Thank you for joining today's Capital Southwest Fourth Quarter Fiscal Year 2025 Earnings Call. Participating on the call today are Michael Sarner, Chief Executive Officer, Chris Rehberger, Chief Financial Officer, Josh Weinstein, Chief Investment Officer, and Amy Baker, Executive Vice President, Accounting. I will now turn the call over to Amy Baker.

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 over to our President and Chief Executive Officer, Michael Sarner.

Thanks, Amy. And thank you, everyone, for joining us for our fourth quarter fiscal year 2025 earnings call. We're pleased to be with you today to discuss our fourth fiscal quarter, the 2025 fiscal year as a whole, as well as share our observations on the market in a rapidly changing environment. Overall, 2025 was a very productive year for Capital Southwest as we were able to make significant strides in strengthening both sides of our balance sheet. On the left side of the balance sheet, during the year, we grew our investment portfolio by approximately $300 million, or 21%, from $1.5 billion to $1.8 billion. The quality of our debt portfolio continued to improve as we further reduced our weighted average leverage in the investment portfolio to 3.5 times, maintained a solid 94% cash income as a percentage of total investment income, while decreasing our non-accruals at fair value from 2.3% to 1.7%. Additionally, our equity portfolio performed exceptionally well this year as we grew unrealized appreciation from $38.5 million, or $0.85 per share, at the end of fiscal year 2024, to $53.2 million, or $1 per share, as of the end of fiscal year 2025. This is an important metric as we anticipate that a portion of this appreciation will be harvested as realized gains in fiscal year 2026, and thus will be available in our UTI bucket to support future dividend distributions. In fact, subsequent to quarter end, we have harvested realized gains of approximately $20 million on our equity investments in two portfolio companies, which will further grow our UTI balance. On the right side of the balance sheet, we were extremely active during the year in diversifying our sources of capital. We raised over $300 million in new debt capital commitments this year in the…

Thanks, Michael. This quarter we deployed a total of $150 million of new committed capital including $113 million of first lien senior secured debt and $3 million of equity across four new portfolio companies. In addition, we closed add-on financings for 15 existing portfolio companies consisting of $33 million in first lien senior secured debt and $1 million in equity. Our on-balance sheet credit portfolio ended the quarter at $1.6 billion representing year-over-year growth of 19% from $1.3 billion as of March 2024. For the current quarter, 100% of our new portfolio company debt originations were first lien senior secured and as of the end of the quarter, 99% of the credit portfolio was first lien senior secured with a weighted average exposure per company of only 0.9%. We believe our portfolio granularity speaks to our continued investment discipline of maintaining a conservative posture to overall risk management as we grow our balance sheet. The vast majority of our portfolio and deal activity is in first lien senior secured loans to companies backed by private equity firms. Currently, approximately 93% of our credit portfolio is backed by private equity firms which provide important guidance and leadership to the portfolio companies as well as the potential for junior capital support if needed. In the lower middle market, we often have the opportunity to invest on a minority basis in the equity of our portfolio companies, pari passu with the private equity firm, when we believe the equity thesis is compelling. As of the end of the quarter, our equity co-investment portfolio consisted of 79 investments with a total fair value of $179 million representing 10% of our total portfolio at fair value. Our equity portfolio was marked at 142% of our cost representing $53.2 million in embedded unrealized appreciation or $1…

Thanks, Josh. Specific to our performance for the quarter, pre-tax net investment income was $28.5 million, or $0.56 per share. Adjusted pre-tax NII, which excludes one-time expenses related to the departure of our Former President and CEO, was $31.3 million, or $0.61 per share. For the quarter, total investment income increased to $52.4 million from $52 million in the prior quarter. The increase was driven by a $2.8 million increase in interest and dividend income, offset by a decrease of $2.4 million in fees and other income compared to the prior quarter. As of the end of the quarter, our loans on non-accrual represented 1.7% of our investment portfolio at fair value, a decrease from 2.7% as of the end of the prior quarter. The reduction this quarter was a result of two portfolio companies being restructured and one portfolio company being sold. We placed one new company on non-accrual, which post-quarter end completed a bankruptcy process and will likely be removed from non-accrual in the June 30 quarter. During the quarter, we paid out a $0.58 per share regular dividend and a $0.06 per share supplemental dividend. As mentioned earlier, our Board has declared a regular dividend of $0.58 per share while also maintaining the supplemental dividend at $0.06 per share for the June 2025 quarter. We continued our strong track record of regular dividend coverage with 110% coverage for 12 months ended March 31, 2025, and 110% cumulative coverage since the launch of our credit strategy. We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of $0.79 per share, the recent exits in the June quarter, which will further increase this balance, and the expectation that we will continue to harvest gains over time from our sizable unrealized…

Thank you, Chris, Josh, and Amy, and all the employees who help us tell this story on a quarterly basis, and thank you everyone for joining us today. This concludes our prepared remarks. Operator, we are ready to open the lines up for Q&A.

