L+7.00%
(Floor
1.00%)
L+7.00%
(Floor
1.00%)
L+7.50%
(Floor
1.00%)
9.50% PIK
—
Principal
Amount
Cost
Fair Value
Percentage
of Members'
Equity
4,987,500
4,891,052
4,987,500
6.92 %
4,783,654
4,718,780
4,769,303
6.62 %
2,850,000
2,845,252
2,703,938
3.75 %
3,217,460
3,208,400
3,043,187
4.22 %
5,676,508
5,658,733
5,638,192
7.83 %
6,930,000
6,883,970
6,791,400
9.43 %
2,925,000
2,867,256
2,866,500
3.98 %
1,684,740
1,677,192
1,087,558
1.51 %
4,657,831
4,638,860
4,640,364
6.44 %
6,242,038
6,212,419
6,242,038
8.66 %
4,987,500
4,880,990
4,877,775
6.77 %
1,186,957
1,151,855
1,160,843
1.61 %
2,502,042
583,177
564,693
2,502,042
583,177
564,693
2,251,838
437,383
423,519
3.13 %
0.61 %
0.59 %
—
—
—
748,600
748,600
1.04 %
Lightbox Intermediate,
L.P.
Software & IT
services
First Lien
5/9/2026
LOGIX Holdings
Company, LLC
Telecommunications First Lien
12/23/2024
Mills Fleet Farm Group
LLC
Consumer products
& retail
First Lien
10/24/2024
L+5.00%
L+5.75%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
4,947,836
4,913,508
4,873,619
6.76 %
5,826,004
5,807,333
5,491,009
7.62 %
4,623,125
4,583,904
4,623,125
6.42 %
6
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2022
6
Portfolio Company
Industry
National Credit Care,
LLC
Consumer services
Investment
1
Type
First Lien -
Term Loan
A
First Lien -
Term Loan
B
Maturity
Date
12/23/2026
12/23/2026
NBG Acquisition, Inc. Wholesale
First Lien
4/26/2024
NinjaTrader, Inc.
Financial services
First Lien
12/18/2024
NorthStar Group
Services, Inc.
Environmental
services
First Lien
11/9/2026
Research Now Group,
Inc.
Retail Services WIS
Corporation
Business services
First Lien
12/20/2024
Business services
First Lien
5/20/2025
SIB Holdings, LLC
Business services
First Lien
10/29/2026
Stellant Midco, LLC
Aerospace &
defense
First Lien
10/2/2028
Tacala, LLC
Consumer products
& retail
Second Lien
2/7/2028
TEAM Services Group,
LLC
Healthcare services
First Lien
12/20/2027
TestEquity, LLC
Capital equipment
First Lien
First Lien -
Term Loan
B
4/28/2022
4/28/2022
UniTek Global
Services, Inc.
Telecommunications First Lien
8/20/2024
U.S. TelePacific Corp. Telecommunications First Lien
5/1/2026
Veregy Consolidated,
Inc.
Vida Capital, Inc.
