CAPITAL SOUTHWEST CORP

Previous wording

The information contained herein may contain “forward-looking statements” based on our current expectations, assumptions and estimates about us and our industry. These forward-looking statements involve risks and uncertainties. Words such as “may,” “predict,” “will,” “continue,” “likely,” “would,” “could,” “should,” “expect,” “anticipate,” “potential,” “estimate,” “indicate,” “seek,” “believe,” “target,” “intend,” “plan,” or “project” and other similar expressions identify forward-looking statements. These risks include risks related to changes in the markets in which the Company invests; changes in the financial and lending markets; interest rate volatility, including the replacement of LIBOR with alternate rates and rising interest rates; the impact of supply chain constraints and labor difficulties on our portfolio companies and the global economy; the elevated level of inflation, and its impact on our portfolio companies and on the industries in which we invest; the impact of geopolitical conditions and its impact on financial market volatility, global economic markets and various sectors and industries; regulatory changes; changes in tax treatment; an economic downturn and its impact on the ability of our portfolio companies to operate and the investment opportunities available to us; and our ability to operate our wholly owned subsidiary, Capital Southwest SBIC I, LP, as a small business investment company. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those we express in the forward-looking statements as a result of several factors more fully described in “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023 and in this Quarterly Report on Form 10-Q. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. You should read the following discussion in conjunction with the consolidated financial statements and related footnotes and other financial information included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023. We undertake no obligation to update publicly any forward-looking statements for any reason, whether as a result of new information, future events or otherwise, except as required by law.

Current wording

The information contained herein may contain “forward-looking statements” based on our current expectations, assumptions and estimates about us and our industry. These forward-looking statements involve risks and uncertainties. Words such as “may,” “predict,” “will,” “continue,” “likely,” “would,” “could,” “should,” “expect,” “anticipate,” “potential,” “estimate,” “indicate,” “seek,” “believe,” “target,” “intend,” “plan,” or “project” and other similar expressions identify forward-looking statements. These risks include risks related to changes in the markets in which the Company invests; changes in the financial and lending markets; interest rate volatility; the impact of supply chain constraints and labor difficulties on our portfolio companies and the global economy; the elevated level of inflation, and its impact on our portfolio companies and on the industries in which we invest; the impact of geopolitical conditions and its impact on financial market volatility, global economic markets and various sectors and industries; regulatory changes; changes in tax treatment; an economic downturn and its impact on the ability of our portfolio companies to operate and the investment opportunities available to us; and our ability to operate our wholly owned subsidiary, Capital Southwest SBIC I, LP, as a small business investment company. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results could differ materially from those we express in the forward-looking statements as a result of several factors more fully described in “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended March 31, 2024 and in this Quarterly Report on Form 10-Q. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. You should read the following discussion in conjunction with the consolidated financial statements and related footnotes and other financial information included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2024. We undertake no obligation to update publicly any forward-looking statements for any reason, whether as a result of new information, future events or otherwise, except as required by law.

Previous wording

We are an internally managed closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. We specialize in providing customized debt and equity financing to LMM companies and debt capital to UMM companies in a broad range of investment segments located primarily in the United States. Our investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments. Our investment strategy is to partner with business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth, changes of control, or other corporate events. We invest primarily in senior debt securities, secured by security interests in portfolio company assets. We also invest in equity interests in our portfolio companies alongside our debt securities.

Current wording

We are an internally managed closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the 1940 Act. We specialize in providing customized debt and equity financing to LMM companies in a broad range of investment segments located primarily in the United States. Our investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments. Our investment strategy is to partner with business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth, changes of control, or other corporate events. We invest primarily in senior debt securities, secured by security interests in portfolio company assets. We also may invest in equity interests in our portfolio companies alongside our debt securities.

Previous wording

We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. We primarily target senior debt and equity investments in LMM companies, and opportunistically target first and second lien loans in UMM companies. Our target LMM companies typically have annual EBITDA between $3.0 million and $20.0 million, and our LMM investments generally range in size from $5.0 million to $35.0 million. Our UMM investments generally include first and second lien loans in companies with EBITDA generally greater than $20.0 million, and our UMM investments typically range in size from $5.0 million to $20.0 million.

Current wording

We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and proven management teams with strong operating discipline. We primarily target senior debt and equity investments in LMM companies. Our target companies typically have annual EBITDA between $3.0 million and $25.0 million, and our investments generally range in size from $5.0 million to $35.0 million.

Previous wording

We seek to fill the financing gap for LMM companies, which, historically, have had more limited access to financing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equity participations. Our ability to invest across a LMM company’s capital structure, from secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is important to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, management teams and business owners in making our investments. Our LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company. Our LMM debt investments typically have a term of between five and seven years from the original investment date. We also often seek to invest in the equity securities of our LMM portfolio companies.

