NEWS

• Capital Southwest (NASDAQ:CSWC) said on Monday [April 14, 2025] the company incurred $2.8 million, or $0.05 per share, of one-time net expenses related to the departure of its former president and CEO during the quarter ended March 31, 2025.
• Capital Southwest’s preliminary estimate of its fourth quarter 2025 pre-tax net investment income is in the range of $0.55 to $0.56 per share.
• Additionally, the company’s preliminary estimate of its net asset value per share as of March 31, 2025, is in the range of $16.65 to $16.75.
• Capital Southwest’s preliminary estimate of its non-accruals as a percentage of the total investment portfolio at cost and fair value is 3.5% and 1.7%, respectively.
• Capital Southwest will release its finalized fourth quarter 2025 results on Wednesday, May 14, 2025, after the market closes.

Source: Seeking Alpha

ANALYSIS

Here’s Your Hat

On February 18, 2025 CSWC announced in a filing and by press release that  Bowen Diehl – President and Chief Executive Officer was stepping down and would be replaced by Chief Financial Officer Michael Sarner, who has also been appointed to the board. Both appointments were effective as of February 17, 2025. Mr. Diehl will continue to serve the Company in an advisory capacity for at least another year.

Mr Diehl had this to say:

“While stepping down is clearly bittersweet, succession planning is an important part of a company’s evolution, and I very much look forward to supporting Capital Southwest in any way that Michael and the team find helpful, in the short term as an advisor, and in the long term as a fellow shareholder.”

The cost of all the above turned out to be $0.05 a share or $2.5mn going by the share count at the end of 2024.

Adjusted for the one-time Diehl expense, CSWC seems to have booked pre-tax net investment income per share of $0.60 to $0.61

That compares with the IVQ 2024 earnings per share of $0.64. That’s about (5%) down and might represent lower profitability due to a full quarter of a lower SOFR rate in the most recent 3 months.

The analyst consensus is for earnings of $0.59, but that’s down from $0.64 90 days ago, maybe an adjustment for Diehl’s departure.

Net Asset Value Per Share (NAVPS) closed out in 2024 at $16.59, down (1.1%) from the level at the end of 2023.

BDC Best Ideas projects that in calendar 2025 – distinct from the BDC’s fiscal year – NAVPS will remain unchanged at the $16.59 level.

In the IQ 2025 – as the numbers above show – CSWC is predicting its NAVPS will range between $16.65 and $16.75. Using the mid-point, this means NAVPS has increased by 0.7% in the first calendar quarter.

CSWC’s non-accruals in the IVQ 2024 amounted to 5.2% of the portfolio at cost, or $89.1mn. After unrealized write-downs, those assets amounted to 2.7% of the portfolio at FMV or $45.9mn. The FMV discount of roughly one half is pretty standard in the BDC sector.

As of March 31, 2025, we are told the cost of portfolio assets on non-accrual amount to 3.5% and by FMV 1.7%.

We can’t provide the absolute numbers but the metrics are clearly lower than before, reflecting some mix of realized losses booked, value recovery and/or further write-downs.

By BDC standards – and its own historical performance – CSWC’s non-accrual percentages are in a normal range, and imply a modest amount of forgone income in the portfolio.

As of the end of 2024, there were 7 companies with one or more loans on non-accrual.

Left Out

Not discussed in the IQ 2025 preliminary results is CSWC’s debt to equity. At the end of 2024 the regulatory debt-to-equity is 0.9x.

Also not discussed are realized and unrealized gains and losses.

This may be an important omission because CSWC is in the process of selling its equity position in one of its portfolio companies: NinjaTrader.

As we discussed in a feature article on March 26, 2025, there might be a very significant realized gain coming.

Also not discussed is what the regular and supplemental dividend might be in the IIQ 2025.

In the IQ 2025, CSWC surprised by maintaining an unchanged $0.58 per share regular distribution but increasing its supplemental dividend to $0.06 per share, from $0.05 previously.

At the end of 2024, the BDC reported having $0.63 per share of undistributed taxable income.

VIEWS

Pretty Good

Just based on what we have been told, CSWC’s first quarter of 2025 seems to have gone pretty well, notwithstanding the loss of its CEO.

However, we will need to fill in many blanks before we can be certain that all remains well at the BDC.

A key issue is how CSWC might pay for the difference between its recurring earnings and its higher payout level.

Our guess is that net realized gains might boost total income available to be distributed.