EPS of $0.48 decreased by 15.8% from previous year
Gross margin of 96.6%
Net income of 22.68M
""Deal flow in the lower middle market continues at a healthy pace this quarter, while competition in the market for both bank and non-bank lenders for quality deals continues to be fierce. This has resulted in tighter spreads on quality new deals, as well as slower net portfolio growth... That said, our current backlog of deals in which we have either signed up or have received an indication that we are likely to win would indicate that net portfolio growth should be very strong in the December quarter."" - Bowen Diehl
Capital Southwest Corporation (CSWC) QQ2 2025 Earnings Review and Investment Outlook – Asset Management in the Lower Middle Market
Executive Summary
Capital Southwest Corporation (CSWC) reported solid QQ2 2025 results, supported by durable pre-tax NII per share of $0.64 that fully covered the regular dividend of $0.58 and a supplemental $0.06 for the quarter. On an annualized basis, NII coverage remained robust, with quarterly distributions aligned to excess earnings. The quarter featured meaningful portfolio activity and a constructive backdrop for near-term growth: new debt commitments of $72 million across four new platforms plus $16 million in add-ons, and equity issuances via the ATM program totaling approximately $21 million at a price of $24.49 per share (148% of NIV). Management emphasized disciplined balance sheet management, with a conservative leverage posture at the low end of the target range and robust liquidity (approximately $475 million in cash and undrawn capacity across facilities), underscoring the flexibility to fund growth and opportunistically repurchase stock if NAV permits.
The portfolio remains heavily secured and diversified: on-balance sheet credit at $1.4 billion (up 17% YoY), 118 portfolio companies, 89.2% of fair value in first-lien senior secured debt, and an embedded equity co-investment program that continues to drive upside via minority stakes. Yield on the credit book stood at 12.9% with 3.4x debt service coverage and 43% average enterprise value exposure per borrower. Nonaccruals represented 3.5% of the portfolio, with two new non-accruals expected to be restructured by year-end. Management highlighted ongoing portfolio upgrades outpacing downgrades and a strong track record of dividend sustainability, supported by a 119% NII coverage for the trailing 12 months and 111% cumulative coverage since the inception of the credit strategy.
Looking forward, the company signaled a strong fourth quarter (calendar Q4) driven by a sizable backlog of signed and likely-to-close deals, with an estimated net portfolio growth of roughly $150–$200 million for the quarter and continued access to capital via secured/unsecured debt and ATM equity. The antagonist to this constructive view remains macro volatility and competition from banks and larger private equity sponsors, which could compress spreads and test underwriting discipline. Overall, CSWC presents a balanced, downside-mitigated path to NAV growth and dividend stability through 2025, anchored by its internally managed model, diversified asset mix, andLiquidity runway.
Key Performance Indicators
Revenue
38.42M
QoQ: 5.97% | YoY:-10.19%
Gross Profit
37.10M
96.57% margin
QoQ: -26.95% | YoY:-10.85%
Operating Income
34.11M
QoQ: 19.12% | YoY:29.14%
Net Income
22.68M
QoQ: 61.62% | YoY:0.27%
EPS
0.48
QoQ: 54.84% | YoY:-15.79%
Revenue Trend
Margin Analysis
Key Insights
Revenue: $38.417 million for QQ2 2025, up 5.97% QoQ but down 10.19% YoY. Gross profit: $37.098 million (gross margin 0.9666). Operating income: $34.107 million (operating margin 0.888). EBITDA: $35.426 million; EBITDARatio: 0.9221. Net income: $22.684 million (net margin 0.590). Earnings per share (EPS, basic/diluted): $0.48.
Net investment income (NII): Pretax NII of $30.0 million, or $0.64 per share, versus $31.3 million ($0.69 per share) in the prior quarter. After-tax NII was $31.2 million ($0.66 per share). Weighting: balance between investment income and realized/deferred tax items.
On-balance sheet credit portfolio ending QQ2 2025: $1.40 billion, up 17% YoY from $1.20 billion in Sep-2023. Weighted average debt originations in the quarter were 100% first lien senior secured. 98% of the credit portfolio was first lien senior secured with average exposure per name ≈1% of portfolio.
