Capital Southwest Corporation

Equities

CSWC

US1405011073

Investment Management & Fund Operators

Market Closed - Nasdaq Other stock markets 21:00:00 15/07/2024 BST			5-day change	1st Jan Change
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05-16	B. Riley Raises Price Target on Capital Southwest to $25 From $24, Keeps Neutral Rating	MT
05-16	JMP Securities Downgrades Capital Southwest to Market Perform From Market Outperform	MT

CAPITAL SOUTHWEST CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

January 31, 2023 at 09:25 pm

The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto appearing elsewhere in this Quarterly
Report on Form 10-Q.

The information contained herein may contain "forward-looking statements" based
on our current expectations, assumptions and estimates about us and our
industry. These forward-looking statements involve risks and uncertainties.
Words such as "may," "predict," "will," "continue," "likely," "would," "could,"
"should," "expect," "anticipate," "potential," "estimate," "indicate," "seek,"
"believe," "target," "intend," "plan," or "project" and other similar
expressions identify forward-looking statements. These risks include risks
related to changes in the markets in which the Company invests; changes in the
financial and lending markets; interest rate volatility, including the
decommissioning of LIBOR and rising interest rates; the impact of supply chain
constraints and labor difficulties on our portfolio companies and the global
economy; the elevated level of inflation, and its impact on our portfolio
companies and on the industries in which we invest; regulatory changes; tax
treatment and general economic and business conditions; our ability to operate
our wholly owned subsidiary, Capital Southwest SBIC I, LP, as a small business
investment company; and uncertainties associated with the continued impact from
the COVID-19 pandemic and new variants of COVID-19, including its impact on the
global and U.S. capital markets and the global and U.S. economy, the length and
duration of the COVID-19 pandemic in the United States as well as worldwide and
the magnitude of the economic impact of that outbreak; the effect of the
COVID-19 pandemic on our business prospects and the operational and financial
performance of our portfolio companies, including our ability and their ability
to achieve their respective objectives, and the effects of the disruptions
caused by the COVID-19 pandemic on our ability to continue to effectively manage
our business. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements that are subject to risks, uncertainties and
assumptions. Our actual results could differ materially from those we express in
the forward-looking statements as a result of several factors more fully
described in "Risk Factors" and elsewhere in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2022 and in this Quarterly Report on Form 10-Q.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate
only to events as of the date on which the statements are made. You should read
the following discussion in conjunction with the consolidated financial
statements and related footnotes and other financial information included in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2022. We
undertake no obligation to update publicly any forward-looking statements for
any reason, whether as a result of new information, future events or otherwise,
except as required by law.

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,

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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 nine months ended December 31, 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 1.89% and
2.73%, 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 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
December 31, 2022 and March 31, 2022, our investment portfolio at fair value
represented approximately 95.7% 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.

Our Board of Directors is responsible for determining, in good faith, the fair
value for our investment portfolio and our valuation procedures, consistent with
1940 Act requirements. Our Board of Directors believes that our investment
portfolio as of December 31, 2022 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.


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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 December 31, 2022,
investments on non-accrual status represented approximately 0.3% of our total
investment portfolio's fair value and approximately 1.4% 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 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 nine months ended December 31, 2022.

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 $1,150.0 million as of December
31, 2022, as compared to $936.6 million as of March 31, 2022. As of December 31,
2022, we had investments in 82 portfolio companies with an aggregate cost of
$1,159.7 million. As of March 31, 2022, we had investments in 73 portfolio
companies with an aggregate cost of $938.3 million.

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As of December 31, 2022 and March 31, 2022, approximately $957.4 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 both December 31, 2022 and
March 31, 2022, the weighted average contractual minimum interest rate is 1.14%
and 1.08%, respectively. As of December 31, 2022 and March 31, 2022,
approximately $32.9 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 December 31, 2022 and March 31, 2022 (excluding our investment in I-45 SLF
LLC):
                                                            December 31, 2022          March 31, 2022
                                                                      (dollars in thousands)
Number of portfolio companies (a)                                            81                      72
Fair value                                                 $       1,102,421          $      879,011
Cost                                                       $       1,083,712          $      862,303
% of portfolio at fair value - debt                                     89.8  %                 90.3  %
% of portfolio at fair value - equity                                   10.2  %                  9.7  %
% of investments at fair value secured by first lien                    86.5  %                 84.2  %
Weighted average annual effective yield on debt
investments (b)                                                         12.0  %                  9.3  %
Weighted average annual effective yield on total
investments (c)                                                         11.7  %                  9.0  %
Weighted average EBITDA (d)                                $          22,102          $       20,889
Weighted average leverage through CSWC security (e)                        3.6x                    4.0x

