Thank you for joining today’s Capital Southwest First Fiscal Quarter 2019 Earnings Call. Participating on the call today are Bowen Diehl, CEO; Michael Sarner, CFO; Chris Rehberger, VP Finance. I will now turn the call over to Chris Rehberger.

Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information and management’s expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest’s publicly available filings with the SEC. The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release, except as required by law. I will now hand the call off to our President and Chief Executive Officer, Bowen Diehl.

Thanks, Chris and thanks to everyone for joining us for our first quarter fiscal year 2019 earnings call. Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com. We are pleased to be with you this morning and to announce our quarterly results. Our focus remains on building a lower middle market portfolio, consisting largely of first lien senior debt with equity co-investments across the loan portfolio where we believe significant equity upside opportunity exists. We continue to execute under our shareholder friendly, internally managed structure, which at its foundation, closely aligns our interest with the interest of our fellow shareholders in generating sustainable long-term value through stable increasing dividends and NAV per share growth. We have also endeavored to bring Capital Southwest to best in class in all areas. One of those areas is corporate governance. With the conclusion of a successful shareholders' meeting last week, we have added a new member to our board. Christine Battist, the current CFO of Avison Young in Chicago has joined our board and will serve as the audit committee chair going forward. Christina has deep financial services expertise at both public and private institutions. We are excited about the expertise, perspective and diversity she will bring to the Capital Southwest board. Now for our financial results. Laid out on slide 5 are some important summary points on our performance for the quarter ended June 30, 2018. This quarter, we earned $0.31 per share of pre-tax net investment income and paid $0.29 per share in regular dividends. In addition, we announced a supplemental dividend program, which initially paid out $0.60 per share to shareholders during the quarter, while also announcing our expectation that we will be distributing $0.10 per quarter…

Thanks, Bowen. As seen on slide 15, our investment portfolio produced $11.1 million in investment income this quarter with a weighted average yield on all investments of 10.6%. This represents an increase of $1.2 million versus $9.9 million from the previous quarter, mostly attributable to the net portfolio growth. The weighted average yield on our credit portfolio was 11.7% for the quarter, up from 11.5% the previous quarter. And as of the end of the quarter, there were no assets on non-accrual. We incurred $3.7 million in operating expenses this quarter, excluding interest expense, which was up by $300,000 from $3.4 million in the previous quarter. The increase from the previous quarter was related to one-time fees paid in connection with the addition of a new board member and expenses related to the preparation of annual shareholder meeting materials. Specifically, we spent significant time and resources, strengthening our corporate governance for the benefit of shareholders. For the quarter, we earned pre-tax net investment income of $5 million or $0.31 per share compared to $0.28 per share during the prior quarter. As a result, we paid out $0.29 per share in regular dividends for the quarter, an increase of $0.01 per share over the $0.28 per share paid out in the prior quarter. We continue to focus on growing our regular dividends in a sustainable manner, demonstrated by our last 12 months regular dividend coverage of 104%. As Bowen mentioned earlier, we also paid out a $0.60 per share supplemental dividend in this quarter, as part of our recently announced supplemental dividend program. This program allows our shareholders to meaningfully participate in the successful exits of our investment portfolio. The program will continue to be funded from our current estimated undistributable taxable income, which was earned from realized gains on both…

Thanks, Michael and thank you everyone for joining us today. We're extremely proud of what our team has accomplished so far. Capital Southwest has grown and the business and portfolio have developed consistent with the vision and strategy we communicated to our shareholders three and a half years ago. We continue to work tirelessly to execute our investment strategy and to be good stewards of our shareholders' capital. Everyone here at Capital Southwest is totally dedicated to our number one goal, the creation of long term sustainable shareholder value. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

[Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg.

Wanted to ask you about Fast Sandwich, as you made a small investment there and it's a Jimmy John’s franchisee. I do realize it's relatively small, but underwriting restaurants is notoriously difficult. Can you tell us how many restaurant this franchisee owns and what in particular drew you to this opportunity as opposed to other things you may have been looking at?