Credit portfolio yield: 12.9%; weighted average leverage (per loan security): 3.8x EBITDA. 93.5% of the portfolio sits in the top two credit quality categories (1 or 2) by fair value.
Equity co-investments: 72 investments with total fair value $134 million (9% of total portfolio); equity portfolio marked at 132% of cost, with embedded unrealized appreciation of $0.68 per CSWC share.
Financial Highlights
Revenue and profitability
- Revenue: $38.417 million for QQ2 2025, up 5.97% QoQ but down 10.19% YoY. Gross profit: $37.098 million (gross margin 0.9666). Operating income: $34.107 million (operating margin 0.888). EBITDA: $35.426 million; EBITDARatio: 0.9221. Net income: $22.684 million (net margin 0.590). Earnings per share (EPS, basic/diluted): $0.48.
- Net investment income (NII): Pretax NII of $30.0 million, or $0.64 per share, versus $31.3 million ($0.69 per share) in the prior quarter. After-tax NII was $31.2 million ($0.66 per share). Weighting: balance between investment income and realized/deferred tax items.
Portfolio and leverage
- On-balance sheet credit portfolio ending QQ2 2025: $1.40 billion, up 17% YoY from $1.20 billion in Sep-2023. Weighted average debt originations in the quarter were 100% first lien senior secured. 98% of the credit portfolio was first lien senior secured with average exposure per name ≈1% of portfolio.
- Credit portfolio yield: 12.9%; weighted average leverage (per loan security): 3.8x EBITDA. 93.5% of the portfolio sits in the top two credit quality categories (1 or 2) by fair value.
- Equity co-investments: 72 investments with total fair value $134 million (9% of total portfolio); equity portfolio marked at 132% of cost, with embedded unrealized appreciation of $0.68 per CSWC share.
Liquidity and capital structure
- Cash and undrawn liquidity: ~$475 million across cash and undrawn facilities, plus a $133 million unfunded commitment base, equating to ~3.6x unfunded commitments; ING-led revolver capacity at $485 million with an accordion option to $750 million.
- Capital deployment vs. funding mix: $89.8 million of new commitments in the quarter (four new platform companies, 11 add-ons); $45.2 million in debt prepayments realized IRR of 14.5% for the quarter. ATM equity raised ~ $21 million at $24.49 per share (148% of NIV).
- Leverage and liquidity posture: regulatory debt-to-equity ratio 0.8x (target 0.8–0.95x). 46% of liabilities are unsecured covenant-free bonds with the earliest maturity in Jan-2026. NAV per share declined by $0.01 to $16.59.
Dividend and shareholder returns
- Regular dividend: $0.58 per share; supplemental dividend: $0.06 per share for QQ2 2025; announced December quarter dividends: $0.58 regular and $0.05 supplemental (total $0.63).
- Dividend coverage: 119% for the LTM period ended Sep-30-2024; 111% cumulative since inception of the credit strategy in Jan-2015. The company emphasizes a policy of maintaining regular dividend at or above a sustainable floor and funding supplemental distributions from excess earnings and gains.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
38.42M
-10.19%
5.97%
Gross Profit
37.10M
-10.85%
-26.95%
Operating Income
34.11M
29.14%
19.12%
Net Income
22.68M
0.27%
61.62%
EPS
0.48
-15.79%
54.84%
Key Financial Ratios
currentRatio
98.49
grossProfitMargin
96.6%
operatingProfitMargin
88.8%
netProfitMargin
59%
returnOnAssets
1.41%
returnOnEquity
2.87%
debtEquityRatio
0.99
operatingCashFlowPerShare
$-0.5
freeCashFlowPerShare
$-0.52
dividendPayoutRatio
134.5%
priceToBookRatio
1.51
priceEarningsRatio
13.17
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key insights from management discussions during the earnings call and Q&A:
- Strategy and capital deployment: “Deal flow in the lower middle market continues at a healthy pace this quarter, while competition in the market for both bank and non-bank lenders for quality deals continues to be fierce. This has resulted in tighter spreads on quality new deals, as well as slower net portfolio growth… That said, our current backlog of deals… would indicate that net portfolio growth should be very strong in the December quarter.†(Bowen Diehl)