Environmental
services
Financial services
First Lien
First Lien
11/3/2027
10/1/2026
Wahoo Fitness
Acquisition, LLC
Consumer products
& retail
First Lien
8/14/2028
YS Garments, LLC
Consumer products
& retail
First Lien
8/9/2024
Current
2
Interest Rate
L+6.50%
(Floor
1.00%)
L+7.50%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
L+7.75%
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+5.50%
(Floor
0.75%)
L+7.50%
(Floor
0.75%)
L+5.00%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+6.25%
(Floor
1.00%)
L+5.50%,
2.00% PIK
(Floor
1.00%)
L+1.00%,
7.25% PIK
(Floor
1.00%)
L+6.00%
(Floor
1.00%)
L+6.00%
L+5.75%
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
Principal
Amount
Cost
Fair Value
Percentage
of Members'
Equity
2,500,000
2,452,711
2,482,500
3.45 %
2,500,000
2,452,711
2,482,500
3.45 %
2,662,500
2,646,932
1,807,172
2.51 %
5,000,000
4,908,403
5,000,000
6.94 %
2,961,290
2,947,702
2,950,185
4.09 %
4,935,567
4,935,567
4,861,015
6.75 %
2,958,524
2,912,186
2,914,146
4.04 %
3,000,000
2,945,060
2,958,000
4.11 %
2,288,500
2,267,212
2,254,173
3.13 %
5,000,000
4,991,330
4,943,750
6.86 %
6,687,303
6,643,981
6,637,148
9.21 %
3,804,805
3,804,239
3,804,805
5.28 %
941,707
941,561
941,707
1.31 %
2,814,048
2,802,007
2,626,913
3.65 %
5,239,140
5,239,140
3,714,550
5.16 %
1,975,000
3,565,000
1,970,150
3,530,511
1,935,500
3,282,777
2.69 %
4.56 %
4,968,750
4,833,270
4,869,375
6.76 %
4,281,594
4,264,683
4,238,778
5.88 %
7
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2022
6
Portfolio Company
Industry
Investment
1
Type
Maturity
Date
Current
2
Interest Rate
Principal
Amount
Cost
Fair Value
Percentage
of Members'
Equity
Total Investments
$187,713,768 $176,704,213
245.26 %
(1) Corporate bank loans and common stock and warrants represent 241.5% and 3.7%, respectively, of Members' Equity as of March 31, 2022.
(2) The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”), Secured Overnight
Financing Rate ("SOFR") or Prime (“P”)) which reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR,
SOFR or Prime and the current interest rate in effect at March 31, 2022. Certain investments are subject to an interest rate floor. Certain investments, as noted,
accrue payment-in-kind ("PIK") interest.
(3) The investment has approximately $0.3 million in an unfunded revolver commitment as of March 31, 2022.
(4) The investment has approximately $0.8 million in an unfunded delayed draw commitment as of March 31, 2022.
(5)
Investment was on non-accrual status as of March 31, 2022, 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.
(6) All portfolio companies are domiciled in the United States, unless otherwise noted.
(7) The company is domiciled in Canada.
See accompanying notes to consolidated financial statements.
8
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2021
Portfolio Company
Industry
AAC New Holdco
Inc.
Healthcare services
Investment
Type (1)
Maturity
Date
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
Corel, Inc.
Geo Parent
Corporation
Software & IT services
Building & infrastructure
products
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
9
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 %
—
7/2/2026
—
L+5.00%
—
7,029,540
1,844,670
6,834,530
1,844,670
7,008,452
2.58 %
9.79 %
L+5.25%
L+6.50%
(Floor
1.00%)
L+6.00%
(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 %
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2021
Portfolio Company
Industry
Investment
Type (1)
Maturity
Date
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
KORE Wireless
Group Inc.
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 6/29/2025
6/29/2025
Tranche B
Tranche C
6/29/2025
1,051
shares
common
stock
—
Lightbox
Intermediate, L.P.
LOGIX Holdings
Company, LLC
Software & IT services
First Lien
5/9/2026
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
Current
Interest
Rate(2)
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%)
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
2,880,000
2,870,351
2,740,622
3.83 %
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 %
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%)
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 %
8/23/2025
8/23/2025
L+5.50%
L+5.50%
1,368,765
4,219,897
1,345,921
4,174,090
1,365,343
4,209,348
1.91 %
5.88 %
10
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2021
Portfolio Company
Industry
Investment
Type (1)
Maturity
Date
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.
Signify Health,
LLC
Business services
First Lien
12/20/2025
Healthcare services
First Lien
12/23/2024
Tacala, LLC
Consumer products &
retail
Second
Lien
2/7/2028
TestEquity, LLC
Capital equipment
First Lien
First Lien -
Term Loan
B
Second
Lien
4/28/2022
4/28/2022
9/25/2025
TGP Holdings III
LLC
Time
Manufacturing
Acquisition
UniTek Global
Services, Inc.
U.S. TelePacific
Corp.
Vida Capital, Inc.
