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, 2023
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
FORM 10-K
For the transition period from to
Commission File Number: 814-00061
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction of incorporation
or organization)
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
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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by
any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2022 was $457,460,183 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 19, 2023 was 36,722,665.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for its 2023 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.
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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
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
Page
2
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65
67
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159
160
161
161
161
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166
167
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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; and
• the timing, form and amount of any dividend distributions.
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 (“we,” “our,” “us,” “CSWC,” or the “Company”), a Texas corporation, 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. Because CSWC is internally managed, all of the executive officers and other employees are employed by CSWC. Therefore, CSWC does not pay any external
investment advisory fees, but instead directly incurs the operating costs associated with employing investment and portfolio management professionals.
Since September 30, 2015, we have pursued a credit-focused investing strategy. We specialize in providing customized financing to middle market companies in
a broad range of industry segments located primarily in the United States. 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. Our common stock trades on The Nasdaq Global Select Market under the ticker
symbol “CSWC.”
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. We will be subject to U.S. federal income tax, and possibly a 4% U.S. federal excise tax, on any income that we do not timely
distribute to our shareholders. Our U.S. federal income tax liability may be reduced to the extent that we make certain distributions during the following calendar year
and satisfy other procedural requirements.
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.
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
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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 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 March 31, 2023, Moody's Investors Service, Inc. assigned CSWC an investment grade long-term issuer rating of Baa3 with a stable outlook.
On April 26, 2023, the Board of Directors declared a total dividend of $0.59 per share, comprised of a regular dividend of $0.54 and a supplemental dividend of
$0.05, for the quarter ended June 30, 2023. The record date for the dividend is June 15, 2023. The payment date for the dividend is June 30, 2023.
On April 26, 2023, pursuant to Rule 2a-5 under the 1940 Act, the Board of Directors designated a committee of certain officers of the Company as the Board's
valuation designee (the “Valuation Designee”) to determine the fair value of the
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Company's investments that do not have readily available market quotations, subject to the oversight of the Board of Directors, effective beginning as of the fiscal quarter
ending June 30, 2023.
Our Investment Strategy
We intend 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 investment 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.
•
•
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
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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, 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
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relationships among the prospective portfolio company’s business plan, operations, financial performance, and legal risks. On our directly originated transactions,
our due diligence often will 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.
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.
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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. As of March 31, 2023, 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. Beginning as of the fiscal quarter ending June 30, 2023, pursuant to Rule 2a-5 under the 1940 Act, the Board of Directors has designated a valuation committee
comprised of certain officers of the Company (the "Valuation Committee") as its valuation designee to determine the fair value of the Company's investments that do not
have readily available market quotations, subject to the oversight of the Board of Directors.
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 2023 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 Valuation Committee 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, subject to the oversight of the Board of Directors.
Our Valuation Committee 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 Valuation Committee has determined reflects the current (as of a time within 48 hours, excluding
Sundays and holidays) NAV of our common stock, which is based upon the NAV disclosed in the most recent periodic report we filed with the SEC, as adjusted
to reflect our management’s assessment of any material change in the NAV since the date of the most recently disclosed NAV, and (ii) the offering price of the
shares of our common stock in the proposed offering.
Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common stock at a price below the then current NAV of our
common stock at the time at which the sale is made or (ii) trigger the undertaking (which we 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 Valuation Committee 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.
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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 the 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 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, the 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
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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, 2023, we had twenty-six 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 (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, 2023 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").
DIVIDEND REINVESTMENT PLAN
We have adopted a dividend reinvestment plan, or DRIP, that provides for the reinvestment of dividends on behalf of our shareholders in shares of our common
stock. 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 regulated as a BDC under the 1940 Act. In addition, we have elected, and intend
to qualify annually, to be treated as a RIC for U.S. federal income tax purposes. 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.
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• 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, and possibly a 4% U.S. federal excise tax, on the portion of our taxable income and gains that we do not timely distribute (actually or constructively)
and certain built-in gains. Our U.S. federal income tax liability may be reduced to the extent that we make certain distributions during the following calendar year and
satisfy other procedural requirements. 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 2021 and 2020 and intend to meet the minimum distribution requirements for tax year 2022. 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.
• 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 our 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 defined in Section 2(a)(19) of the 1940 Act) of the Company. 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.
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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 to eligible 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, which may include early stage or emerging companies and bankrupt,
insolvent or distressed companies (see following paragraph); (4) offer to make available significant managerial assistance to such eligible 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 who reports directly to
the Board of Directors to be responsible for administering these policies and procedures.
Qualifying Assets
The 1940 Act provides that we may not acquire any assets other than "qualifiying assets" specified in the 1940 Act 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
BDCs generally must offer, and must provide upon request, significant managerial assistance to certain of their portfolio companies, except in circumstances
where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more other persons acting together and
one of the other persons in the group makes 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
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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 modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act.
As a result, effective April 25, 2019, the minimum asset coverage ratio applicable to the Company was decreased from 200% to 150%. 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, 2023, we had $235.0 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, 2023, our asset coverage for borrowed amounts was 235%.
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 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 2023 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 of Directors, 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
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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"), which became effective on July 28, 2021, 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 and shareholders approved the
Capital Southwest Corporation 2021 Non-Employee Director Restricted Stock Award Plan (the "Non-Employee Director Plan"), which became effective on July 27,
2022, 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 covers both employees and non-employee directors of the Board of Directors.
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.
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For purposes of our discussion, a “non-U.S. shareholder” means a beneficial owner of shares of our common stock that is neither a U.S. shareholder nor a
partnership (including an entity treated as a partnership for U.S. federal income tax purposes).
If an entity treated as a partnership for U.S. federal income tax purposes (a “partnership”) holds shares of our common stock, the tax treatment of a partner or
member of the partnership will generally depend upon the status of the partner or member and the activities of the partnership. A prospective shareholder that is a partner
or member in a partnership holding shares of our common stock should consult his, her or its tax advisors with respect to the purchase, ownership and disposition of
shares of our common stock.
Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her, or its particular
situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the
applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
Taxation as a Regulated Investment Company
Election to be Taxed as a RIC
We have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally are not subject to U.S. federal income tax 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.
Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current year. In particular, if we pay a distribution in
January of the following year that was declared in October, November, or December of the current year and is payable to shareholders of record in the current year, the
dividend will be treated for all U.S. federal tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends,
referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain our qualification for taxation as a RIC and eliminate our
liability for U.S. federal income tax. Under these spillover dividend procedures, we may defer distribution of income earned during the current year until December of
the following year. For example, we may defer distributions of income earned during 2022 until as late as December 31, 2023. If we choose to pay a spillover dividend,
we will incur the nondeductible 4% U.S. federal excise tax on some or all of the distribution.
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 regulated as a BDC or be registered as a management investment company under the 1940 Act at all times during each taxable year;
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• 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 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.
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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 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.
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 common stock, taxable shareholders receiving such dividends will be required to include the full amount of the dividend (whether received
in cash, our common 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
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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 common 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 common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common 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 holding period and other limitations under the Code, corporate distributees may 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.
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 common 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 common 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
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generally include businesses that (together with their affiliates) have a tangible net worth not exceeding $24.0 million and has average annual net income after U.S.
federal income taxes not exceeding $8.0 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 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, also may 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 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.
• 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.
•
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.
• 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.
Rising credit spreads could affect the value of our investments, and rising interest rates make it more difficult for portfolio companies to make periodic payments
on their loans.
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 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.
• 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 quotation is readily available, at fair value as determined in good faith by
our Valuation Committee 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 the 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, 2023, the Credit Facility provides us with a revolving credit line of up to
$400.0 million of which $235.0 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. If we breach a covenant under the terms of the Credit Facility and seek a waiver, we may not be able to obtain a waiver from
the required lenders. 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, 2023, we had $235.0 million debt outstanding out of $400 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, 2023, the carrying amount of the January 2026 Notes was $139.1 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, 2023, the carrying amount of the October 2026 Notes was $147.3 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)%
(27.20)%
(5.0)%
(16.55)%
0.0%
(5.90)%
5.0%
4.75%
10.0%
15.40%
(1) Assumes $1,257.7 million in total assets, $645.0 million in debt principal outstanding, $590.4 million in net assets and a weighted-average interest rate of 5.27% on our indebtedness based on our
financial data available on March 31, 2023. 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, 2023 total assets of at least 2.77%.
(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, 2023, 86.1% of our total assets consisted 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). If we need to dispose of investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to
find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes could have a material
adverse effect on our business, financial condition, results of operations, and cash flows.
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:
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•
•
•
The annual distribution requirement for a RIC is generally 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. We will be subject to U.S. federal income tax, and possibly a 4%
U.S. federal excise tax, on any income that we do not timely distribute to our shareholders. Our U.S. federal income tax liability may be reduced to the extent that
we make certain distributions during the following calendar year and satisfy other procedural requirements.
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.
If we qualify for taxation as a RIC under the Code, we generally will not be subject to U.S. federal income tax on income that we timely distribute to our
shareholders as dividends. Income derived through the Taxable Subsidiary will be subject to U.S. federal income tax at corporate rates without regard to the Annual
Distribution Requirement.
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 by the Valuation Committee, subject to the oversight 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 quotation, at fair value as
determined in good faith by the Valuation Committee, subject to the oversight of our Board of Directors. 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, the Valuation Committee values these securities quarterly at fair value based
on inputs from our investment team and our third-party valuation firms, subject to the oversight 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 our valuation process. 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 available market
quotations, 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 that 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
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shares during a period in which the NAV understates the value of our investments may receive a lower price for their shares than the value of our investments might
warrant.
We are currently operating in a period of capital markets disruptions and economic uncertainty. Such market conditions may materially and adversely affect
debt and equity capital markets, which may have a negative impact on our business, financial condition and 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). 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 economic conditions caused by the COVID-19 pandemic 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; and (iii) greater volatility in pricing and spreads and difficulty in valuing loans during
periods of increased volatility and liquidity issues. 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 directors who are not "interested persons" (as such term is used under Section 2(a)(19) of the 1940 Act) of the Company, or 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. 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 are unable to predict the duration of these business and supply chain disruptions, the extent to which the economic conditions caused by 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.
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 response to inflation. 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.
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Political, social and economic uncertainty 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 significantly impacting 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; economic recessions or downturns; and difficulties in obtaining and/or enforcing legal judgments.
Following the November 2022 elections in the United States, the Democratic Party controls the Presidency and the Senate, with the Republican Party
controlling the House of Representatives. Despite political tensions and uncertainty in a divided legislature, changes in federal policy, including tax policies, and at
regulatory agencies may occur over time through policy and personnel changes, 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.
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 effect of global climate change may impact the operations and valuation of our 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 adopted a climate accord (the “Paris Agreement”), which the United States rejoined in 2021, with the long-term goal of
limiting global warming and the short-term goal of significantly reducing greenhouse gas emissions. Additionally, the Inflation Reduction Act of 2022 included several
measures designed to combat climate change, including restrictions on methane emissions. 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 their ability to make
payments on our investments.
Environmental, social and governance factors may adversely affect our business or cause us to alter our business strategy.
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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 credit-rating downgrades, or a recession in the U.S. Although U.S. lawmakers
have passed legislation to raise the federal debt ceiling on multiple occasions, including in December 2021, ratings agencies have threatened to lower the long-term
sovereign credit rating on the United States. The impact of the increased debt ceiling and/or 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. Absent further quantitative easing by the Federal Reserve, 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 the SBA, on which the operation of our business may rely.
Inadequate funding for and/or the shutdown of these or other 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.
Our business is dependent on bank relationships and recent strain on the banking system may adversely impact us.
The financial markets recently have encountered volatility associated with concerns about the balance sheets of banks, especially small and regional banks that
may have significant losses associated with investments that make it difficult to fund demands to withdraw deposits and other liquidity needs. Although the federal
government has announced measures to assist these banks and protect depositors, some banks have already been impacted and others may be materially and adversely
impacted. Our business is dependent on bank relationships, including small and regional banks, and we are proactively monitoring the financial health of banks with
which we (or our portfolio companies) do or may in the future do business. To the extent that our portfolio companies work with banks that are negatively impacted by
the foregoing, such portfolio companies’ ability to access their own cash, cash equivalents and investments may be threatened. In addition, such affected portfolio
companies may not be able to enter into new banking arrangements or credit facilities or receive the benefits of their existing banking arrangements or credit facilities.
Any such developments could harm our business, financial condition, and operating results, and prevent us from fully implementing our investment plan. Continued
strain on the banking system may adversely impact 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 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
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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. Many of the entities, including investment funds (such as private equity funds and debt funds) and traditional
financial services companies, with which we compete for experienced personnel have greater resources than we have.
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 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
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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 requires 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 and effective April 25, 2019, 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. 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 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.
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• 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 the 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 2023 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 that are convertible to 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 affect 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 that are convertible to shares of our common stock.
The 1940 Act prohibits us from selling shares of our common stock at a price below the current NAV per share of such stock, with certain exceptions. One such
exception is prior shareholder approval of issuances below NAV provided that our Board of Directors determines that such sale is in the best interests of the Company
and its shareholders. We do not intend to seek shareholder authorization to sell shares of our common stock below the then current NAV per share of our common stock
at our 2023 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
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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 that are convertible 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 NAV. 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 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.
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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, a terrorist attack or war, events unanticipated in 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. If a significant number of
our employees were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.
We, and the third-party service providers with which we do business, 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. We may experience threats to our data and
systems, including malware and computer virus attacks, unauthorized access, 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, transfer agents, 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 may be impacted by operating restrictions, which may include requiring employees to continue 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.
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
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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 ongoing 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. While we are currently not
subject to any securities litigation or shareholder activism, due to the potential volatility of our stock price and for a variety of other reasons, we may in the future
become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in
substantial costs and divert management’s and our Board of Directors’ attention and resources from our business. Additionally, such securities litigation and shareholder
activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain
qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters.
Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and
shareholder activism.
RISKS RELATED TO OUR INVESTMENTS
Our investments in portfolio companies involve a number of significant risks.
We primarily invest in privately held U.S. middle market companies. Investments in privately held middle market companies involve a number of significant
risks, including the following:
•
•
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
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•
•
•
substantial additional capital to support their operations, finance expansion or maintain their competitive position.
Private companies generally have less 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 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 generally are 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 non-payment of interest and
other defaults 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, which may include the waiver of certain financial covenants, with the defaulting portfolio company.
We may not realize gains from our equity investments.
We may purchase common stock and other equity securities, including warrants, alongside our debt investments. Although equity securities have historically
generated higher average total returns than fixed-income securities over the long term, equity securities have also experienced significantly more volatility in those
returns. The equity securities we acquire may fail to appreciate and may decline in value or become worthless, and our ability to recover our investment depends on our
portfolio company's success. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional
issuances, inability to access additional capital and failure to pay current distributions. Investments in preferred securities involve special risks, such as the risk of
deferred distributions, credit risk, illiquidity and limited voting rights. 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.
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Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
We are subject to the risk that the debt investments we make in our portfolio companies may be prepaid 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.
We are exposed to risks associated with changes in interest rates.
Because we have borrowed and intend to continue to borrow money to make investments, our net investment income depends, in part, upon the difference
between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest
rates will not have a material adverse effect on our net investment income. In response to market indicators showing a rise in inflation, since March 2022, the Federal
Reserve has been rapidly increasing interest rates and has indicated that it would consider additional rate hikes in response to ongoing inflation concerns. An increase in
interest rates could decrease the value of any investments we hold which earn fixed interest rates and also could increase our interest expense, thereby decreasing our net
income. Also, an increase in interest rates available to investors could make an investment in shares of our common stock less attractive if we are not able to increase our
distribution rate, which could reduce the value of our common stock. Further, rising interest rates could also adversely affect our performance if such increases cause our
borrowing costs to rise at a rate in excess of the rate that our investments yield. It is possible that the Federal Reserve's tightening cycle could also result in a recession in
the United States.
In the current and any future periods of rising interest rates, to the extent we borrow money subject to a floating interest rate (such as under the Credit Facility),
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. Further, rising interest rates could also adversely affect our performance if we hold investments with floating interest rates, subject to specified minimum (or
“floor”) interest rates, while at the same time engaging in borrowings subject to floating interest rates not subject to such minimums. In such a scenario, rising interest
rates may temporarily increase our interest expense, even though our interest income from investments is not increasing in a corresponding manner if market rates remain
lower than the existing floor rate.
If interest rates continue to rise, there is also a risk that portfolio companies in which we hold floating rate loans will be unable to pay escalating interest
amounts, which could increase the risk of payment defaults and cause the portfolio companies to defer or cancel needed investment. Any failure of one or more portfolio
companies to repay or refinance its debt at or prior to maturity or the inability of one or more portfolio companies to make ongoing payments following an increase in
contractual interest rates could have a material adverse effect on our business, financial condition, results of operations and cash flows. The value of our securities could
also be reduced from an increase in market credit spreads as rates available to investors could make an investment in our securities less attractive than alternative
investments.
There may be circumstances in which our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
Even though we may have structured our investments as secured debt, if one of our portfolio companies were to go bankrupt, depending on the facts and
circumstances, and based upon principles of equitable subordination, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors and
transfer any lien securing our subordinated claim to the bankruptcy estate. The principles of equitable subordination based on case law generally provide that a claim may
be subordinated only if its holder is guilty of misconduct or where the secured debt is re-characterized as an equity investment and the senior lender has actually provided
significant managerial assistance to the bankrupt debtor. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or
instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in
rendering significant managerial assistance or actions to compel and collect payments from the borrower outside the ordinary course of business.
As a RIC, we may have certain regulatory restrictions that could preclude us from making additional investments in our portfolio companies.
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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 the ICE Benchmark
Administration ("IBA") (the entity regulated by the FCA that is responsible for calculating LIBOR) had notified the FCA of its intent, among other things, to cease
providing 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.
New York and several other states have passed laws intended to apply to U.S. dollar LIBOR-based contracts, securities, and instruments governed by those
states’ laws. These laws established fallbacks for LIBOR when there is no or insufficient fallback rates in these contracts. The federal Adjustable Interest Rate (LIBOR)
Act (the “LIBOR Act”) was signed into law on March 15, 2022. The federal legislation provides a statutory fallback mechanism on a nation-wide basis to replace U.S.
dollar LIBOR with a benchmark rate, selected by the Federal Reserve Board and based on SOFR, for certain contracts that reference U.S. dollar LIBOR and contain no
or insufficient fallback provisions. The New York and other state laws were superseded by the LIBOR Act. On December 16, 2022, the Federal Reserve Board adopted a
final rule implementing certain provisions of the LIBOR Act (“Regulation ZZ”). Regulation ZZ specifies that on the LIBOR replacement date, which is the first London
banking day after June 30, 2023, the Federal Reserve Board-selected benchmark replacement, based on SOFR and including any tenor spread adjustment as provided by
Regulation ZZ, will replace references to overnight, 1, 3, 6, and 12-month LIBOR in certain contracts that do not mature before the LIBOR replacement date and that do
not contain adequate fallback language. Regulation ZZ could apply to certain of our investments that reference LIBOR to the extent that they do not have fallback
provisions or adequate fallback provisions.
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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 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
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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.
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.
Our investments in the healthcare sector are subject to substantial risk. 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. Healthcare companies often must obtain and maintain regulatory approvals to market many of their products, change prices for certain
regulated products and consummate some of their acquisitions and divestitures. Delays in obtaining or failing to obtain or maintain these approvals could reduce revenue
or increase costs. 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, accounting pronouncements 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 our investment income or net investment income or any increase in losses from levels expected by investors or securities analysts;
proposed, or completed, offerings of our securities, including securities other than our common stock;
departure of our key personnel;
operating performance of companies comparable to us;
credit market changes;
general economic trends and other external factors; 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.
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Shares of closed-end investment companies, including BDCs, may trade at a discount to their NAV.
Our common stock is listed on The Nasdaq Global Select Market. Shareholders desiring liquidity may sell their shares on The Nasdaq Global Select Market at
current market value, which could be below NAV. Shares of closed-end investment companies frequently trade at discounts from NAV, which is a risk separate and
distinct from the risk that a fund’s performance will cause its NAV to decrease. We cannot predict whether our common stock will trade at, above or below NAV. In
addition, if our common stock trades below our NAV per share, we will generally not be able to issue additional common stock at the market price unless our
shareholders approve such a sale and our Board of Directors make certain determinations. See “Shareholders may incur dilution if we sell shares of our common stock in
one or more offerings at prices below the then current NAV per share of our common stock or issue securities that are convertible to 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, 2023, we had $235.0 million in outstanding indebtedness under our Credit
Facility, which is secured by (1) substantially all of the present and future property and assets of the Company and the guarantors and (2) 100.0% of the equity interests
in the Company’s wholly owned subsidiaries (except for the assets held in SBIC I).
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
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coverage has not been in compliance with the minimum asset coverage required by Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act or any
successor provisions (after giving effect to any exemptive relief granted to us by the SEC) for more than six consecutive months. If Section 18(a)(1)(B) as
modified by Section 61(a)(2) of the 1940 Act were currently applicable to us in connection with this offering, these provisions would generally prohibit us from
declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940
Act, were below 150% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution
or purchase;
sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);
enter into transactions with affiliates;
create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;
create restrictions on the payment of dividends or other amounts to us from our subsidiaries.
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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 prior to the maturity of 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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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 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 common 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.
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 common stock. Under certain applicable provisions of the Code and the Treasury
regulations, distributions payable by us in cash or in shares of stock (at the shareholders election) would satisfy the annual distribution requirement for a RIC. The IRS
has issued a revenue procedure providing that a dividend payable in stock or in cash at the election of the shareholders will be treated as a taxable dividend eligible for
the dividends paid deduction provided that at least 20% of the total dividend is payable in cash and certain other requirements are satisfied. Taxable shareholders
receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such dividend is
properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S.
shareholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. shareholder sells the stock it receives as a dividend in
order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common
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 common stock in order to pay
taxes owed on dividends, it may put downward pressure on the trading price of our common 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 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 the Company. These
provisions may prevent any premiums being offered to you for our common stock.
Item 1B. Unresolved Staff Comments
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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 75225, 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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Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
SENIOR SECURITIES
Information about our senior securities is shown in the following table for the years ended March 31, 2023, 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, 2023, 2022, 2021 2020, 2019, and 2018, on the senior securities
table as of March 31, 2023, 2022, 2021 2020, 2019, and 2018 is attached as an exhibit to this Annual Report on Form 10-K.
Class and Year
Credit Facility
2023
2022
2021
2020
2019
2018
2017
December 2022 Notes
2023
2022
2021
2020
2019
2018
2017
October 2024 Notes
2023
2022
2021
2020
2019
2018
2017
January 2026 Notes
2023
2022
2021
2020
2019
2018
2017
Total Amount Outstanding
Exclusive of Treasury
Securities (1)
(dollars in thousands)
Asset Coverage per Unit (2)
Involuntary Liquidating
Preference per Unit (3)
Average Market Value per
Unit (4)
$
$
$
$
235,000
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
140,000
—
—
—
—
44
2.35
1.93
1.87
1.89
2.49
4.16
12.40
—
—
—
1.89
2.49
4.16
—
—
—
1.87
1.89
—
—
—
2.35
1.93
1.87
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
N/A
N/A
N/A
N/A
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
N/A
October 2026 Notes
2023
2022
$
150,000
150,000
2.35
1.93
—
—
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 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, 2024
First Quarter (through May 19, 2023)
*
$
18.67 $
Year ended March 31, 2023
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year ended March 31, 2022
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$
$
16.37 $
16.25
16.53
16.54
16.86 $
16.19
16.36
16.58
20.20 $
19.72
21.23
24.40
26.61 $
28.41
28.33
28.10
17.22
16.34
16.28
16.70
17.79
22.78
23.75
23.28
22.16
*
*
23.40 %
21.36
28.43
47.52
57.83 %
75.48
73.17
69.48
(0.18)%
0.18
1.03
7.56
35.11 %
46.70
42.30
33.66
(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 19, 2023, there were approximately 333 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.
45
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. We may be subject to U.S. federal income tax and
a 4% U.S. federal excise tax on any income that we do not timely distribute to our shareholders. Our U.S. federal income tax liability may be reduced to the extent that
we make certain distributions during the following calendar year and satisfy other procedural requirements.
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, as amended.
ISSUER PURCHASES OF EQUITY SECURITIES
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, 2023, the Company did not repurchase any shares under the share repurchase
program.
46
The following table provides information regarding purchases of our common stock during the year ended March 31, 2023.
Period
April 1 through April 30, 2022
May 1 through May 31, 2022
June 1 through June 30, 2022 (1)
July 1 through July 31, 2022
August 1 through August 31, 2022
September 1 through September 30, 2022
October 1 through October 31, 2022
November 1 through November 30, 2022 (1)
December 1 through December 31, 2022
January 1 through January 31, 2023
February 1 through February 28, 2023
March 1 through March 31, 2023
Total
Total Number of
Shares Purchased
Average Price Paid
Per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under the Plans or
Programs (2)
— $
—
29,673
—
—
—
—
19,917
—
—
—
—
49,590 $
—
—
21.60
—
—
—
—
19.09
—
—
—
—
20.59
— $
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
(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, 2023, the Company did not repurchase any shares under the share repurchase program. As of March 31, 2023, the Company has $20 million available under the share
repurchase program.
47
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 ETF, the S&P BDC Index and the S&P Regional Banking ETF. The graph assumes initial
investment of $100 on March 31, 2018 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]
49
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 management 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 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 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 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.
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. For the years ended March 31, 2023, 2022, and 2021 the ratio of our
last twelve months ("LTM") operating expenses, excluding interest expense, as a percentage of our LTM average total assets was 1.91%, 2.20% and 2.42%, respectively.
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
50
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, 2023 and March 31, 2022, our investment portfolio at fair value represented approximately
95.9% and 96.2% 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.
As of March 31, 2023, our Board of Directors was 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, 2023 and March 31, 2022 reflects the
fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.
Revenue Recognition
Interest and Dividend Income
Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized on the date
dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Discounts/premiums received to par
on loans purchased are capitalized and accreted or amortized into income over the life of the loan 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, 2023, investments on
non-accrual status represented approximately 0.3% of our total investment portfolio's fair value and approximately 1.3% of its cost. As of March 31, 2022, investments
on non-accrual status represented approximately 1.5% of our total investment portfolio's fair value and approximately 2.6% of its cost.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU 2020-04, "Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial reporting."
The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging relationships that reference LIBOR
or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance for all entities. The Company has agreements that
have LIBOR as a reference rate with certain portfolio companies and certain lenders. Many of these agreements include 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 and certain 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. On December 21, 2022, the FASB issued
ASU 2022-06 "Reference rate reform (Topic 848)—Deferral of the Sunset Date of Topic
51
848," which defers the sunset date of ASC 848 until December 31, 2024. ASU 2022-06 became effective upon issuance. The expedients and exceptions provided by the
amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2024, except for hedging transactions as of
December 31, 2024, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company does not
believe it will have a material impact on its consolidated financial statements or its disclosure and did not utilize the optional expedients and exceptions provided by ASU
2020-04 during the year ended March 31, 2023.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale
Restrictions,” which was issued to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to
contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity
securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The new guidance is effective for interim and annual
periods beginning after December 15, 2023. The Company is currently evaluating the impact of the new standard on the Company's consolidated financial statements and
related disclosures and does not believe it will have a material impact on its consolidated financial statements or its disclosure.
INVESTMENT PORTFOLIO COMPOSITION
The total value of our investment portfolio was $1,206.4 million as of March 31, 2023, as compared to $936.6 million as of March 31, 2022. As of March 31,
2023, we had investments in 86 portfolio companies with an aggregate cost of $1,220.2 million. As of March 31, 2022, we had investments in 73 portfolio companies
with an aggregate cost of $938.3 million.