Certainly, and our first question for today comes from the line of Mickey Schleien from Ladenburg. Your question, please.

Good morning, everyone. Michael, at a very high level, notwithstanding your great insight into the backdrop for the market, how attractive do you think the current vintage of investments is in the lower middle market relative to the history of Capital Southwest?

Well, it feels at the moment that it's somewhat binary. The deals that are coming to market today are deals in spaces and industries that we're actually interested in being in, service industries like accounting and finance, HVAC plumbing type of industries, marketing services, data centers. Those are quality deals that don't have a lot of the issues that are from the policy changes that are kind of uncertain. Deals that are more cyclical or have the issues that we've noted earlier really are either being pulled from the market or they're being delayed. And so I think the deal that we are going to underwrite here, we still feel very good about. Our originations this quarter, we're probably still going to see somewhere between $125 million and $150 million in originations, you know, add-on acquisitions for quality companies, our existing portfolio, and new platform companies. So I think, you know, there's going to be less of them is what I would say to you right now, but the quality of the ones we're going to underwrite and close are going to be consistent on part of what we've done historically. Josh, I don't know if you have a different opinion or a thought.

No, I mean, we continue to, you know, tackle the private equity market and, you know, cultivate the relationships so that we don't have to be the best term sheet to win the deal because it's relationship lending at the end of the day. And so we -- we're trying our best to find good risk return profile deals and continue to find them in opportunities that are not exposed to the macroeconomic environment right now.

Okay, noted. Thanks for that. At a high level, again, could you just break out what were the main drivers of a net realized loss and the markdown in the credit portfolio?

Yes, so the couple of companies that really drove the realized and unrealized losses this quarter were related to the restructurings. And we noted in our remarks, two of those were on non-approval that were restructured during the quarter. And so it's really those two companies that drove most of the depreciation, net depreciation for the quarter. It wasn't really across the broad credit portfolio.

Yes, and I would tell you, so the appreciation in the quarter was very granular. It's, you know, you can see it in the strength of our weighted average debt, even the drop in the 3.5, we saw solid performance. To Chris's point, there were a few companies that sort of, you know, that were on our watch list that had restructurings where we had to take right down that from an accounting perspective, unrealized losses. And so, you know, that's the net impact of the quarter.

Terrific. I'm glad to hear that. And lastly, you know, tapping into the SBA debentures is a process. It's great that you got the second license. When do you actually expect to start to inject capital into the new SBIC subsidiary? And when will you be allowed to start to issue some debentures?

Yes, so I think that will probably start over the next three months or so. So certainly in the 9-30 quarter, probably not in June quarter. The way that works is you've got to bed the second SBIC too, with some equity capital with new deals, which we expected, you know, to be doing shortly. And thereafter, we'll start to draw on the debentures. So I'd say the first draws will be sort of three months now or so.

And that new SBIC will ultimately have access to another $175 million. Is that right?

That's right. So, you know, the family of funds for SBIC is going to have up to $350 million. So we do have full access to that, obviously, you know, subject to SBA approval along the way. But yes, we would expect that we'll be able to draw the full $175 million on the second license.

Sounds good. Those are all my questions. Thanks for your time this morning.

Thank you. And our next question comes from a line of Doug Harter from UBS. Your question, please.

Hi, this is actually Corey Johnson on for Doug. So I just wanted to make sure that I'm understanding this correctly. So, you know, we've heard from some companies about how, you know, the lack of exit opportunities for companies, you know, just less capital markets activity in general has sort of led to companies running to, you know, be able to get lending, direct lending. So if I understand correctly, you guys are actually seeing, in context, they talked about that as a possibility of some spread, you know, spread widening. I think in the comments, you mentioned the possibility of some spread compression. And that's just because you're seeing, even though there might be more deals out there, the quality ones are ones that, you know, they're being competitively bid. And thus, you're seeing, you know, some possible thinking there might be some possible spread compression from that?

Yes, I mean, I think what we're trying to say is that because there's so many deals that are deemed sort of non-underwritable at the moment, because of what we've seen, I mean, some of those industries, you know, healthcare services with Medicaid reimbursement, you're manufacturing companies with, you know, that get their supply or inventory from China, some government services from DOGE, any companies tied onto the farming industry, you know, recessionary industries, which be the byproduct of some of the policies, all of those deals are sort of risk off for a lot of companies. And so now you're narrowing the amount of industries that you can focus on. And there's still a deep bench of capital chasing deals. And from that perspective, those we expect, you know, hopefully we'll be proven wrong, that the spreads on those are going to tighten, because people are going to want to deploy capital and those are the deals they're going to feel safest to invest in.