Durable consumer goods
Capital equipment
First Lien
2/3/2023
Telecommunications
First Lien
8/20/2024
Telecommunications
Financial services
First Lien
First Lien
5/2/2023
10/1/2026
YS Garments, LLC
Consumer products &
retail
First Lien
8/9/2024
Total Investments
4,987,113
4,760,225
4,464,917
5,000,000
5,044,000
Principal
Amount
Current
Interest
Rate(2)
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%)
L+5.50%,
1.00% PIK
(Floor
1.00%)
L+5.50%
(Floor
1.00%)
5,200,139
L+6.00% 3,805,000
L+6.00%
(Floor
1.00%)
2,736,317
5,802,043
2,500,000
3,815,993
4,634,374
949,133
Cost
Fair Value
Percentage of
Members'
Equity
4,750,204
4,641,219
6.48 %
4,464,916
4,464,917
6.24 %
4,987,113
4,950,333
6.92 %
5,016,857
5,063,596
7.07 %
4,989,074
5,002,100
6.99 %
3,807,756
3,358,074
4.69 %
946,991
835,237
1.17 %
2,478,913
2,482,813
3.47 %
5,785,401
5,823,800
8.14 %
2,720,753
2,479,651
3.46 %
5,171,710
3,760,016
4,829,005
3,671,825
6.75 %
5.13 %
4,608,311
4,286,796
5.99 %
$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.
11
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Operations
2022
Years Ended March 31,
2021
2020
$
12,614,627 $
6,049
183,154
12,803,830
13,503,215 $
—
426,418
13,929,633
19,885,861
—
414,445
20,300,306
3,819,893
125,298
220,781
4,165,972
8,637,858
4,236,991
118,416
209,783
4,565,190
9,364,443
7,684,904
140,469
220,051
8,045,424
12,254,882
Investment income
Interest income
Dividend income
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 gain (loss) on investments
Net change in unrealized (depreciation) appreciation on investments
Net (loss) gain on investments
1,047,337
(4,569,244)
(3,521,907)
(15,312,952)
30,467,391
15,154,439
603,240
(32,393,964)
(31,790,724)
Net increase (decrease) in members' equity resulting from operations
$
5,115,951 $
24,518,882 $
(19,535,842)
See accompanying notes to consolidated financial statements.
12
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Changes in Members' Equity
Members' equity beginning balance
$
Contributions
Distributions
Net increase in members' equity resulting from operations:
Net investment income
Net realized gain (loss) on investments
Net change in unrealized (depreciation) appreciation on investments
Net increase (decrease) in members' equity resulting from operations
2022
Years Ended March 31,
2021
2020
71,573,341 $
4,000,000
(8,641,185)
66,932,156
49,779,446 $
16,000,000
(18,724,987)
47,054,459
8,637,858
1,047,337
(4,569,244)
5,115,951
9,364,443
(15,312,952)
30,467,391
24,518,882
82,001,122
—
(12,685,834)
69,315,288
12,254,882
603,240
(32,393,964)
(19,535,842)
Members' equity ending balance
$
72,048,107 $
71,573,341 $
49,779,446
See accompanying notes to consolidated financial statements.
13
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 (gain) loss on investments
Net change in unrealized depreciation (appreciation) on investments
Amortization of premiums and discounts on investments
Amortization of deferred financing costs
Purchases of investments
Proceeds from sales and repayments of debt investments
Proceeds from sales and return of capital of equity 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 (used in) provided by operating activities
Cash flows from financing activities
Borrowings under credit facility
Repayments of credit facility
Deferred financing costs paid
Capital contributions
Distributions
Net cash provided by (used in) 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
2022
Years Ended March 31,
2021
2020
$
5,115,951 $
24,518,882 $
(19,535,842)
(1,047,337)
4,569,244
(393,573)
820,017
(75,778,732)
57,552,349
3,601,813
(856,791)
29,433
(297,380)
(10,500)
(13,071,599)
27,675
(17,074)
(19,756,504)
56,000,000
(32,500,000)
(26,715)
4,000,000
(8,186,826)
19,286,459
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)
(470,045)
10,418,599
9,948,554 $
6,679,495
3,739,104
10,418,599 $
(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)
45,465,670
23,363,635
(58,363,636)
—
—
(13,132,163)
(48,132,164)
(2,666,494)
6,405,598
3,739,104
2,983,211 $
3,357,055 $
7,129,754
2,374,444 $
1,920,085 $
2,808,471
$
$
$
See accompanying notes to consolidated financial statements.