(a)At December 31, 2022 and March 31, 2022, we had equity ownership in approximately 59.3% 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 December 31, 2022 and March 31, 2022, respectively, including accretion of
original issue discount but excluding fees payable upon repayment of the debt
instruments. As of December 31, 2022, investments on non-accrual status
represented approximately 0.3% of our total investment portfolio's fair value
and approximately 1.4% 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 quarter ended December
31, 2022, 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.

(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 quarter ended December 31, 2022, 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

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other industry participants and the portfolio company's future outlook. The ratings are not intended to reflect the performance or expected level of returns of our equity investments.



•Investment Rating 1 represents the least amount of risk in our portfolio. The
investment is performing materially above underwriting expectations and the
trends and risk factors are generally favorable. The investment generally has a
higher probability of being prepaid in part or in full.

•Investment Rating 2 indicates the investment is performing as expected at the
time of underwriting and the trends and risk factors are generally favorable to
neutral. All new loans are initially rated 2.

•Investment Rating 3 involves an investment performing below underwriting
expectations and the trends and risk factors are generally neutral to negative.
The investment may be out of compliance with financial covenants and interest
payments may be impaired, however principal payments are generally not past due.

•Investment Rating 4 indicates that the investment is performing materially
below underwriting expectations, the trends and risk factors are generally
negative and the risk of the investment has increased substantially. Interest
and principal payments on our investment are likely to be impaired.


As the COVID-19 pandemic continues to evolve, we are closely monitoring the
impact of the COVID-19 pandemic (including any new variants of COVID-19) on our
portfolio companies, our due diligence and underwriting processes, and financial
markets. The operational and financial performance of the portfolio companies in
which we make investments may be significantly impacted by COVID-19, which may
in turn impact the valuation of our investments.

We 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), 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 December 31, 2022 and
March 31, 2022:
                                            As of December 31, 2022
 Investment Rating     Debt Investments at Fair Value       Percentage of Debt Portfolio
                                            (dollars in thousands)
 1                    $                       118,016                             11.9  %
 2                                            823,966                             83.2
 3                                             47,993                              4.8
 4                                                323                              0.1
 Total                $                       990,298                            100.0  %


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                                             As of March 31, 2022
 Investment Rating     Debt Investments at Fair Value       Percentage of Debt Portfolio
                                            (dollars in thousands)
 1                    $             124,192                                       15.6  %
 2                                  632,675                                       79.7
 3                                   36,648                                        4.6
 4                                      319                                        0.1
 Total                $             793,834                                      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 December 31, 2022, investments on non-accrual status represented
approximately 0.3% of our total investment portfolio's fair value and
approximately 1.4% 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 nine months ended December 31, 2022, we made new debt investments
totaling $221.3 million, follow-on debt investments totaling $85.4 million, and
equity investments totaling $7.9 million. We received contractual principal
repayments totaling approximately $18.4 million and full prepayments of
approximately $72.6 million. We funded $28.8 million on revolving loans and
received $17.7 million in repayments on revolving loans. In addition, we
received proceeds from sales of debt and equity investments totaling $3.4
million.

During the nine months ended December 31, 2021, we made new debt investments
totaling $350.3 million, follow-on debt investments totaling $29.5 million, and
equity investments totaling $11.8 million. We also funded $3.2 million on our
existing equity commitment to I-45 SLF LLC. We received contractual principal
repayments totaling approximately $11.7 million and full prepayments of
approximately $209.8 million. We funded $15.3 million on revolving loans and
received $5.1 million in repayments on revolving loans. In addition, we received
proceeds from sales of investments totaling $11.9 million.