As of March 31, 2023 and March 31, 2022, approximately $1,002.9 million, or 96.7%, and $772.7 million, or 97.3%, 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, 2023 and March 31, 2022,
the weighted average contractual minimum interest rate is 1.15% and 1.08%, respectively. As of March 31, 2023 and March 31, 2022, approximately $34.7 million, or
3.3%, and $21.1 million, or 2.7%, respectively, of our debt investment portfolio (at fair value) bore interest at fixed rates.
The following tables provide a summary of our investments in portfolio companies as of March 31, 2023 and March 31, 2022 (excluding our investment in I-45
SLF LLC):
Number of portfolio companies (a)
Fair value
Cost
% of portfolio at fair value - debt
% of portfolio at fair value - equity
% of investments at fair value secured by first lien
Weighted average annual effective yield on debt investments (b)
Weighted average annual effective yield on total investments (c)
Weighted average EBITDA (d)
Weighted average leverage through CSWC security (e)
March 31, 2023
March 31, 2022
(dollars in thousands)
$
$
$
85
1,155,132
1,139,352
$
$
89.8 %
10.2 %
86.7 %
12.8 %
12.1 %
21,049
$
4.0x
72
879,011
862,303
90.3 %
9.7 %
84.2 %
9.3 %
9.0 %
20,889
4.0x
(a) At March 31, 2023 and March 31, 2022, we had equity ownership in approximately 62.4% and 56.9%, respectively, of our investments.
(b) The weighted average annual effective yields were computed using the effective interest rates during the quarter for all debt investments at cost as of March 31, 2023 and March 31,
2022, respectively, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments. As of March 31, 2023, investments on non-
accrual status represented approximately 0.3% of our total investment portfolio's fair value and approximately 1.3% of its cost. As of March 31, 2022, investments on non-accrual
status represented approximately 1.5% of our total investment portfolio's fair value and approximately 2.6% of its cost. 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) The weighted average annual effective yields on total investments were calculated by dividing total investment income, exclusive of non-recurring fees, by average total investments at
fair value.
(d)
Includes CSWC debt investments only. Weighted average EBITDA metric is calculated using investment cost basis weighting. For the year ended March 31, 2023, nine portfolio
companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio
52
that was not meaningful. 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.
(e)
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, 2023,
nine 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, 2022, three
portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.
Portfolio Asset Quality
We utilize an internally developed investment rating system to rate the performance and monitor the expected level of returns for each debt investment in our
portfolio. The investment rating system takes into account both quantitative and qualitative factors of the portfolio company and the investments held therein, including
each investment's expected level of returns and the collectability of our debt investments, comparisons to competitors and other industry participants and the portfolio
company's future outlook. The ratings are not intended to reflect the performance or expected level of returns of our equity investments.
•
•
•
•
Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materially above underwriting expectations and the trends
and risk factors are generally favorable. The investment generally has a higher probability of being prepaid in part or in full.
Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trends and risk factors are generally favorable to
neutral. 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.
We also have observed, and continue to observe, supply chain disruptions, labor and resource shortages, commodity inflation, elements of financial market
instability (including rapidly rising interest rates and volatility in the banking systems, particularly with small and regional banks), an uncertain economic outlook for the
United States (which may include a recession), and elements of geopolitical instability (including the ongoing war in Ukraine and U.S. and China relations). In the event
that the U.S. economy enters into a protracted recession, it is possible that the results of certain U.S. middle market companies could experience deterioration. We are
closely monitoring the effect of such market volatility may have on our portfolio companies and our investment activities, and we have also increased oversight of credits
in vulnerable industries to mitigate any decline in loan performance and reduce credit risk.
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, 2023 and March
31, 2022:
Investment Rating
1
2
3
4
Total
As of March 31, 2023
Debt Investments at
Fair Value
Percentage of
Debt Portfolio
(dollars in thousands)
$
$
153,118
839,456
44,726
295
1,037,595
14.8 %
80.9
4.3
0.0
100.0 %
53
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 %
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, 2023, investments on non-accrual status represented approximately 0.3% of our total investment portfolio's fair value and approximately 1.3%
of its cost. As of March 31, 2022, investments on non-accrual status represented approximately 1.5% of our total investment portfolio's fair value and approximately
2.6% of its cost.
Investment Activity
During the year ended March 31, 2023, we made new debt investments totaling $259.5 million, follow-on debt investments totaling $115.1 million, and equity
investments totaling $13.5 million. We also funded $4.8 million on our existing equity commitment to I-45 SLF LLC. We received contractual principal repayments
totaling approximately $29.4 million and full prepayments of approximately $89.7 million. We funded $40.3 million on revolving loans and received $22.1 million in
repayments on revolving loans. In addition, we received proceeds from sales of debt and equity investments totaling $3.4 million.
During the year ended March 31, 2022, we made new debt investments totaling $412.2 million, follow-on debt investments totaling $46.2 million, and equity
investments 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.
54
Total portfolio investment activity for the year ended March 31, 2023 and 2022 was as follows (dollars in thousands):
Preferred
& Common
Equity
Subordinated Debt
Second Lien
Loans
Year ended March 31, 2023
Fair value, beginning of period
New investments
Proceeds from sales of investments
Principal repayments received
Conversion of security
PIK interest earned
Accretion of loan discounts
Realized (loss) gain
Unrealized gain (loss)
Fair value, end of period
$
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 earned
Accretion of loan discounts
Realized gain
Unrealized gain (loss)
Fair value, end of period
First Lien Loans
$
524,161 $
462,032
—
(247,538)
(4,683)
2,455
2,726
(67)
786
739,872 $
$
First Lien Loans
$
739,872 $
411,745
—
(128,932)
(13,715)
5,577
3,587
(4,957)
(12,193)
1,000,984 $
I-45 SLF, LLC
Total
52,645 $
2,735
(692)
(12,310)
—
314
255
(2,239)
(4,888)
35,820 $
1,317 $
385
—
—
(587)
74
—
(104)
(294)
791 $
85,177 $
13,535
(2,664)
—
14,302
—
—
(9,260)
16,447
117,537 $
57,603 $
4,800
—
—
—
—
—
—
(11,147)
51,256 $
936,614
433,200
(3,356)
(141,242)
—
5,965
3,842
(16,560)
(12,075)
1,206,388
Second Lien
Loans
Subordinated Debt
Preferred
& Common
Equity
I-45 SLF, LLC
Total
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 $
688,432
499,218
(11,934)
(266,282)
—
4,190
3,005
6,550
13,435
936,614
55
RESULTS OF OPERATIONS
The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Net increase 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 (loss) gain 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 unrealized (depreciation) 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. The “Net realized (loss) gain on investments before
income tax” and “Net unrealized appreciation (depreciation) 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, 2023 and 2022. For the comparison of the results of operations for the
years ended March 31, 2022 and 2021, see the Company's Annual Report on Form 10-K for the year ended March 31, 2022, which was filed with the SEC on May 24,
2022, 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, 2023 and March 31, 2022
Total investment income
Interest expense
Other operating expenses
Income before taxes
Income tax (benefit) provision
Net investment income
Net realized (loss) gain on investments, net of tax
Net unrealized (depreciation) 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
Years Ended
March 31,
Net Change
2023
2022
Amount
%
(in thousands)
$
$
119,300 $
(28,873)
(21,387)
69,040
329
68,711
(17,029)
(18,589)
—
—
33,093 $
82,215 $
(19,924)
(18,989)
43,302
615
42,687
5,834
11,467
(17,087)
(86)
42,815 $
37,085
(8,949)
(2,398)
25,738
(286)
26,024
(22,863)
(30,056)
17,087
86
(9,722)
45.1 %
44.9 %
12.6 %
59.4 %
(46.5)%
61.0 %
(391.9)%
(262.1)%
(100.0)%
(100.0)%
(22.7)%
Total investment income consisted of interest income, dividend income, fee income and other income for each applicable period. For the year ended March 31,
2023, we reported investment income of $119.3 million, a $37.1 million, or 45.1%, increase as compared to the year ended March 31, 2022. The increase was primarily
due to a $36.6 million increase in interest income generated from our debt investments due to a 3.2% increase in the weighted average yield on debt investments, a
32.6% increase in the cost basis of debt investments held by us from $802.3 million to $1,063.4 million year-over-year and an increase of $0.9 million in dividend
income, partially offset by a decrease of $0.5 million in fee income.
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.
56
Interest and Fees on our Borrowings
For the year ended March 31, 2023, our total interest expense was $28.9 million, an increase of $8.9 million, as compared to the total interest expense of $19.9
million for the year ended March 31, 2022. The increase was primarily attributable to an increase in average total borrowings outstanding and an increase in the weighted
average interest rate on total debt.
Salaries, General and Administrative Expenses
For the year ended March 31, 2023, our total employee compensation expense (including both cash and share-based compensation) increased by $1.2 million, or
9.3%, as compared to the total employee compensation expense for the year ended March 31, 2022. For the year ended March 31, 2023, our total general and
administrative expense was $7.8 million, an increase of $1.2 million, or 19.0%, as compared to the total general and administrative expense of $6.6 million for the year
ended March 31, 2022. The increase was primarily due to an increase in audit fees, an increase in expenses related to the Company's new office space and an increase in
insurance costs, as well as an increase in professional fees incurred in connection with the compensation consultant engaged by the Compensation Committee and the
initial fee related to being assigned an investment grade rating by Moody's Investors Services.
Net Investment Income
For the year ended March 31, 2023, income before taxes increased by $25.7 million, or 59.4%. Net investment income increased from the prior year period by
$26.0 million, or 61.0%, to $68.7 million as a result of a $37.1 million increase in total investment income and a $0.3 million decrease in income tax provision, partially
offset by a $8.9 million increase in interest expense.
Net Realized Gains (Losses) on Investments
The following table provides a summary of the primary components of the total net realized loss on investments of $17.0 million for the year ended March 31,
2023:
Full Exits
Net Gain (Loss)
Partial Exits
Net Gain (Loss)
Year Ended March 31, 2023
Restructures
Net Gain (Loss)
Other (1)
Net Gain (Loss)
Total
Net Gain (Loss)
Debt
Equity
Total net realized gain (loss)
$
$
(1,220) $
853
(367) $
420 $
—
420 $
(6,983) $
(10,107)
(17,090) $
302 $
(294)
8 $
(7,481)
(9,548)
(17,029)
(1)
Included in other is a $0.1 million income tax provision related to realized gains on equity investments, as well as realized gains and losses from transactions, which are not
considered to be significant individually or in the aggregate.
The following table provides a summary of the primary components of the total net realized gain on investments of $5.8 million for the year ended March 31,
2022:
Full Exits
Net Gain (Loss)
Partial Exits
Net Gain (Loss)
Year Ended March 31, 2022
Restructures
Net Gain (Loss)
Other (1)
Net Gain (Loss)
Total
Net Gain (Loss)
Debt
Equity
Total net realized gain (loss)
$
$
1,210 $
7,419
8,629 $
176 $
—
176 $
(3,649) $
—
(3,649) $
640 $
38
678 $
(1,623)
7,457
5,834
(1)
Included in other is a $1.4 million income tax provision related to realized gains on equity investments, as well as realized gains and losses from transactions, which are not
considered to be significant individually or in the aggregate.
57
Net Unrealized Gains (Losses) on Investments
The following table provides a summary of the total net unrealized (depreciation) appreciation on investments of $18.6 million for the year ended March 31,
2023 (amounts in thousands):
Accounting reversals of net unrealized (appreciation) depreciation
recognized in prior periods due to net realized (gains) losses recognized
during the current period
Net unrealized (depreciation) appreciation relating to portfolio investments
Total net unrealized (depreciation) appreciation on investments
$
$
(2,009) $
(15,366)
(17,375) $
(1,257) $
1
11,190
9,933 $
— $
(11,147)
(11,147) $
(3,26
(15,32
(18,58
1
Includes a deferred tax provision of $6.5 million associated with the Taxable Subsidiary.
Debt
Equity
I-45 SLF LLC
Total
Year Ended March 31, 2023
The following table provides a summary of the total net unrealized appreciation (depreciation) on investments of $11.5 million for the year ended March 31,
2022 (amounts in thousands):
Accounting reversals of net unrealized depreciation (appreciation)
recognized in prior periods due to net realized losses (gains) recognized
during the current period
Net unrealized (depreciation) appreciation relating to portfolio investments
Total net unrealized appreciation (depreciation) on investments
$
$
2,000 $
(888)
1,112 $
(8,286) $
1
21,396
13,110 $
— $
(2,755)
(2,755) $
(6,286)
17,753
11,467
Debt
Equity
I-45 SLF LLC
Total
Year Ended March 31, 2022
1
Includes a deferred tax provision of $2.0 million associated with the Taxable Subsidiary.
Realized Loss on Extinguishment of Debt
During the year ended March 31, 2023, we did not recognize any loss on extinguishment of debt. During the year ended March 31, 2022, we recognized a loss
on extinguishment of debt of $17.1 million due to the full redemption of the October 2024 Notes, which included a make-whole premium of $15.2 million.
58
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 the debentures guaranteed by the Small Business Administration (the "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 this time, we believe we have adequate liquidity to support our near-term capital requirements. In
light of current market conditions, 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 the notes of our consolidated financial statements.
Cash Flows
For the year ended March 31, 2023, we experienced a net increase in cash and cash equivalents in the amount of $10.2 million. During the foregoing period, our
operating activities used $227.1 million in cash, consisting primarily of new portfolio investments of $433.2 million, partially offset by $139.1 million from sales and
repayments received from debt investments in portfolio companies and $2.7 million from sales and return of capital of equity investments in portfolio companies. In
addition, our financing activities provided cash of $237.5 million, consisting primarily of net proceeds from the Equity ATM Program of $158.9 million, net proceeds
from an underwritten equity offering of $44.1 million, net proceeds from the issuance of SBA debentures of $78.1 million and net borrowings on our Credit Facility of
$30.0 million, partially offset by cash dividends paid in the amount of $71.1 million. At March 31, 2023, the Company had cash and cash equivalents of approximately
$21.6 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 from sales and
repayments received from debt investments in portfolio companies and $11.9 million from sales and return of capital of equity investments in portfolio companies. In
addition, our financing activities provided cash of $164.5 million, consisting primarily of net borrowings on our Credit Facility of $85.0 million, net proceeds from the
Equity ATM Program of $98.1 million, net proceeds from the issuance of the October 2026 Notes of $146.4 million and net proceeds from issuance of SBA debentures
of $39.0 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,
2022, the Company had cash and cash equivalents of approximately $11.4 million.
Financing Transactions
In accordance with the 1940 Act, effective April 25, 2019, the Company is only allowed to borrow amounts such that its asset coverage (i.e., the ratio of assets
less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940 Act, is at least 150% after such borrowing.
The Board of Directors also approved a resolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any
such issuance, would not be less than 166%, which became effective April 25, 2019. On August 11, 2021, we received an exemptive order from 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, 2023, the Company’s asset coverage was 235%.
Credit Facility
In August 2016, CSWC entered into a senior secured credit facility (the “Credit Facility”) to provide additional liquidity to support its investment and
operational activities.
On August 9, 2021, CSWC entered into the Second Amended and Restated Senior Secured Revolving Credit Agreement (as amended or otherwise modified
from time to time, 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
59
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.
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 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 Adjusted Term SOFR. In addition, CSWC entered into an Incremental Commitment Agreement, pursuant to which the total commitments under the
Credit Agreement increased from $335 million to $380 million.
On November 16, 2022, CSWC entered into an Incremental Assumption Agreement that increased the total commitments under the accordion feature of the
Credit Agreement by $20 million, which increased total commitments from $380 million to $400 million. The $20 million increase was provided by one existing lender
and one new lender, bringing the total bank syndicate to eleven participants.
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 Agreement 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 Agreement, 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, 2023, 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, 2023, CSWC had $235.0 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 $13.2 million, $6.2 million and $6.8 million for the years ended March 31, 2023,
2022 and 2021, respectively. The weighted average interest rate on the Credit Facility was 5.22% and 2.50% for the years ended March 31, 2023 and 2022, respectively.
Average borrowings for the years ended March 31, 2023 and 2022 were $213.7 million and $173.5 million, respectively. As of March 31, 2023 and 2022, CSWC was in
compliance with all financial covenants under the Credit Agreement.
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 the October 2024 Notes 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.
60
On September 24, 2021, the Company redeemed $125.0 million 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 did not recognize any interest expense related to the October 2024 Notes for the year ended March 31, 2023. For the years ended March 31, 2022
and 2021, the Company recognized interest expense related to the October 2024 Notes, including amortization of deferred issuance costs, of $3.6 million and
$6.3 million, respectively. From April 1, 2021 through September 24, 2021 (the redemption date of the October 2024 Notes), average borrowings were $125.0 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 have 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, 2023, the carrying amount of the January 2026 Notes was $139.1 million on an aggregate principal amount of $140.0 million at a weighted
average effective yield of 4.46%. As of March 31, 2023, the fair value of the January 2026 Notes was $122.8 million. This is a Level 3 fair value measurement under
ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to the January 2026 Notes, including
amortization of deferred issuance costs, of $6.6 million, $6.7 million and $1.2 million for the years ended March 31, 2023, 2022 and 2021, respectively. For each of the
years ended March 31, 2023 and 2022, average borrowings were $140.0 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
61
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 have 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, 2023, the carrying amount of the October 2026 Notes was $147.3 million on an aggregate principal amount of $150.0 million at a weighted
average effective yield of 3.5%. As of March 31, 2023, the fair value of the October 2026 Notes was $132.2 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 October 2026 Notes, including
amortization of deferred issuance costs, of $5.8 million and $3.1 million for the years ended March 31, 2023, respectively. For the year ended March 31, 2023, average
borrowings were $150.0 million. 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. On November 22,
2022, SBIC I received an additional leverage commitment in the amount of $50.0 million to be issued on or prior to September 30, 2027. As of March 31, 2023, SBIC I
had regulatory capital of $65.0 million and leverageable capital of $65.0 million. As of March 31, 2023, SBIC I had a total leverage commitment from the SBA in the
amount of $130.0 million, of which $10.0 million remains unused. 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, 2023, the carrying amount of SBA Debentures was $116.3 million on an aggregate principal amount of $120.0 million. As of March 31, 2023,
the fair value of the SBA Debentures was $115.8 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 820. The Company recognized interest expense and fees related to SBA Debentures of $3.2 million and $0.3 million for the years ended March 31,
2023 and 2022, respectively. The weighted average interest rate on
62
the SBA Debentures was 3.38% and 1.30% for the years ended March 31, 2023 and 2022, respectively. For the years ended March 31, 2023 and 2022, average
borrowings were $82.6 million and $17.0 million, respectively.
As of March 31, 2023, the Company's issued and outstanding SBA Debentures mature as follows (amounts in thousands):
Pooling Date (1)
9/22/2021
3/23/2022
9/21/2022
3/22/2023
Maturity Date
9/1/2031
3/1/2032
9/1/2032
3/1/2033
Fixed Interest Rate
1.575%
3.209%
4.435%
5.215%
$
$
March 31, 2023
15,000
25,000
40,000
40,000
120,000
(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
On November 17, 2022, the Company completed an underwritten public equity offering of 2,534,436 shares of common stock, including shares issuable
pursuant to the underwriters' option to purchase additional shares, at a public offering price of $18.15 per share, raising $46.0 million of gross proceeds. Net proceeds
were $44.1 million after deducting underwriting discounts and offering expenses.
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. On August 2, 2022,
the Company increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $650,000,000 from $250,000,000.
The following table summarizes certain information relating to shares sold under the Equity ATM Program:
Number of shares sold
Gross proceeds received (in thousands)
1
Net proceeds received (in thousands)
Weighted average price per share
Years Ended March 31,
2023
2022
8,435,462
161,216 $
158,798 $
19.11 $
3,872,031
99,636
98,142
25.73
$
$
$
1
Net proceeds reflects proceeds after deducting commissions to the sales agents on shares sold and offering expenses. As of March 31, 2023, no proceeds remained receivable. As
of March 31, 2022, $1.7 million in proceeds remained receivable and was included in other receivables in the Consolidated Statement of Assets and Liabilities.
Cumulative to date, the Company has sold 16,613,122 shares of its common stock under the Equity ATM Program at a weighted-average price of $20.75,
raising $344.7 million of gross proceeds. Net proceeds were $339.1 million after commissions to the sales agents on shares sold. As of March 31, 2023, the Company has
$305.3 million available under the Equity ATM Program.
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
63
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 years ended March 31, 2023 and 2022, the Company did not repurchase any shares under the share
repurchase program.
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 generally is 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.
At March 31, 2023 and March 31, 2022, we had a total of approximately $125.2 million and $134.3 million, respectively, in currently unfunded commitments
(as discussed in Note 11 to the Consolidated Financial Statements). As of March 31, 2023, 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, 2023, we had $0.9 million 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 2023, $0.4 million expire in
February 2024 and $0.2 million expire in April 2024. As of March 31, 2023, 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, 2023, the Company had cash and cash
equivalents of $21.6 million and $164.4 million in available borrowings under the Credit Facility.
Contractual Obligations
As shown below, we had the following contractual obligations as of March 31, 2023. 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)
Payments Due By Period
(in thousands)
Total
4,262 $
276,784
158,900
170,250
610,196 $
$
$
Less than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
406 $
12,474
6,300
5,062
24,242 $
842 $
24,879
152,600
10,125
188,446 $
882 $
239,431
—
155,063
395,376 $
2,132
—
—
—
2,132
(1) Amounts include interest payments calculated at an average rate of 5.22% of outstanding Credit Facility borrowings, which were $235.0 million as of March 31,
2023.
(2) Includes interest payments.
RECENT DEVELOPMENTS
On April 26, 2023, the Board of Directors declared a total dividend of $0.59 per share, comprised of a regular dividend of $0.54 and a supplemental dividend of
$0.05, for the quarter ending June 30, 2023. The record date for the dividend is June 15, 2023. The payment date for the dividend is June 30, 2023.
On April 26, 2023, pursuant to Rule 2a-5 under the 1940 Act, the Board of Directors designated a committee of certain
64
officers of the Company as the Board's valuation designee (the “Valuation Designee”) to determine the fair value of the Company's investments that do not have readily
available market quotations, subject to the oversight of the Board of Directors, effective beginning as of the fiscal quarter ending June 30, 2023.
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; overall market changes, including an increase in market volatility; interest rate volatility, including the
decommissioning of LIBOR and rising interest rates; inflationary pressures; legislative reform; and local, regional, national or global political, social or economic
instability.
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, SOFR or an alternative rate.
Since March 2022, the Federal Reserve has been rapidly raising interest rates and has indicated that it would consider additional rate hikes in response to
ongoing inflation concerns. In a rising interest rate environment, 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. It is possible that the Federal Reserve's tightening cycle could result in a recession in the
United States, which would likely lead to a decrease in interest rates. Alternatively, 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 base rates, such as LIBOR or SOFR, are not offset by a corresponding increase in the spread
over such base rate that we earn on any portfolio investments or a decrease in the interest rate of our floating interest rate liabilities tied to such base rate. See “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 also will be affected by changes in the published SOFR 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, 2023, we were not a party to any hedging arrangements.
As of March 31, 2023, approximately 96.7% of our debt investment portfolio (at fair value) bore interest at floating rates, 100.0% of which were subject to
contractual minimum interest rates. Our Credit Facility bears interest on a per annum basis equal to the applicable Adjusted Term SOFR rate plus 2.15%. We pay unused
commitment fees of 0.50% to 1.00% per annum, based on utilization. The following table shows the approximate annualized increase or decrease in net investment
income due to hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings as of March 31, 2023.
65
Basis Point Change
Increase (decrease) in net investment
income (in thousands)
Increase (decrease) net investment income
per share
(200 bps)
(150 bps)
(100 bps)
(50 bps)
50 bps
$
(16,942) $
(12,707)
(8,471)
(4,236)
4,236
(0.47)
(0.35)
(0.23)
(0.12)
0.12
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 table 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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Table of Contents
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID: 49)
Consolidated Statements of Assets and Liabilities as of March 31, 2023 and 2022
Consolidated Statements of Operations for Years Ended March 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for Years Ended March 31, 2023, 2022 and 2021
Consolidated Schedules of Investments as of March 31, 2023 and 2022
Notes to Consolidated Financial Statements
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Page
68
70
71
72
73
74
105
Table of Contents
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, 2023 and 2022, 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, 2023, 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, 2023 (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, 2023 and 2022, and the results of its operations, changes in net assets, and
cash flows for each of the three years in the period ended March 31, 2023, 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, 2023 and 2022, by correspondence with the custodians or the portfolio companies and other
appropriate procedures where replies were not received. 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 matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Fair value of investments using significant unobservable inputs
As discussed in Note 4, at March 31, 2023, the fair value of the Company’s investments categorized as Level 3 investments within the fair value hierarchy (Level 3
investments) totaled $1,155.132 million. Level 3 investments represent investments whose values are based on unobservable inputs that are significant to the overall fair
value measurement. Management estimates, 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 fair value of Level 3 investments as a critical audit matter because of the management judgment necessary to select the valuation techniques used to
estimate the fair value of the investments and to estimate the significant unobservable
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inputs used in those valuation techniques. Auditing the fair value of the Company’s Level 3 investments is complex, as the valuation techniques, unobservable inputs and
assumptions used by management are highly judgmental and changes could have a significant effect on the fair value measurements of such investments.
The audit procedures we performed to address this critical audit matter included the following, among others:
• We evaluated the appropriateness of the Company’s valuation techniques used for Level 3 investments by reviewing the reasonableness of significant changes in
those valuation techniques from the prior year-end, if applicable, and also comparing to those used by market participants.
• We tested the reasonableness of assumptions used by management to estimate the unobservable inputs, including market yield, financial performance measures,
•
and discounts rates, by comparing these inputs to market information obtained from external sources.
For a sample of investments, we utilized valuation specialists, with specialized skill and knowledge, to assist with evaluation of the Company’s valuation
techniques and testing the reasonableness of the assumptions used by management.