Got it. And then I think you mentioned, you know, the possibility of there being some exits and realizations of this upcoming quarter. Can you maybe just like size that or, you know, let us kind of know, are there any other opportunities that you see in that within the coming quarters? Do you have a line of sight of that?

Yes, I think we said in the prepared remarks, we have two exits already subsequent to quarter end for proceeds a little more than $20 million in realized gains. And so obviously that's a sizable amount for, you know, potential for our UTI bucket. There are some other portfolio companies with size that are starting to enter the market. But that's, you know, a little bit further down the road. I think we provide updates in the next few quarters. So I think that those two are sort of what we might've been hinting at in previous quarters. So we're, we're pleased at execution on both.

Got it. Thanks. And just, just my last question. It seems that the fixed income has increased a bit over the last few quarters. Is there any trends that you're seeing there? Any particular type of like companies or what are your thoughts in regards to like how that may trend over the -- in regards to credit quality over the next few quarters?

Sure. So we saw a few companies that had a pick toggle that elected in this quarter that they hadn't in previous quarters. And those, honestly, those are like short lived in nature. So they'll come back off in time. We do know that for the June quarter that we're expecting to see a few companies that their pick toggle expired and they are able to take cash pay. So, you know, at the moment I could probably say we expect the pick percentage to come down in the 5% to 6% range for reoccurring picks.

That is appreciated. Thank you.

And our next question comes from the line of Eric Zwick from Lucid Capital Markets. Your question, please.

Thanks. Good morning, everyone. Wanted to start with a question on the pipeline, just given you had, you know, pretty nice funding activity in the most recent quarter. So curious if you could, one, maybe kind of size up what the pipeline looks like today. Also curious about, you know, what that mix looks like in terms of new and add-ons and also potentially what might be eligible to be funded by, you know, SBIC 2. And I know you said, you know, you may not kind of be active on that more until the 9-30 quarter?

So if you're referring to the June quarter, is that correct?

Yes. Yes. Kind of curious, you know, how pipeline is moving up so far.

Yes. I mean, honestly, it's still a little early, obviously, but I think we would tell you that we're looking at somewhere between probably in the running three to five new platform companies that, let's say, somewhere in the $75 million to $100 million in new capital. And then we expect to see around $50 million on add-on activity because it's already been pretty active through today's date.

Yes. And I would just add to your second question, you know, some of these new prospective deals will certainly be eligible for the SBIC. One thing I would remind everyone of is we're still reinvesting out of SBIC1 as well to the extent that we have repayments there. So these deals are, you know, generally maybe 50% are eligible for the SBIC. We're funding SBIC 1, and we're going to begin to fund SBIC 2 certainly this quarter, but the debentures probably come in the next quarter.

Thank you. That's helpful. And then two, just kind of looking at the industry diversification of your portfolio, your second largest concentration based on your pie chart is 9% in consumer products. And given that there is some concern in the market today regarding the lower end consumer, I'm wondering if you could just kind of remind me, you know, kind of the companies that you have in there that you qualify or characterize as consumer, you know, what segment of the consumer market are they delivering their product to?

I mean, honestly, it's kind of a tough question to ask because it's very granular and diversified. I don't think there's any one industry within consumer products. You know, we just did a deep dive, you know, as part of the tariff exposure. We also did a deep dive just on the whole portfolio. And we really identified very few, if any, you know, sub-industries that we feel like we're overweighted towards and which we were have a concern on from a recessionary perspective. Now that, you know, doesn't say that in a recession, in a deep recession, that all companies will struggle at some point, but I don't believe it's anything that will be lumpy and therefore kind of be moving in the same direction. One of the things we've done since the inception of our credit platform is downside case modeling on all of our deals as it relates to the Great Recession. So, you know, we've taken the posturing of being a little bit less aggressive on deals that cycled really hard or industries that cycled really hard in the Great Recession. So generally speaking, at a very high level, I think a lot of our consumer products businesses would be focused more on the lower end, you know, with, you know, more value end of the spectrum. So give us some insulation to that.

Thanks. And last one for me, just curious if there's any kind of new updates to communicate on the potential sidecar fund?