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Total portfolio investment activity for the nine months ended December 31, 2022 and 2021 was as follows (dollars in thousands):


                                                                                                        Preferred

Nine months ended December 31, First Lien Second Lien

                             & Common
2022                                  Loans               Loans             Subordinated Debt            Equity             I-45 SLF, LLC

Total

Fair value, beginning of period $ 739,872 $ 52,645 $


           1,317          $   85,177          $       57,603          $   936,614
New investments                      332,391               2,735                         385               7,891                       -              343,402
Proceeds from sales of
investments                                -                (692)                          -              (2,664)                      -               (3,356)
Principal repayments received        (96,475)            (12,239)                          -                   -                       -             (108,714)
Conversion of security               (13,715)                  -                        (587)             14,302                       -                    -
PIK interest earned                    3,512                 314                          65                   -                       -                3,891
Accretion of loan discounts            2,678                 195                           -                   -                       -                2,873
Realized (loss) gain                  (5,083)             (2,240)                       (104)             (9,260)                      -              (16,687)
Unrealized gain (loss)                (9,180)             (5,272)                       (224)             16,677                  (9,978)              (7,977)
Fair value, end of period         $  954,000          $   35,446          $              852          $  112,123          $       47,625          $ 1,150,046


                                                                                                       Preferred

Nine months ended December 31, First Lien Second Lien

                             & Common
2021                                  Loans               Loans             Subordinated Debt            Equity            I-45 SLF, LLC

Total

Fair value, beginning of period $ 524,161 $ 36,919 $


          11,534          $  58,660          $       57,158          $ 688,432
New investments                      376,192              18,669                         237             11,768                   3,200            410,066
Proceeds from sales of
investments                                -                 (53)                          -            (11,881)                      -            (11,934)
Principal repayments received       (219,454)             (7,152)                          -                  -                       -           (226,606)
Conversion of security                (4,683)              5,208                           -               (525)                      -                  -
PIK interest earned                    1,994               1,079                         477                  -                       -              3,550
Accretion of loan discounts            1,972                 172                          33                  -                       -              2,177
Realized gain                           (580)             (2,274)                          -              8,845                       -              5,991
Unrealized gain (loss)                  (418)                483                         165              7,628                  (2,769)             5,089
Fair value, end of period         $  679,184          $   53,051          $           12,446          $  74,495          $       57,589          $ 876,765


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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 appreciation (depreciation) 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.

Comparison of three months ended December 31, 2022 and December 31, 2021


                                                         Three Months Ended
                                                            December 31,                            Net Change
                                                       2022               2021              Amount                %
                                                           (in thousands)
Total investment income                            $   32,766          $ 22,311          $  10,455                46.9  %
Interest expense                                       (7,937)           (4,655)            (3,282)               70.5  %
Other operating expenses                               (6,150)           (5,819)              (331)                5.7  %
Income before taxes                                    18,679            11,837              6,842                57.8  %
Income tax benefit                                       (746)              (62)              (684)            1,103.2  %
Net investment income                                  19,425            11,899              7,526                63.2  %
Net realized (loss) gain on investments, net of
tax                                                   (11,086)            2,715            (13,801)             (508.3) %
Net unrealized (depreciation) appreciation on
investments, net of tax                                (5,390)           (2,054)            (3,336)             (162.4) %

Net increase (decrease) in net assets from
operations                                         $    2,949          $ 12,560          $  (9,611)              (76.5) %



Investment Income

Total investment income consisted of interest income, dividend income, fee
income and other income for each applicable period. For the three months ended
December 31, 2022, we reported investment income of $32.8 million, a $10.5
million, or 46.9%, increase as compared to the three months ended December 31,
2021. The increase was primarily due to an $11.4 million increase in interest
income generated from our debt investments due to a 34.4% increase in the cost
basis of debt investments held by us from $754.0 million to $1,013.4 million
year-over-year, partially offset by a decrease in fee income of $1.7 million due
to more non-recurring fees received in the prior quarter.

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.

Interest and Fees on our Borrowings



For the three months ended December 31, 2022, our total interest expense was
$7.9 million, an increase of $3.3 million, as compared to the total interest
expense of $4.7 million for the three months ended December 31, 2021. The
increase was primarily attributable to an increase in average borrowings
outstanding and an increase in the weighted average interest rate on our total
debt from 3.18% to 4.69% for the three months ended December 31, 2021 and

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December 31, 2022, respectively. This increase in the weighted average interest rate was primarily due to an increase to the base rate on our Credit Facility.