Current wording

We seek to fill the financing gap for LMM companies, which, historically, have had more limited access to financing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equity participations. Our ability to invest across a LMM company’s capital structure, from secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is important to LMM companies. We generally seek to partner directly with financial sponsors, entrepreneurs, management teams and business owners in making our investments. Our LMM debt investments typically include senior loans with a first lien on the assets of the portfolio company. Our LMM debt investments typically have a term of up to five years from the original investment date. We also often seek to invest in the equity securities of our LMM portfolio companies.

Previous wording

Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately held investment firms that are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the nine months ended December 31, 2023 and 2022, the ratio of our last twelve months ("LTM") operating expenses, excluding interest expense, as a percentage of our LTM average total assets was 1.84% and 1.89%, respectively.

Current wording

Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately held investment firms that are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the three months ended June 30, 2024 and 2023, the ratio of our last twelve months ("LTM") operating expenses, excluding interest expense, as a percentage of our LTM average total assets was 1.79% and 1.90%, respectively.

Previous wording

The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. As of December 31, 2023 and March 31, 2023, our investment portfolio at fair value represented approximately 95.5% and 95.9% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. See Note 4 — Fair Value Measurements in the notes to consolidated financial statements for a detailed discussion of our investment portfolio valuation process and procedures.

Current wording

The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. As of June 30, 2024 and March 31, 2024, our investment portfolio at fair value represented approximately 95.1% and 94.8% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. See Note 4 — Fair Value Measurements in the Notes to Consolidated Financial Statements for a detailed discussion of our investment portfolio valuation process and procedures.

Previous wording

As of March 31, 2023, our Board of Directors was responsible for determining, in good faith, the fair value for our investment portfolio and our valuation procedures, consistent with 1940 Act requirements. Beginning as of the fiscal quarter ended June 30, 2023, pursuant to Rule 2a-5 under the 1940 Act, the Board of Directors designated a valuation committee comprised of certain officers of the Company (the "Valuation Committee") as its valuation designee to determine the fair value of the Company's investments that do not have readily available market quotations, subject to the oversight of the Board of Directors. Our Valuation Committee and the Board of Directors believe that our investment portfolio as of December 31, 2023 and March 31, 2023, respectively, reflects the fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.

Current wording

Beginning as of the fiscal quarter ended June 30, 2023, pursuant to Rule 2a-5 under the 1940 Act, the Board of Directors designated a valuation committee (the "Valuation Committee") comprised of certain officers of the Company as its valuation designee to determine the fair value of the Company's investments that do not have readily available market quotations, subject to the oversight of the Board of Directors. Our Valuation Committee and the Board of Directors believe that our investment portfolio as of June 30, 2024 and March 31, 2024, respectively, reflects the fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.

Previous wording

Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized on the date dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life of the loan using the effective interest method. In accordance with our valuation policy, accrued interest and dividend income is evaluated quarterly for collectability. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding its ability to service debt or other obligations, it will be restored to accrual basis. As of December 31, 2023, investments on non-accrual status represented approximately 2.2% of our total investment portfolio's fair value and approximately 2.8% of its cost. As of March 31, 2023, investments on non-accrual status represented approximately 0.3% of our total investment portfolio's fair value and approximately 1.3% of its cost.

Current wording

Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized on the date dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life of the loan using the effective interest method. In accordance with our valuation policy, accrued interest and dividend income is evaluated quarterly for collectability. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding its ability to service debt or other obligations, it will be restored to accrual basis. As of June 30, 2024, investments on non-accrual status represented approximately 1.9% of our total investment portfolio's fair value and approximately 3.9% of its cost. As of March 31, 2024, investments on non-accrual status represented approximately 2.3% of our total investment portfolio's fair value and approximately 3.9% of its cost.

Previous wording

The total value of our investment portfolio was $1,365.0 million as of December 31, 2023, as compared to $1,206.4 million as of March 31, 2023. As of December 31, 2023, we had investments in 96 portfolio companies with an aggregate cost of $1,369.9 million. As of March 31, 2023, we had investments in 86 portfolio companies with an aggregate cost of $1,220.2 million.

Current wording

The total fair value of our investment portfolio was $1,468.1 million as of June 30, 2024, as compared to $1,476.6 million as of March 31, 2024. As of June 30, 2024, we had investments in 117 portfolio companies with an aggregate cost of $1,484.1 million. As of March 31, 2024, we had investments in 116 portfolio companies with an aggregate cost of $1,476.7 million.

Previous wording

As of December 31, 2023 and March 31, 2023, approximately $1,147.7 million, or 97.1%, and $1,002.9 million, or 96.7%, respectively, of our debt investment portfolio (at fair value) bore interest at floating rates, of which 100.0% were subject to contractual minimum interest rates. As of December 31, 2023 and March 31, 2023, the weighted average contractual minimum interest rate is 1.28% and 1.15%, respectively. As of December 31, 2023 and March 31, 2023, approximately $34.0 million, or 2.9%, and $34.7 million, or 3.3%, respectively, of our debt investment portfolio (at fair value) bore interest at fixed rates.