• 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 this information 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 23, 2023
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Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(In thousands, except shares and per share data)
March 31,
2023
March 31,
2022
Assets
Investments at fair value:
Non-control/Non-affiliate investments (Cost: $947,829 and $721,392, respectively)
Affiliate investments (Cost: $191,523 and $140,911, respectively)
Control investments (Cost: $80,800 and $76,000, respectively)
Total investments (Cost: $1,220,152 and $938,303, respectively)
Cash and cash equivalents
Receivables:
Dividends and interest
Escrow
Other
Income tax receivable
Debt issuance costs (net of accumulated amortization of $5,642 and $4,573, respectively)
Other assets
Total assets
Liabilities
SBA Debentures (Par value: $120,000 and $40,000, respectively)
January 2026 Notes (Par value: $140,000 and $140,000, respectively)
October 2026 Notes (Par value: $150,000 and $150,000, respectively)
Credit facility
Other liabilities
Accrued restoration plan liability
Income tax payable
Deferred tax liability
Total liabilities
Commitments and contingencies (Note 11)
$
$
$
Net Assets
Common stock, $0.25 par value: authorized, 40,000,000 shares; issued, 38,415,937 shares at March 31, 2023 and 27,298,032
shares at March 31, 2022
Additional paid-in capital
Total distributable (loss) earnings
Treasury stock - at cost, 2,339,512 shares
Total net assets
Total liabilities and net assets
Net asset value per share (36,076,425 shares outstanding at March 31, 2023 and 24,958,520 shares outstanding at March 31,
2022)
$
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
70
966,627 $
188,505
51,256
1,206,388
21,585
18,430
363
647
368
3,717
6,186
1,257,684 $
116,330 $
139,051
147,263
235,000
16,761
598
156
12,117
667,276
9,604
646,586
(41,845)
(23,937)
590,408
1,257,684 $
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
16.37 $
16.86
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except shares and per share data)
Investment income:
Interest income:
Non-control/Non-affiliate investments
Affiliate investments
Payment-in-kind interest income:
Non-control/Non-affiliate investments
Affiliate 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
Federal income, excise and other taxes
Deferred taxes
Total income tax provision
Net investment income
Realized (loss) gain
Non-control/Non-affiliate investments
Affiliate investments
Income tax provision
Total net realized (loss) gain on investments, net of tax
Net unrealized (depreciation) appreciation on investments
Non-control/Non-affiliate investments
Affiliate investments
Control investments
Income tax provision
Total net unrealized (depreciation) appreciation on investments, net of tax
Net realized and unrealized (losses) gains on investments
Realized loss on extinguishment of debt
Realized loss on disposal of fixed assets
Net increase 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 in net assets from operations – basic and diluted
Weighted average shares outstanding – basic and diluted
Years Ended
March 31,
2022
2023
2021
$
87,982 $
11,658
58,136 $
7,122
42,880
6,126
2,382
3,060
1,824
141
7,337
4,057
638
100
121
119,300
9,870
3,705
28,873
3,180
4,632
50,260
69,040
630
(301)
329
68,711 $
(5,872) $
(11,027)
(130)
(17,029)
(6,942)
6,014
(11,147)
(6,514)
(18,589)
(35,618)
—
—
33,093 $
2.30 $
2.29 $
1.10 $
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
30,015,533
22,839,835
19,060,131
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(In thousands, except shares)
Common Stock
Treasury Stock
Number of Shares
Par Value
Number of Shares
Par Value
Additional
Paid-In Capital
Total
Distributable
Earnings (Loss)
Balances at March 31, 2020
Issuance of common stock
Share-based compensation
Issuance of common stock under restricted stock plan, net of
forfeitures
Common stock withheld for payroll taxes upon vesting of
restricted stock
Dividends to shareholders
Change in restoration plan liability
Reclassification for certain permanent book-to-tax differences
Net increase resulting from operations
Balances at March 31, 2021
Issuance of common stock
Share-based compensation
Issuance of common stock under restricted stock plan, net of
forfeitures
Common stock withheld for payroll taxes upon vesting of
restricted stock
Dividends to shareholders
Change in restoration plan liability
Reclassification for certain permanent book-to-tax differences
Net increase resulting from operations
Balances at March 31, 2022
Issuance of common stock
Share-based compensation
Issuance of common stock under restricted stock plan, net of
forfeitures
Common stock withheld for payroll taxes upon vesting of
restricted stock
Dividends to shareholders
Change in restoration plan liability
Reclassification for certain permanent book-to-tax differences
Net increase resulting from operations
Balances at March 31, 2023
17,998,098 $
2,810,541
—
5,085
702
—
211,994
53
(15,309)
—
—
—
—
21,005,324 $
3,872,031
—
133,289
(52,124)
—
—
—
—
24,958,520 $
10,969,898
—
(4)
—
—
—
—
5,836
969
—
33
(13)
—
—
—
—
6,825
2,742
—
197,597
49
(49,590)
—
—
—
—
36,076,425 $
(12)
—
—
—
—
9,604
72
2,339,512 $ (23,937) $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
310,846 $
49,691
2,944
(53)
(235)
—
(7)
(6,739)
—
2,339,512 $ (23,937) $
356,447 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
97,138
3,585
(33)
(1,395)
—
141
(7,648)
—
2,339,512 $ (23,937) $
448,235 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
200,039
3,705
(49)
(1,009)
—
2,085
(6,420)
—
2,339,512 $ (23,937) $
646,586 $
Total Net Asset
Value
272,222
50,393
2,944
—
(239)
(39,945)
(7)
—
50,883
336,251
98,107
3,585
—
(1,408)
(58,624)
141
—
42,815
420,867
202,781
3,705
—
(1,021)
(71,102)
2,085
—
33,093
590,408
(19,772) $
—
—
—
—
(39,945)
—
6,739
50,883
(2,095) $
—
—
—
—
(58,624)
—
7,648
42,815
(10,256) $
—
—
—
—
(71,102)
—
6,420
33,093
(41,845) $
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net increase in net assets from operations
Adjustments to reconcile net increase 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 loss (gain) on investments before income tax
Realized loss on extinguishment of debt
Realized loss on disposal of fixed assets
Net unrealized depreciation (appreciation) on investments before income tax
Accretion of discounts on investments
Payment-in-kind interest
Share-based compensation expense
Deferred income taxes
Changes in other assets and liabilities:
(Increase) decrease in dividend and interest receivable
Decrease (increase) in escrow receivables
(Increase) decrease in tax receivable
Decrease (increase) in other receivables
(Increase) decrease in other assets
(Decrease) increase in taxes payable
Increase in other liabilities
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
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow disclosures:
Cash paid for income taxes
Cash paid for interest
Years Ended
March 31,
2022
2023
2021
$
33,093 $
42,815 $
50,883
(433,200)
139,051
2,664
1,570
1,313
2,750
(24)
17,222
—
—
12,075
(3,842)
(5,965)
3,705
6,369
(6,803)
756
(209)
1,591
(128)
(1,085)
1,997
(227,100)
(281)
(281)
(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)
1,191
3,153
(182,675)
(1,995)
(1,995)
202,956
(102)
185,000
(155,000)
(1,248)
78,052
—
—
—
—
—
—
(71,102)
(1,021)
237,535
10,154
11,431
21,585 $
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 $
(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
(463)
6,779
(68,252)
—
—
50,410
—
182,000
(216,000)
(540)
—
49,000
138,571
—
(77,136)
—
—
(39,945)
(239)
86,121
17,869
13,744
31,613
1,896 $
25,466
461 $
18,404
1,464
11,738
$
$
The accompanying Notes are an integral part of these Consolidated Financial Statements.
73
Table of Contents
Portfolio Company
1,18
Non-control/Non-affiliate
5
Investments
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
2
Type of Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
360 QUOTE TOPCO, LLC
Revolving Loan
Media & marketing
6/16/2022
6/16/2027
$
3,250 $
3,209 $
3,006
SOFR+6.50% (Floor
1.00%)/Q, Current
Coupon 11.55%
SOFR+6.50% (Floor
1.00%)/Q, Current
Coupon 11.55%
Healthcare services
18.00% PIK
12/11/2020
6/25/2025
10,199
6/16/2022
6/16/2027
25,000
AAC NEW HOLDCO INC.
First Lien
19
10
First Lien
Delayed Draw Term
Loan
374,543 shares common
stock
Warrants (Expiration -
December 11, 2025)
ACACIA BUYERCO V LLC
Revolver Loan
10
Software & IT
services
First Lien - Term Loan A
10
Delayed Draw Term
Loan
1,000,000 Class B-2
Units
9,13
ACCELERATION, LLC
Revolving Loan
10
Media & marketing
First Lien - Term Loan A
First Lien - Term Loan B
10
First Lien - Term Loan C
Delayed Draw Term
Loan
13,451.22 Preferred
Units
1,611.22 Common
Units
9,13
9,13
24,674
27,883
10,199
270
1,785
2,198
14,452
(37)
23,125
26,131
9,842
264
716
881
11,703
—
274
—
—
—
18.00% PIK
1/31/2023
6/25/2025
—
—
12/11/2020
12/11/2020
—
—
11/25/2022
11/26/2027
SOFR+6.50% (Floor
1.00%)
SOFR+6.50% (Floor
1.00%)/Q, Current
Coupon 11.35%
SOFR+6.50% (Floor
1.00%)/Q, Current
Coupon 11.43%
11/25/2022
11/26/2027
5,000
4,905
4,920
11/25/2022
11/26/2027
7,500
7,332
7,380
—
11/25/2022
—
—
1,000
13,200
1,000
13,300
SOFR+8.50% (Floor
1.00%)/Q, Current
20
Coupon 13.56%
SOFR+7.50% (Floor
1.00%)/Q, Current
Coupon 12.35%
SOFR+8.50% (Floor
1.00%)/Q, Current
Coupon 13.35%
SOFR+9.50% (Floor
1.00%)/Q, Current
Coupon 14.35%
SOFR+8.50% (Floor
1.00%)
—
—
74
6/13/2022
6/14/2027
3,700
3,616
3,700
6/13/2022
6/14/2027
9,228
9,067
9,228
6/13/2022
6/14/2027
9,228
9,066
9,228
6/13/2022
6/14/2027
9,228
9,066
9,228
6/13/2022
6/14/2027
6/13/2022
6/13/2022
—
—
—
—
—
(42)
893
107
31,773
—
1,482
165
33,031
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
ACCELERATION PARTNERS,
LLC
8
First Lien
1,019 Preferred Units
1,019 Class A Common
Units
9,13
9,13
Media & marketing
Current Interest
3
Rate
SOFR+8.15% (Floor
1.00%)/Q, Current
20
Coupon 12.90%
—
12/1/2020
12/1/2020
12/1/2025
—
—
12/1/2020
—
19,550
—
—
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
ACE GATHERING, INC.
ALLIANCE SPORTS GROUP, L.P.
15
Second Lien
Unsecured convertible
Note
3.88% membership
preferred interest
Energy services
(midstream)
Consumer products &
retail
SOFR+12.00% (Floor
2.00%)/Q, Current
Coupon 16.85%
12/13/2018
12/13/2023
7,698
6.00% PIK
7/15/2020
9/30/2024
—
8/1/2017
—
173
—
19,162
1,019
14
20,195
7,668
173
2,500
2,673
19,550
1,223
—
20,773
7,082
201
2,691
2,892
AMERICAN NUTS OPERATIONS
LLC
First Lien - Term Loan A
Food, agriculture and
beverage
First Lien - Term Loan B
3,000,000 units of Class
A common stock
9,13
AMERICAN
TELECONFERENCING
SERVICES, LTD. (DBA
PREMIERE GLOBAL SERVICES,
INC.)
Revolving Loan
10,16
Telecommunications
First Lien
16
ARBORWORKS, LLC
Revolving Loan
10
Environmental services
First Lien
100 Class A Units
9,13
ASC ORTHO MANAGEMENT
COMPANY, LLC
2,572 Common Units
9,13
Healthcare services
SOFR+6.75%, 1.00%
PIK (Floor 1.00%)/Q,
Current Coupon
12.49%
SOFR+8.75%, 1.00%
PIK (Floor 1.00%)/Q,
Current Coupon
14.49%
3/11/2022
4/10/2026
11,716
11,667
10,978
3/11/2022
4/10/2026
11,716
11,667
9,958
—
4/10/2018
—
—
3,000
26,334
—
20,936
P+5.50%/Q (Floor
2.00%), Current
Coupon 9.00%
P+5.50%/Q (Floor
2.00%), Current
Coupon 9.00%
L+7.00%, 3.00% PIK
(Floor 1.00%)/Q,
Current Coupon
14.83%
L+7.00%, 3.00% PIK
(Floor 1.00%)/Q,
Current Coupon
14.85%
—
—
75
9/17/2021
4/7/2023
862
853
9/21/2016
6/8/2023
4,899
4,858
5,711
44
251
295
11/17/2021
11/9/2026
2,000
1,956
1,502
11/17/2021
11/17/2021
11/9/2026
—
12,610
—
12,417
100
14,473
9,470
—
10,972
8/31/2018
—
—
1,026
847
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
ATS OPERATING, LLC
Revolving Loan
10
Consumer products &
retail
First Lien - Term Loan A
First Lien - Term Loan B
1,000,000 Preferred
units
9,13
900,000 shares of
common stock
Distribution
1,131,579 Series A
Preferred units
89,335 Series C Preferred
units
9,13
9,13
Telecommunications
BINSWANGER HOLDING CORP.
BROAD SKY NETWORKS LLC
(DBA EPIC IO
TECHNOLOGIES)
C&M CONVEYOR, INC.
First Lien - Term Loan
A
15
Business services
First Lien - Term Loan
B
15
CADMIUM, LLC
Revolving Loan
Software & IT services
First Lien
CAMIN CARGO CONTROL,
INC.
First Lien
Energy services
(midstream)
CAVALIER BUYER, INC.
Revolving Loan
10
Healthcare services
First Lien
625,000 Preferred
Units
625,000 Class A-1
Units
9,13
9,13
Current Interest
3
Rate
SOFR+6.50% (Floor
1.00%)/Q, Current
Coupon 11.39%
SOFR+5.50% (Floor
1.00%)/Q, Current
Coupon 10.35%
SOFR+7.50% (Floor
1.00%)/Q, Current
Coupon 12.35%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
1/18/2022
1/18/2027
500
462
492
1/18/2022
1/18/2027
9,250
9,104
9,102
1/18/2022
1/18/2027
9,250
9,102
9,102
—
—
—
—
1/18/2022
3/9/2017
12/11/2020
10/21/2022
—
—
—
—
—
—
—
—
1,000
19,668
900
1,132
89
1,221
1,000
19,696
—
1,649
130
1,779
SOFR+7.50% (Floor
1.50%)/M, Current
Coupon 12.28%
SOFR+5.50% (Floor
1.50%)/M, Current
Coupon 10.28%
L+7.00% (Floor
1.00%)/Q, Current
Coupon 12.16%
L+7.00% (Floor
1.00%)/Q, Current
Coupon 12.16%
SOFR+6.50% (Floor
1.00%)/M, Current
Coupon 11.42%
SOFR+8.00% (Floor
2.00%)
SOFR+8.00% (Floor
2.00%)/Q, Current
Coupon 12.88%
—
—
76
1/3/2023
9/30/2026
6,500
6,377
6,377
1/3/2023
9/30/2026
6,500
6,377
12,754
6,377
12,754
1/7/2022
12/22/2026
615
611
594
1/7/2022
12/22/2026
7,385
7,326
7,937
7,134
7,728
6/2/2021
6/4/2026
5,692
5,652
5,692
2/10/2023
2/10/2028
—
(19)
—
2/10/2023
2/10/2028
6,500
2/10/2023
2/10/2023
—
—
—
—
6,372
625
—
6,978
6,372
625
—
6,997
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
CRAFTY APES, LLC
8
First Lien
Media & marketing
EVEREST TRANSPORTATION
SYSTEMS, LLC
First Lien
Transportation &
logistics
EXACT BORROWER, LLC
Revolving Loan
10
Media & marketing
First Lien - Term Loan A
10
First Lien - Term Loan B
Delayed Draw Term
Loan
Promissory Note
615.156 Common units
FLIP ELECTRONICS, LLC
First Lien
Technology products
& components
Delayed Draw Term
Loan
2,000,000 Common
Units
9,11,13
FM SYLVAN, INC.
Revolving Loan
10
Industrial services
First Lien
FOOD PHARMA SUBSIDIARY
HOLDINGS, LLC
First Lien
75,000 Class A Units
9,13
Food, agriculture &
beverage
Current Interest
3
Rate
SOFR+7.02% (Floor
1.00%)/Q, Current
20
Coupon 12.07%
SOFR+8.00% (Floor
1.00%)/M, Current
Coupon 12.91%
SOFR+7.50% (Floor
2.00%)
SOFR+7.50% (Floor
2.00%)/Q, Current
Coupon 12.24%
SOFR+7.50% (Floor
2.00%)/Q, Current
Coupon 12.24%
SOFR+7.50% (Floor
2.00%)
13.574%
SOFR+7.50% (Floor
1.00%)/Q, Current
20
Coupon 12.41%
SOFR+7.50% (Floor
1.00%)/Q, Current
Coupon 12.25%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
6/9/2021
11/1/2024
15,000
14,911
15,000
11/9/2021
8/26/2026
12/7/2022
8/6/2027
8,566
—
8,498
(47)
8,566
—
12/7/2022
8/6/2027
9,450
9,271
9,271
12/7/2022
8/6/2027
9,450
9,271
9,271
12/7/2022
12/7/2022
12/7/2022
8/6/2027
12/6/2028
—
—
385
—
(23)
385
615
—
385
770
19,472
19,697
1/4/2021
1/2/2026
31,845
31,214
31,845
3/24/2022
1/2/2026
2,818
2,777
2,818
—
1/4/2021
—
—
2,000
35,991
17,678
52,341
SOFR+8.00% (Floor
1.00%)/Q, Current
Coupon 12.94%
SOFR+8.00% (Floor
1.00%)/Q, Current
Coupon 12.85%
L+6.50% (Floor
1.00%)/Q, Current
Coupon 11.25%
—
77
11/8/2022
11/8/2027
2,000
1,816
2,000
11/8/2022
11/8/2027
11,963
6/1/2021
6/1/2021
6/1/2026
—
7,030
—
11,737
13,553
6,908
750
7,658
11,963
13,963
7,030
911
7,941
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
GAINS INTERMEDIATE, LLC
Revolving Loan
10
Business services
First Lien - Term Loan A
First Lien - Term Loan B
Delayed Draw Term
Loan
10
First Lien
1,500,000 Class A
Units
Warrants (Expiration -
February 10, 2033)
9,13
Transportation &
logistics
GUARDIAN FLEET SERVICES,
INC.
GULF PACIFIC ACQUISITION,
LLC
Revolving Loan
10
Food, agriculture &
beverage
First Lien
Delayed Draw Term
Loan
10
HYBRID APPAREL, LLC
Second Lien
15
INFOLINKS MEDIA BUYCO,
LLC
First Lien
Delayed Draw Term
Loan
1.68% LP interest
10
9,10,11,13
Consumer products &
retail
Media & marketing
Current Interest
3
Rate
SOFR+7.50% (Floor
2.00%)
SOFR+6.50% (Floor
2.00%)/Q, Current
Coupon 11.35%
SOFR+8.50% (Floor
2.00%)/Q, Current
Coupon 13.35%
SOFR+7.50% (Floor
2.00%)
SOFR+7.25%, 1.75%
PIK (Floor 2.50%)/Q,
Current Coupon
14.05%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
12/15/2022
12/15/2027
—
(47)
—
12/15/2022
12/15/2027
7,500
7,357
7,358
12/15/2022
12/15/2027
7,500
7,356
7,358
12/15/2022
12/15/2027
—
2/10/2023
2/10/2028
4,511
—
—
2/10/2023
2/10/2023
—
—
—
—
(162)
14,504
—
14,716
4,376
1,500
80
5,956
4,376
1,500
80
5,956
SOFR+6.00% (Floor
1.00%)/Q, Current
20
Coupon 10.99%
SOFR+6.00% (Floor
1.00%)/Q, Current
Coupon 11.05%
SOFR+6.00% (Floor
1.00%)/Q, Current
Coupon 11.11%
SOFR+8.25% (Floor
1.00%)/Q, Current
Coupon 13.10%
L+5.50% (Floor
1.00%)/Q, Current
Coupon 10.66%
L+5.50% (Floor
1.00%)
—
78
9/30/2022
9/29/2028
353
335
347
9/30/2022
9/29/2028
3,642
3,574
3,573
9/30/2022
9/29/2028
303
286
4,195
297
4,217
6/30/2021
6/30/2026
15,750
15,528
13,120
11/1/2021
10/30/2026
7,653
11/1/2021
10/29/2021
10/30/2026
—
—
—
7,537
(16)
588
8,109
7,653
—
944
8,597
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
ISI ENTERPRISES, LLC
Revolving Loan
10
Software & IT services
First Lien
1,000,000 Series A
Preferred units
ISLAND PUMP AND TANK, LLC Revolving Loan
10
Environmental services
First Lien
750,000 Preferred
units
9,13
JVMC HOLDINGS CORP.
First Lien
Financial services
KMS, INC.
15
First Lien
Distribution
Delayed Draw Term
Loan
10
LASH OPCO, LLC
Revolving Loan
10
Consumer products &
retail
First Lien
LGM PHARMA, LLC
First Lien
Healthcare products
Delayed Draw Term
Loan
Unsecured convertible
note
142,278.89 units of Class
A common stock
9,13
9,13
Current Interest
3
Rate
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q, Current
Coupon 11.75%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
10/1/2021
10/1/2026
—
(28)
—
10/1/2021
10/1/2026
—
10/1/2021
—
5,000
—
4,926
1,000
5,898
5,000
1,000
6,000
SOFR+7.50% (Floor
2.00%)/Q, Current
Coupon 12.67%
SOFR+7.50% (Floor
2.00%)/Q Current
Coupon 12.66%
3/2/2023
8/3/2026
500
471
471
3/2/2023
8/3/2026
9,000
8,823
8,823
—
3/2/2023
—
—
750
10,044
750
10,044
L+6.50% (Floor
1.00%)/M, Current
Coupon 11.34%
L+7.25% (Floor
1.00%)/Q, Current
Coupon 12.44%
L+7.25% (Floor
1.00%)/Q, Current
Coupon 12.44%
L+7.00% (Floor
1.00%)/S, Current
20
Coupon 11.89%
L+7.00% (Floor
1.00%)/S, Current
Coupon 11.84%
L+8.50% (Floor
1.00%), 1.00% PIK/Q,
Current Coupon
14.16%
L+10.00% (Floor
1.00%), 1.00% PIK/Q,
Current Coupon
15.66%
2/28/2019
2/28/2024
6,132
6,117
6,132
10/4/2021
10/2/2026
15,800
15,681
14,299
10/4/2021
10/2/2026
2,228
2,174
17,855
2,016
16,315
12/29/2021
9/18/2025
343
336
330
12/29/2021
3/18/2026
10,532
10,315
10,651
10,110
10,440
11/15/2017
11/15/2023
11,477
11,436
11,477
7/24/2020
11/15/2023
2,501
25.00% PIK
12/21/2021
12/31/2024
—
11/15/2017
—
113
—
79
2,491
113
1,600
15,640
2,501
113
1,692
15,783
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
LIGHTNING INTERMEDIATE II,
LLC (DBA VIMERGY)
Revolving Loan
10
Healthcare products
First Lien
0.88% LLC interest
9,13
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)
First Lien
Telecommunications
Second Lien
2,089,599 Series A
units
9,13
MICROBE FORMULAS LLC
Revolving Loan
10
Healthcare products
First Lien
MUENSTER MILLING
COMPANY, LLC
Revolving Loan
10
Food, agriculture &
beverage
First Lien
1,000,000 Class A
units
9,13
Current Interest
3
Rate
SOFR+6.50% (Floor
1.00%)
SOFR+6.50% (Floor
1.00%)/S, Current
Coupon 11.54%
—
L+9.00% (Floor
1.00%)/Q, Current
Coupon 13.75%
L+7.25% (Floor
0.75%)/S, Current
20
Coupon 11.89%
L+7.25% (Floor
0.75%)/Q, Current
Coupon 12.30%
L+8.00% (Floor
1.00%)/Q, Current
Coupon 12.75%
L+11.00% (Floor
1.00%)/Q, Current
Coupon 15.75%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
6/6/2022
6/7/2027
—
(31)
—
6/6/2022
6/6/2022
6/7/2027
—
22,714
—
22,318
600
22,887
22,305
416
22,721
8/16/2021
8/14/2026
10,835
10,656
10,131
3/15/2021
3/13/2026
943
921
939
3/15/2021
3/13/2026
7,879
7,778
8,699
7,839
8,778
12/6/2021
12/7/2026
12,344
12,150
11,949
12/6/2021
12/7/2026
2,759
2,715
2,593
—
12/6/2021
—
SOFR+6.25% (Floor
1.00%)
SOFR+6.25% (Floor
1.00%)/M, Current
Coupon 11.09%
SOFR+7.25% (Floor
1.00%)
SOFR+7.25% (Floor
1.00%)/Q, Current
Coupon 11.99%
4/4/2022
4/3/2028
4/4/2022
4/3/2028
11,621
—
—
—
14,865
(27)
11,421
11,394
770
15,312
—
11,505
11,505
8/10/2021
8/10/2026
—
(67)
—
8/10/2021
8/10/2026
21,800
21,457
21,800
—
12/15/2022
—
—
1,000
22,390
1,185
22,985
80
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
NATIONAL CREDIT CARE, LLC First Lien - Term Loan A Consumer services
First Lien - Term Loan B
191,049.33 Class A-3
Preferred units
9,11,13
NEUROPSYCHIATRIC
HOSPITALS, LLC
Revolving Loan
Healthcare services
First Lien - Term Loan A
First Lien - Term Loan B
First Lien - Term Loan C
NEW SKINNY MIXES, LLC
Revolving Loan
10
Food, agriculture &
beverage
First Lien
Delayed Draw Term
Loan
10
NINJATRADER, INC.
Revolving Loan
10
Financial services
First Lien
Delayed Draw Term
Loan
2,000,000 Preferred
Units
9,11,13
10
Current Interest
3
Rate
L+6.50% (Floor
1.00%)/Q, Current
Coupon 11.25%
L+7.50% (Floor
1.00%)/Q, Current
Coupon 12.25%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
12/23/2021
12/23/2026
9,716
9,564
9,550
12/23/2021
12/23/2026
9,716
9,563
9,550
—
3/17/2022
—
—
2,000
21,127
2,000
21,100
L+8.00% (Floor
1.00%)/Q, Current
Coupon 12.75%
L+7.00% (Floor
1.00%)/Q, Current
Coupon 11.75%
L+9.00% (Floor
1.00%)/Q, Current
Coupon 13.75%
SOFR+10.00% (Floor
1.00%)/Q, Current
Coupon 15.00%
SOFR+8.00% (Floor
2.00%)
SOFR+8.00% (Floor
2.00%)/Q, Current
Coupon 12.79%
SOFR+8.00% (Floor
2.00%)
L+6.25% (Floor
1.00%)
L+6.25% (Floor
1.00%)/Q, Current
Coupon 11.00%
L+6.25% (Floor
1.00%)
5/14/2021
5/14/2026
4,400
4,338
4,180
3/21/2023
5/14/2026
7,478
7,375
7,104
3/21/2023
5/14/2026
7,478
7,375
6,356
3/21/2023
5/14/2026
3,176
3,097
22,185
3,097
20,737
12/21/2022
12/21/2027
—
(76)
—
12/21/2022
12/21/2027
13,000
12,750
12,753
12/21/2022
12/21/2027
12/18/2019
12/18/2024
—
—
(28)
12,646
—
12,753
(3)
—
12/18/2019
12/18/2024
23,150
22,864
23,150
12/31/2020
12/18/2024
—
12/18/2019
—
—
—
(28)
2,000
24,833
—
11,138
34,288
NWN PARENT HOLDINGS, LLC Revolving Loan
10
Software & IT services
First Lien
SOFR+8.00% (Floor
1.00%)/Q, Current
20
Coupon 12.85%
SOFR+8.00% (Floor
1.00%)/Q, Current
Coupon 12.87%
81
5/7/2021
5/7/2026
1,020
997
1,006
5/7/2021
5/7/2026
12,688
12,519
13,516
12,510
13,516
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
OPCO BORROWER, LLC (DBA
GIVING HOME HEALTH CARE) Revolving Loan
10
Healthcare services
First Lien
Second Lien
Warrants (Expiration -
August 19, 2029)
9
PIPELINE TECHNIQUE LTD.
Revolving Loan
10
Energy services
(midstream)
First Lien
RESEARCH NOW GROUP, INC.
Second Lien
Business services
ROOF OPCO, LLC
Revolving Loan
10
Consumer services
First Lien
535,714.29 Class A
Units
9,13
RTIC SUBSIDIARY HOLDINGS,
LLC
Revolving Loan
10
Consumer products &
retail
First Lien
SCRIP INC.