Salaries, General and Administrative Expenses



For the three months ended December 31, 2022, our total employee compensation
expense (including both cash and share-based compensation) increased by
$0.2 million, or 4.1%, as compared to the total employee compensation expense
for the three months ended December 31, 2021. For the three months ended
December 31, 2022, our total general and administrative expense was $1.8
million, an increase of $0.2 million or 9.9%, as compared to the total general
and administrative expense of $1.6 million for the three months ended December
31, 2021. The increase was due to individually immaterial increases across
several general operating expenses.

Net Investment Income

For the three months ended December 31, 2022, income before taxes increased by $6.8 million, or 57.8%. Net investment income increased from the prior year period by $7.5 million, or 63.2%, to $19.4 million as a result of a $10.5 million increase in total investment income and a $0.7 million increase in income tax benefit, partially offset by a $3.3 million increase in interest expense.

Net Realized and Unrealized Gains (Losses) on Investments



During the three months ended December 31, 2022, we recognized net realized and
unrealized losses totaling $16.5 million, which primarily consisted of net
realized and unrealized losses on debt investments of $8.5 million, our
investment in I-45 SLF LLC of $3.3 million and equity investments of $1.2
million. These realized and unrealized gains and losses were due to changes in
fair value based on the overall EBITDA performance and cash flows of each
investment, as well as exits of investments. We also recorded an income tax
provision related to realized gains on investments of $0.1 million and net
unrealized depreciation related to deferred tax of $3.4 million associated with
the Taxable Subsidiary.

During the three months ended December 31, 2021, we recognized net realized and
unrealized gains totaling $0.7 million, which primarily consisted of net
realized and unrealized gains on equity investments of $5.5 million, partially
offset by net realized and unrealized losses on debt investments of $2.1 million
and our investment in I-45 SLF LLC of $2.0 million. These realized and
unrealized gains and losses were due to changes in fair value based on the
overall EBITDA performance and cash flows of each investment, as well as exits
of investments. We also recorded an income tax provision related to realized
gains on investments of $1.4 million and net unrealized appreciation related to
deferred tax associated with the Taxable Subsidiary of $0.7 million.



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Comparison of nine months ended December 31, 2022 and December 31, 2021



                                                         Nine Months Ended
                                                            December 31,                           Net Change
                                                       2022              2021              Amount                %
                                                           (in thousands)
Total investment income                            $  82,108          $ 61,186          $  20,922                34.2  %
Interest expense                                     (20,050)          (15,015)            (5,035)               33.5  %
Other operating expenses                             (15,771)          (14,855)              (916)                6.2  %
Income before taxes                                   46,287            31,316             14,971                47.8  %
Income tax (benefit) provision                           (20)              648               (668)             (103.1) %
Net investment income                                 46,307            30,668             15,639                51.0  %
Net realized (loss) gain on investments, net of
tax                                                  (17,401)            5,259            (22,660)             (430.9) %
Net unrealized (depreciation) appreciation on
investments, net of tax                              (13,989)            4,306            (18,295)             (424.9) %
Realized loss on extinguishment of debt                    -           (17,087)            17,087              (100.0) %

Net increase in net assets from operations $ 14,917 $ 23,146 $ (8,229)

              (35.6) %



Investment Income

Total investment income consisted of interest income, dividend income, fee
income and other income for each applicable period. For the nine months ended
December 31, 2022, we reported investment income of $82.1 million, a $20.9
million, or 34.2%, increase as compared to the nine months ended December 31,
2021. The increase was primarily due to a $21.3 million increase in interest
income generated from our debt investments due to a 34.4% increase in the cost
basis of debt investments held by us from $754.0 million to $1,013.4 million
year-over-year, partially offset by a decrease of $1.1 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.

Interest and Fees on our Borrowings



For the nine months ended December 31, 2022, our total interest expense was
$20.1 million, an increase of $5.0 million, as compared to the total interest
expense of $15.0 million for the nine months ended December 31, 2021. The
increase was primarily attributable to an increase in average borrowings
outstanding and an increase in the weighted average interest rate on our total
debt from 3.71% to 4.05% for the nine months ended December 31, 2021 and
December 31, 2022, respectively. The increase in the weighted average interest
rate was primarily due to an increase to the base rate on our Credit Facility.