Current wording

As of June 30, 2024 and March 31, 2024, approximately $1,303.1 million, or 97.6%, and $1,310.0 million, or 97.4%, respectively, of our debt investment portfolio (at fair value) bore interest at floating rates, of which 99.2% and 99.1%, respectively, were subject to contractual minimum interest rates. As of June 30, 2024 and March 31, 2024, the weighted average contractual minimum interest rate is 1.34% and 1.28%, respectively. As of June 30, 2024 and March 31, 2024, approximately $32.2 million, or 2.4%, and $34.5 million, or 2.6%, respectively, of our debt investment portfolio (at fair value) bore interest at fixed rates.

Previous wording

The following tables provide a summary of our investments in portfolio companies as of December 31, 2023 and March 31, 2023 (excluding our investment in I-45 SLF LLC):

Current wording

The following tables provide a summary of our investments in portfolio companies as of June 30, 2024 and March 31, 2024:

Previous wording

(a)At December 31, 2023 and March 31, 2023, we had equity ownership in approximately 65.3% and 62.4%, respectively, of our investments.

Current wording

(a)At June 30, 2024 and March 31, 2024, we had equity ownership in approximately 59.0% and 56.0%, respectively, of our investments.

Previous wording

(b)The weighted average annual effective yields were computed using the effective interest rates during the quarter for all debt investments at cost as of December 31, 2023 and March 31, 2023, respectively, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments. As of December 31, 2023, investments on non-accrual status represented approximately 2.2% of our total investment portfolio's fair value and approximately 2.8% of its cost. As of March 31, 2023, investments on non-accrual status represented approximately 0.3% of our total investment portfolio's fair value and approximately 1.3% of its cost. Weighted average annual effective yield is not a return to shareholders and is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor.

Current wording

(b)The weighted average annual effective yield of debt investments is not the same as a return on investment for CSWC's shareholders, but rather relates to CSWC's investment portfolio and is calculated before the payment of all of CSWC's and subsidiaries' fees and expenses. The weighted average annual effective yields were computed using the effective interest rates during the quarter for all debt investments at cost as of June 30, 2024 and March 31, 2024, respectively, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments. As of June 30, 2024, investments on non-accrual status represented approximately 1.9% of our total investment portfolio's fair value and approximately 3.9% of its cost. As of March 31, 2024, investments on non-accrual status represented approximately 2.3% of our total investment portfolio's fair value and approximately 3.9% of its cost. Weighted average annual effective yield is not a return to shareholders and is higher than what an investor in shares in our common stock will realize on its investment because it does not reflect our expenses or any sales load paid by an investor.

Previous wording

(c)The weighted average annual effective yields on total investments were calculated by dividing total investment income, exclusive of non-recurring fees, by average total investments at fair value.

Current wording

(c)The weighted average annual effective yield of total investments is not the same as a return on investment for CSWC's shareholders, but rather relates to CSWC's investment portfolio and is calculated before the payment of all of CSWC's and subsidiaries' fees and expenses. The weighted average annual effective yields on total investments were calculated by dividing total investment income, exclusive of non-recurring fees, by average total investments at fair value.

Previous wording

(d)Includes CSWC debt investments only. Weighted average EBITDA metric is calculated using investment cost basis weighting. For the three months ended December 31, 2023, 11 portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the year ended March 31, 2023, nine portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.

Current wording

(d)Includes CSWC debt investments only. Weighted average EBITDA metric is calculated using investment cost basis weighting. For the three months ended June 30, 2024, 12 portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the year ended March 31, 2024, 12 portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.

Previous wording

(e)Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Weighted average leverage is calculated using investment cost basis weighting. Management uses this metric as a guide to evaluate relative risk of its position in each portfolio debt investment. For the three months ended December 31, 2023, 11 portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the year ended March 31, 2023, nine portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.

Current wording

(e)Includes CSWC debt investments only. Calculated as the amount of each portfolio company’s debt (including CSWC’s position and debt senior or pari passu to CSWC’s position, but excluding debt subordinated to CSWC’s position) in the capital structure divided by each portfolio company’s adjusted EBITDA. Weighted average leverage is calculated using investment cost basis weighting. Management uses this metric as a guide to evaluate relative risk of its position in each portfolio debt investment. For the year ended June 30, 2024, 12 portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful. For the year ended March 31, 2024, 12 portfolio companies are excluded from this calculation due to a reported debt to adjusted EBITDA ratio that was not meaningful.