8
First Lien
100 shares of common
stock
Healthcare products
Current Interest
3
Rate
SOFR+6.50% (Floor
1.00%)
SOFR+6.50% (Floor
1.00%)/M, Current
Coupon 11.50%
12.50%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
8/19/2022
8/19/2027
—
(7)
—
8/19/2022
8/19/2022
8/19/2027
2/19/2028
—
8/19/2022
—
9,052
3,000
—
8,970
2,755
207
11,925
9,052
3,000
399
12,451
P+6.25% (Floor
2.00%)/Q, Current
Coupon 14.25%
SOFR+7.25% (Floor
1.00%)/Q, Current
Coupon 12.32%
L+9.50% (Floor
1.00%)/S, Current
Coupon 14.31%
SOFR+6.50% (Floor
1.00%)
SOFR+6.50% (Floor
1.00%)/Q, Current
Coupon 11.35%
8/23/2022
8/19/2027
500
441
490
8/23/2022
8/19/2027
9,750
9,574
10,015
9,565
10,055
12/8/2017
12/20/2025
10,500
10,163
6,431
8/27/2021
8/27/2026
—
(42)
—
8/27/2021
8/27/2026
21,633
21,267
21,071
—
9/23/2022
—
—
750
21,975
750
21,821
SOFR+7.75% (Floor
1.25%)/M, Current
20
Coupon 12.56%
SOFR+7.75% (Floor
1.25%)/M, Current
Coupon 12.52%
L+10.98% (Floor
2.00%)/M, Current
Coupon 15.83%
—
82
9/1/2020
9/1/2025
822
813
715
9/1/2020
9/1/2025
6,166
6,123
6,936
5,364
6,079
3/21/2019
3/21/2024
16,750
16,634
15,594
3/21/2019
—
—
1,000
17,634
751
16,345
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
SHEARWATER RESEARCH,
9
INC.
Revolving Loan
10
Consumer products &
retail
First Lien
1,200,000 Class A
Preferred Units
40,000 Class A Common
Units
SIB HOLDINGS, LLC
Revolving Loan
Business services
First Lien
238,095.24 Common
Units
9,13
SOUTH COAST TERMINALS,
LLC
Revolving Loan
10
Specialty chemicals
First Lien
SPECTRUM OF HOPE, LLC
First Lien
1,000,000 Common
units
9,13
Healthcare services
SPOTLIGHT AR, LLC
Revolving Loan
10
Business services
First Lien
750 Common Units
9,11,13
SYSTEC CORPORATION (DBA
INSPIRE AUTOMATION)
Revolving Loan
10
Business services
First Lien
Current Interest
3
Rate
L+6.25% (Floor
1.00%)
L+6.25% (Floor
1.00%)/Q, Current
Coupon 11.06%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
4/30/2021
4/30/2026
—
(30)
—
4/30/2021
4/30/2026
13,643
13,462
13,643
—
—
4/30/2021
4/30/2021
—
—
—
—
978
33
14,443
2,558
85
16,286
L+6.25% (Floor
1.00%)/M, Current
20
Coupon 11.23%
L+6.25% (Floor
1.00%)/M, Current
Coupon 11.21%
10/29/2021
10/29/2026
702
694
681
10/29/2021
10/29/2026
11,382
11,235
11,040
—
10/29/2021
—
12/13/2021
12/11/2026
12/13/2021
12/11/2026
17,839
9/6/2022
6/11/2024
22,358
22,020
21,934
—
2/17/2023
—
—
—
500
12,429
(28)
17,560
17,532
411
12,132
—
17,839
17,839
—
—
7,481
—
1,000
23,020
(28)
7,370
750
8,092
1,000
22,934
—
7,481
972
8,453
12/8/2021
6/8/2026
12/8/2021
12/8/2021
6/8/2026
—
8/13/2021
8/13/2025
1,600
1,576
1,600
8/13/2021
8/13/2025
9,000
8,886
10,462
9,000
10,600
L+5.25% (Floor
1.00%)
L+5.25% (Floor
1.00%)/M, Current
Coupon 10.03%
SOFR+7.50% (Floor
1.00%)/M, Current
Coupon 12.24%
L+6.75% (Floor
1.00%)
L+6.75% (Floor
1.00%)/Q, Current
Coupon 11.50%
—
L+7.50% (Floor
1.00%)/Q, Current
20
Coupon 12.32%
L+7.50% (Floor
1.00%)/Q, Current
Coupon 12.25%
83
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
THE PRODUCTO GROUP, LLC
First Lien
1,500,000 Class A
units
9,13
Industrial products
Current Interest
3
Rate
SOFR+8.00% (Floor
1.00%)/M, Current
Coupon 12.92%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
12/31/2021
12/31/2026
17,655
17,355
17,655
—
12/31/2021
—
—
TRAFERA, LLC (FKA TRINITY
3, LLC)
US COURTSCRIPT HOLDINGS,
INC.
15
First Lien
Unsecured convertible
note
896.43 Class A units
9,13
9,11,13
Technology products
& components
L+6.50% (Floor
1.00%)/Q, Current
Coupon 11.26%
9/30/2020
9/30/2025
5,775
10.00% PIK
—
2/7/2022
11/15/2019
3/31/2026
—
92
—
9,13
First Lien
1,000,000 Class D-3 LP
Units
211,862.61 Class D-4 LP
Units
211,465.87 Class D-5 LP
Units
9,13
9,13
Business services
SOFR+6.00% (Floor
1.00%)/Q, Current
20
Coupon 10.87%
5/17/2022
5/17/2027
16,800
16,540
16,800
—
—
—
5/17/2022
10/31/2022
1/10/2023
—
—
—
—
—
—
1,000
1,354
212
211
278
275
17,963
18,707
1,500
18,855
7,833
25,488
5,727
92
1,205
7,024
5,775
92
1,509
7,376
USA DEBUSK, LLC
VERSICARE MANAGEMENT
LLC
First Lien
Industrial services
Revolving Loan
10
Healthcare services
First Lien - Term Loan A
Delayed Draw Term
Loan
10
L+5.75% (Floor
1.00%)/M, Current
Coupon 10.59%
SOFR+8.00% (Floor
1.00%)
SOFR+8.00% (Floor
1.00%)/Q, Current
Coupon 12.85%
SOFR+8.00% (Floor
1.00%)/Q, Current
Coupon 13.16%
VISTAR MEDIA INC.
VTX HOLDINGS, INC. (DBA
VERTEX ONE)
171,617 shares of Series
A preferred stock
1,597,707 Series A
Preferred units
9,13
9,13
Media & marketing
Software & IT services
—
—
84
2/25/2020
9/8/2026
11,498
11,367
11,498
8/18/2022
8/18/2027
—
(44)
—
8/18/2022
8/18/2027
13,500
13,256
13,257
8/18/2022
8/18/2027
2,400
4/3/2019
7/23/2019
—
—
—
—
2,332
15,544
1,874
1,598
2,357
15,614
9,054
2,694
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
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
Business services
ZIPS CAR WASH, LLC
First Lien
Delayed Draw Term
Loan - A
Delayed Draw Term
Loan - B
Consumer services
Total Non-control/Non-affiliate Investments (163.7% of net assets at fair value)
Current Interest
3
Rate
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q, Current
Coupon 11.75%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
7/19/2021
7/20/2026
—
(13)
—
7/19/2021
7/20/2026
10,588
10,436
10,588
—
7/19/2021
—
9/9/2021
9/9/2026
9/9/2021
9/9/2026
17,730
—
—
1,000
11,423
(64)
17,466
17,402
1,205
11,793
—
17,730
17,730
11/19/2021
11/19/2026
—
(65)
—
11/19/2021
11/19/2026
20,000
19,693
20,000
11/19/2021
11/19/2026
—
(32)
19,596
—
20,000
7/17/2017
7/17/2025
2,000
1,994
1,954
7/17/2017
7/17/2025
18,913
18,762
20,756
18,478
20,432
2/11/2022
3/1/2024
15,840
15,611
15,634
2/11/2022
3/1/2024
3,970
3,914
19,525
3,919
19,553
$
947,829 $
966,627
L+8.00% (Floor
1.00%)
L+8.00% (Floor
1.00%)/Q, Current
Coupon 12.75%
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q, Current
Coupon 11.75%
L+7.00% (Floor
1.00%)
SOFR+9.00% (Floor
1.00%)/Q, Current
Coupon 13.82%
SOFR+9.00% (Floor
1.00%)/Q, Current
Coupon 13.82%
SOFR+7.25% (Floor
1.00%)/M, Current
20
Coupon 12.15%
SOFR+7.25% (Floor
1.00%)/M, Current
20
Coupon 12.12%
85
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
6
Affiliate Investments
AIR CONDITIONING
SPECIALIST, INC.
Revolving Loan
10
Consumer services
First Lien
766,738.93 Preferred
Units
9,13
CATBIRD NYC, LLC
Revolving Loan
10
Consumer products &
retail
First Lien
1,000,000 Class A
units
500,000 Class B
9,10,11,13
units
9,11,13
CENTRAL MEDICAL SUPPLY
LLC
Revolving Loan
10
Healthcare services
First Lien
Delayed Draw Capex
10
Term Loan
1,380,500 Preferred
Units
9,13
SOFR+7.25% (Floor
1.00%)/Q, Current
Coupon 12.40%
SOFR+7.25% (Floor
1.00%)/Q, Current
20
Coupon 12.12%
11/9/2021
11/9/2026
$
800 $
766 $
800
11/9/2021
11/9/2026
27,438
26,940
27,438
—
11/9/2021
—
10/15/2021
10/15/2026
—
—
809
28,515
(57)
1,202
29,440
—
SOFR+7.00% (Floor
1.00%)
SOFR+7.00% (Floor
1.00%)/Q, Current
Coupon 11.88%
L+9.00% (Floor
1.75%)/Q, Current
Coupon 13.75%
L+9.00% (Floor
1.75%)/Q, Current
Coupon 13.75%
L+9.00% (Floor
1.75%)/Q, Current
Coupon 13.75%
10/15/2021
10/15/2026
15,500
15,265
15,500
—
—
10/15/2021
10/15/2021
—
—
—
—
1,000
1,658
500
16,708
714
17,872
5/22/2020
5/22/2025
300
287
296
5/22/2020
5/22/2025
7,500
7,427
7,402
—
5/22/2020
5/22/2020
5/22/2025
—
—
1/4/2016
100
—
—
87
976
8,777
1,500
CHANDLER SIGNS, LLC
1,500,000 units of Class
A-1 common stock
9,13
Business services
DELPHI BEHAVIORAL HEALTH
GROUP, LLC
Protective Advance
16
First Lien
16
Healthcare services
16
First Lien
1,681.04 Common Units
—
L+16.70% PIK (Floor
1.00%)/Q, Current
Coupon 21.06%
L+11.00% PIK (Floor
1.00%)/S, Current
Coupon 15.74%
L+9.00% PIK (Floor
1.00%)/S, Current
Coupon 14.13%
—
86
8/31/2021
4/7/2023
1,448
1,448
4/8/2020
4/7/2023
1,649
1,649
4/8/2020
4/8/2020
4/7/2023
—
1,829
—
1,829
3,615
8,541
99
357
8,154
3,215
—
—
—
—
—
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
DYNAMIC COMMUNITIES, LLC First Lien - Term Loan A Business services
Current Interest
3
Rate
Acquisition
Date
14
SOFR+4.50% PIK
(Floor 2.00%)/Q,
Current Coupon 9.41% 12/20/2022
Maturity
Principal
Cost
12,17
4
Fair Value
12/31/2026
3,846
3,826
3,823
9,13
First Lien - Term Loan B
250,000 Class A
Preferred Units
5,435,211.03 Class B
Preferred Units
255,984.22 Class C
Preferred Units
2,500,000 Common
units
9,13
9,13
9,13
GPT INDUSTRIES, LLC
Revolving Loan
10
Industrial products
19
First Lien
1,000,000 Class A
9,13
Preferred Units
GRAMMATECH, INC.
Revolving Loan
10
Software & IT services
First Lien
1,000 Class A units
360.06 Class A-1 units
SOFR+6.50% PIK
(Floor 2.00%)/ Q,
Current Coupon
11.41%
—
—
—
—
SOFR+9.00% (Floor
2.00%)
SOFR+9.00% (Floor
2.00%)/Q, Current
Coupon 13.93%
12/20/2022
12/31/2026
3,867
12/20/2022
12/20/2022
12/20/2022
12/20/2022
—
—
—
—
1/30/2023
1/31/2028
—
—
—
—
—
1/30/2023
1/31/2028
6,150
—
1/30/2023
—
SOFR+9.50% (Floor
2.00%)
SOFR+9.50% (Floor
2.00%)/Q, Current
Coupon 14.24%
—
—
11/1/2019
11/1/2024
11/1/2019
11/1/2019
1/10/2022
11/1/2024
—
—
—
—
10,031
—
—
87
3,844
250
2,218
—
—
3,843
625
2,218
—
—
10,138
10,509
(58)
—
6,030
1,000
6,972
(14)
9,967
1,000
360
11,313
6,030
1,000
7,030
—
10,031
—
372
10,403
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
ITA HOLDINGS GROUP, LLC
Revolving Loan
Transportation &
logistics
First Lien - Term Loan
First Lien - Term B Loan
First Lien - PIK Note A
First Lien - PIK Note B
Warrants (Expiration -
March 29, 2029)
9.25% Class A
Membership Interest
9,13
9,13
LIGHTING RETROFIT
INTERNATIONAL, LLC (DBA
ENVOCORE)
Environmental services
10
16
Revolving Loan
First Lien
Second Lien
208,333.3333 Series A
Preferred units
203,124.9999 Common
units
9,13
9,13
OUTERBOX, LLC
Revolving Loan
10
Media & marketing
First Lien
6,308.2584 Class A
common units
9,13
SOFR+9.00%, 0.50%
PIK (Floor 1.00%)/Q,
Current Coupon
14.35%
SOFR+8.00%, 0.50%
PIK (Floor 1.00%)/Q,
Current Coupon
13.35%
SOFR+11.00%, 0.50%
PIK (Floor 1.00%)/Q,
Current Coupon
16.35%
10.00% PIK
10.00% PIK
—
—
7.50%
7.50%
10.00% PIK
—
—
SOFR+6.75% (Floor
1.00%)
SOFR+6.75% (Floor
1.00%)/Q, Current
20
Coupon 11.56%
—
88
2/14/2018
5/12/2023
7,000
6,974
7,014
2/14/2018
5/12/2023
10,114
10,139
10,114
6/5/2018
3/29/2019
3/29/2019
3/29/2019
2/14/2018
5/12/2023
5/12/2023
5/12/2023
—
—
12/31/2021
12/31/2021
12/31/2021
12/31/2021
12/31/2021
12/31/2025
12/31/2025
12/31/2026
—
—
6/8/2022
6/8/2027
5,057
3,271
129
—
—
—
5,143
5,208
—
—
—
5,056
3,259
129
538
1,500
27,595
—
5,143
5,208
—
—
5,068
3,255
128
4,046
4,348
33,973
—
5,143
3,594
—
—
10,351
8,737
(25)
—
6/8/2022
6/8/2027
14,625
14,428
14,552
6/8/2022
—
—
631
15,034
773
15,325
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2023
Portfolio Company
1,18
2
Type of Investment
Industry
ROSELAND MANAGEMENT,
LLC
Revolving Loan
10
Healthcare services
First Lien
3,364 Class A-2 Units
1,100 Class A-1 Units
16,084 Class A Units
SONOBI, INC.
500,000 Class A
Common Units
9,13
Media & marketing
STATINMED, LLC
First Lien
Healthcare services
STUDENT RESOURCE CENTER
LLC
Delayed Draw Term
Loan
4,718.62 Class A
Preferred Units
39,097.96 Class B
Preferred Units
First Lien
10,502,487.46 Preferred
Units
2,000,000.00 Preferred
Units
9,13
Current Interest
3
Rate
SOFR+8.00%,2.00%
PIK (Floor 2.00%)/Q,
Current Coupon
14.74%
SOFR+8.00%, 2.00%
PIK (Floor 2.00%)/Q,
Current Coupon
14.74%
—
—
—
—
SOFR+9.50% PIK
(Floor 2.00%)/M,
Current Coupon
14.28%
SOFR+9.50% PIK
(Floor 2.00%)/M,
Current Coupon
14.28%
—
—
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
11/9/2018
11/12/2024
575
566
555
11/9/2018
3/31/2023
9/26/2022
11/9/2018
11/12/2024
—
—
—
15,051
—
—
—
15,008
202
66
1,517
17,359
14,524
694
161
422
16,356
9/17/2020
—
—
500
1,749
7/1/2022
7/1/2027
7,288
7,288
7,288
12/23/2022
4/15/2023
7/1/2022
7/1/2022
—
—
122
—
—
122
4,838
1,400
13,648
8,727
5,845
—
14,572
122
3,767
—
11,177
8,720
5,845
—
14,565
Education
8.50% PIK
12/31/2022
12/30/2027
8,889
—
—
12/31/2022
12/31/2022
—
—
—
—
Total Affiliate Investments (31.9% of net assets at fair value)
$
191,523 $
188,505
7
Control Investments
9, 10, 11
I-45 SLF LLC
80% LLC equity interest Multi-sector holdings
—
10/20/2015
—
Total Control Investments (8.7% of net assets at fair value)
TOTAL INVESTMENTS (204.3% of net assets at fair value)
— $
$
80,800 $
80,800 $
51,256
51,256
$
1,220,152 $
1,206,388
89
Table of Contents
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
All debt investments are income-producing, unless otherwise noted. Equity investments 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 Secured Overnight Financing Rate ("SOFR"), London Interbank Offered Rate (“LIBOR” or
“L”), or Prime (“P”) and reset daily (D), monthly (M), quarterly (Q), or semiannually (S). For each investment, the Company has provided the spread over SOFR, LIBOR or Prime
and the current contractual interest rate in effect at March 31, 2023. Certain investments are subject to an interest rate floor. Certain investments, as noted, accrue payment-in-kind
("PIK") interest. SOFR based contracts may include a credit spread adjustment (the "Adjustment") that is charged in addition to the stated spread. The Adjustment is applied when the
SOFR rate, plus the Adjustment, exceeds the stated floor rate, as applicable. As of March 31, 2023, SOFR based contracts in the portfolio had Adjustments ranging from 0.10% to
0.26161%.
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 - Fair Value Measurements 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, 2023, approximately 80.1% 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 163.7%.
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, 2023, approximately 15.6% of the Company’s investment assets were affiliate investments. The fair value of these investments as a percent of net
assets is 31.9%.
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, 2023, approximately 4.2% of the
Company’s investment assets were control investments. The fair value of these investments as a percent of net assets is 8.7%.
The investment is structured as a first lien last out term loan.
Indicates assets that are not considered "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, 2023, approximately 13.9% of the Company's assets were non-qualifying assets.
The investment has an unfunded commitment as of March 31, 2023. Refer to Note 11 - Commitments and Contingencies for further discussion.
Income producing through dividends or distributions.
As of March 31, 2023, the cumulative gross unrealized appreciation for U.S. federal income tax purposes was approximately $72.3 million; cumulative gross unrealized depreciation
for federal income tax purposes was $76.8 million. Cumulative net unrealized depreciation was $4.5 million, based on a tax cost of $1,210.8 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, 2023 represented 204.3% of the Company's net assets or 95.9% 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, 2023, meaning the Company has ceased to recognize interest income on the investment.
Negative cost in this column represents the original issue discount of certain undrawn revolvers and delayed draw term loans.
90
Table of Contents
18
19
20
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.
The investment is structured as a first lien first out term loan.
The rate presented represents a weighted-average rate for borrowings under the facility as of March 31, 2023.
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, 2023 is included in Note 15 - Significant
Subsidiaries.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
91
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
4
Fair Value
5
Non-control/Non-affiliate Investments
AAC NEW HOLDCO INC.
First Lien
374,543 Common
Warrants (Expiration -
December 11, 2025)
ACCELERATION PARTNERS, LLC
8
First Lien
1,000 Preferred Units
1,000 Class A Common
Units
9,13
9,13
Healthcare services
10.00%, 8.00% PIK
—
12/11/2020
12/11/2020
6/25/2025
—
$
8,653 $
—
8,653 $
1,785
Media & marketing
—
12/11/2020
—
—
L+8.17% (Floor
1.00%)/Q, Current
Coupon 9.17%
—
12/1/2020
12/1/2020
12/1/2025
—
—
12/1/2020
—
11,875
—
—
ACE GATHERING, INC.
Second Lien
15
ALLIANCE SPORTS GROUP, L.P.
Unsecured convertible note
3.88% preferred membership
interest
Energy services
(midstream)
Consumer products &
retail
L+8.50% (Floor
2.00%)/Q, Current
Coupon 10.50%
12/13/2018
12/13/2023
7,948
6.00% PIK
7/15/2020
9/30/2024
—
8/1/2017
—
173
—
AMERICAN NUTS OPERATIONS
LLC
First Lien - Term Loan A
Food, agriculture and
beverage
First Lien - Term Loan B
3,000,000 units of Class A
common stock
9,13
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
—
—
9/17/2021
6/30/2022
9/21/2016
6/8/2023
899
4,899
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%
92
8,350
1,785
2,198
12,333
11,875
1,153
—
13,028
7,765
495
3,681
4,176
2,198
12,636
11,600
1,000
—
12,600
7,881
173
2,500
2,673
3,000
27,776
890
4,858
5,748
4,195
29,095
49
269
318
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
ARBORWORKS, LLC
Revolving Loan
10
Environmental services
First Lien
100 Class A Units
ASC ORTHO MANAGEMENT
COMPANY, LLC
2,156 Common Units
9,13
Healthcare services
ATS OPERATING, LLC
Revolving Loan
10
Consumer products &
retail
First Lien - Term Loan A
First Lien - Term Loan B
1,000,000 Preferred units
9,13
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%
—
L+8.50% (Floor
1.00%)/M, Current
Coupon 9.50%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
11/17/2021
11/9/2026
—
(56)
—
11/17/2021
11/17/2021
11/9/2026
—
12,903
—
8/31/2018
—
—
1/18/2022
1/18/2027
1,000
12,660
100
12,704
801
952
12,657
100
12,757
584
952
1/18/2022
1/18/2027
9,250
9,071
9,071
1/18/2022
1/18/2022
1/18/2027
—
9,250
—
9,071
1,000
20,094
9,071
1,000
20,094
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%
93
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
7,314
7,616
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
CALIFORNIA PIZZA KITCHEN,
INC.
48,423 shares of common
stock
Restaurants
CAMIN CARGO CONTROL, INC.
First Lien
Energy services
(midstream)
CITYVET, INC.
Delayed Draw Term Loan
9,13
271,739 Class A units
10
Healthcare services
8
CRAFTY APES, LLC
First Lien
Media & marketing
DUNN PAPER, INC.
Second Lien
Paper & forest products
EVEREST TRANSPORTATION
SYSTEMS, LLC
First Lien
Transportation &
logistics
FAST SANDWICH, LLC
Revolving Loan
10
Restaurants
First Lien
FLIP ELECTRONICS, LLC
First Lien
Technology products &
components
Delayed Draw Term Loan
2,000,000 Common
Units
9,11,13
10
FOOD PHARMA SUBSIDIARY
HOLDINGS, LLC
First Lien
Food, agriculture &
beverage
Delayed Draw Term Loan
75,000 Class A Units
9,13
10
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
—
L+6.50% (Floor
1.00%)/Q, Current
Coupon 7.50%
L+6.50% (Floor
1.00%)/Q, Current
Coupon 7.50%
—
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%)
11/23/2020
—
—
1,317
2,090
6/2/2021
6/4/2026
5,752
5,702
5,700
3/5/2021
3/5/2021
3/5/2026
—
13,000
—
12,656
500
13,156
13,247
1,757
15,004
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
5/24/2018
5/23/2023
8,938
—
5/24/2018
5/23/2023
3,277
8,853
(22)
3,262
3,240
8,848
—
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
L+6.50% (Floor
1.00%)/M, Current
Coupon 7.50%
L+6.50% (Floor
1.00%)/M, Current
Coupon 7.50%
—
94
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
2
Type of Investment
Industry
GS OPERATING, LLC
Revolving Loan
10
Distribution
First Lien
Delayed Draw Term Loan
10
HYBRID APPAREL, LLC
Second Lien
15
Consumer products &
retail
INFOLINKS MEDIA BUYCO, LLC
First Lien
Media & marketing
Delayed Draw Term Loan
1.68% LP interest
9,10,13
10
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
First Lien
15
Distribution
Delayed Draw Term Loan
10
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
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
—
2/28/2019
2/28/2024
11/13/2020
11/13/2025
5,000
—
6,589
—
4,908
1,000
6,672
6,558
(13)
5,000
1,000
6,800
6,589
—
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
Current Interest
3
Rate
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%
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%)
95
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
LASH OPCO, LLC
Revolving Loan
10
Consumer products &
retail
First Lien
Delayed Draw Term Loan
10
LGM PHARMA, LLC
First Lien
Healthcare products
Delayed Draw Term Loan
Unsecured convertible
note
142,278.89 units of Class A
common stock
9,13
9,13
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)
First Lien
Telecommunications
Second Lien
2,089,599 Series A units
9,13
Current Interest
3
Rate
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%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
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
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
12/6/2021
12/7/2026
—
3,292
—
3,229
—
15,461
3,229
1,536
16,997
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%
—
96
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
MUENSTER MILLING COMPANY,
LLC
Revolving Loan
10
Food, agriculture &
beverage
First Lien
Delayed Draw Term Loan
10
NATIONAL CREDIT CARE, LLC
First Lien - Term Loan A
Consumer services
First Lien - Term Loan B
191,049.33 Class A-3
Preferred units
9,13
NEUROPSYCHIATRIC HOSPITALS,
LLC
Revolving Loan
10
Healthcare services
First Lien
Delayed Draw Term Loan
10
NINJATRADER, INC.
Revolving Loan
10
Financial services
First Lien
Delayed Draw Term Loan
2,000,000 Preferred
Units
9,11,13
10
Current Interest
3
Rate
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%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
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
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
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%
97
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
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
SCRIP, INC.
8
First Lien
100 shares of common stock
Healthcare products
9
SHEARWATER RESEARCH, INC.
Revolving Loan
10
Consumer products &
retail
First Lien
10
Delayed Draw Term Loan
1,200,000 Class A Preferred
Units
40,000 Class A Common
Units
SIB HOLDINGS, LLC
Revolving Loan
10
Business services
First Lien
Delayed Draw Term Loan
238,095.24 Common
Units
9,13
10
Current Interest
3
Rate
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%
—
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%)
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
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
3/21/2019
3/21/2019
3/21/2024
—
16,750
—
6,870
8,227
16,521
1,000
17,521
6,933
8,303
16,750
1,601
18,351
4/30/2021
4/30/2026
—
(40)
—
4/30/2021
4/30/2026
13,794
13,561
13,545
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
—
98
—
—
—
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
Revolving Loan
10
Business services
First Lien
750 Common Units
9,13
STUDENT RESOURCE CENTER
LLC
Revolving Loan
10
Education
First Lien
2,000 Preferred Units
9,13
SYSTEC CORPORATION (DBA
INSPIRE AUTOMATION)
Revolving Loan
10
Business services
First Lien
Delayed Draw Term Loan
10
THE PRODUCTO GROUP, LLC
First Lien
1,500,000 Class A units
9,13
Industrial products
TRAFERA, LLC (FKA TRINITY 3,
LLC)
Technology products &
components
15
First Lien
Unsecured convertible
note
896.43 Class A units
9,13
9,11,13
USA DEBUSK, LLC
First Lien
Industrial services
Current Interest
3
Rate
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%
—
L+7.75%(Floor
1.00%)/Q, Current
Coupon 8.75%
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
12/13/2021
12/11/2026
—
(36)
—
12/13/2021
12/11/2026
18,019
12/8/2021
6/8/2026
—
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
—
17,676
17,640
(37)
7,359
750
8,072
(23)
18,489
2,000
20,466
17,749
17,749
—
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
—
12/31/2021
12/31/2021
12/31/2026
—
12,644
—
8,844
(25)
9,635
12,401
1,500
13,901
8,820
—
9,653
12,391
1,500
13,891
9/30/2020
9/30/2025
9,875
9,764
9,835
10.00% PIK
—
2/7/2022
11/15/2019
3/31/2026
—
84
—
84
1,205
11,053
84
3,000
12,919
2/25/2020
9/8/2026
11,614
11,451
11,614
L+5.75% (Floor
1.00%)/M, Current
Coupon 6.75%
99
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
4
Fair Value
VISTAR MEDIA INC.