Salaries, General and Administrative Expenses



For the nine months ended December 31, 2022, our total employee compensation
expense (including both cash and share-based compensation) increased by $0.1
million, or 1.2%, as compared to the total employee compensation expense for the
nine months ended December 31, 2021. For the nine months ended December 31,
2022, our total general and administrative expense was $5.7 million, an increase
of $0.8 million, or 16.2%, as compared to the total general and administrative
expense of $4.9 million for the nine months ended December 31, 2021. The
increase was primarily due to an increase in professional fees incurred in
connection with the compensation consultant engaged by the Compensation
Committee, an increase in audit fees and an increase in expenses related to the
Company's new office space.

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Net Investment Income



For the nine months ended December 31, 2022, income before taxes increased by
$15.0 million, or 47.8%. Net investment income increased from the prior year
period by $15.6 million, or 51.0%, to $46.3 million as a result of a $20.9
million increase in total investment income and a $0.7 million decrease in
income tax provision, partially offset by a $5.0 million increase in interest
expense.

Net Realized and Unrealized Gains (Losses) on Investments



During the nine months ended December 31, 2022, we recognized net realized and
unrealized losses totaling $31.4 million, which primarily consisted of net
realized and unrealized losses on debt investments of $22.4 million and on I-45
SLF LLC of $10.0 million, partially offset by net realized and unrealized gains
on equity investments of $7.3 million. These realized and unrealized gains and
losses were due to changes in fair value based on the overall EBITDA performance
and cash flows of each investment, as well as exits of investments. We also
recorded an income tax provision related to realized gains on investments of
$0.3 million and net unrealized depreciation related to deferred tax of $6.0
million associated with the Taxable Subsidiary.

During the nine months ended December 31, 2021, we recognized net realized and
unrealized gains totaling $9.6 million, which primarily consisted of net
realized and unrealized gains on equity investments of $16.5 million, partially
offset by net realized and unrealized losses on debt investments of $1.9 million
and I-45 SLF LLC of $2.8 million. These realized and unrealized gains and losses
were due to changes in fair value based on the overall EBITDA performance and
cash flows of each investment, as well as exits of investments. We also recorded
an income tax provision related to realized gains on investments of $1.4 million
and net unrealized depreciation related to deferred tax associated with the
Taxable Subsidiary of $0.8 million.

Realized Loss on Extinguishment of Debt



During the nine months ended December 31, 2022, we did not recognize any loss on
extinguishment of debt. During the nine months ended December 31, 2021, 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.

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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. As the impact
of COVID-19 continues to evolve and 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 nine months ended December 31, 2022, we experienced a net increase in
cash and cash equivalents in the amount of $10.3 million. During the foregoing
period, our operating activities used $193.6 million in cash, consisting
primarily of new portfolio investments of $343.4 million, partially offset by
$106.6 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 $204.1 million, consisting primarily of net proceeds from the
Equity ATM Program of $130.1 million, net proceeds from an underwritten equity
offering of $44.1 million, net proceeds from the issuance of SBA debentures of
$62.4 million and net borrowings on our Credit Facility of $20.0 million,
partially offset by cash dividends paid in the amount of $50.2 million. At
December 31, 2022, the Company had cash and cash equivalents of approximately
$21.7 million.

For the nine months ended December 31, 2021, we experienced a net decrease in
cash and cash equivalents in the amount of $12.9 million. During that period,
our operating activities used $139.1 million in cash, consisting primarily of
new portfolio investments of $410.1 million, partially offset by $221.5 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
$126.2 million, consisting primarily of net borrowings on our Credit Facility of
$70.0 million, net proceeds from the Equity ATM Program of $73.3 million, net
proceeds from the issuance of the October 2026 Notes of $146.4 million and net
proceeds from issuance of SBA debentures of $28.3 million, partially offset by
the redemption of the October 2024 Notes of $125.0 million and cash dividends
paid in the amount of $46.8 million. At December 31, 2021, the Company had cash
and cash equivalents of approximately $18.7 million.