Yeah. So it’s a good question. So restaurants are not something we focus on clearly. They have 33 restaurants in Chicago and Florida. It's a very, very low levered deal for a private equity sponsor that has an excellent track record in the Main Street Capital in New York and so we’re forming a relationship with. It's a very safe credit. My bigger issue was more, do we want to spend a bunch of time underwriting a $3.3 million. And that really came down to dealing with this sponsor that we're building a relationship with, funding a very small, but very safe low levered credit in a deal that frankly none of the banks really wanted to do without personal guarantees and various things like that and a lot of our competitors, it was really small. So we looked at it as an opportunity to build a relationship, but in a very money good, well-paying loan, just small.

And I wanted to touch on the I-45 fund. Looking at these funds at some of your competitors, the results seem generally to point to how difficult that market is, the more liquid end of the upper middle market. So it would be helpful if you could remind us, how you manage the I-45 fund, what differentiates it from others and how you're navigating such a difficult and tight market for more liquid first lien loans in the leverage loan market.

Yeah. Well, look, I mean, first of all, it's a very large market and I-45 frankly is not a very large fund. And so, taking small pieces of the loans we want to take, you can see the average leverage is pretty low certainly for this market and so we can select certain loans and grow the find, which is really small relative to the market at a reasonable pace and so we can just pick our spots. And frankly, I think Main Street is an excellent partner, as you guys, I'm sure everyone on the phone would agree. And so, we and they have been able to keep, I mean, the fund is not doubling in size, right, I mean, it’s just kind of – it’s own size, it's kind of just creeping along, recapped out, being investing in a few small loans and new deals. And so I look at it as, it's performing very well. But I look at it as that's kind of how you deal with this market. There are nice companies out there, interesting fundamental businesses being financed. This leverage is a little bit higher than we'd liked, pricing is a little bit lower. So, let's take a very granular approach, pick the deals we like and take small positions in it. I mean, if you think about what I just said that fits perfectly in I-45. And, we have a great partner with Main Street, helping us and we and they are migrating through that market. We have a better market with more value, you’d probably see us put more in the same loans, I take larger positions in those same loans if we thought the value was there, and you’d see those starting to show up on our balance sheet. And, you're not seeing that because it's really, really, I like to take small little positions in nice companies and keep a very granular portfolio.

Okay. I understand that approach. And just my last question, we haven't seen the Q yet, but I did notice that the line item labeled other assets grew pretty meaningfully quarter to quarter. Was there something specific there that you wanted to highlight for us that explains that increase?

Mickey, that's actually just the dividend payable and the cash to pay the dividend. Mostly, and the supplemental dividend obviously with $0.60, that was a large balance.

Our next question comes from Chris York with JMP Securities.

So your prepared remarks were quite comprehensive and it took out many of my questions. But I have two. So how much was the one-time fee associated with the addition of Christine to the board?

So, it was about 130,000 for the search fee related to Christine's hire.

And then second question, Bowen, I just wanted to clarify maybe your comments, did I hear correctly that if realized gains continue to occur in some of your portfolio companies according to your expectations, there could be a special dividend in addition to the $0.10 quarterly supplemental dividend?

Yeah. I’ll let Michael comment on that.

Yeah. The way we look at it is future gains that we see are going to extend the duration of the programs. They would not increase the size of the supplemental dividend itself, the $0.10 per share. That’s the way we’re thinking about going over in time. What we might see if we have large gains, we might see the ability to share some of that capital in the way of a supplemental dividend on top of. So similar to the $0.60 we just paid, but that $0.10 recurring will continue on. What we've seen is based on the Titan Liner plus the UTI that we had in the previous year, the duration of these programs is approximately, call it, three years and any future exits that occur with that duration into the future.

Our next question comes from Christopher Testa of National Securities.

So just curious, obviously, MRI, you're positive on that. It keeps growing and I totally understand why you'd want to hold onto it and continue to have it to help your NAV. But, I'm just curious how are you looking at this in the context of having a concentrated equity position on the portfolio and have you had discussions with your shareholders and if they express comfort in you guys holding this or I'm just trying to get some more detail on that and what your plans are on it?