VTX HOLDINGS, INC. (DBA
VERTEX ONE)
171,617 shares of Series A
preferred stock
1,597,707 Series A Preferred
units
Media & marketing
—
4/3/2019
Software & IT services
7/23/2019
—
—
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 Loan -
B
10
Total Non-control/Non-affiliate Investments (177.5% of net assets at fair value)
7/19/2021
7/20/2026
7/19/2021
7/20/2026
10,863
10,670
10,656
—
7/19/2021
—
—
—
—
1,874
1,598
(17)
9,273
2,082
—
—
—
1,000
11,653
(83)
17,583
17,500
1,000
11,656
—
17,910
17,910
9/9/2021
9/9/2026
9/9/2021
9/9/2026
17,910
11/19/2021
11/19/2026
2,444
2,362
2,386
11/19/2021
11/19/2026
20,000
11/19/2021
11/19/2026
—
19,624
(41)
21,945
19,520
—
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
—
L+7.00% (Floor
1.00%)
L+7.00% (Floor
1.00%)/Q, Current
Coupon 8.00%
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%
100
Table of Contents
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
6
Affiliate Investments
AIR CONDITIONING SPECIALIST,
INC.
Revolving Loan
10
Consumer services
First Lien
623,693.55 Preferred
Units
9,13
CATBIRD NYC, LLC
Revolving Loan
10
Consumer products &
retail
First Lien
1,000,000 Class A units
500,000 Class B units
9,13
9,10,13
CENTRAL MEDICAL SUPPLY LLC Revolving Loan
10
Healthcare services
First Lien
10
Delayed Draw Capex Term
Loan
1,380,500 Preferred Units
9,13
CHANDLER SIGNS, LLC
1,500,000 units of Class A-1
common stock
9,13
Business services
DELPHI BEHAVIORAL HEALTH
GROUP, LLC
First Lien
Healthcare services
First Lien
Protective Advance
1,681.04 Common Units
Current Interest
3
Rate
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
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
10/15/2021
10/15/2021
10/15/2021
10/15/2026
—
—
—
—
15,900
—
—
624
13,141
(73)
15,606
1,000
500
17,033
634
13,169
—
15,884
1,221
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
5/22/2020
5/22/2025
—
1/4/2016
—
100
—
—
81
976
8,736
1,500
97
641
8,288
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
4/8/2020
4/7/2023
—
526
—
526
3,615
7,414
526
2,460
5,860
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%
—
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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
DYNAMIC COMMUNITIES, LLC
Revolving Loan
10
Business services
First Lien
Senior subordinated debt
2,000,000 Preferred Units
9,13
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
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
29, 2029)
9.25% Class A Membership
Interest
9,11,13
9,13
LIGHTING RETROFIT
INTERNATIONAL, LLC (DBA
ENVOCORE)
Environmental services
10
16
Revolving Loan
First Lien
Second Lien
208,333.3333 Series A
Preferred units
203,124.9999 Common
units
9,13
9,13
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
7/17/2018
7/17/2023
—
(1)
—
7/17/2018
12/4/2020
7/17/2018
7/17/2023
1/16/2024
—
11,221
650
—
11,147
650
2,000
13,796
10,323
650
1,274
12,247
11/1/2019
11/1/2024
—
(22)
—
11/1/2019
11/1/2019
1/10/2022
0
11/1/2024
—
—
11,500
—
—
11,384
1,000
56
12,418
9,775
674
38
10,487
2/14/2018
2/14/2023
750
733
750
2/14/2018
2/14/2023
10,071
10,041
10,041
6/5/2018
3/29/2019
3/29/2019
3/29/2019
2/14/2018
12/31/2021
12/31/2021
12/31/2021
12/31/2021
12/31/2021
2/14/2023
2/14/2023
2/14/2023
—
—
12/31/2025
12/31/2025
12/31/2026
—
—
5,036
2,959
117
—
—
—
5,195
5,208
—
—
5,010
2,721
117
538
1,500
20,660
—
5,195
5,208
—
—
5,061
2,959
117
3,199
3,063
25,190
—
4,780
3,104
—
—
10,403
7,884
Current Interest
3
Rate
L+8.50% (Floor
1.00%)
L+8.50% (Floor
1.00%)/Q, Current
Coupon 9.51%
25.00% PIK
—
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%
10.00% PIK
10.00% PIK
—
—
7.50%
7.50%
10.00% PIK
—
—
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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2022
Portfolio Company
1,18
2
Type of Investment
Industry
ROSELAND MANAGEMENT, LLC
Revolving Loan
10
Healthcare services
First Lien
16,084 Class A Units
SIMR, LLC
16
First Lien
9,374,510.2 Class B
Common Units
904,903.31 Class W Units
Healthcare services
SONOBI, INC.
500,000 Class A Common
Units
9,13
Media & marketing
Total Affiliate Investments (31.3% of net assets at fair value)
7
Control Investments
I-45 SLF LLC
9,10,11
80% LLC equity interest
Multi-sector holdings
Total Control Investments (13.7% of net assets at fair value)
TOTAL INVESTMENTS (222.5% of net assets at fair value)
Current Interest
3
Rate
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%
—
—
—
—
Acquisition
Date
14
Maturity
Principal
Cost
12,17
4
Fair Value
11/9/2018
11/9/2023
575
564
575
11/9/2018
11/9/2018
11/9/2023
—
14,125
—
9/7/2018
9/7/2023
13,235
9/7/2018
2/4/2021
9/17/2020
—
—
—
—
—
—
14,021
1,517
16,102
13,101
6,107
—
19,208
500
14,125
1,905
16,605
10,588
—
—
10,588
2,960
$
140,911 $
131,879
10/20/2015
—
— $
$
$
76,000 $
76,000 $
57,603
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.
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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 13. Significant
Subsidiaries.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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1. ORGANIZATION AND BASIS OF PRESENTATION
Notes to Consolidated Financial Statements
References in this Quarterly Report on Form 10-Q 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. CSWC has elected to be regulated as a business development company under the 1940 Act.
Our common stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.”
We have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes 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 U.S. federal income tax at corporate rates
on any ordinary income or capital gains that we 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 timely 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. We may be subject to U.S. federal income tax and a 4% U.S. federal excise tax on any income that we do not
timely distribute to our shareholders. Our U.S. federal income tax liability may be reduced to the extent that we make certain distributions during the following calendar
year and satisfy other procedural requirements.
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.
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 U.S. federal income tax purposes must consist of qualifying
investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.
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 a small business investment company ("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 financial reporting purposes under generally accepted accounting principles in the United States ("U.S. GAAP"), 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.
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
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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 its total assets in qualifying assets. As of March 31, 2023, the
Company has 86.1% of its 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; and
(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; and
(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");
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
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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.
For the quarter ended March 31, 2023, we satisfied all RIC requirements and have 11.3% 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. At
March 31, 2023 and March 31, 2022, cash held in money market funds amounted to $8.9 million and $6.5 million, respectively. 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, 2023 and March 31, 2022, cash balances totaling $20.3 million and $10.2 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
the Taxable Subsidiary and SBIC I. 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.
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
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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, 2023, investments on non-accrual status represented approximately 0.3% of our
total investment portfolio's fair value and approximately 1.3% of its cost. As of March 31, 2022, investments on non-accrual status represented approximately 1.5% of
our total investment portfolio's fair value and approximately 2.6% of its cost.
To maintain RIC tax treatment, non-cash sources of income such as accretion of interest income may need to be paid out to shareholders in the form of
distributions, even though CSWC may not have collected the interest income. For the years ended March 31, 2023 and 2022, approximately 3.2% and 3.7%, respectively,
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 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, 2023 and March 31, 2022, we have not
written off any accrued and uncollected PIK interest from prior periods. For the year ended March 31, 2023, we had three investments for which we stopped accruing
PIK interest. For the year ended March 31, 2022, we had two investments for which we stopped accruing PIK interest. For the years ended March 31, 2023 and 2022,
approximately 4.6% and 3.9%, 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 may 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 our shelf registration statement and expenses related to the launch of the
"at-the-market" ("ATM") program through which we can sell, from time to time, shares of our common stock (the "Equity ATM Program"). These expenses consist
primarily of SEC registration fees, legal fees and accounting fees incurred related thereto. These expenses are included in other assets on the Consolidated
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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 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 lease does 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 U.S. federal income taxes at corporate rates 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
rate U.S. 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 U.S. federal income
tax paid at corporate rates 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.
The Taxable Subsidiary, a wholly-owned subsidiary of CSWC, is not a RIC and is required to pay taxes at the corporate rate of 21%. For tax purposes, the
Taxable Subsidiary has elected to be treated as a taxable entity, and therefore is not consolidated for tax purposes and is taxed at normal corporate tax rates based on
taxable income and, as a result of its activities, may generate 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
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meet the recognition of measurement criteria of ASC Topic 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, 2023,
2022 and 2021.
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 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"), which became
effective on July 28, 2021, 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 and shareholders approved the Capital Southwest Corporation 2021 Non-Employee Director Restricted Stock Plan (the
"Non-Employee Director Plan"), which became effective on July 27, 2022, 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 covers both employees and non-
employee directors of the Board of Directors.
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, generally are 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 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 and certain 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. On December 21, 2022, the FASB issued ASU 2022-06 "Reference rate reform (Topic 848)—Deferral of the Sunset Date of Topic 848," which defers
the sunset date of ASC 848 until December 31, 2024. ASU 2022-06 became effective upon issuance. The expedients and exceptions provided by the amendments do not
apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2024, except for hedging transactions as of December 31, 2024,
that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company does not believe it will have a
material impact on its consolidated financial statements or its disclosure and did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the
year ended March 31, 2023.
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In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale
Restrictions,” which was issued to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to
contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity
securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The new guidance is effective for interim and annual
periods beginning after December 15, 2023. The Company is currently evaluating the impact of the new standard on the Company's consolidated financial statements and
related disclosures and does not believe it will have a material impact on its consolidated financial statements or its disclosure.
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3. INVESTMENTS
The following table shows the composition of the investment portfolio, at fair value and cost (with corresponding percentage of total portfolio investments) as of
March 31, 2023 and March 31, 2022:
March 31, 2023:
1,2
First lien loans
2
Second lien loans
3
Subordinated debt
Preferred equity
Common equity & warrants
4
I-45 SLF LLC
March 31, 2022:
1,2
First lien loans
2
Second lien loans
3
Subordinated debt
Preferred equity
Common equity & warrants
4
I-45 SLF LLC
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of Net
Assets
at Fair Value
(dollars in thousands)
Cost
Percentage of
Total Portfolio
at Cost
$
$
$
$
1,000,984
35,820
791
63,393
54,144
51,256
1,206,388
739,872
52,645
1,317
44,663
40,514
57,603
936,614
83.0 %
3.0
0.1
5.2
4.5
4.2
100.0 %
79.0 %
5.6
0.1
4.8
4.3
6.2
100.0 %
169.5 % $
6.1
0.1
10.7
9.2
8.7
204.3 % $
175.8 % $
12.5
0.3
10.6
9.6
13.7
222.5 % $
1,018,595
44,038
763
43,634
32,322
80,800
1,220,152
745,290
55,976
994
25,544
34,499
76,000
938,303
83.5 %
3.6
0.1
3.6
2.6
6.6
100.0 %
79.4 %
6.0
0.1
2.7
3.7
8.1
100.0 %
1
2
3
4
Included in first lien loans are loans structured as first lien last out loans. These loans may, in certain cases, be subordinated in payment priority to other senior secured lenders. As
of March 31, 2023 and March 31, 2022, the fair value of the first lien last out loans are $50.1 million and $38.6 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, 2023 and March 31, 2022, the fair value of the split lien term loans included in first lien loans
is $45.0 million and $36.4 million, respectively. As of March 31, 2023 and March 31, 2022, the fair value of the split lien term loans included in second lien loans is $20.2 million
and $33.9 million, respectively.
Included in subordinated debt are unsecured convertible notes with a fair value of $0.4 million and $0.7 million as of March 31, 2023 and March 31, 2022, 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 15 for further
discussion.
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The following tables show the composition of the investment portfolio by industry, at fair value and cost (with corresponding percentage of total portfolio
investments) as of March 31, 2023 and March 31, 2022:
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of Net
Assets
at Fair Value
(dollars in thousands)
Cost
Percentage of
Total Portfolio
at Cost
March 31, 2023:
Media & Marketing
Business Services
Healthcare Services
Consumer Services
Consumer Products and Retail
Food, Agriculture & Beverage
Healthcare Products
Technology Products & Components
1
I-45 SLF LLC
Transportation & Logistics
Software & IT Services
Financial Services
Industrial Products
Environmental Services
Education
Industrial Services
Energy Services (Midstream)
Specialty Chemicals
Energy Services (Upstream)
Telecommunications
Distribution
Containers & Packaging
Aerospace & Defense
$
$
149,357
146,727
126,971
91,913
86,385
68,833
66,355
59,718
51,256
48,494
47,641
40,420
32,518
29,753
26,357
25,460
22,829
17,839
17,730
17,386
16,315
10,131
6,000
1,206,388
12.4 %
12.2
10.5
7.6
7.2
5.7
5.5
5.0
4.2
4.0
3.9
3.3
2.7
2.5
2.2
2.1
1.9
1.5
1.5
1.4
1.4
0.8
0.5
100.0 %
113
25.3 % $
24.9
21.5
15.6
14.6
11.7
11.2
10.1
8.7
8.2
8.1
6.8
5.5
5.0
4.5
4.3
3.9
3.0
3.0
2.9
2.8
1.7
1.0
204.3 % $
139,750
147,056
143,455
91,142
86,607
73,223
67,555
43,016
80,800
42,049
47,563
30,950
25,827
34,869
25,995
24,920
23,337
17,531
17,402
21,796
18,755
10,656
5,898
1,220,152
11.5 %
12.1
11.8
7.5
7.1
6.0
5.5
3.5
6.6
3.4
3.9
2.5
2.1
2.9
2.1
2.0
1.9
1.4
1.4
1.9
1.5
0.9
0.5
100.0 %
Table of Contents
March 31, 2022:
Business Services
Consumer Products & Retail
Healthcare Services
Consumer Services
1
I-45 SLF LLC
Distribution
Food, Agriculture & Beverage
Media & Marketing
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
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of Net
Assets
at Fair Value
(dollars in thousands)
Cost
Percentage of
Total Portfolio
at Cost
$
$
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 %
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 %
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 in I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests directly. See Note 15 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 fair value and cost (with
corresponding percentage of total portfolio investments), as of March 31, 2023 and March 31, 2022:
March 31, 2023:
Northeast
Southeast
Southwest
West
Midwest
1
I-45 SLF LLC
International
March 31, 2022:
Northeast
Southwest
West
Southeast
Midwest
1
I-45 SLF LLC
International
Fair Value
Percentage of
Total Portfolio
at Fair Value
Percentage of Net
Assets
at Fair Value
(dollars in thousands)
Cost
Percentage of
Total Portfolio
at Cost
$
$
$
$
269,569
235,782
234,127
233,079
156,233
51,256
26,342
1,206,388
225,578
206,057
163,924
136,588
132,308
57,603
14,556
936,614
22.3 %
19.5
19.4
19.3
13.1
4.2
2.2
100.0 %
24.1 %
22.0
17.5
14.6
14.1
6.1
1.6
100.0 %
45.7 % $
39.9
39.6
39.5
26.4
8.7
4.5
204.3 % $
53.6 % $
49.0
38.9
32.5
31.4
13.7
3.4
222.5 % $
255,995
236,333
231,467
232,109
158,989
80,800
24,459
1,220,152
221,780
204,443
153,292
138,929
129,354
76,000
14,505
938,303
21.0 %
19.4
19.0
19.0
13.0
6.6
2.0
100.0 %
23.6 %
21.8
16.3
14.9
13.8
8.1
1.5
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 geographic regions, which are similar to those in which CSWC invests directly. See Note 15 for further discussion.
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.
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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 determining, in good faith, the fair value of CSWC’s investments in accordance with
the 1940 Act.
Fair Value Hierarchy
CSWC has established and documented processes for determining the fair values of portfolio company investments on a recurring basis in accordance with the
1940 Act and ASC 820. As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair
value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value
measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized appreciation and depreciation related to such
investments categorized within the Level 3 tables below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and
unobservable inputs (Level 3). CSWC conducts reviews of fair value hierarchy classifications on a quarterly basis. We also use judgment and consider factors specific to
the investment in determining the significance of an input to a fair value measurement.
The three levels of valuation inputs established by ASC 820 are as follows:
•
•
•
Level 1: Investments whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Investments whose values are based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3: Investments whose values are based on unobservable inputs that are significant to the overall fair value measurement.
As of March 31, 2023 and March 31, 2022, 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 CSWC's valuation policy and procedures that are
established by the management of CSWC, with assistance from multiple third-party valuation advisors and approved by our Board of Directors.
Investment Valuation Inputs
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date excluding transaction costs. Under ASC 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;
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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;
•
•
•
•
• market yields on other securities of similar risk;
•
•
•
•
•
•
•
•
•
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;
qualitative assessment of key management;
contractual rights, obligations or restrictions associated with the investment; and
other factors deemed relevant.
CSWC uses several different valuation approaches depending on the security type including the Market Approach, the Income Approach, the Enterprise Value
Waterfall Approach, and the NAV Valuation Method.
Market Approach
Market Approach is a qualitative and quantitative analysis of the aforementioned unobservable inputs. It is a combination of the Enterprise Value Waterfall
Approach and Income Approach as described in detail below. For investments recently originated (within a quarterly reporting period) or where the value has not
departed significantly from its cost, we generally rely on our cost basis or recent transaction price to determine the fair value, unless a material event has occurred since
origination.
Income Approach
In valuing debt securities, CSWC typically uses an Income Approach model, which considers some or all of the factors listed above. Under the Income
Approach, CSWC develops an expectation of the yield that a hypothetical market participant would require when purchasing each debt investment (the “Required
Market Yield”). The Required Market Yield is calculated in a two-step process. First, using quarterly market data we estimate the current market yield of similar debt
securities. Next, based on the factors described above, we modify the current market yield for each security to produce a unique Required Market Yield for each of our
investments. The resulting Required Market Yield is the significant Level 3 input to the Income Approach model. If, with respect to an investment, the unobservable
inputs have not fluctuated significantly from the date the investment was made or have not fluctuated significantly from CSWC’s expectations on the date the investment
was made, and there have been no significant fluctuations in the market pricing for such investments, we may conclude that the Required Market Yield for that
investment is equal to the stated rate on the investment. In instances where CSWC determines that the Required Market Yield is different from the stated rate on the
investment, we discount the contractual cash flows on the debt instrument using the Required Market Yield in order to estimate the fair value of the debt security.
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.
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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, 2023 and March 31, 2022 (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 Category
First lien loans
Second lien loans
Subordinated debt
Preferred equity
Common equity & warrants
1
Investments measured at net asset value
Total Investments
$
$
$
$
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
Fair Value Measurements
at March 31, 2023 Using
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
1,000,984
35,820
791
63,393
54,144
—
1,155,132
Total
1,000,984 $
35,820
791
63,393
54,144
51,256
1,206,388 $
Fair Value Measurements
at March 31, 2022 Using
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
Total
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
739,872 $
52,645
1,317
44,663
40,514
57,603
936,614 $
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
739,872
52,645
1,317
44,663
40,514
—
879,011
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 NAV per share at March 31, 2023 and March 31, 2022, 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.
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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, 2023 and March 31, 2022. 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.
Type
Valuation
Technique
Fair Value at
March 31, 2023
(in thousands)
Significant
Unobservable
Inputs
First lien loans
Income Approach
$
953,918 Discount Rate
Market Approach
Enterprise Value
Waterfall Approach
Second lien loans
Income Approach
Enterprise Value
Waterfall Approach
Market Approach
Enterprise Value
Waterfall Approach
Enterprise Value
Waterfall Approach
Market Approach
Enterprise Value
Waterfall Approach
Market Approach
Subordinated debt
Preferred equity
Common equity &
warrants
Total Level 3
Investments
Third Party Broker Quote
41,923 Cost
5,143 EBITDA Multiple
Discount Rate
32,226 Discount Rate
Third Party Broker Quote
3,594 EBITDA Multiple
Discount Rate
205 Cost
586 EBITDA Multiple
Discount Rate
59,518 EBITDA Multiple
Discount Rate
3,875 Cost
53,064 EBITDA Multiple
Discount Rate
1,080 Cost
$
1,155,132
120
Range
6.9% - 26.2%
5.1 - 96.5
94.1 - 98.1
9.4x - 9.4x
27.2% - 27.2%
18.3% - 34.3%
61.3 - 61.3
9.4x - 9.4x
27.2% - 27.2%
100.0 - 100.0
6.0x - 7.7x
20.2% - 25.0%
4.7x - 16.7x
11.7% - 30.8%
100.0 - 100.0
5.5x - 18.6x
11.4% - 36.6%
100.0 - 100.0
Weighted
Average
13.0%
93.9
97.9
9.4x
27.2%
25.1%
61.3
9.4x
27.2%
100.0
6.6x
21.8%
9.8x
17.1%
100.0
9.5x
18.2%
100.0
Table of Contents
Type
Valuation
Technique
Fair Value at
March 31, 2022
(in thousands)
Significant
Unobservable
Inputs
First lien loans
Income Approach
$
645,034 Discount Rate
Market Approach
Second lien loans
Income Approach
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
Subordinated debt
Preferred equity
Common equity &
warrants
Total Level 3
Investments
Changes in Fair Value Levels
Third Party Broker Quote
94,838 Cost
Exit Value
49,541 Discount Rate
Third Party Broker Quote
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
$
879,011
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
Weighted
Average
10.7%
93.2
98.1
101.8
15.4%
97.3
8.3x
22.1%
27.4%
100.0
8.1x
20.5
10.6x
17.8%
100.0
8.5x
18.1%
351.4
158.7
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, 2023 and 2022, we had no transfers between levels.
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The following tables provide a summary of changes in the fair value of investments measured using Level 3 inputs during the year ended March 31, 2023 and
2022 (in thousands):
Fair Value March
31, 2022
Realized &
Unrealized Gains
(Losses)
Purchases of
1
Investments
Repayments
PIK Interest
Capitalized
Divestitures
Conversion/Reclassification
of Security
Fair Value March
31, 2023
YTD Un
Apprec
(Deprecia
Investmen
period
$
739,872 $
(17,150) $
415,332 $
(128,932) $
5,577 $
— $
(13,715) $
1,000,984 $
(
52,645
1,317
44,663
40,514
(7,127)
(398)
(3,360)
10,547
2,990
385
7,788
5,747
(12,310)
—
—
—
314
74
—
—
(692)
—
—
(2,664)
—
(587)
14,302
—
35,820
791
63,393
54,144
$
879,011 $
(17,488) $
432,242 $
(141,242) $
5,965 $
(3,356) $
— $
1,155,132 $
Fair Value March
31, 2021
Realized &
Unrealized Gains
(Losses)
Purchases of
1
Investments
Repayments
PIK Interest
Capitalized
Divestitures
Conversion/Reclassification
of Security
Fair Value March
31, 2022
YTD Un
Apprec
(Deprecia
Investmen
period
$
524,161 $
719 $
464,758 $
(247,538) $
2,455 $
— $
(4,683) $
739,872 $
36,919
11,534
22,608
36,052
(2,325)
422
11,889
12,035
18,902
364
10,691
4,308
(7,223)
1,217
(11,521)
—
—
518
—
—
(53)
—
—
(11,881)
5,208
—
(525)
—
52,645
1,317
44,663
40,514
$
631,274 $
22,740 $
499,023 $
(266,282) $
4,190 $
(11,934) $
— $
879,011 $
First lien loans
Second lien
loans
Subordinated
debt
Preferred equity
Common equity
& warrants
Total
Investments
First lien loans
Second lien
loans
Subordinated
debt
Preferred equity
Common equity
& warrants
Total
Investments
1
Includes purchases of new investments, as well as discount accretion on existing investments.
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5. BORROWINGS
In accordance with the 1940 Act, effective April 25, 2019, the Company is only allowed to borrow amounts such that its asset coverage (i.e., the ratio of assets
less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940 Act, is at least 150% after such borrowing.
The Board of Directors also approved a resolution which limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any
such issuance, would not be less than 166%, which became effective April 25, 2019. On August 11, 2021, we received an exemptive order from 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, 2023, the Company’s asset coverage was 235%.
The Company had the following borrowings outstanding as of March 31, 2023 and March 31, 2022 (amounts in thousands):
March 31, 2023
SBA Debentures
Credit Facility
January 2026 Notes
October 2026 Notes
March 31, 2022
SBA Debentures
Credit Facility
January 2026 Notes
October 2026 Notes
Outstanding Balance
Unamortized Debt Issuance Costs and
Debt Discount/Premium
(1)
Recorded Value
$
$
$
$
120,000 $
235,000
140,000
150,000
645,000 $
40,000 $
205,000
140,000
150,000
535,000 $
(3,670) $
—
(949)
(2,737)
(7,356) $
(1,648) $
—
(1,286)
(3,478)
(6,412) $
116,330
235,000
139,051
147,263
637,644
38,352
205,000
138,714
146,522
528,588
(1)
The unamortized debt issuance costs for the Credit Facility are reflected as Debt issuance costs on the Consolidated Statements of Assets and Liabilities.
Credit Facility
In August 2016, CSWC entered into a senior secured credit facility (the “Credit Facility”) to provide additional liquidity to support its investment and
operational activities.
On August 9, 2021, CSWC entered into the Second Amended and Restated Senior Secured Revolving Credit Agreement (as amended or otherwise modified
from time to time, 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.
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 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 Adjusted Term SOFR. In addition, CSWC entered into an Incremental
Commitment Agreement, pursuant to which the total commitments under the Credit Agreement increased from $335 million to $380 million. On November 16, 2022,
CSWC entered into an Incremental Assumption Agreement that
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increased the total commitments of the Credit Agreement by $20 million, which increased total commitments from $380 million to $400 million. The $20 million
increase was provided by one existing lender and one new lender, bringing the total bank syndicate to eleven participants.
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 Agreement 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 Agreement, 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, 2023, 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, 2023, CSWC had $235.0 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 $13.2 million, $6.2 million and $6.8 million for the years ended March 31, 2023,
2022 and 2021, respectively. The weighted average interest rate on the Credit Facility was 5.22% and 2.50% for the years ended March 31, 2023 and 2022, respectively.