Financing Transactions



In accordance with the 1940 Act, with certain limitations, effective April 25,
2019, the Company is only allowed to borrow amounts such that its asset coverage
(i.e., the ratio of assets less liabilities not represented by senior securities
to senior securities such as borrowings), calculated pursuant to the 1940 Act,
is at least 150% after such borrowing. The Board of Directors also approved a
resolution which limits the Company's issuance of senior securities such that
the asset coverage ratio, taking into account any such issuance, would not be
less than 166%, which became effective April 25, 2019. 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 December 31, 2022, the Company's asset
coverage was 229%.

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.

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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
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 December 31,
2022, substantially all of the Company's assets were pledged as collateral for
the Credit Facility, except for assets held in SBIC I.

At December 31, 2022, CSWC had $225.0 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 $3.9 million and $8.8 million for the three and nine months ended
December 31, 2022, respectively. For the three and nine months ended December
31, 2021, CSWC recognized interest expense of $1.6 million and $4.5 million,
respectively. The weighted average interest rate on the Credit Facility was
6.02% and 4.63% for the three and nine months ended December 31, 2022,
respectively. For the three and nine months ended December 31, 2021, the
weighted average interest rate on the Credit Facility was 2.37% and 2.52%,
respectively. Average borrowings for the three and nine months ended December
31, 2022 were $228.0 million and $208.6 million, respectively. For the three and
nine months ended December 31, 2021, average borrowings were $200.2 million and
$165.8 million, respectively. As of December 31, 2022, CSWC was in compliance
with all financial covenants under the Credit Agreement.

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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 three months ended December 31, 2021. For the nine months
ended December 31, 2021, the Company recognized interest expense related to the
October 2024 Notes, including amortization of deferred issuance costs, of $3.6
million. 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 December 31, 2022, the carrying amount of the January 2026 Notes was
$139.0 million on an aggregate principal amount of $140.0 million at a weighted
average effective yield of 4.46%. As of December 31, 2022, the fair value of the
January 2026 Notes was $121.9 million. This is a Level 3 fair value measurement
under ASC 820 based on a valuation model using a discounted cash flow analysis.
The Company recognized interest expense related to the January 2026 Notes,
including amortization of deferred issuance costs, of $1.7 million and $5.0
million for the three and nine months ended December 31, 2022, respectively. For
the three and nine months ended December 31, 2021, the Company recognized
interest expense of $1.6 million and $5.0 million, respectively. For each of the
three and nine months ended December 31, 2022 and 2021, 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

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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 December 31, 2022, the carrying amount of the October 2026 Notes was
$147.1 million on an aggregate principal amount of $150.0 million at a weighted
average effective yield of 3.5%. As of December 31, 2022, the fair value of the
October 2026 Notes was $130.0 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 $1.4 million and $4.3
million for the three and nine ended December 31, 2022, respectively. For the
three and nine months ended December 31, 2021, the Company recognized interest
expense of $1.3 million and $1.7 million, respectively. For both the three and
nine months ended December 31, 2022, average borrowings were $150.0 million. For
the three months ended December 31, 2021, average borrowings were $128.8
million. Since the issuance of the October 2026 Notes on August 27, 2021 through
December 31, 2021, average borrowings were $120.9 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

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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
December 31, 2022, SBIC I had regulatory capital of $65.0 million and
leverageable capital of $65.0 million. As of December 31, 2022, SBIC I had a
total leverage commitment from the SBA in the amount of $130.0 million, of which
$26.0 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 December 31, 2022, the carrying amount of SBA Debentures was
$100.6 million on an aggregate principal amount of $104.0 million. As of
December 31, 2022, the fair value of the SBA Debentures was $97.4 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 related fees related to SBA Debentures of
$0.9 million and $1.9 million for the three and nine months ended December 31,
2022, respectively. For the three and nine months ended December 31, 2021, the
Company recognized interest expense of $0.1 million and $0.2 million,
respectively. The weighted average interest rate on the SBA Debentures was 3.70%
and 2.98% for the three and nine months ended December 31, 2022, respectively.
For the three and nine months ended December 31, 2021, the weighted average
interest rate on the SBA Debentures was 1.43% and 1.24%, respectively. For the
three and nine months ended December 31, 2022, average borrowings were
$83.9 million and $54.1 million, respectively. Average borrowings for the three
and nine months ended December 31, 2021 were $21.0 million and $10.1 million,
respectively.