No, I don't think there's anything explicit to communicate there. And I would, you know, say more so that there's a little delay there based on what's happened. I think, you know, a lot of the funds we've been looking at are, you know, some are domestic and some are international. And there's definitely a pause from our perspective on the international and as to, you know, capital being deployed in the U.S. market. So it's still something that we feel very confident and aggressive towards achieving. But I would say from the last time we've spoken to today, I don't think there's much more progress and just a little bit more of a pause.

Makes sense. Thanks for taking my question today. Appreciate it.

Thank you. And our next question for today comes from the line of Robert Dodd from Raymond James. Your question, please.

Hi, guys. And congrats on the quarter. One -- two questions for me. First, going back to your prepared remarks, I think you said there could be some spread impact given increased competition for the non-tariff impacted industries. I mean, how would you -- what potential scale do you think you could see there in terms of incremental spread compression? And then also like tied to that, it's like, how much is that is also what we might see in like weighted average spreads on originations? Because obviously, I'd expect non-tariff impacted businesses to be lower spreads already. And if you do a more share of those kinds of businesses, I mean, how much of it's like for like with competition and you're seeing, you know, bigger players move down market versus how much of it is potentially a mixed thing?

Yes. I wouldn't think that it would be a material spread compression. I think the point would be more -- we certainly wouldn't see widening. We've gotten a lot of questions or had a lot of conversations as to whether or not we'd see widening spreads, given the macro environment. And I think that the counter to that is still a lot of dollars chasing potentially fewer deals. So, you know, wouldn't expect widening for sure. But, you know, I wouldn't -- if there was some spread compression, I wouldn't expect it to be material. We've seen, I think everyone's seen that the BSL market blew out in the last two months. The lower middle market, you know, it's slower to react and it's just a little more insular than the BSL. And so, we haven't seen that. I mean, what we would tell you specific to Capital Southwest is, we're averaging around, you know, 5% to 7% on the new deals we're seeing. But having said that, the ranges are as low as, you know, 5.5% and as high as 7.5%. And we would tell you some of those 5.5%, I think Josh and I would say that was probably 100 basis points wider, certainly in 2023. And the other part of our aspects of it is we're also seeing, you know, the DDTLs that get funded are from older vintages, generally speaking, you know, prior to 2025. And those are usually 7% plus. So, we've seen only limited amount of compression in our portfolio. I think this quarter we had 10 basis points of spread compression. And then, you know, the other reduction had to do with SOFR coming down by 25 basis points. So, I think that kind of frames what Josh's comments and then us on a specific basis, I think that kind of frames where we think we are, kind of around that 7% range.

Got it. Got it. No, I appreciate that. Thank you. Then on UTI, you're still overbalanced. I mean, $0.80 at the end of this quarter, $20 million, I mean, that's adding in the ballpark of $0.50. So, you could be coming out of Q2 with almost two full quarters the increased dividend, including the supplemental, almost two quarters of dividend and spillover and potentially growing further. I mean, what's your comfort level on how high you would want that balance to potentially go? I mean, in the past, you have distributed specials sometimes to work it down when you've had a period of material gains. I mean, kind of, can you give us your thoughts on how much that could go up before you'd want to deal with it with maybe some kind of one-time distribution?

Yes, I mean, that's a great question. That's what we think about a lot around here. I would tell you, I don't know, our approach might be different, somewhat different than others. I mean, our intent here is to create realized gains as well as having sucked away some pennies when SOFR was extremely high and we knew that was coming back to build up the UTI balance, but we want to distribute to our shareholders. So, you know, you rightfully identified the fact that we'll likely have a dollar balance-ish coming out of the June 30 quarter, and we do have some anticipation of that balance going sizably higher. I don't believe that unless that we exceed our UTI maximum that we'll do a special dividend. What I would say is that UTI balance is there to support our regular dividends. It's also there to support that supplemental. If we do play out a scenario where we're pushing, you know, $1.52, we would see that $0.06 supplemental dividend increase. And I don't think that we have a -- I don't think we have a number in mind on how big, you know, we want it. I think I can tell you, we probably don't want it any less than $0.50. But, our intent at the end of the day is to return capital to shareholders. And we believe the most beneficial way from a shareholder value is to do it in a programmatic basis, which is to pay it out in a supplemental. I don't think we've seen the value for shareholders in doing specials. I t quickly reduces liquidity. It quickly increases leverage by reducing NAV. And it doesn't have a long-term impact from a trading perspective of, you know, distributing $0.50 at a time. So, I think you should expect to see the supplemental be where it is or stronger in the coming quarters.

Got it. Thank you.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Michael Sarner for any further remarks.

Thanks again to everyone for joining today. We look forward to speaking to you guys next quarter. Take care. Goodbye.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.