Average borrowings for the years ended March 31, 2023 and 2022 were $213.7 million and $173.5 million, respectively. As of March 31, 2023 and 2022, CSWC was in
compliance with all financial covenants under the Credit Agreement.
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 the October 2024 Notes 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 $125.0 million 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 did not recognize any interest expense related to the October 2024 Notes for the year ended March 31, 2023. For the years ended March 31, 2022
and 2021, the Company recognized interest expense related to the October 2024 Notes, including amortization of deferred issuance costs, of $3.6 million and
$6.3 million, respectively. From April 1, 2021 through September 24, 2021 (the redemption date of the October 2024 Notes), average borrowings were $125.0 million.
The October 2024 Notes had a weighted average effective yield of 5.375%.
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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 have 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, 2023, the carrying amount of the January 2026 Notes was $139.1 million on an aggregate principal amount of $140.0 million at a weighted
average effective yield of 4.46%. As of March 31, 2023, the fair value of the January 2026 Notes was $122.8 million. This is a Level 3 fair value measurement under
ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to the January 2026 Notes, including
amortization of deferred issuance costs, of $6.6 million, $6.7 million and $1.2 million for the years ended March 31, 2023, 2022 and 2021, respectively. For each of the
years ended March 31, 2023 and 2022, average borrowings were $140.0 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 have 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, 2023, the carrying amount of the October 2026 Notes was $147.3 million on an aggregate principal amount of $150.0 million at a weighted
average effective yield of 3.5%. As of March 31, 2023, the fair value of the October 2026 Notes was $132.2 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 October 2026 Notes, including
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amortization of deferred issuance costs, of $5.8 million and $3.1 million for the years ended March 31, 2023 and 2022, respectively. For the year ended March 31, 2023,
average borrowings were $150.0 million. 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. On November 22,
2022, SBIC I received an additional leverage commitment in the amount of $50.0 million to be issued on or prior to September 30, 2027. As of March 31, 2023, SBIC I
had regulatory capital of $65.0 million and leverageable capital of $65.0 million. As of March 31, 2023, SBIC I had a total leverage commitment from the SBA in the
amount of $130.0 million, of which $10.0 million remains unused. 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, 2023, the carrying amount of SBA Debentures was $116.3 million on an aggregate principal amount of $120.0 million. As of March 31, 2023,
the fair value of the SBA Debentures was $115.8 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 820. The Company recognized interest expense and fees related to SBA Debentures of $3.2 million and $0.3 million for the years ended March 31,
2023 and 2022, respectively. The weighted average interest rate on the SBA Debentures was 3.38% and 1.30% for the years ended March 31, 2023 and 2022,
respectively. For the years ended March 31, 2023 and 2022, average borrowings were $82.6 million and $17.0 million, respectively.
As of March 31, 2023, the Company's issued and outstanding SBA Debentures mature as follows (amounts in thousands):
Pooling Date (1)
9/22/2021
3/23/2022
9/21/2022
3/22/2023
Maturity Date
9/1/2031
3/1/2032
9/1/2032
3/1/2033
126
Fixed Interest Rate
1.575%
3.209%
4.435%
5.215%
$
$
March 31, 2023
15,000
25,000
40,000
40,000
120,000
Table of Contents
(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.
Contractual Payment Obligations
A summary of the Company's contractual payment obligations for the repayment of outstanding indebtedness at March 31, 2023 is as follows:
SBA Debentures
Credit Facility
January 2026 Notes
October 2026 Notes
Total
6. INCOME TAXES
Years Ending March 31,
2024
2025
2026
2027
2028
Thereafter
Total
$
$
— $
—
—
—
— $
— $
—
—
—
— $
— $
—
140,000
—
140,000 $
— $
235,000
—
150,000
385,000 $
— $
—
—
—
— $
120,000 $
—
—
—
120,000 $
120,000
235,000
140,000
150,000
645,000
We have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes 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 capital gains that is distributed to its shareholders, including “deemed distributions” as discussed
below. As part of maintaining RIC tax treatment, undistributed taxable income and capital gain, 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 and (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, 2022, 2021 and 2020, CSWC qualified for RIC tax treatment. We intend to meet the applicable qualifications to be taxed
as a RIC in future periods. However, the Company’s ability to meet certain portfolio diversification requirements of RICs in future years may not be controllable by the
Company.
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, 2023, CSWC declared a quarterly dividend in the amount of $20.9 million, or $0.58 per share
($0.53 per share in regular dividends and $0.05 per share in supplemental dividends). Our distributions for the tax years ended December 31, 2022 and 2021 were as
follows:
Payment Date
Tax Year Ended December 31, 2022
March 31, 2022
1
June 30, 2022
September 30, 2022
2
December 31, 2022
Tax Year Ended December 31, 2021
3
March 31, 2021
3
June 30, 2021
3
September 30, 2021
4
December 31, 2021
127
Cash Dividend
0.48
0.63
0.50
0.57
2.18
0.52
0.53
0.54
0.97
2.56
$
$
$
$
Table of Contents
Tax Year Ended December 31, 2020
3
March 31, 2020
3
June 30, 2020
3
September 30, 2020
3
December 31, 2020
$
$
0.51
0.51
0.51
0.51
2.04
1
2
3
4
On June 30, 2022, CSWC paid a regular dividend of $0.48 per share and a special dividend of $0.15 per share.
On December 31, 2022, CSWC paid a regular dividend of $0.52 per share and a supplemental dividend of $0.05 per share.
On each of these dates, the 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.
Book and tax basis differences relating to dividends and distributions to our shareholders 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 U.S. GAAP; accordingly, for the years ended March 31, 2023 and 2022, CSWC reclassified for book purposes amounts arising from permanent book/tax
differences related to the tax treatment of return of capital and/or deemed distributions, tax treatment of investments upon disposition, and non-deductible expenses, as
follows (amounts in thousands):
Additional capital
Total distributable earnings
Years Ended March 31,
2023
2022
$
(6,420) $
6,420
(7,648)
7,648
The determination of the tax attributes for CSWC’s distributions is made after tax year end, based upon its taxable income for the full year and distributions paid
for the full tax year. Therefore, any determination made on an interim basis for fiscal year end is forward-looking based on currently available facts, rules and
assumptions and may not be representative of the actual tax attributes of distributions determined at tax year end.
For tax purposes, the 2022 dividends totaled $2.18 per share and were comprised entirely of ordinary income. In addition, 89.74% of each of the ordinary
distributions represent interest-related dividends. 89.74% 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 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.
Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate 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, 2022 and 2021 was as follows (amounts in thousands):
Ordinary income
Distributions of long term capital gains
1
Distributions on tax basis
1
Includes only those distributions which reduce estimated taxable income.
Twelve Months Ended December 31,
2022
2021
$
$
60,960 $
—
60,960 $
56,633
—
56,633
As of March 31, 2023, CSWC estimates that it has cumulative undistributed taxable income of approximately $16.1 million, or $0.45 per share, that will be
carried forward toward distributions to be paid in future periods. We intend to meet the applicable qualifications to be taxed as a RIC in future periods.
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Table of Contents
The following reconciles net increase in net assets resulting from operations to estimated RIC taxable income for the years ended March 31, 2023, 2022 and
2021:
1
Reconciliation of RIC Distributable Income
Net increase in net assets from operations
Net unrealized depreciation (appreciation) on investments
Income/gain (expense/loss) recognized for tax on pass-through entities
(Gain) loss recognized on dispositions
2
Capital loss carryover
Net operating income - wholly-owned subsidiary
Dividend income from wholly-owned subsidiary
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
Years Ended March 31,
2023
2022
2021
33,093 $
18,589
962
(1,473)
12,796
809
1,068
628
(2,726)
3,243
812
3,343
1,191
72,335 $
70,034 $
—
—
—
2,301 $
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)
$
$
$
$
1
2
3
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.
At March 31, 2023, the Company had long-term capital loss carryforwards of $30.2 million to offset future capital gains. These capital loss carryforwards are not subject to
expiration.
Includes only those distributions which reduce estimated distributable income.
As of March 31, 2023, 2022 and 2021, 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
2023
Years Ended March 31,
2022
2021
$
$
16,070 $
(30,201)
(61,710)
(13,639)
(89,480) $
12,682 $
(17,252)
(20,126)
—
(24,696) $
21,083
(17,924)
(766)
(663)
1,730
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 net capital gains by designating them as a “deemed distribution” to its shareholders and paying a federal tax on
the net capital gains for the benefit of its shareholders. Shareholders then report their share of the retained capital gains on their income tax returns as if it had been
received and report a tax credit for tax paid on their behalf by the RIC. Shareholders then add the amount of the “deemed distribution” net of such tax to the basis of their
shares. For the tax years ended December 31, 2022, 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.
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Table of Contents
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 U.S. federal income tax purposes must consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionate amount of any gross income
of a partnership or LLC (or other pass-through entity) portfolio investment would flow through directly to us. To the extent that 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 U.S. federal income taxes at corporate rates. 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 tax treatment 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. The 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, 2023, the cost of investments held at the RIC for U.S. federal income tax purposes was $1,172.7 million, with such investments having gross
unrealized appreciation of $10.5 million and gross unrealized depreciation of $72.3 million, resulting in net unrealized depreciation of $61.8 million. As of March 31,
2023, the cost of investments held at the Taxable Subsidiary for U.S. federal income tax purposes was $38.1 million, with such investments having gross unrealized
appreciation of $61.8 million and gross unrealized depreciation of $4.5 million, resulting in net unrealized appreciation of $57.3 million. On a consolidated basis, the
total investment portfolio has net unrealized depreciation of $4.5 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, 2023 and March 31,
2022, the Taxable Subsidiary had a deferred tax liability of $12.1 million and $5.7 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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Table of Contents
The following table sets forth the significant components of the deferred tax assets and liabilities as of March 31, 2023 and March 31, 2022 (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
March 31, 2023
March 31, 2022
$
$
— $
219
219
(11,413)
(923)
(12,336)
(12,117) $
—
185
185
(4,899)
(1,033)
(5,932)
(5,747)
The income tax provision, or benefit, and the related tax assets and liabilities, generated by CSWC and the Taxable Subsidiary, if any, are reflected in CSWC’s
consolidated financial statements. For the year ended March 31, 2023, we recognized a net income tax provision of $0.3 million, principally consisting of a $0.6 million
accrual for U.S. federal excise tax and a $0.3 million tax benefit relating to the Taxable Subsidiary. For the year ended March 31, 2022, we recognized a 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, 2019 through December 31, 2021.
The following table sets forth the significant components of income tax provision as of March 31, 2023, 2022 and 2021 (amounts in thousands):
Components of Income Tax Provision
162(m) limitation
Excise tax
Write-off of deferred tax asset
Tax (benefit) provision related to Taxable Subsidiary
Stock compensation benefits
Other
Total income tax provision (benefit)
2023
Years Ended March 31,
2022
2021
$
$
— $
630
—
(301)
—
—
329 $
— $
65
—
550
—
—
615 $
122
637
1,837
50
(207)
3
2,442
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7. SHAREHOLDERS' EQUITY
Public Equity Offering
On November 17, 2022, the Company completed an underwritten public equity offering of 2,534,436 shares of common stock, including shares issuable
pursuant to the underwriters' option to purchase additional shares, at a public offering price of $18.15 per share, raising $46.0 million of gross proceeds. Net proceeds
were $44.1 million after deducting underwriting discounts and offering expenses.
Equity ATM Program
On March 4, 2019, the Company established 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. On August 2, 2022, the Company
increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $650,000,000 from $250,000,000.
The following table summarizes certain information relating to shares sold under the Equity ATM Program:
Number of shares sold
Gross proceeds received (in thousands)
1
Net proceeds received (in thousands)
Weighted average price per share
Years Ended March 31,
2023
2022
8,435,462
161,216 $
158,798 $
19.11 $
3,872,031
99,636
98,142
25.73
$
$
$
1
Net proceeds reflects proceeds after deducting commissions to the sales agents on shares sold and offering expenses. As of March 31, 2023, no proceeds remained receivable. As
of March 31, 2022, $1.7 million in proceeds remained receivable and was included in other receivables in the Consolidated Statement of Assets and Liabilities..
Cumulative to date, the Company has sold 16,613,122 shares of its common stock under the Equity ATM Program at a weighted-average price of $20.75,
raising $344.7 million of gross proceeds. Net proceeds were $339.1 million after commissions to the sales agents on shares sold. As of March 31, 2023, the Company has
$305.3 million available under the Equity ATM Program.
Share Repurchases
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, which became effective on July 28, 2021, 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 and shareholders approved the Capital Southwest Corporation 2021 Non-Employee Director Restricted Stock
Plan (the "Non-Employee Director Plan"), which became effective on July 27, 2022, 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 covers both employees
and non-employee directors of the Board of Directors. The following table summarizes certain information relating to shares repurchased in connection with the vesting
of restricted stock awards:
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Table of Contents
Number of shares repurchased
Aggregate cost of shares repurchased (in thousands)
Weighted average price per share
Years Ended March 31,
2023
2022
$
$
49,590
1,021 $
20.59 $
52,124
1,408
27.01
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 years ended March 31, 2023 and 2022, the Company did not repurchase any shares under the share
repurchase program.
8. STOCK BASED COMPENSATION PLANS
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 packages 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, 2023, there are 1,005,633 shares of common stock available for issuance under the 2021 Employee Plan.
In addition, the Company's Board of Directors and shareholders approved the Non-Employee Director Plan as part of the compensation package for non-
employee directors of the Board of Directors. Under the Non-Employee Director Plan, at the beginning of each one-year term of service on our Board, each non-
employee director will receive a number of shares equivalent to $50,000 based on the market value at the close of the Nasdaq Global Select Market on the date of grant.
These shares will vest one year from the date of the grant and are expensed over the one-year term of non-employee directors. The Non-Employee Director Plan makes
available for issuance 120,000 shares of common stock. As of March 31, 2023, there are 107,895 shares of common stock available for issuance under the Non-
Employee Director 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, 2023, 2022, and 2021, we recognized total share based compensation expense of $3.7 million (of which $0.2 million was
related to restricted stock issued to non-employee directors), $3.6 million and $2.9 million, respectively, related to the restricted stock issued.
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.
As of March 31, 2023, the total remaining unrecognized compensation expense related to non-vested restricted stock awards was $7.0 million, which will be
amortized over the weighted-average vesting period of approximately 2.3 years.
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The following table summarizes the restricted stock outstanding under the 2010 Plan and the 2021 Employee Plan as of March 31, 2023:
Restricted Stock Awards
Unvested at March 31, 2021
Granted
Vested
Forfeited
Unvested at March 31, 2022
Granted
Vested
Forfeited
Unvested at March 31, 2023
Number of Shares
Weighted Average
Fair Value Per
Share at grant date
Weighted Average
Remaining Vesting
Term (in Years)
429,776 $
172,945
(167,072)
(39,656)
395,993 $
199,042
(148,774)
(13,550)
432,711 $
17.05
27.60
17.71
16.07
21.48
21.25
20.49
24.71
21.61
The following table summarizes the restricted stock outstanding under the Non-Employee Director Plan as of March 31, 2023:
Restricted Stock Awards
Unvested at March 31, 2022
Granted
Vested
Forfeited
Unvested at March 31, 2023
9. OTHER EMPLOYEE COMPENSATION
Number of Shares
Weighted Average
Fair Value Per
Share at grant date
Weighted Average
Remaining Vesting
Term (in Years)
— $
12,105
—
—
12,105 $
—
20.66
—
—
20.66
2.5
—
—
—
2.4
—
—
—
2.4
—
—
—
—
0.4
We established a 401(k) plan (the “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 year ended March 31, 2023, 2022 and 2021, we made matching contributions of approximately $0.2 million.
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10. RETIREMENT PLANS
CSWC sponsors an unfunded Retirement Restoration Plan, which is a nonqualified 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, 2023, 2022 and 2021, as well
as amounts recognized in our Consolidated Statements of Assets and Liabilities at March 31, 2023 and 2022 (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 (gain) loss
Benefits paid
Benefit obligation at end of year
Amounts recognized in our Consolidated Statements of Assets and Liabilities
Projected benefit obligation
Net actuarial (gain) loss recognized as a component of equity
Total
Accumulated benefit obligation
Years ended March 31,
2023
2022
2021
$
$
90 $
33
123 $
79 $
37
116 $
96
35
131
Years ended March 31,
2023
2022
2021
$
$
2,707 $
90
(2,052)
(147)
598 $
2,979 $
79
(104)
(247)
2,707 $
3,082
96
42
(241)
2,979
Years ended March 31,
2023
2022
$
$
$
(598) $
(1,128)
(1,726) $
(2,707)
957
(1,750)
(598) $
(2,707)
The corridor approach is used to amortize the actuarial gains or losses based on 10% of the projected benefit obligation. The increase in the actuarial gain in the
current year was primarily due to the death of a retired participant in the Retirement Restoration Plan.
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Table of Contents
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,
2023
2022
2021
5.00 %
3.50 %
2.75 %
Years ended March 31,
2023
2022
2021
3.50 %
2.75 %
3.25 %
Following are the expected benefit payments for the next five years and in the aggregate for the years 2029-2033 (amounts in thousands):
2028
2025
2027
2024
2026
2029-2033
Restoration Plan
$
47 $
47 $
47 $
46 $
46 $
221
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11. COMMITMENTS AND CONTINGENCIES
Commitments
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 generally is 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.
The balances of unfunded debt commitments as of March 31, 2023 and March 31, 2022 were as follows (amounts in thousands):
Portfolio Company
Revolving Loans
Acacia BuyerCo V LLC
Acceleration, LLC
Air Conditioning Specialist, Inc.
American Teleconferencing Services, Ltd. (DBA Premiere Global Services, Inc.)
ArborWorks, LLC
ATS Operating, LLC
Cadmium, LLC
Catbird NYC, LLC
Cavalier Buyer, Inc.
Central Medical Supply LLC
Dynamic Communities, LLC
Exact Borrower, LLC
Fast Sandwich, LLC
FM Sylvan, Inc.
Gains Intermediate, LLC
GPT Industries, LLC
GrammaTech, Inc.
GS Operating, LLC
Gulf Pacific Acquisition, LLC
ISI Enterprises, LLC
Island Pump and Tank, LLC
ITA Holdings Group, LLC
Klein Hersh, LLC
Lash OpCo, LLC
Lighting Retrofit International, LLC (DBA Envocore)
Lightning Intermediate II, LLC
Mako Steel LP
Microbe Formulas LLC
Muenster Milling Company, LLC
NeuroPsychiatric Hospitals, LLC
New Skinny Mixes, LLC
NinjaTrader, Inc.
NWN Parent Holdings, LLC
137
$
March 31,
2023
March 31,
2022
2,000 $
1,300
1,200
154
1,000
2,000
—
4,000
2,000
1,200
—
2,500
—
8,000
2,500
3,000
2,500
—
657
2,000
1,000
—
—
138
2,083
1,852
943
1,627
7,000
—
4,000
2,500
480
—
—
1,000
117
3,000
1,500
308
4,000
—
1,200
500
—
3,100
—
—
—
2,500
1,540
—
1,200
—
1,250
938
481
2,083
—
943
—
5,000
600
—
2,500
1,380
Table of Contents
Portfolio Company
Opco Borrower, LLC (DBA Giving Home Health Care)
Outerbox, LLC
Pipeline Technique Ltd.
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)
Versicare Management LLC
Wall Street Prep, Inc.
Well-Foam, Inc.
Winter Services Operations, LLC
Zenfolio Inc.
Total Revolving Loans
Delayed Draw Term Loans
AAC New Holdco Inc.
Acacia BuyerCo V LLC
Acceleration, LLC
Central Medical Supply LLC
CityVet Inc.
Exact Borrower, LLC
Flip Electronics, LLC
FoodPharma Subsidiary Holdings, LLC
Gains Intermediate, LLC
GS Operating, LLC
Gulf Pacific Acquisition, LLC
Infolinks Media Buyco, LLC
KMS, LLC
Lash OpCo, LLC
Muenster Milling Company, LLC
NeuroPsychiatric Hospitals, LLC
New Skinny Mixes, LLC
NinjaTrader, Inc.
Roof OpCo, LLC
Shearwater Research, Inc.
SIB Holdings, LLC
Systec Corporation (DBA Inspire Automation)
US CourtScript Holdings, Inc.
Versicare Management LLC
Winter Services Operations, LLC
Zips Car Wash, LLC - B
138
March 31,
2023
March 31,
2022
833
2,000
2,833
3,056
1,425
548
2,446
—
1,935
2,000
—
400
2,500
1,000
4,500
4,444
—
87,554
199
2,500
5,000
1,400
—
2,500
—
—
5,000
—
1,212
2,250
2,286
—
—
—
3,000
4,692
—
—
—
—
—
2,600
4,444
—
—
—
—
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
Table of Contents
Portfolio Company
Total Delayed Draw Term Loans
Total Unfunded Debt Commitments
March 31,
2023
March 31,
2022
$
37,083
124,637 $
71,274
128,914
The following table provides additional information on the Company’s unfunded debt commitments regarding expirations (amounts in thousands):
Unfunded Debt Commitments
Expiring during:
2023
2024
2025
2026
2027
2028
2029
Total Unfunded Debt Commitments
March 31,
2023
March 31,
2022
$
$
— $
31,625
10,637
6,712
38,062
35,318
2,283
124,637 $
39,946
37,321
5,000
8,194
38,453
—
—
128,914
The balances of unfunded equity commitments as of March 31, 2023 and March 31, 2022 were as follows (amounts in thousands):
Unfunded Equity Commitments
Catbird NYC, LLC
Infolinks Media Buyco, LLC
I-45 SLF LLC
Total Unfunded Equity Commitments
March 31,
2023
March 31,
2022
$
$
125 $
412
—
537 $
125
412
4,800
5,337
As of March 31, 2023, 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, 2023, the Company had $0.9 million 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 2023, $0.4 million expire in February 2024, and
$0.2 million expire in April 2024. As of March 31, 2023, 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 evaluate its leases to determine whether they should be classified as operating or financing leases. The
Company previously had an operating lease for its office space that commenced October 1, 2014 and expired February 28, 2022. In March 2021, the Company executed
an agreement to lease new office space that commenced on February 1, 2022 and expires September 30, 2032. The Company identified the foregoing as an operating
lease.
ASC 842 indicates that an ROU asset and lease liability should be recorded based on the effective date. As such, CSWC recorded an ROU 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, 2023, 2022 and 2021 was $0.3 million, $0.3 million and $0.2 million, respectively. As of both
March 31, 2023 and 2022, the asset related to the operating lease was $1.8 million
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Table of Contents
and the lease liability was $2.8 million and $2.7 million, respectively. As of March 31, 2023, the remaining lease term was 9.5 years and the discount rate was 7.21%.
The following table shows future minimum payments under the Company's operating leases as of March 31, 2023 (in thousands):
Year ending March 31,
2024
2025
2026
2027
2028
Thereafter
Total
Contingencies
Rent Commitment
406
416
426
436
446
2,132
4,262
$
$
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. To our knowledge, we have no currently pending material legal
proceedings to which we are party or to which any of our assets are 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, 2023 and 2022 (in thousands
except per share amounts):
2023
Net investment income
Net realized gain (loss) on investments, net of tax
Net change in unrealized (depreciation) appreciation on investments, net of
tax
Net increase (decrease) in net assets from operations
Pre-tax net investment income per share
Net investment income per share
Net increase (decrease) in net assets from operations per share
2022
Net investment income
Net realized (loss) gain on investments
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
$
12,438 $
2,320
14,444 $
(8,635)
19,425 $
(11,086)
22,404 $
372
(12,248)
2,510
0.50
0.49
0.10
3,649
9,458
0.54
0.52
0.34
(5,390)
2,949
0.60
0.62
0.09
(4,600)
18,176
0.65
0.64
0.52
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
9,043 $
(952)
9,726 $
3,496
11,899 $
2,715
12,019 $
575
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
Total
68,711
(17,029)
(18,589)
33,093
2.30
2.29
1.10
Total
42,687
5,834
11,467
(17,087)
(86)
42,815
1.90
1.87
1.87
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Table of Contents
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 offer to provide significant guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company. We also are 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 each of the years ended March 31, 2023 and 2022, we did not receive any management fees from our portfolio companies. As of both March 31, 2023
and March 31, 2022, we had dividends receivable from I-45 SLF LLC of $1.9 million, which were included in dividends and interest receivables on the Consolidated
Statements of Assets and Liabilities. Additionally, we recognized administrative fee income from I-45 SLF LLC of $0.1 million for the year ended March 31, 2023,
which was included in fee income on the Consolidated Statement of Operations.
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14. SUMMARY OF PER SHARE INFORMATION
The following presents a summary of per share data for the years ended March 31, 2023, 2022, 2021, 2020, 2019, 2018, and 2017 (share amounts presented in
thousands).
Per Share Data:
1
Investment income
1
Operating expenses
1
Income taxes
1
Net investment income
1
Net realized (loss) gain, net of tax
Net unrealized (depreciation) appreciation on investments, net of
1
tax
1
Realized loss on extinguishment of debt
Total increase (decrease) from investment operations
Accretive effect of share issuances and repurchases
Dividends to shareholders
Spin-off Compensation Plan Distribution, net of tax
1,2
Issuance of restricted stock
Common stock withheld for payroll taxes upon vesting of
restricted stock
3
Exercise of employee stock options
Share based compensation expense
Change in restoration plan
Repurchase of common stock
4
Other
(Decrease) increase in net asset value
Net asset value
Beginning of period
End of period
Ratios and Supplemental Data
Ratio of operating expenses to average net assets
Ratio of net investment income to average net assets
Portfolio turnover
5
Total investment return
6
Total return based on change in NAV
2023
2022
2021
2020
2019
2018
2017
Years Ended
March 31,
$
3.97
$
3.60
$
3.57
$
3.45
$
3.10
$
2.18
$
(1.67)
(0.01)
2.29
(0.57)
(0.62)
—
1.10
0.50
(2.28)
—
(0.14)
(0.01)
—
0.10
0.06
—
0.18
(0.49)
(1.70)
(0.03)
1.87
0.26
0.50
(0.75)
1.88
1.45
(2.52)
—
(0.10)
(0.03)
—
0.14
0.01
—
0.02
0.85
(1.78)
(0.13)
1.66
(0.45)
1.51
(0.05)
2.67
0.30
(2.05)
—
(0.16)
—
—
0.14
—
—
(0.02)
0.88
(1.76)
(0.12)
1.57
2.35
(5.16)
—
(1.24)
0.45
(2.75)
—
(0.06)
—
—
0.16
(0.01)
0.15
(0.19)
(3.49)
(1.62)
(0.06)
1.42
1.24
(0.68)
—
1.98
0.06
(2.27)
—
(0.23)
(0.01)
(0.12)
0.13
(0.01)
—
0.01
(0.46)
(1.16)
(0.01)
1.01
0.10
1.34
—
2.45
(0.04)
(0.99)
(0.03)
(0.18)
(0.01)
0.01
0.11
(0.05)
—
0.01
1.28
1.48
(0.87)
(0.11)
0.50
0.50
0.49
—
1.49
—
(0.79)
(0.08)
(0.15)
—
(0.09)
0.08
—
—
—
0.46
16.86
16.37
$
16.01
16.86
15.13
16.01
$
18.62
15.13
$
19.08
18.62
$
$
17.80
19.08
$
17.34
17.80
$
10.06 %
13.75 %
13.68 %
(15.36)%
10.62 %
10.31 %
11.31 %
33.91 %
18.10 %
21.05 %
11.51 %
10.74 %
18.81 %
9.87 %
8.77 %
22.76 %
118.56 %
(37.52)%
19.37 %
(3.97)%
8.61 %
7.53 %
23.38 %
38.34 %
9.49 %
6.35 %
5.51 %
25.42 %
6.61 %
12.75 %
4.95 %
2.83 %
23.57 %
27.88 %
7.21 %
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Table of Contents
Per share market value at the end of the period
Weighted-average basic shares outstanding
Weighted-average diluted shares outstanding
Common shares outstanding at end of period
$
17.78 $
23.73 $
22.16 $
11.42 $
21.04 $
17.02 $
30,016
30,016
36,076
22,840
22,840
24,959
19,060
19,060
21,005
18,000
18,000
17,998
16,074
16,139
17,503
16,074
16,139
16,162
16.91
15,825
15,877
16,011
1
2
3
4
5
6
Based on weighted average of common shares outstanding for the period.