- Backlog and near-term growth: “The current backlog of deals… indicates that net portfolio growth should be very strong in the December quarter.†(Bowen Diehl)
- Capital formation and liquidity: “In addition, we raised approximately $21 million in gross equity proceeds during the quarter through our equity ATM program at a weighted average share price of $24.49 per share.†(Bowen Diehl)
- Portfolio activity and underwriting discipline: “Portfolio growth for the quarter was offset by $45.2 million in proceeds from four debt prepayments… deal flow… remains strong and credit discipline remains intact.†(Bowen Diehl / Josh Weinstein)
- Portfolio quality and risk management: “Cash flow coverage of debt service obligations across the portfolio remained at a healthy 3.4x… 93.5% of the portfolio at fair value sits in the top two categories.†(Josh Weinstein / Bowen Diehl)
- Credit metrics and outlook: “We are confident in our ability to continue to distribute quarterly supplemental dividends for the foreseeable future based upon our current UTI balance of $0.64 per share and the expectation that we will harvest gains over time from our existing $0.68 per share in unrealized appreciation on the equity portfolio.†(Michael Sarner)
- Capital markets and leverage strategy: “We will continue to methodically and opportunistically raise secured and unsecured debt capital as well as equity capital through our ATM program, to ensure we maintain significant liquidity and conservative balance sheet leverage with adequate covenant cushions.†(Michael Sarner)
- Non-accruals and recoveries: “Two new non-accruals… are expected to be restructured by the end of December.†(Bowen Diehl / Michael Sarner)
"Deal flow in the lower middle market continues at a healthy pace this quarter, while competition in the market for both bank and non-bank lenders for quality deals continues to be fierce. This has resulted in tighter spreads on quality new deals, as well as slower net portfolio growth... That said, our current backlog of deals in which we have either signed up or have received an indication that we are likely to win would indicate that net portfolio growth should be very strong in the December quarter."
— Bowen Diehl
"We are always opportunistically looking to additional capital and certainly with an eye towards our funds in 2026, sort of refinance those in time. So I would tell you, yes, we're active there. You'll probably see us increase secure capacity a little bit. We certainly should expect over the next six to nine months to see some unsecured activity and raising ATM money will probably look like something in the $20 million to $40 million a quarter."
— Michael Sarner
Forward Guidance
Near-term outlook and observable catalysts:
- Net portfolio growth: Management guided that December quarter net portfolio growth should be very strong, with an estimated $150–$200 million of net portfolio growth driven by deals signed and those in heavy diligence or with a high likelihood of closing in the quarter. This implies QoQ acceleration in deployment activity versus prior quarters.
- Backlog and deal flow: A robust backlog indicates continued visibility into future originations; management expects this to translate into stronger Q4 earnings and NAV build, assuming closing conditions remain favorable.
- Capital availability: The ATM program remains active (approx. $20–$40 million per quarter likely), and the ING revolver has capacity of $485 million with room to grow to $750 million. Expect continued opportunistic debt and equity financings to fund growth while maintaining liquidity cushions.
- Leverage and capital structure: Continue to manage leverage at the low end of the target range (0.8x–0.95x) to preserve flexibility for growth investments and potential dividend growth, while preserving covenant cushions.
- Risks to monitor: (i) tighter deal spreads or slower-than-expected pipeline conversion; (ii) nonaccruals or restructurings in the portfolio; (iii) macro rate moves and their effect on portfolio yields; (iv) competition from banks/private equity buyers affecting pricing; (v) regulatory/licensing developments (e.g., SBIC process) that could influence funding flexibility.