14
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 current profits interest of 78.25%, while Main Street Capital Corporation owns 20.0% and
has a current profits interest of 21.75%. 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, 2022, total funded equity capital totaled $95.0 million, consisting of $76.0 million from Capital
Southwest Corporation and $19.0 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”).
15
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, 2022, the Company had one investment on non-accrual status. As of March 31, 2021, the
Company did not have any 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, 2021, 2020
and 2019 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, 2018 through 2020.
16
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. The expedients and exceptions provided by
the amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging
transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging
relationship. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the year ended March 31, 2022.
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.
17
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, 2022 and 2021:
Type of Investment
Fair Value at March 31,
2022
Valuation Technique
Unobservable Input
Range
Corporate bank loans
$
107,165,687
57,124,375
9,734,012
Common stock and warrants
2,680,139
Type of Investment
$
176,704,213
Fair Value at March 31,
2021
Income Approach
Income Approach
Market Approach
Enterprise Value
Waterfall Analysis
Enterprise Value
Waterfall Analysis
Broker Quotes
Discount Rate
Exit Value
5.5 - 100.0
7.3% - 20.0%
100.0 - 100.0
Discount Rate
11.6% - 20.0%
EBITDA Multiple
9.0x - 11.1x
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%
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, 2022 and 2021. 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, 2022, 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
1,549,246
— $
—
—
—
174,024,074 $
2,680,139
176,704,213
174,024,074
2,680,139
176,704,213
—
1,549,246
$
1,549,246 $
— $
176,704,213 $
178,253,459
18
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
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, 2022 and 2021, the Company purchased $75,778,732 and $40,196,036, 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, 2022 and 2021, the Company had $114.5 million and $91.0 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 $3.8 million and $4.2 million, respectively, for the years ended March 31, 2022 and 2021. The
weighted average interest rate on the Credit Facility was 2.40% and 2.65%, respectively, for the years ended March 31, 2022 and 2021. Average
borrowings for the years ended March 31, 2022 and 2021 were $102.9 million and $104.2 million, respectively.
A summary of the Company's contractual payment obligations for the repayment of outstanding indebtedness at March 31, 2022 is as follows:
Credit Facility
—
—
—
— $
2022
2023
2024
2025
Years Ending March 31,
2026
114,500
Thereafter
— $
Total
114,500
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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 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, 2022 and 2021, the balance in due from brokers is cash of approximately $123 thousand and $152 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, 2022, the Company had incurred $125 thousand in
administration fees, of which $32 thousand were payable at the end of the year. 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 period 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.
The Administrator is affiliated with a broker, U.S. Bank, through which the Company transacts operations. At March 31, 2022, cash and cash
equivalents in the amount of $9.9 million are held with U.S. Bank. At March 31, 2021, cash and cash equivalents in the amount of $10.4 million are held
by U.S. Bank.
8. COMMITMENTS AND CONTINGENCIES
The Company entered into various trades during the periods ended March 31, 2022 and 2021. As of March 31, 2022 and 2021 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, 2022 and 2021:
Portfolio Company
Burning Glass Intermediate Holding Company, Inc.
Lash OpCo, LLC
Investment Type
Revolving Loan
Delayed Draw Term Loan
Total unused commitments to extend financing
March 31,
2022
March 31,
2021
$
$
295,890 $
813,043
1,108,933 $
—
—
—
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
20
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)
2022
Years Ended March 31,
2021
2020
11.77 %
(5.68)%
9.85 %
13.42 %
(6.54)%
10.25 %
16.88 %
(11.08)%
4.87 %
(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 16, 2022, the
date the consolidated financial statements were available to be issued.
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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 24, 2022, 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, 2022, included in Part II, Item 5 of the Company’s annual report on Form 10-K for the year ended March 31, 2022. This table is the
responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits 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 24, 2022