As of December 31, 2022, the Company's issued and outstanding SBA Debentures mature as follows (amounts in thousands):



      Pooling Date (1)        Maturity Date        Fixed Interest Rate       December 31, 2022
         9/22/2021              9/1/2031                 1.575%             $           15,000
         3/23/2022              3/1/2032                 3.209%                         25,000
         9/21/2022              9/1/2032                 4.533%                         40,000
            (2)                    (2)                     (2)                          24,000
                                                                            $          104,000


(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.
(2)The Company issued $24.0 million in SBA Debentures that will pool in March
2023. Until the pooling date, the SBA Debentures bear interest at a fixed rate
with a weighted-average interim interest rate of 5.14%.

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)

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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:

                                                           Three Months Ended December 31,
                                                           2022                       2021
Number of shares sold                                      3,264,878                    616,156
Gross proceeds received (in thousands)             $          58,324          $          16,000
Net proceeds received (in thousands)1              $          57,449          $          15,760
Weighted average price per share                   $           17.86          $           25.97

                                                           Nine Months Ended December 31,
                                                           2022                       2021
Number of shares sold                                      6,909,446                  2,834,734
Gross proceeds received (in thousands)             $         131,990          $          74,463
Net proceeds received (in thousands)1              $         130,010          $          73,347
Weighted average price per share                   $           19.10          $           26.27



1Net proceeds reflects proceeds after deducting commissions to the sales agents
on shares sold and offering expenses. As of December 31, 2022, $2.7 million
remained receivable and is included in other receivables in the Consolidated
Statement of Assets and Liabilities. As of December 31, 2021, no proceeds
remained receivable.

Cumulative to date, the Company has sold 15,087,106 shares of its common stock
under the Equity ATM Program at a weighted-average price of $20.91, raising
$315.5 million of gross proceeds. Net proceeds were $310.3 million after
commissions to the sales agents on shares sold. As of December 31, 2022, the
Company has $334.5 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 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 three and nine months ended December 31,
2022, the Company did not repurchase any shares under the share repurchase
program.

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CONTRACTUAL OBLIGATIONS



As shown below, we had the following contractual obligations as of December 31,
2022.
                                                       Payments Due By Period
                                                           (in thousands)
                                              Less than                                    More Than
Contractual Obligations          Total         1 Year        1-3 Years      3-5 Years       5 Years
Operating lease obligations   $   4,354      $     395      $     837      $     878      $    2,244
Credit Facility (1)             274,543         13,741         27,520        233,282               -
January 2026 Notes (2)          162,050          6,300         12,600        143,150               -
October 2026 Notes (2)          170,250          5,062         10,125        155,063               -
                              $ 611,197      $  25,498      $  51,082      $ 532,373      $    2,244



(1)Amounts include interest payments calculated at an average rate of 6.02% of
outstanding Credit Facility borrowings, which were $225.0 million as of December
31, 2022.
(2)Includes interest payments.


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OFF-BALANCE SHEET ARRANGEMENTS



We may be a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financial needs of our portfolio
companies. These instruments may include commitments to extend credit and fund
equity capital and involve, to varying degrees, elements of liquidity and credit
risk in excess of the amount recognized in the balance sheet. 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 December 31, 2022 and March 31, 2022, we had a total of approximately $159.7
million and $134.3 million, respectively, in currently unfunded commitments (as
discussed in Note 10 to the Consolidated Financial Statements). As of December
31, 2022, the total unfunded commitments included commitments to issue letters
of credit through a financial intermediary on behalf of certain portfolio
companies. As of December 31, 2022, 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, $0.4
million expire in February 2023, $0.2 million expire in April 2023, and $0.3
million expire in August 2023. As of December 31, 2022, 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 December 31, 2022, the Company had cash and cash
equivalents of $21.7 million and $174.4 million in available borrowings under
the Credit Facility.