- Synthesis for investors: The combination of a strong dividend coverage track record, a diversified, first-lien-heavy portfolio, and substantial liquidity positions provides an attractive balance sheet in a volatile rate environment. The key monitorables are the pace of net portfolio growth in Q4, the level of new prepayments/coupled yields as rates reset, and the ability to sustain both regular and supplemental dividends through evolving earnings power.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
CSWC Focus
96.57%
88.80%
2.87%
13.17%
OXLC
74.90%
40.80%
4.09%
5.04%
XFLT
85.00%
1.13%
9.58%
2.28%
CRF
90.30%
2.50%
13.30%
2.14%
CLM
89.30%
2.93%
13.80%
1.95%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
CSWC’s QQ2 2025 results reflect a resilient earnings base underpinned by a diversified, first-lien-dominant credit portfolio, strong dividend coverage, and ample liquidity. The near-term catalyst is a backlog-backed acceleration in net portfolio growth in the December quarter, supported by disciplined underwriting and the ability to fund growth through a combination of secured debt and ATM equity. Management’s emphasis on maintaining a conservative leverage profile and robust liquidity provides a buffer against rate volatility and market stress. Relative to peers in the finite private credit ecosystem, CSWC benefits from an efficient internally managed model, a disciplined capital deployment framework, and meaningful equity co-investment upside. However, investors should monitor nonaccrual evolution, spread dynamics in a tightening credit market, and the timing of equity issuances that fund growth and dividends. Overall, CSWC presents a constructive long-term investment thesis anchored by predictable dividend delivery, portfolio quality, and scalable capital markets capability, with a balanced risk/return profile suitable for income-focused investors seeking exposure to the lower middle market credit environment.
Key Investment Factors
Growth Potential
Backlog-driven deployment visibility supports a pronounced near-term growth trajectory; equity co-investments offer upside participation and potential NAV accretion as portfolio companies mature and are institutionalized. The ATM and revolver facilities provide scalable liquidity to fund growth and opportunistically repurchase shares if NAV strength persists. Expect continued platform add-ons and growth in first-lien senior secured lending in the lower middle market, with potential expansion into select upper middle-market opportunities via syndicated structures when risk-adjusted returns justify.
Profitability Risk
Credit risk in the lower middle market remains idiosyncratic; nonaccruals exist and are subject to restructuring. Competitive pressure from banks and larger sponsors can compress spreads, impacting earnings power. Leverage sensitivity to base rate movements and the need to preserve covenant cushions during rate shifts could constrain dividend growth. Dependence on external capital markets to fund growth (ATM activity, debt and equity issuances) introduces funding risk in stressed markets. Regulatory/licensing timing for the SBIC program could influence future fund-raising dynamics.
Financial Position
Strong liquidity runway with ~$475 million in cash and undrawn commitments; total unfunded commitments of $133 million; revolver capacity of $485 million with potential accordion to $750 million. Leverage managed at the lower end of target (0.8x) with a 3.6x–3.8x range seen in the portfolio debt, and 93.5% of the portfolio valued in top two credit categories. NAV per share stands at $16.59, with a track record of dividend coverage and earnings-based supplemental distributions.
SWOT Analysis
Strengths
High concentration of first-lien, senior secured debt (~89.2% of portfolio fair value) with broad diversification across 118 companies, reducing single-name risk.
Strong dividend track record supported by 119% NII coverage over the last 12 months and a policy of ongoing supplemental distributions funded by earnings and realized gains.
Internally managed BDC model provides fixed-cost leverage benefits and capital allocation flexibility; robust access to multiple capital sources (credit facilities, ATM equity, and unsecured debt).
Healthy liquidity cushion with ~$475 million in cash and undrawn capacity; potential SBIC license progress enhancing funding flexibility.
Equity co-investments provide upside participation and potential NAV accretion from minority stakes alongside PE sponsors.
Weaknesses
Negative free cash flow in QQ2 2025 due to investment activity and financing needs, reflecting ongoing deployment and leverage management.
Nonaccruals (3.5% of portfolio) introduce earnings risk and potential near-term volatility in yields and coverage metrics.
Reliance on external capital markets (ATM, debt, and equity issuances) for growth can expose earnings to funding-cycle risks, especially in stressed markets.
Opportunities
Backlog-driven near-term net portfolio growth supports potential NAV uplift and higher fee-related earnings as deployments close.
SBIC license process could unlock alternate capital sources and fuel incremental growth capacity.
Further diversification into platform acquisitions and add-ons may broaden product capabilities and cross-sell opportunities.
Debt cap structure and accordion facilities provide flexibility to scale balance sheet with modest incremental risk.
Threats
Macro rate volatility and persistent spread compression from competition (banks and large sponsors) could erode yields and NII accretion.
Credit cycle risk in lower middle market remains a tail risk; continued nonaccruals or restructurings could impact earnings stability.
Regulatory and licensing delays or changes (SBIC) could affect long-term funding strategy and capital planning.
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