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Introduction & Market Context
Capital Southwest Corporation (NASDAQ:CSWC), an internally managed business development company (BDC), presented its Q4 2025 earnings results on May 15, 2025, highlighting continued portfolio growth and consistent dividend performance. The company, which focuses on providing customized financing to middle-market companies, reported pre-tax net investment income of $28.5 million or $0.56 per share for the quarter ended March 31, 2025.
The Dallas-based firm, which has been operating since 1961 and elected BDC status in 1988, continues to maintain its investment-grade ratings of Baa3 from Moody’s and BBB- from Fitch. Notably, Fitch upgraded CSWC’s secured debt rating to BBB from BBB- during the fiscal year, reflecting the company’s strengthening financial position.
Quarterly Performance Highlights
For Q4 2025, Capital Southwest reported adjusted pre-tax net investment income of $0.61 per share, excluding one-time expenses of $2.8 million ($0.05 per share) related to the departure of the former President and CEO. The company declared a regular dividend of $0.58 per share and a supplemental dividend of $0.06 per share for the quarter ending June 30, 2025.
The investment portfolio reached approximately $1.8 billion at fair value, with net asset value per share of $16.70 as of March 31, 2025. During the quarter, the company raised $68.6 million in gross proceeds through its Equity ATM Program at a weighted average price of $22.91 per share, representing 138% of the prevailing NAV per share.
As shown in the following chart, the company’s NAV per share increased from $16.59 at the end of December 2024 to $16.70 by March 31, 2025, with pre-tax net investment income of $0.56 per share partially offset by regular and supplemental dividends totaling $0.64 per share:
The company’s investment activity remained robust during the quarter, with $149.9 million in total new committed investments to four new portfolio companies and fifteen existing portfolio companies. These new commitments consisted primarily of first lien debt (97.5%) with a weighted average spread of 6.90%. Additionally, CSWC exited nine portfolio investments, generating proceeds of $40.6 million and net realized gains of $5.1 million.
Portfolio Quality and Composition
Capital Southwest maintains a diversified investment portfolio with a strong focus on first lien investments, which represented 88.9% of the total portfolio at fair value as of March 31, 2025. The portfolio included 121 companies with a weighted average EBITDA of $18.5 million and weighted average leverage through CSWC’s security of 3.5x.
The following chart illustrates the company’s investment portfolio composition by type and industry:
The credit quality of the portfolio remains strong, with over 95% of debt investments rated as "1" or "2" on the company’s internal rating scale. The quarter-over-quarter investment rating migration shows stability in the portfolio’s credit quality:
The company’s credit portfolio is heavily weighted toward first lien investments, which comprised 99% of the credit portfolio as of March 31, 2025, with an average investment hold size of 0.9%:
Dividend Strategy and Value Creation
Capital Southwest has maintained a consistent dividend strategy, with a track record of regular dividend coverage through pre-tax net investment income. In the last twelve months ended March 31, 2025, CSWC generated $2.53 per share in pre-tax NII and paid out $2.31 per share in regular dividends, representing a 110% coverage ratio.
The following chart demonstrates the company’s dividend history and yield:
Since launching its credit strategy in 2015, Capital Southwest has created significant value for shareholders. The total value per share (NAV plus cumulative dividends paid) has increased by $17.72 through March 31, 2025:
Balance Sheet and Liquidity
Capital Southwest maintains a strong balance sheet with significant unused debt capacity and long-term duration. The company’s earliest debt maturity is in October 2026, providing ample runway for continued portfolio growth. As of March 31, 2025, CSWC had $341 million of total availability under its credit facilities and $43 million in cash and cash equivalents.
The company’s debt structure and maturity schedule are illustrated below:
Capital Southwest has demonstrated impressive operating leverage as it has scaled its business. Total (EPA:TTEF) assets have grown from $284 million in FY16 to $1,883 million in FY25, while operating expenses as a percentage of average total assets have decreased from 4.9% to 1.7% over the same period:
The company’s interest rate sensitivity analysis indicates that its predominantly floating-rate portfolio (97.3%) positions it to benefit from rising interest rates, while providing some cushion against moderate rate decreases:
Forward-Looking Statements
Looking ahead, Capital Southwest is well-positioned for continued growth with its recent receipt of a second SBIC license from the SBA (LON:SBA) in April 2025. The company also increased the total commitments on its Corporate Credit Facility to $510 million from $485 million after the quarter end, further enhancing its liquidity position.
The company’s strategy remains focused on the lower middle market, targeting companies with EBITDA between $3 million and $25 million, typical leverage of 2.5x to 4.5x debt to EBITDA, and investment sizes ranging from $5 million to $50 million. This approach, combined with the company’s disciplined underwriting standards and diversified portfolio, should continue to support stable returns for shareholders.
Capital Southwest’s fiscal year 2025 performance demonstrated strong growth, with investments at fair value increasing 21% year-over-year to $1.8 billion and investment revenue rising 15% to $204.4 million. The company’s focus on first lien investments, combined with its internally managed structure and improving operating leverage, positions it well to navigate potential market volatility while maintaining its dividend strategy.
Full presentation:
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