Yeah. So it’s a good question. So, clearly a concentrated equity position and a BDC credit focus, BDC like Capital Southwest is, in a vacuum, is not a positive thing. You are correct. MRI is growing and the team is doing a great job. We don't think it's core, as I've said in the last couple of quarters. I mean, it's not -- it is an asset that we will ultimately look to sell. But as investors, we’re stewards of our shareholders' capital. So while we don't want to hold onto it for every nickel of every future upside in value, at the same time, we do want to be smart about when we sell it and there are things going on with the company like new products that are getting traction, lean manufacturing initiatives that are showing up in the bottom line and therefore the longer, the more credibility you have in those cost changing elements of the business, the more value a buyer would give you in a sale. Those types of things influence the timing of a sale. So you don't necessarily -- those are things that may make you -- make one -- not want to sell too quick, but at the same time, it is a large investment, while one hand is growing, the reality is equity and so it creates volatility, it could always -- obviously in theory, go the other direction. So we're very conscious of that risk associated with that. So that's why, over the last several quarters, I've made comments about it being an asset that would be potentially for sale in the intermediate term, just to try to add message that, look, it’s not something that's going to be the next spin-off like [indiscernible] was ten years from now, but at the same time, we're going to be smart in thinking about the timing of the sale. Now, there has been interest in the asset. And so, it is something that we're very focused on thinking through the right timing of a sale and we think that’s kind of an intermediate term kind of item.

And looking at the broadly syndicated market there's been a bit of a backup in spreads in terms of getting at least marginally better somewhat, has that at all trickled down into the upper middle market, those favorable terms, are you seeing more favorable deal flow like M&A and organic growth as opposed to just dividend recaps or has that not yet happened and you're still dealing with a choppy market where it's still very much a borrower’s market?

And when you say, you're talking about the term -- the things you say, you're talking about in the large market and you're asking me whether it's creep down into the upper middle market with the I-45?

Exactly. Yeah.

Yeah. I would say, it's not -- think about the deals we were going to review and I wouldn't say it’s gotten a lot better, but it certainly hasn't gotten worse. Definitely more M&A, less dividend recaps, definitely that's true. And, I'd say, add backs, we're seeing lenders push back the syndication -- syndicate group is pushing back on heavy add backs. So that's encouraging obviously. So those are all -- from that perspective, I’d say, it's probably gotten a little bit better. With respect to spread versus leverage, I'd say it's about the same.

And just more of a philosophical question. Obviously, you guys are some of the most cognizant people about where we are in the credit cycle and underwrite accordingly. I'm curious, where are you seeing the relative value between the lower and upper middle market today, because as we were just saying, the upper middle market obviously, there are still more light, there are weaker terms, but at the same time, these businesses cycle far less in the event of a downturn. So should we expect, as you guys are able to now increase your balance sheet leverage more, a greater composition of upper middle market loans that you'll put on balance sheet or is it just more first lien assets, whether they be upper or lower that are going to go on balance sheet?

Yeah. I would think about it more as more first lien loans, we're already heavily first lien, but a focus on first lien loans. And maybe potentially even safer first lien loans. I mean, we’re typically lending money from, I was looking through the last several deals, 30% to 50% of value. Deals are 30% loan to value, you are going to have tighter spreads and deals that are 45% to 50% loan to value. So, maybe going even safer of the food chain, not necessarily to the upper middle market per se, but the term -- unless the terms and covenants and credit protections are there, certainly, if you have the same credit protection, same yield, a larger company might be better than a smaller company. Generally, we look at the companies themselves and the industries they're in and if it's a small company that competes with three large companies in an industry, that's obviously not a good thing and that would be a company that would probably have a hard time in a credit -- in an economic cycle. But we see a lot of our deals aren’t in that situation at all. And so, I would say, as we add leverage, we would definitely be even more focused on first line, if that could be true and maybe lower loan to value, which would be maybe slightly tighter spreads, but then ultimately, a safer portfolio. But not necessarily putting more upper middle market assets. I mean, that's really not necessarily the strategy and what we see the value there.

And I'm not showing any further questions at this time. I’d like to turn the call back over to Bowen.

Great. Thank you, everybody for joining the call. We appreciate your time and we appreciate your support and following us and we continued to have our head down executing and we look forward to giving you further quarterly updates. Thanks a lot.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.