NEWS

On December 10, 2020 Capital Southwest (CSWC) announced, in an 8-K filing which is attached,  an amendment to its secured Revolver.

The changes included an expansion of its “accordion feature” from $350mn to $400mn.

Furthermore, CSWC entered into an Incremental Commitment Agreement, which increases total lender commitments under its Revolver from $325 million to $340 million.

ANALYSIS

Purpose

We are taking the opportunity afforded by the amendment to briefly review the evolution of CSWC’s Revolver and the changing size of both the “accordion” and the actual commitments.

Furthermore – at a time when many BDCs are reviewing and fine tuning their mix of secured and unsecured debt – we recap where the BDC stood in this regard as of September 2020.

Finally, we’ll have a look at CSWC’s liquidity status.

History

CSWC has enjoyed a secured Revolver since August 2016 when the BDC split off from its parent and became a leveraged lender and investor.

The initial commitment was for $100mn, but the “accordion feature” permitted an expansion up to $150mn.

Initial pricing was LIBOR + 325 basis points.

In subsequent years, both the “accordion” and the actual committed amounts – and the number of lenders involved in the syndicate – have increased multiple times.

As recently as March 19, 2020 CSWC was able to increase total commitments from $295mn to $325mn.

Nine months later – as noted – the commitment amount has been increased again to $340mn.

Lower Is Better

Likewise, pricing has improved since December 2018 when borrowings were re-priced to LIBOR + 250 bps.

As of the IIIQ 2020 CSWC’s average secured borrowing cost was 2.86%, substantially lower than a year before (5.00%) due to lower LIBOR.

The outstanding balance of the Revolver was $187mn as of September 30, 2020, or 57% of the Revolver commitments.

Liquidity

The BDC has indicated having $151mn of available liquidity as of September 2020, virtually all of which consisted of undrawn Revolver.

With the latest commitment increase liquidity will increase further to $176mn on a pro-forma basis.

Debt Mix

CSWC has two sets of unsecured notes outstanding due in 2022 and 2024, with an amortized cost of $180mn.

As a result, there is roughly a 50/50 balance between secured and unsecured debt on CSWC’s balance sheet.

The secured debt is “covered” by $631mn of portfolio assets.

VIEWS

Thoughtful

The latest amendment is one more brick in a long term construction CSWC began in 2016.

In four years the BDC has quietly and efficiently improved its secured debt facility while maintaining a conservative balance of secured and unsecured debt.

Real Life Consequences

This allowed the BDC, despite relatively high debt to equity, to navigate through the recent crisis with adequate liquidity and with no need for a Rights Offering; selling off of assets or other emergency measures taken by some of its peers.

Moreover, CSWC was able to maintain its regular dividend and a previously announced series of “special dividends”.

Plenty

Looking forward, CSWC is well positioned to fund additional incremental loans with its Revolver and the initial equity capital of its recently approved SBIC subsidiary.

Management has the option to also tap the unsecured debt market, if need be.

On the most recent conference call, the plans for this expansion of the Revolver and future liability management were spelt out by the BDC’s CFO:

“I think our strategy over the next few years is going to be to grow this revolver. As I said, we’re going to utilize the SBIC. And quite frankly, we’re hopeful over the next year to 2 years as we grow our balance sheet and we get closer to investment grade, we would look to go back to the unsecured bond market and tap that market at the 4% rate or thereabouts. If there’s a need for liquidity during this coming year, 2021, we would hit the baby bond market perhaps. But that’s — at this moment, that’s not our baseline assumption”.

From a funding standpoint everything seems to be going according to plan at CSWC and the BDC is well positioned for substantial asset growth in 2021.