Reflects impact of the different share amounts as a result of issuance or forfeiture of restricted stock during the period.
Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value.
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, and has not been annualized.
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15. 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) 76.2625% as
of the date of the Amendment through the quarter ended March 31, 2021; (ii) 76.925% for quarter ended June 30, 2021; (iii) 77.5875% for the quarter ended September
30, 2021; and (iv) 78.25% 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, 2023, total funded
equity capital totaled $101.0 million, consisting of $80.8 million from CSWC and $20.2 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, 2023 and March 31, 2022, I-45 SLF LLC had total assets of $152.8 million and $189.1 million, respectively. I-45 SLF LLC had approximately
$143.7 million and $176.7 million of total investments at fair value as of March 31, 2023 and March 31, 2022, respectively. The portfolio companies in I-45 SLF LLC
are in industries similar to those in which CSWC may invest directly. For the years ended March 31, 2023 and 2022, I-45 SLF LLC declared total dividends of
$9.4 million and $8.6 million, respectively.
Additionally, I-45 SLF LLC closed on a $75.0 million 5-year senior secured credit facility (the “I-45 credit facility”) in November 2015. The I-45 credit facility
includes an accordion feature which will allow I-45 SLF LLC to achieve leverage of approximately 2x debt-to-equity. Borrowings under the I-45 credit facility are
secured by all of the assets of I-45 SLF LLC and bear interest at a rate equal to LIBOR plus 2.5% per annum. During the year ended March 31, 2017, I-45 SLF LLC
increased debt commitments outstanding by an additional $90.0 million by adding three additional lenders to the syndicate, bringing total debt commitments to
$165.0 million. In July 2017, the I-45 credit facility was amended to extend the maturity to July 2022. Additionally, the amendment reduced 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 I-45 credit 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%. On March 30, 2023, the I-45 credit facility was further amended to permanently
reduce the I-45 credit facility debt commitments to $100.0 million and replace LIBOR with Term SOFR as the reference interest rate. After giving effect to the
amendment, the interest rate on borrowings is Term SOFR plus 2.41% per annum. Under the I-45 credit facility, $86.0 million has been drawn as of March 31, 2023.
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Table of Contents
At March 31, 2023, our investment in I-45 SLF LLC did not exceed the 10% threshold in any of the tests under Rule 4-08(g) and did not exceed the 20%
threshold in any 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 the financial statements of I-45 SLF LLC as an exhibit to our Annual Report
on Form 10-K for the fiscal year ended March 31, 2023. Below is certain summarized financial information for I-45 SLF LLC as of March 31, 2023 and March 31, 2022
and for the years ended March 31, 2023, 2022 and 2021 (amounts in thousands):
Selected Balance Sheet Information:
Investments, at fair value (cost $169,874 and $187,714)
Cash and cash equivalents
Interest receivable
Accounts receivable
Deferred financing costs and other assets
Total assets
Senior credit facility payable
Other liabilities
Total liabilities
Members’ equity
Total liabilities and members' equity
March 31, 2023
March 31, 2022
$
$
$
$
$
143,712 $
6,478
1,145
1,038
416
152,789 $
86,000 $
2,674
88,674 $
64,115
152,789 $
176,704
9,949
850
123
1,518
189,144
114,500
2,596
117,096
72,048
189,144
Selected Statement of Operations Information:
Total revenues
Total expenses
Net investment income
Net unrealized (depreciation) appreciation
Net realized gains (losses)
Net (decrease) increase in members’ equity resulting from operations
2023
Years Ended March 31,
2022
2021
$
$
16,914 $
(7,542)
9,372
(15,153)
1,224
(4,557) $
12,804 $
(4,166)
8,638
(4,569)
1,047
5,116 $
13,930
(4,565)
9,365
30,467
(15,313)
24,519
146
Table of Contents
Below is a summary of I-45 SLF LLC’s portfolio, followed by a listing of the individual loans in I-45 SLF LLC’s portfolio as of March 31, 2023 and March 31,
2022 (in thousands):
Portfolio Company
AAC New Holdco Inc.
I-45 SLF LLC Loan Portfolio as of March 31, 2023
Industry
Type
Date
Investment
Maturity
Current
Interest
1
Rate
Principal
Cost
2
Fair Value
6/25/2025
18.00% PIK
$
2,238 $
2,239 $
2,160
Healthcare services
First Lien
Delayed Draw
5
Term Loan
304,075 shares
common stock
Warrants
(Expiration -
December 11,
2025)
—
—
6/25/2025
18.00% PIK
ADS Tactical, Inc.
American Teleconferencing Services,
3
Ltd.
Aerospace & defense
First Lien
3/19/2026
Telecommunications
Revolving Loan
4/7/2023
Burning Glass Intermediate Holding
Company, Inc.
Software & IT services
Corel Inc.
Emerald Technologies (U.S.)
Acquisitionco, Inc.
Software & IT services
Technology products &
components
First Lien
Revolving
4
Loan
First Lien
First Lien
6/8/2023
6/10/2028
6/10/2028
7/2/2026
First Lien
12/29/2027
Evergreen AcqCo 1 LP
Evergreen North America Acquisitions,
LLC
Geo Parent Corporation
Consumer products & retail
First Lien
4/26/2028
Industrial services
Building & infrastructure
products
First Lien
8/13/2026
First Lien
12/19/2025
Infogain Corporation
Software & IT services
First Lien
7/28/2028
Integro Parent Inc.
Business services
First Lien
5/8/2023
Intermedia Holdings, Inc.
Inventus Power, Inc.
Software & IT services
Technology products &
components
First Lien
7/21/2025
First Lien
3/29/2024
INW Manufacturing, LLC
Food, agriculture, & beverage
First Lien
3/25/2027
147
—
—
L+5.75%
(Floor 1.00%)
P+5.50%
(Floor 2.00%)
P+5.50%
(Floor 2.00%)
L+5.00%
(Floor 1.00%)
L+5.00%
(Floor 1.00%)
SOFR+5.00%
SOFR+6.25%
(Floor 1.00%)
SOFR+5.50%
(Floor 0.75%)
L+6.75%
(Floor 1.00%)
SOFR+5.25%
SOFR+5.75%
(Floor 1.00%)
SOFR+12.25%
PIK
(Floor 1.00%)
L+6.00%
(Floor 1.00%)
SOFR+5.00%
(Floor 1.00%)
L+5.75%
(Floor 0.75%)
60
—
—
6,058
985
5,597
123
3,157
6,440
4,485
2,606
6,673
6,769
4,735
369
6,607
6,860
2,775
59
1,449
482
5,975
978
5,566
118
3,113
6,311
4,430
2,584
6,575
6,743
4,678
369
6,562
6,836
2,713
58
581
193
5,634
51
287
123
3,157
6,050
4,261
2,501
6,673
6,397
4,684
347
5,088
6,791
2,391
Table of Contents
Portfolio Company
Industry
Type
Date
Investment
Maturity
3
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
Lift Brands, Inc.
Consumer services
Consumer products & retail
First Lien
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
Lightbox Intermediate, L.P.
Software & IT services
LOGIX Holdings Company, LLC
Telecommunications
First Lien
12/23/2024
Mills Fleet Farm Group LLC
Consumer products & retail
National Credit Care
Consumer services
First Lien
First Lien -
Term Loan A
First Lien -
Term Loan B
10/24/2024
12/23/2026
12/23/2026
3
NBG Acquisition, Inc.
Wholesale
First Lien
4/26/2024
NinjaTrader, Inc.
Financial services
First Lien
12/18/2024
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
First Lien
2/5/2027
TEAM Services Group, LLC
Healthcare services
First Lien
12/20/2027
Second Lien
2/4/2028
U.S. TelePacific Corp.
Telecommunications
First Lien
5/1/2026
148
Current
Interest
1
Rate
L+7.75%
(Floor 1.00%)
SOFR+5.50%
SOFR+7.25%
(Floor 1.00%)
L+7.00%
(Floor 1.00%)
SOFR+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+7.75%
(Floor 1.00%)
L+6.25%
(Floor 1.00%)
SOFR+5.50%
(Floor 0.75%)
L+3.50%
(Floor 0.75%)
L+7.50%
(Floor 0.75%)
L+5.00%
(Floor 1.00%)
SOFR+1.00%,
7.25% PIK
(Floor 1.00%)
Principal
Cost
2
Fair Value
1,650
5,597
1,641
5,582
10,050
10,017
6,113
2,477
602
565
—
6,876
4,443
4,491
2,159
2,159
2,606
5,000
5,874
2,827
2,929
2,265
990
6,000
6,620
5,999
2,477
602
565
749
6,831
4,431
4,462
2,125
2,125
2,593
4,939
5,837
2,793
2,884
2,247
950
5,958
6,582
561
5,317
9,929
5,868
2,427
548
514
553
6,636
3,638
4,401
2,122
2,122
78
5,000
4,505
2,742
2,841
2,172
974
5,501
6,454
5,635
5,635
1,479
Table of Contents
Portfolio Company
Industry
Type
Date
Investment
Maturity
Veregy Consolidated, Inc.
Vida Capital, Inc.
Environmental services
Financial services
First Lien
First Lien
11/3/2027
10/1/2026
3
Wahoo Fitness Acquisition, LLC
Consumer products & retail
First Lien
8/14/2028
YS Garments, LLC
Total Investments
Consumer products & retail
First Lien
8/9/2026
Current
Interest
1
Rate
L+6.00%
(Floor 1.00%)
L+6.00%
SOFR+5.75%
(Floor 1.00%)
L+7.50%
(Floor 1.00%)
Principal
Cost
2
Fair Value
1,955
3,265
4,875
4,157
1,951
3,236
4,751
1,683
2,408
2,071
4,132
169,874 $
3,741
143,712
$
1
2
3
4
5
Represents the interest rate as of March 31, 2023. 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”), Prime (“P”) or Secured Overnight Financing Rate ("SOFR"), which reset daily, monthly, quarterly,
or semiannually. For each investment, the Company has provided the spread over LIBOR, Prime, or SOFR in effect at March 31, 2023. Certain investments are subject to an
interest rate floor.
Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is determined by the
Board of Managers of 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, 2023, meaning the Company has ceased to recognize interest income on the investment.
The investment has approximately $246.6 thousand in an unfunded revolving loan commitment as of March 31, 2023.
The investment has approximately $43.8 thousand in an unfunded delayed draw loan commitment as of March 31, 2023.
149
Table of Contents
Portfolio Company
Industry
Type
Date
Investment
Maturity
Current
Interest
1
Rate
Principal
2
Cost
3
Fair Value
I-45 SLF LLC Loan Portfolio as of March 31, 2022
AAC New Holdco Inc.
Healthcare services
ADS Tactical, Inc.
American Teleconferencing Services,
4
Ltd.
Aerospace & defense
Telecommunications
ATX Networks (Toronto) Corporation
Technology products &
components
Burning Glass Intermediate Holding
Company, Inc.
Software & IT services
Corel, Inc.
Emerald Technologies (U.S.)
Acquisitionco, Inc.
Software & IT services
Technology products &
components
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
First Lien
First Lien
—
—
3/19/2026
6/30/2022
6/8/2023
9/1/2026
—
6/10/2028
6/10/2028
7/2/2026
First Lien
12/29/2027
Evergreen AcqCo 1 LP
Evergreen North America Acquisitions,
LLC
Geo Parent Corporation
Consumer products & retail
First Lien
4/26/2028
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
150
6/25/2025
10.00%, 8.00%
PIK
$
1,899 $
1,899 $
1,833
—
—
1,449
1,449
9/1/2028
10.00% PIK
1,081
1,081
—
L+5.75%
(Floor 1.00%)
P+5.50%
P+5.50%
L+7.50%
(Floor 1.00%)
—
6,394
1,027
5,598
2,617
482
6,283
1,021
5,566
2,610
—
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
3,189
6,803
3,125
4,179
6,740
6,840
4,988
4,784
2,850
3,217
5,677
—
67
3,140
6,650
3,063
4,142
6,623
6,809
4,891
4,719
2,845
3,209
5,659
482
6,133
64
308
2,499
729
—
67
3,189
6,805
3,078
4,158
6,740
6,806
4,988
4,769
2,704
3,043
5,638
Table of Contents
Portfolio Company
Inventus Power, Inc.
INW Manufacturing, LLC
Industry
Type
Date
Investment
Maturity
Technology products &
components
Food, agriculture, &
beverage
First Lien
3/29/2024
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
Lift Brands, Inc.
Consumer services
Lightbox Intermediate, L.P.
Software & IT services
First Lien
Delayed Draw
6
Term Loan
Tranche A
Tranche B
Tranche C
1,051 shares
common stock
First Lien
3/18/2026
3/18/2026
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
National Credit Care, LLC
Consumer services
First Lien
First Lien -
Term Loan A
First Lien -
Term Loan B
10/24/2024
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
Current
Interest
1
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%)
151
Principal
2
Cost
3
Fair Value
6,930
2,925
1,685
4,658
6,242
4,988
1,187
2,502
583
565
—
4,948
5,826
4,623
2,500
2,500
2,663
5,000
2,961
4,936
2,959
3,000
2,289
6,884
2,867
1,677
4,639
6,213
4,881
1,152
2,502
583
564
749
4,914
5,807
4,584
2,453
2,453
2,647
4,908
2,948
4,936
2,912
2,945
2,267
6,791
2,867
1,088
4,640
6,242
4,878
1,161
2,252
437
423
749
4,874
5,491
4,623
2,483
2,483
1,807
5,000
2,950
4,861
2,914
2,958
2,254
Table of Contents
Portfolio Company
Industry
Type
Date
Investment
Maturity
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
Total Investments
Consumer products & retail
First Lien
8/9/2024
Current
Interest
1
Rate
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
2
Cost
3
Fair Value
5,000
6,687
3,805
942
4,991
6,644
3,804
942
4,944
6,637
3,805
942
2,814
2,802
2,627
5,239
1,975
3,565
4,969
4,282
5,239
1,970
3,531
4,833
3,714
1,936
3,283
4,869
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.
152
Table of Contents
16. SUBSEQUENT EVENTS
On April 26, 2023, the Board of Directors declared a total dividend of $0.59 per share, comprised of a regular dividend of $0.54 and a supplemental dividend of
$0.05, for the quarter ending June 30, 2023. The record date for the dividend is June 15, 2023. The payment date for the dividend is June 30, 2023.
On April 26, 2023, pursuant to Rule 2a-5 under the 1940 Act, the Board of Directors designated a committee of certain officers of the Company as the Board's
valuation designee (the "Valuation Designee") to determine the fair value of the Company's investments that do not have readily available market quotations, subject to
the oversight of the Board of Directors, effective beginning as of the fiscal quarter ending June 30, 2023.
153
Table of Contents
SCHEDULE 12-14
Schedule of Investments in and Advances to Affiliates
(In thousands)
Portfolio Company
Control Investments
I-45 SLF LLC
Total Control Investments
Affiliate Investments
Air Conditioning Specialists,
Inc.
Catbird NYC, LLC
Central Medical Supply LLC
Chandler Signs, LLC
Delphi Intermediate Healthco
LLC
Type of Investment (1)
80% LLC equity
interest
Revolving Loan
First Lien
766,738.93 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
March 31,
2023
Principal
Amount -
Debt
Investments
Amount of
Interest or
Dividends
Credited in
Income (2)
Fair Value at
March 31,
2022
Gross
Additions (3)
Gross
Reductions
(4)
Amount of
Realized
Gain/(Loss)
(5)
Amount of
Unrealized
Gain/(Loss)
Fair Value at
March 31,
2023
$
$
$
— $
— $
7,337 $
7,337 $
57,603 $
57,603 $
4,800 $
4,800 $
— $
— $
— $
— $
(11,147) $
(11,147) $
51,256
51,256
800 $
15 $
— $
27,438
1,905
12,535
1,384 $
14,574
(600) $
(170)
— $
—
16 $
499
800
27,438
—
—
15,500
—
36
1,635
634
—
15,884
—
—
300
7,500
100
—
—
1,649
1,829
1,448
—
1,221
572
290
7,260
97
641
924
1,402
1,472
526
2,460
88
53
49
950
25
—
—
108
98
79
—
154
186
16
59
—
—
6
29
6
—
—
108
97
922
—
—
—
(400)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
382
(16)
(43)
437
142
—
113
(4)
(284)
1,202
—
15,500
1,658
714
296
7,402
99
357
2,291
3,215
(1,510)
(1,569)
(1,448)
(2,460)
—
—
—
—
Amount of
Interest or
Dividends
Credited in
Income (2)
1
286
Fair Value at
March 31,
2022
—
10,323
Gross
Additions (3)
—
12
Gross
Reductions
(4)
—
(11,159)
Amount of
Realized
Gain/(Loss)
(5)
1
—
Table of Contents
Portfolio Company
Type of Investment (1)
Dynamic Communities, LLC
GPT Industries, LLC
GrammaTech, Inc.
ITA Holdings Group, LLC
Revolving Loan
First Lien
First Lien - Term
Loan A
First Lien - Term
Loan B
Senior subordinated
debt
2,000,000 Preferred
units
250,000 Class A
Preferred units
5,435,211.03 Class
B Preferred units
255,984.22 Class C
Preferred units
2,500,000 Common
units
Revolving loan
First lien
1,000,000 Class A
Preferred Units
Revolving Loan
First Lien
1,000 Class A units
360.06 Class A-1
units
Revolving loan
First Lien - Term
Loan
First Lien - Term
Loan B
First Lien - PIK
Note A
First Lien - PIK
Note B
Warrants
9.25% Class A
membership interest
March 31,
2023
Principal
Amount -
Debt
Investments
—
—
3,846
3,867
—
—
—
—
—
—
—
6,150
—
—
10,031
—
—
7,000
249
118
41
—
—
—
—
—
5
148
—
10
1,336
—
—
786
—
—
650
1,274
—
—
—
—
—
—
—
—
9,775
674
38
750
10,114
1,232
10,041
5,057
3,271
129
—
—
5,061
2,959
117
3,199
3,063
766
545
13
—
—
155
Amount of
Unrealized
Gain/(Loss)
Fair Value at
March 31,
2023
(1)
824
(3)
(1)
—
726
375
—
—
—
58
—
—
(9)
1,674
(674)
30
23
(25)
(40)
(242)
(1)
847
1,285
—
—
3,823
3,843
—
—
625
2,218
—
—
—
6,030
1,000
—
10,031
—
372
7,014
10,114
5,068
3,255
128
4,046
4,348
9,554
(4,604)
(1,124)
9,423
(4,484)
(1,095)
41
—
250
2,218
—
—
(58)
6,030
1,000
9
67
—
304
6,241
98
47
538
12
—
—
(587)
(104)
—
—
—
—
—
—
—
—
—
(1,500)
—
—
—
—
—
—
—
—
—
(2,000)
—
—
—
—
—
—
—
—
15
—
—
—
—
—
—
—
—
—
Table of Contents
Portfolio Company
Type of Investment (1)
March 31,
2023
Principal
Amount -
Debt
Investments
Amount of
Interest or
Dividends
Credited in
Income (2)
Fair Value at
March 31,
2022
Gross
Additions (3)
Gross
Reductions
(4)
Amount of
Realized
Gain/(Loss)
(5)
Amount of
Unrealized
Gain/(Loss)
Fair Value at
March 31,
2023
Lighting Retrofit International,
LLC (DBA Envocore)
Outerbox, LLC
Roseland Management, LLC
SIMR, LLC
Sonobi, Inc.
STATinMED, LLC
Revolving Loan
First Lien
Second Lien
208,333.3333 Series
A Preferred units
203,124.9999
Common units
Revolving Loan
First Lien
6,308.2584 Class A
common units
Revolving Loan
First Lien
3,364 Class A-2
Units
1,100 Class A-1
units
16,084 Class A units
First Lien
First Lien -
Incremental
9,374,510.2 Class B
Common Units
904,903.31 Class W
Units
500,000 Class A
Common units
First Lien
Delayed Draw Term
Loan
4,718.62 Class A
Preferred Units
39,097.96 Class B
Preferred Units
—
5,143
5,208
—
—
—
14,625
—
575
15,051
—
—
—
—
—
—
—
—
7,288
122
—
—
833
—
—
—
—
(25)
14,429
631
2
1,132
202
66
—
191
191
—
—
—
7,479
121
4,838
1,400
(833)
(53)
—
—
—
—
—
—
—
(145)
—
—
—
(13,081)
(191)
—
—
—
(191)
—
—
—
—
4,780
3,104
—
—
—
—
—
575
14,125
—
—
1,905
10,588
—
—
—
2,960
—
—
—
—
34
393
—
—
—
9
982
—
81
1,883
—
—
—
—
—
—
—
—
699
6
—
—
156
—
5,143
3,594
—
—
—
14,552
773
555
14,524
694
161
422
—
—
—
—
1,749
7,288
122
—
—
—
—
—
—
—
—
—
—
—
—
—
(211)
—
—
416
490
—
—
25
123
142
(22)
(588)
492
95
(1,483)
2,513
—
(6,107)
6,107
—
(1,211)
—
1
—
—
—
—
—
—
(1,071)
3,767
(1,400)
—
Table of Contents
Portfolio Company
Type of Investment (1)
Student Resource Center LLC
First Lien
10,502,487.46
Preferred units
2,000,000 Preferred
units
Total Affiliate Investments
Total Control & Affiliate
Investments
$
$
March 31,
2023
Principal
Amount -
Debt
Investments
8,889
—
Amount of
Interest or
Dividends
Credited in
Income (2)
195
—
Fair Value at
March 31,
2022
—
—
Gross
Additions (3)
8,727
5,845
Gross
Reductions
(4)
Amount of
Realized
Gain/(Loss)
(5)
Amount of
Unrealized
Gain/(Loss)
Fair Value at
March 31,
2023
—
—
—
—
(7)
—
8,720
5,845
—
162,930 $
—
14,859 $
—
131,879 $
—
99,235 $
—
(37,998)
—
(10,625) $
—
6,014 $
—
188,505
162,930 $
22,196 $
189,482 $
104,035 $
(37,998) $
(10,625) $
(5,133) $
239,761
(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 company 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.
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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, 2023. Based upon this evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that as of March 31, 2023, 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, 2023.
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, 2023 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.
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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, 2023):
Operating expenses
Interest payments on borrowed funds
Income tax provision
Acquired fund fees and expenses
Total annual expenses
— % (1)
— % (2)
— % (3)
— %
3.62 % (4)
7.54 % (5)
0.06 % (6)
1.52 % (7)
12.74 %
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, 2023.
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, 2023, we had $235.0 million outstanding under our Credit Facility, $120.0 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, 2023.
(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, 2023.
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
$
127 $
353 $
545 $
910
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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Table of Contents
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.
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Table of Contents
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 2023 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, 2023, 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 2023 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, 2023, 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 2023 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, 2023, 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 2023 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, 2023, 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 2023 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, 2023, and is incorporated herein by reference.
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Table of Contents
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed or incorporated by reference as part of this Annual Report:
1. Consolidated Financial Statements
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Assets and Liabilities as of March 31, 2023 and 2022
Consolidated Statements of Operations for Years Ended March 31, 2023, 2022 and 2021
Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for Years Ended March 31, 2023, 2022 and 2021
Consolidated Schedules of Investments as of March 31, 2023 and 2022
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule of Investments in and Advances to Affiliates for the Year Ended March 31, 2023
3. Exhibits
Page
68
70
71
72
73
74
105
Page
154
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 Current Report on 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 Quarterly Report on 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 Current Report on 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).
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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 Annual Report on 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 Quarterly Report on 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 Annual Report on 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 Annual Report on 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 Current Report on 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 Quarterly
Report on 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 Quarterly
Report on 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 Current Report on 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 Quarterly Report on 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
Quarterly Report on 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 Quarterly Report on 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 Current Report on 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 Current Report on 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 Current Report on Form 8-K (File No. 814-00061) filed on August 9, 2021).
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Table of Contents
Exhibit No.
Description
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
14*
21.1*
23.1*
23.2*
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 Current Report on Form 8-K (File No. 814-00061) filed on
September 10, 2021).
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 Current Report on 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 Annual Report on 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 Current Report on 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 Current Report on Form 8-K (File No. 814-
00061) filed on November 2, 2021).
Form of Third Amendment, dated August 2, 2022, to 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 Current Report on
Form 8-K filed on August 2, 2022).
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 Current Report on 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 Current Report on Form 8-K (File No. 814-00061)
filed on November 2, 2021).
Form of Third Amendment, dated August 2, 2022, to Amended and Restated Equity Distribution Agreement, dated May 26, 2021, between the Company and
each of JMP Securities LLC and B. Riley Securities, Inc., respectively (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on
August 2, 2022).
Incremental Commitment and Assumption Agreement dated November 16, 2022 among the Company, as borrower, ING Capital LLC, as Administrative
Agent, the Increasing Lenders Party thereto, as Increasing Lenders and the Assuming Lenders Party thereto, as Assuming Lenders (incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K filed on November 16, 2022).
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).
164
Table of Contents
Exhibit No.
31.1*
Description
Certification of President and Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
31.2*
32.1*^
32.2*^
99.1*
99.2*
99.3
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, 2023 and 2022 and for the years ended March 31, 2023, 2022 and 2021.
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.
165
Table of Contents
Item 16. Form 10-K Summary
None.
166
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 23, 2023
Signature
/s/ David R. Brooks
David R. Brooks
/s/ Christine S. Battist
Christine S. Battist
/s/ Jack D. Furst
Jack D. Furst
/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
Date
May 23, 2023
May 23, 2023
May 23, 2023
May 23, 2023
May 23, 2023
President and Chief Executive Officer
May 23, 2023
Chief Financial Officer
(Chief Financial/Accounting Officer)
May 23, 2023
167
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 (File No. 333-259455) (the Registration Statement on Form N-2) and in the
Registration Statements on Form S-8 (File Nos. 333-258899 and 333-266518) of Capital Southwest Corporation and its subsidiaries (collectively, the Company) of our
report dated May 23, 2023, relating to the consolidated financial statements, and the Schedule of Investments In and Advances to Affiliates for the year ended March 31,
2023 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, 2023 (the Form 10-K). We also
consent to the incorporation by reference in the Registration Statement on Form N-2 of our report dated May 23, 2023, relating to the senior securities table, appearing in
Part II, Item 5 of the Form 10-K of the Company, 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 23, 2023
CONSENT OF INDEPENDENT AUDITOR
Exhibit 23.2
We consent to the incorporation by reference in the Registration Statement on Form N-2 (File No. 333-259455) and in the Registration Statements on Forms S-8 (File
Nos. 333-258899 and 333-266518) of Capital Southwest Corporation of our report dated May 12, 2023, 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, 2023.