RECENT DEVELOPMENTS

On January 25, 2023, the Board of Directors declared a total dividend of $0.58
per share, comprised of a regular dividend of $0.53 and a supplemental dividend
of $0.05, for the quarter ending March 31, 2023. The record date for the
dividend is March 15, 2023. The payment date for the dividend is March 31, 2023.


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Latest news about Capital Southwest Corporation

B. Riley Raises Price Target on Capital Southwest to $25 From $24, Keeps Neutral Rating	05-16	MT
JMP Securities Downgrades Capital Southwest to Market Perform From Market Outperform	05-16	MT
Transcript : Capital Southwest Corporation, Q4 2024 Earnings Call, May 15, 2024	05-15
Capital Southwest Fiscal Q4 Net Investment Income Rises	05-14	MT
Tranche Update on Capital Southwest Corporation's Equity Buyback Plan announced on August 2, 2021.	05-14	CI
Capital Southwest Corporation Reports Earnings Results for the Full Year Ended March 31, 2024	05-14	CI
Capital Southwest Corporation Declares Regular Dividend for the Quarter Ended June 30, 2024, Payable on June 28, 2024	05-14	CI
Capital Southwest Corporation Declares Supplemental Dividend for the Quarter Ended June 30, 2024, Payable on June 28, 2024	05-13	CI
Capital Southwest Corporation Announces Management Appointments	05-07	CI
CSW Industrials, Inc: A smallcap with an exceptional track record	04-30
Capital Southwest Gets $150 Million Credit Facility	03-20	MT
UBS Adjusts Capital Southwest Price Target to $23 From $21, Maintains Neutral Rating	01-31	MT
Raymond James Raises Price Target on Capital Southwest to $26.50 From $24, Maintains Outperform Rating	01-31	MT
B. Riley Lifts Capital Southwest's PT to $24 From $23.50, Says Fiscal Q3 Results Point to Continued 'Solid' Fundamental Trends; Keeps Neutral Rating	01-31	MT
Transcript : Capital Southwest Corporation, Q3 2024 Earnings Call, Jan 30, 2024	01-30
Capital Southwest Keeps Total Quarterly Dividend at $0.63 a Share, Payable March 29 to Holders of Record March 15	01-29	MT
Capital Southwest Reports No Share Buybacks in Fiscal Q3	01-29	MT
Capital Southwest Fiscal Q3 Investment Income Rises	01-29	MT
Tranche Update on Capital Southwest Corporation's Equity Buyback Plan announced on August 2, 2021.	01-29	CI
Earnings Flash (CSWC) CAPITAL SOUTHWEST CORPORATION Reports Q3 EPS $0.72	01-29	MT
Capital Southwest Corporation Declares A Supplemental Dividend for the Quarter Ended March 31, 2024, Payable on March 29, 2024	01-29	CI
Capital Southwest Corporation Reports Earnings Results for the Third Quarter and Nine Months Ended December 31, 2023	01-29	CI
Capital Southwest Corporation Declares Regular Dividend for the Quarter Ended March 31, 2024, Payable on March 29, 2024	01-29	CI
North American Morning Briefing : Cautious Start to Fully-Booked Week	01-29	DJ
North American Morning Briefing : Samsung Warning -2-	01-09	DJ

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Company Profile

Capital Southwest Corporation is an internally managed business development company. The Company is a middle market lending firm focused on supporting the acquisition and growth of middle market businesses investments across the capital structure, including first lien, second lien and non-control equity co-investments. The Company specializes in providing customized financing to middle market companies in a range of industry segments located primarily in the United States. Its investment objective is to produce attractive risk-adjusted returns by generating current income from the Company's debt investments and realizing capital appreciation from its equity and equity-related investments. The Company invests primarily in debt securities, including senior debt and second lien, and also invest in preferred stock and common stock alongside its debt investments or through warrants. It offers managerial assistance to its portfolio companies.

Sector

Investment Management & Fund Operators

Calendar

25/07/2024 - Annual General Meeting

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Income Statement Evolution

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Ratings for Capital Southwest Corporation

Trading Rating

Investor Rating

ESG Refinitiv

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Analysts' Consensus

Sell

Buy

Mean consensus

OUTPERFORM

Number of Analysts

Last Close Price

26.94 USD

Average target price

25.42 USD

Spread / Average Target

-5.65%

Consensus

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