/s/ RSM US LLP
Chicago, Illinois
May 23, 2023
CERTIFICATIONS
Exhibit 31.1
I, Bowen S. Diehl, certify that:
1
I have reviewed this annual report on Form 10-K of Capital Southwest Corporation (the “registrant”);
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 23, 2023
By:
/s/ Bowen S. Diehl
Bowen S. Diehl
President and Chief Executive Officer
CERTIFICATIONS
Exhibit 31.2
I, Michael S. Sarner, certify that:
1
I have reviewed this annual report on Form 10-K of Capital Southwest Corporation (the “registrant”);
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 23, 2023
By:
/s/ Michael S. Sarner
Michael S. Sarner
Chief Financial Officer
Certification of the President and Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1
I, Bowen S. Diehl, President and Chief Executive Officer of Capital Southwest Corporation, certify that, to my knowledge:
1. The Form 10-K for the year ended March 31, 2023, filed with the Securities and Exchange Commission on May 23, 2023 (“accompanied report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the accompanied report fairly presents, in all material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: May 23, 2023
By:
/s/ Bowen S. Diehl
Bowen S. Diehl
President and Chief Executive Officer
Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2
I, Michael S. Sarner, Chief Financial Officer of Capital Southwest Corporation, certify that, to my knowledge:
1. The Form 10-K for the year ended March 31, 2023, filed with the Securities and Exchange Commission on May 23, 2023 (“accompanied report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the accompanied report fairly presents, in all material respects, the consolidated financial condition and results of
operations of Capital Southwest Corporation.
Date: May 23, 2023
By:
/s/ Michael S. Sarner
Michael S. Sarner
Chief Financial Officer
Exhibit 99.1
I-45 SLF LLC
and Subsidiary
Consolidated Financial Statements
and
Independent Auditor’s Report
As of March 31, 2023 and 2022 and for the years ended
March 31, 2023, 2022 and 2021
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
3
4
11
12
13
14
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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, 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, 2023 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.
1
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 12, 2023
2
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Assets, Liabilities
and Members’ Equity
Assets
Investments, at fair value (cost of $169,874,371 and $187,713,768, respectively)
Cash and cash equivalents
Due from broker
Deferred financing costs (net of accumulated amortization of $4,821,668 and $3,784,559, respectively)
Interest receivable
Other assets
Liabilities and Members' Equity
Liabilities
Credit facility
Distributions payable
Interest payable
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies (Note 9)
Members' equity
$
$
$
March 31,
2023
2022
143,712,034 $
6,478,105
1,037,570
414,844
1,145,252
875
152,788,680 $
176,704,213
9,948,554
123,016
1,451,953
850,342
65,972
189,144,050
86,000,000 $
2,425,586
87,236
161,022
88,673,844
114,500,000
2,374,444
66,878
154,621
117,095,943
64,114,836
72,048,107
$
152,788,680 $
189,144,050
See accompanying notes to consolidated financial statements.
3
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2023
Maturity
Date
6/25/2025
Current
2
Interest Rate
18.00% PIK $ 2,238,544 $ 2,238,544 $ 2,160,195
Principal
Amount
Fair Value
Cost
Percentage of
Members'
Equity
3.37 %
6/25/2025
18.00% PIK
60,154
59,202
58,049
0.09 %
—
—
1,449,126
580,964
0.91 %
—
L+5.75%
(Floor 1.00%)
P+5.50%
(Floor 2.00%)
P+5.50%
(Floor 2.00%)
L+5.00%
(Floor 1.00%)
L+5.00%
(Floor 1.00%)
SOFR+5.00%
SOFR+6.25%
(Floor 1.00%)
SOFR+5.50%
(Floor 0.75%)
L+6.75%
(Floor 1.00%)
SOFR+5.25%
SOFR+5.75%
(Floor 1.00%)
—
482,412
193,401
0.30 %
6,057,693
5,974,923
5,633,654
8.79 %
984,823
978,229
50,472
0.08 %
5,597,579
5,565,782
286,877
0.45 %
123,289
118,442
123,288
0.19 %
3,157,397
3,113,130
3,157,396
4.92 %
6,439,966
6,311,392
6,049,544
9.44 %
4,484,926
4,429,822
4,260,680
6.65 %
2,605,639
2,584,336
2,501,182
3.90 %
6,672,580
6,575,342
6,672,581
10.41 %
6,769,244
6,743,151
6,396,920
9.98 %
4,735,577
4,678,138
4,683,486
7.30 %
6
Portfolio Company
AAC New Holdco Inc.
Industry
Healthcare services
Investment
1
Type
First Lien
Delayed
Draw Term
4
Loan
304,075
shares
common
stock
Warrants
(Expiration -
December 11,
2025)
—
—
ADS Tactical, Inc.
American
Teleconferencing
5
Services, Ltd.
Aerospace & defense First Lien
3/19/2026
Telecommunications
Revolving
Loan
4/7/2023
Burning Glass
Intermediate Holding
Company, Inc.
Software & IT
services
Revolving
3
Loan
6/10/2028
First Lien
6/8/2023
7
Corel, Inc.
Emerald Technologies
(U.S.) Acquisitionco, Inc.
Evergreen AcqCo 1 LP
Evergreen North America
Acquisitions, LLC
Geo Parent Corporation
Infogain Corporation
Software & IT
services
Technology products
& components
Consumer products
& retail
Industrial services
Building &
infrastructure
products
Software & IT
services
First Lien
6/10/2028
First Lien
7/2/2026
First Lien
12/29/2027
First Lien
4/26/2028
First Lien
8/13/2026
First Lien
12/19/2025
First Lien
7/28/2028
4
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2023
6
Portfolio Company
Industry
Investment
1
Type
Maturity
Date
Integro Parent Inc.
Intermedia Holdings, Inc.
Inventus Power, Inc.
INW Manufacturing,
LLC
Isagenix International,
5
LLC
KORE Wireless Group
Inc.
Business services
Software & IT
services
Technology products
& components
Food, agriculture, &
beverage
Consumer products
& retail
First Lien
5/8/2023
First Lien
7/21/2025
First Lien
3/29/2024
First Lien
3/25/2027
First Lien
6/14/2025
Telecommunications First Lien
12/20/2024
Lab Logistics, LLC
Lash OpCo, LLC
Healthcare services
Consumer products
& retail
First Lien
9/25/2023
First Lien
3/18/2026
Lift Brands, Inc.
Consumer services
Tranche A
Tranche B
Tranche C
1,051 shares
common
stock
6/29/2025
6/29/2025
6/29/2025
Current
2
Interest Rate
SOFR+12.25%
PIK
(Floor 1.00%)
L+6.00%
(Floor 1.00%)
SOFR +5.00%
(Floor 1.00%)
L+5.75%
(Floor 0.75%)
L+7.75%
(Floor 1.00%)
SOFR+5.50%
SOFR+7.25%
(Floor 1.00%)
L+7.00%
(Floor 1.00%)
SOFR+7.50%
(Floor 1.00%)
9.50% PIK
—
Principal
Amount
Cost
Fair Value
Percentage of
Members'
Equity
368,811
368,810
346,695
0.54 %
6,607,500
6,561,763
5,087,775
7.94 %
6,860,000
6,835,569
6,791,399
10.59 %
2,775,000
2,712,583
2,391,120
3.73 %
1,650,209
1,640,577
561,070
0.88 %
5,596,801
5,582,240
5,316,962
8.29 %
10,049,775
10,016,805
9,929,178
15.49 %
6,112,587
5,998,755
5,868,085
9.15 %
2,476,833
601,606
564,693
2,476,832
601,632
564,693
2,427,296
547,461
513,870
3.79 %
0.85 %
0.80 %
—
—
—
748,600
552,953
0.86 %
Lightbox Intermediate,
L.P.
LOGIX Holdings
Company, LLC
Mills Fleet Farm Group
LLC
National Credit Care,
LLC
Software & IT
services
First Lien
5/9/2026
Telecommunications First Lien
Consumer products
& retail
12/23/2024
10/24/2024
First Lien
First Lien -
Term Loan A 12/23/2026
First Lien -
Term Loan B
12/23/2026
Consumer services
NBG Acquisition, Inc. Wholesale
5
First Lien
4/26/2024
NinjaTrader, Inc.
Financial services
First Lien
12/18/2024
5
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%)
6,876,393
6,831,428
6,635,720
10.35 %
4,443,350
4,431,262
3,637,991
5.67 %
4,490,700
4,462,209
4,400,885
6.86 %
2,159,091
2,125,317
2,122,171
3.31 %
2,159,091
2,125,121
2,122,170
3.31 %
2,606,250
2,592,630
78,187
0.12 %
5,000,000
4,939,218
5,000,000
7.80 %
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2023
6
Portfolio Company
Research Now Group,
Inc.
Retail Services WIS
Corporation
Industry
Investment
1
Type
Maturity
Date
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
Tacala, LLC
Aerospace & defense First Lien
Consumer products
& retail
First Lien
10/2/2028
2/5/2027
TEAM Services Group,
LLC
Healthcare services
First Lien
12/20/2027
Second Lien
2/4/2028
U.S. TelePacific Corp.
Veregy Consolidated,
Inc.
Vida Capital, Inc.
Wahoo Fitness
5
Acquisition, LLC
YS Garments, LLC
Total Investments
Telecommunications First Lien
Environmental
services
Financial services
Consumer products
& retail
Consumer products
& retail
First Lien
First Lien
First Lien
First Lien
5/1/2026
11/3/2027
10/1/2026
8/14/2028
8/9/2026
Current
2
Interest Rate
L+5.50%
(Floor 1.00%)
L+7.75%
(Floor 1.00%)
L+6.25%
(Floor 1.00%)
SOFR+5.50%
(Floor 0.75%)
L+3.50%
(Floor 0.75%)
L+7.50%
(Floor 0.75%)
L+5.00%
(Floor 1.00%)
SOFR+1.00%,
7.25% PIK
(Floor 1.00%)
L+6.00%
(Floor 1.00%)
L+6.00%
SOFR+5.75%
(Floor 1.00%)
L+7.50%
(Floor 1.00%)
Principal
Amount
Cost
Fair Value
Percentage of
Members'
Equity
5,873,577
5,836,826
4,504,770
7.03 %
2,826,812
2,793,391
2,742,007
4.28 %
2,928,750
2,884,429
2,840,888
4.43 %
2,265,500
2,246,704
2,172,048
3.39 %
989,583
949,481
973,913
1.52 %
6,000,000
5,958,064
5,501,280
8.58 %
6,619,754
6,582,130
6,454,260
10.07 %
5,635,000
5,634,999
1,479,187
2.31 %
1,955,000
3,265,000
1,950,885
3,236,194
1,683,255
2,407,937
2.63 %
3.76 %
4,875,000
4,751,309
2,071,876
3.23 %
4,156,593
4,131,944
3,740,936
$169,874,371 $ 143,712,034
5.83 %
224.15 %
(1) Corporate bank loans and common stock and warrants represent 222.1% and 2.1%, respectively, of Members' Equity as of March 31, 2023.
(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, 2023. Certain investments are subject to an interest rate floor. Certain investments, as noted, accrue payment-in-kind ("PIK") interest. SOFR
based contracts may include a credit spread adjustment (the "Adjustment") that is charged in addition to the stated spread. The Adjustment is applied when the SOFR rate, plus
the Adjustment, exceeds the stated floor rate, as applicable. As of March 31, 2023, SOFR based contracts in the portfolio had Adjustments ranging from 0.10% to 0.26161%.
(3) The investment has approximately $246.6 thousand in an unfunded revolver commitment as of March 31, 2023.
(4) The investment has approximately $43.8 thousand in an unfunded delayed draw commitment as of March 31, 2023.
(5)
(6) All portfolio companies are domiciled in the United States, unless otherwise noted.
(7) The company is domiciled in Canada.
Investment was on non-accrual status as of March 31, 2023, meaning the Company has ceased to recognize interest income on the investment.
See accompanying notes to consolidated financial statements.
6
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
—
—
ADS Tactical, Inc.
American
Teleconferencing
5
Services, Ltd.
Aerospace & defense
First Lien
3/19/2026
Telecommunications
Revolving
Loan
6/30/2022
First Lien
6/8/2023
ATX Networks (Toronto)
7
Corporation
Technology products &
components
Burning Glass
Intermediate Holding
Company, Inc.
Software & IT services
First Lien
Senior
Subordinated
Debt
196 Class A
units
Revolving
3
Loan
9/1/2026
—
6/10/2028
7
Corel, Inc.
Software & IT services
Emerald Technologies
(U.S.) Acquisitionco,
Inc.
Technology products &
components
First Lien
First Lien
6/10/2028
7/2/2026
First Lien
12/29/2027
Evergreen AcqCo 1 LP
Evergreen North
America Acquisitions,
LLC
Geo Parent Corporation
Consumer products &
retail
First Lien
4/26/2028
Industrial services
Building & infrastructure
products
First Lien
8/13/2026
Current
2
Interest 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%
(Floor
2.00%)
P+5.50%
(Floor
2.00%)
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
1,020,896
63,855
0.09 %
5,597,579
5,565,782
307,867
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
6,802,781
3,139,669
6,649,975
3,189,452
6,804,924
4.43 %
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 %
7
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
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
Inventus Power, Inc.
INW Manufacturing,
LLC
Isagenix International,
LLC
KORE Wireless Group
Inc.
Technology products &
components
Food, agriculture, &
beverage
First Lien
3/29/2024
First Lien
3/25/2027
Consumer products & retail First Lien
6/14/2025
Telecommunications
First Lien
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
Delayed
Draw Term
4
Loan
Tranche A
Tranche B
Tranche C
1,051 shares
common
stock
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.
LOGIX Holdings
Company, LLC
Mills Fleet Farm Group
LLC
Software & IT services
First Lien
5/9/2026
Telecommunications
First Lien
12/23/2024
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 %
8
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2022
Maturity
Date
Current
2
Interest Rate
Principal
Amount
Cost
Fair Value
Percentage of
Members'
Equity
12/23/2026
L+6.50%
(Floor 1.00%)
2,500,000
2,452,711
2,482,500
3.45 %
6
Portfolio Company
Industry
National Credit Care,
LLC
Consumer services
First Lien - Term Loan B
Investment
1
Type
First Lien -
Term Loan
A
First Lien -
Term Loan
B
12/23/2026
NBG Acquisition, Inc. Wholesale
First Lien
4/26/2024
NinjaTrader, Inc.
NorthStar Group
Services, Inc.
Research Now Group,
Inc.
Retail Services WIS
Corporation
Financial services
First Lien
12/18/2024
Environmental services
First Lien
11/9/2026
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
TEAM Services Group,
LLC
Consumer products & retail Second Lien
2/7/2028
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.
Veregy Consolidated,
Inc.
Vida Capital, Inc.
Wahoo Fitness
Acquisition, LLC
Telecommunications
First Lien
5/1/2026
Environmental services
Financial services
First Lien
First Lien
11/3/2027
10/1/2026
Consumer products & retail First Lien
8/14/2028
9
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%)
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 %
I-45 SLF LLC
and Subsidiary
Consolidated Schedules of Investments
March 31, 2022
6
Portfolio Company
Industry
Investment
1
Type
Maturity
Date
YS Garments, LLC
Consumer products &
retail
First Lien
8/9/2024
Current
2
Interest Rate
L+5.50%
(Floor
1.00%)
Principal
Amount
Cost
Fair Value
Percentage of
Members'
Equity
4,281,594
4,264,683
4,238,778
5.88 %
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.
10
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Operations
2023
Years Ended March 31,
2022
2021
$
16,537,219 $
—
376,940
16,914,159
7,302,023
100,130
139,949
7,542,102
9,372,057
12,614,627 $
6,049
183,154
12,803,830
3,819,893
125,298
220,781
4,165,972
8,637,858
13,503,215
—
426,418
13,929,633
4,236,991
118,416
209,783
4,565,190
9,364,443
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
1,223,803
(15,152,771)
(13,928,968)
1,047,337
(4,569,244)
(3,521,907)
(15,312,952)
30,467,391
15,154,439
Net (decrease) increase in members' equity resulting from operations
$
(4,556,911) $
5,115,951 $
24,518,882
See accompanying notes to consolidated financial statements.
11
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 (decrease) increase in members' equity resulting from operations
2023
Years Ended March 31,
2022
2021
72,048,107 $
6,000,000
(9,376,360)
68,671,747
71,573,341 $
4,000,000
(8,641,185)
66,932,156
9,372,057
1,223,803
(15,152,771)
(4,556,911)
8,637,858
1,047,337
(4,569,244)
5,115,951
49,779,446
16,000,000
(18,724,987)
47,054,459
9,364,443
(15,312,952)
30,467,391
24,518,882
Members' equity ending balance
$
64,114,836 $
72,048,107 $
71,573,341
See accompanying notes to consolidated financial statements.
12
I-45 SLF LLC
and Subsidiary
Consolidated Statements of Cash Flows
Cash flows from operating activities
Net (decrease) increase 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 provided by (used in) operating activities
Cash flows from financing activities
Borrowings under credit facility
Repayments of credit facility
Deferred financing costs paid
Capital contributions
Distributions
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information
Cash paid during the period for interest
Supplemental disclosure of noncash financing activities
Distributions payable
2023
Years Ended March 31,
2022
2021
$
(4,556,911) $
5,115,951 $
24,518,882
(1,203,361)
15,152,771
(443,918)
1,037,109
(16,450,381)
35,875,329
1,173,049
(1,111,310)
(914,554)
(294,910)
65,097
—
20,358
6,401
28,354,769
14,500,000
(43,000,000)
—
6,000,000
(9,325,218)
(31,825,218)
(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
(3,470,449)
9,948,554
6,478,105 $
(470,045)
10,418,599
9,948,554 $
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)
6,679,495
3,739,104
10,418,599
5,871,220 $
2,983,211 $
3,357,055
2,425,586 $
2,374,444 $
1,920,085
$
$
$
See accompanying notes to consolidated financial statements.
13
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. On January 19, 2023, the Company called $6.0 million in
equity capital from its members. As of March 31, 2023, total funded equity capital totaled $101.0 million, consisting of $80.8 million from Capital Southwest
Corporation and $20.2 million from Main Street Capital Corporation. The Company's Board of Managers makes all investment and operational decisions for the fund,
and consists of equal representation from Capital Southwest Corporation and Main Street Capital Corporation.
On March 11, 2021, Capital Southwest Corporation and Main Street Capital Corporation entered into the Second Amended and Restated Limited Liability
Company Operating Agreement (the "Amendment"), which increased Capital Southwest Corporation's profits interest from (a) 75.6% to (b) an amount equal to: (i)
76.26250% as of the date of the Amendment through the quarter ended March 31, 2021; (ii) 76.9250% for the quarter ending June 30, 2021; (iii) 77.58750% for the
quarter ending September 30, 2021; and (iv) 78.250% for the quarter ending December 31, 2021 and periods thereafter.
On September 18, 2015, the Company’s wholly-owned and consolidated subsidiary, I-45 SPV LLC (the “SPV”) was organized as a Delaware limited liability
company by the filing of a certificate of formation with the Office of the Secretary of State of the State of Delaware. The Company is the sole equity member of the SPV.
All intercompany balances and transactions have been eliminated in consolidation.
The registered agent and office of the Company required by the Act to be maintained in the State of Delaware is The Corporation Trust Company, 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801. The principal office of the Company shall be located at such place within or without the State of Delaware,
and the Company shall maintain such records, as the Members shall determine from time to time.
BASIS OF PRESENTATION
The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles (“U.S. GAAP”) as detailed in the Financial
Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). The Company is an investment company and follows the accounting and
reporting guidance in FASB Topic 946 - Financial Services - Investment Companies (“ASC Topic 946”). Financial statements prepared on a U.S. GAAP basis require
management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Investment transactions are accounted for on a trade-date basis. Premiums and discounts are amortized over the lives of the respective debt securities using the
effective interest method. Investments that are held by the Company are stated at fair value in accordance with ASC Topic 820 - Fair Value Measurements and
Disclosures (“ASC Topic 820”).
14
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. Cash may be held in a money market fund from time to time, which is a Level 1 security.
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, 2023,
the Company had four investments on non-accrual status, which represented approximately 2.1% of the total investment portfolio's fair value and approximately 9.1% of
its cost. As of March 31, 2022, the Company had one investment on non-accrual status, which represented 0.2% of the total investment portfolio's fair value and
approximately 3.5% of its cost.
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, 2022, 2021 and 2020 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,
2019 through 2021.
15
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 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 and certain 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. On December 21, 2022 the FASB issued
ASU 2022-06 "Reference rate reform (Topic 848)—Deferral of the Sunset Date of Topic 848," which defers the sunset date of ASC 848 until December 31, 2023. ASU
2022-06 became effective upon issuance. The expedients and exceptions provided by the amendments do not apply to contract modifications and hedging relationships
entered into or evaluated after December 31, 2024, except for hedging transactions as of December 31, 2024, that an entity has elected certain optional expedients for and
that are retained through the end of the hedging relationship. The Company does not believe it will have a material impact on its consolidated financial statements or its
disclosure and did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the year ended March 31, 2023.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale
Restrictions,” which was issued to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to
contractual restrictions that prohibit the sale of an equity security, (2) amend a related illustrative example, and (3) introduce new disclosure requirements for equity
securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The new guidance is effective for interim and annual
periods beginning after December 15, 2024. The Company is currently evaluating the impact of the new standard on the Company's consolidated financial statements and
related disclosures and does not believe it will have a material impact on its consolidated financial statements or its disclosure.
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, 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:
16
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.
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, 2023 and 2022:
Type of Investment
Fair Value at March 31,
2023
Valuation Technique
Unobservable Input
Range
Corporate bank loans
$
Common stock and warrants
79,760,373
62,624,344
1,327,317
Income Approach
Income Approach
Enterprise Value Waterfall
Analysis
Enterprise Value Waterfall
Analysis
Broker Quotes
Discount Rate
3.0 - 98.4
8.2% - 16.7%
Discount Rate
12.1% - 20.0%
EBITDA Multiple
9.0x - 10.0x
Type of Investment
$
143,712,034
Fair Value at March 31,
2022
Valuation Technique
Unobservable Input
Range
Corporate bank loans
$
Common stock and warrants
107,165,687
57,124,375
9,734,012
2,680,139
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
$
176,704,213
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, 2023 and 2022. The inputs or methodology used for
valuing investments are not necessarily an indication of the risk associated with investing in those investments.
17
The following is a summary categorization, as of March 31, 2023, of the Company’s investments based on the level of inputs utilized in determining the value
Level 1
Level 2
Level 3
Total
$
— $
—
—
— $
—
—
—
142,384,717 $
1,327,317
143,712,034
142,384,717
1,327,317
143,712,034
—
3,074,055
Cash equivalents - money market fund
3,074,055
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
$
3,074,055 $
— $
143,712,034 $
146,786,089
of such investments:
Investments (at fair value)
Corporate bank loans
Common stock and warrants
Total investments
of such investments:
Investments (at fair value)
Corporate bank loans
Common stock and warrants
Total investments
Level 1
Level 2
Level 3
Total
$
— $
—
—
— $
—
—
—
174,024,074 $
2,680,139
176,704,213
174,024,074
2,680,139
176,704,213
—
1,549,246
Cash equivalents - money market fund
1,549,246
$
1,549,246 $
— $
176,704,213 $
178,253,459
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, 2023 and 2022, the Company purchased $16,450,381 and $75,778,732, 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%.
On March 30, 2023, the Credit Facility was further amended to permanently reduce the Credit Facility amount to $100.0 million in total debt commitments and
replace LIBOR with Term SOFR as the reference interest rate. After giving effect to the amendment, the interest rate on borrowings is Term SOFR rate plus 2.41%.
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
18
Company. The Credit Facility contains certain affirmative and negative covenants, including but not limited to maintenance of a borrowing base.
At March 31, 2023 and 2022, the Company had $86.0 million and $114.5 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 $7.3 million, $3.8 million, and $4.2 million respectively, for the years ended March 31, 2023, 2022, and 2021. The weighted average interest
rate on the Credit Facility was 5.48% and 2.40%, respectively, for the years ended March 31, 2023 and 2022. Average borrowings for the years ended March 31, 2023
and 2022 were $104.2 million and $102.9 million, respectively.
A summary of the Company's contractual payment obligations for the repayment of outstanding indebtedness at March 31, 2023 is as follows:
Credit Facility
$
— $
— $
86,000 $
— $
— $
— $
86,000
2024
2025
2026
2027
2028
Thereafter
Total
Years Ending March 31,
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, 2023 and 2022, the balance in due from
brokers is cash of approximately $1.0 million and $0.1 million, respectively.
7. ADMINISTRATION AGREEMENT
In consideration for administrative, accounting, and recordkeeping services, the Company engaged US Bancorp Fund Services, LLC ("USBFS") for the years
ended March 31, 2022 and March 31, 2021. Effective April 1, 2022, the Company terminated its administration agreement with USBFS and entered into an
administration agreement with Capital Southwest Corporation (the "Administrator").
The Company paid USBFS a quarterly administration fee, which was calculated based on the quarter end invested assets. For the year ended March 31, 2022,
the Company had incurred $125.3 thousand in administration fees, of which $31.6 thousand were payable at the end of the year. For the year ended March 31, 2021, the
Company had incurred $118.4 thousand in administration fees, of which $28.5 thousand were payable at the end of the year.
Effective April 1, 2022, the Company pays the Administrator an annual administration fee, which is set as the lesser of (a) $100 thousand and (b) the invested
assets par value multiplied by six basis points. For the year ended March 31, 2023, the Company had incurred $100.1 thousand in administration fees, of which $25.0
thousand were payable at the end of the year.
19
USBFS is affiliated with a broker, U.S. Bank, through which the Company transacts operations. At March 31, 2023, cash and cash equivalents in the amount of
$6.5 million are held with U.S. Bank. At March 31, 2022, cash and cash equivalents in the amount of $9.9 million are held by U.S. Bank.
8. RELATED PARTY TRANSACTIONS
The Administrator is a member of the Company. The Administrator owns 80.0% of the Company and has a current profits interest of 78.25%. The
administration agreement effective April 1, 2022 was approved by the Company's Board of Managers. As of March 31, 2023, the Company had dividends payable to the
Administrator of $1.9 million, which was included in distributions payable on the Consolidated Statements of Assets, Liabilities and Members' Equity.
9. COMMITMENTS AND CONTINGENCIES
The Company entered into various trades during the periods ended March 31, 2023 and 2022. As of March 31, 2023 there was an outstanding trade in the
amount of approximately $0.7 million that remained unsettled. This amount is included in the balance of Due from Broker on the Consolidated Statements of Assets,
Liabilities and Members' Equity. As of March 31, 2022, 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, 2023 and 2022:
Portfolio Company
AAC New Holdco Inc.
Burning Glass Intermediate Holding Company, Inc.
Lash OpCo, LLC
Total unused commitments to extend financing
Investment Type
Delayed Draw Term Loan
Revolving Loan
Delayed Draw Term Loan
March 31,
2023
March 31,
2022
43,814 $
246,575
—
290,389 $
—
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 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.
10. 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)
2023
Years Ended March 31,
2022
2021
14.46 %
(11.64)%
8.06 %
11.77 %
(5.68)%
9.85 %
13.42 %
(6.54)%
10.25 %
(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.
20
10. SUBSEQUENT EVENTS
Management has evaluated the need for additional disclosures and/or adjustments resulting from subsequent events through May 12, 2023, the date the
consolidated financial statements were available to be issued.
21
Report of Independent Registered Public Accounting Firm
Exhibit 99.2
Board of Directors and Shareholders
Capital Southwest Corporation and Subsidiaries
Our audits of the consolidated financial statements referred to in our report dated May 23, 2023, 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, 2023, included in
Part II, Item 5 of the Company’s annual report on Form 10-K for the year ended March 31, 2023. 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 23, 2023