Previous wording

We also have observed, and continue to observe, supply chain disruptions, labor and resource shortages, commodity inflation, elements of financial market instability (including rapidly rising interest rates and volatility in the banking systems, particularly with small and regional banks), an uncertain economic outlook for the United States (which may include a recession), and elements of geopolitical instability (including the ongoing war in Ukraine, conflict in the Middle East, and U.S. and China relations). In the event that the U.S. economy enters into a protracted recession, it is possible that the results of certain U.S. middle market companies could experience deterioration. We are closely monitoring the effect of such market volatility may have on our portfolio companies and our investment activities, and we have also increased oversight of credits in vulnerable industries to mitigate any decline in loan performance and reduce credit risk.

Current wording

Wecontinue to observe supply chain disruptions, labor and resource shortages, commodity inflation, elements of financial market instability (including elevated interest rates and volatility in the banking systems, particularly with small and regional banks), an uncertain economic outlook for the United States (which may include a recession), and elements of geopolitical instability (including the ongoing war in Ukraine, conflict in the Middle East, and U.S. and China relations). In the event that the U.S. economy enters into a protracted recession, it is possible that the results of certain U.S. middle market companies could experience deterioration. We are closely monitoring the effect of such market volatility may have on our portfolio companies and our investment activities, and we have also increased oversight of credits in vulnerable industries to mitigate any decline in loan performance and reduce credit risk.

Previous wording

During the nine months ended December 31, 2023, we made new debt investments totaling $192.1 million, follow-on debt investments totaling $84.7 million, and equity investments totaling $13.6 million. We received contractual principal repayments totaling approximately $42.6 million and full prepayments of approximately $79.7 million. We funded $27.4 million on revolving loans and received $20.1 million in repayments on revolving loans. In addition, we received proceeds from sales of debt and equity investments totaling $18.0 million.

Current wording

During the three months ended June 30, 2024, we made debt investments totaling $76.8 million and equity investments totaling $3.1 million. We received contractual principal repayments totaling approximately $9.0 million and full prepayments of approximately $71.1 million. We funded $11.3 million on revolving loans and received $8.2 million in repayments on revolving loans. In addition, we received proceeds from sales of debt investments totaling $8.2 million.

Previous wording

On January 22, 2024, the board of managers of I-45 SLF LLC approved additional capital commitments of $47.0 million to I-45 SLF LLC, which would result in an additional $37.6 million of capital commitment from the Company. The board of managers of I-45 SLF LLC also approved the dissolution and liquidation of I-45 SLF LLC and the wind up of its affairs, including distributing all of the assets of I-45 SLF LLC to the Company and Main Street Capital Corporation in accordance with their respective residual percentage. On January 24, 2024, I-45 SLF LLC paid down the full outstanding balance and terminated its credit facility.

Current wording

During the quarter ended March 31, 2024, the board of managers of I-45 SLF LLC ("I-45 SLF"), the joint venture between CSWC and Main Street Capital Corporation ("Main Street"), approved the dissolution and liquidation of I-45 SLF and the wind up of its affairs, including distributing all of the assets to CSWC and Main Street in accordance with their respective residual percentage. During the three months ended June 30, 2024, we received distributions-in-kind of investments from I-45 SLF totaling $6.4 million.

Previous wording

During the nine months ended December 31, 2022, we made new debt investments totaling $221.3 million, follow-on debt investments totaling $85.4 million, and equity investments totaling $7.9 million. We received contractual principal repayments totaling approximately $18.4 million and full prepayments of approximately $72.6 million. We funded $28.8 million on revolving loans and received $17.7 million in repayments on revolving loans. In addition, we received proceeds from sales of debt and equity investments totaling $3.4 million.

Current wording

During the three months ended June 30, 2023, we made debt investments totaling $94.5 million and equity investments totaling $5.0 million. We received contractual principal repayments totaling approximately $18.2 million. We funded $4.6 million on revolving loans and received $6.7 million in repayments on revolving loans. In addition, we received proceeds from sales of equity investments totaling $3.4 million.

Previous wording

Total portfolio investment activity for the nine months ended December 31, 2023 and 2022 was as follows (dollars in thousands):

Current wording

Total portfolio investment activity for the three months ended June 30, 2024 and 2023 was as follows (dollars in thousands):

Previous wording

1 Includes $3.8 million of cost basis allocated from first lien debt to warrants.

Current wording

2 Includes $3.8 million of cost basis allocated from first lien debt to warrants.

Previous wording

The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Net increase in net assets from operations” and consists of four elements. The first is “Net investment income,” which is the difference between income from interest, dividends and fees and our combined operating and interest expenses, net of applicable income taxes. The second element is “Net realized (loss) gain on investments, net of tax,” which is the difference between the proceeds received from the disposition of portfolio securities and their stated cost. The third element is the “Net unrealized (depreciation) appreciation on investments, net of tax,” which is the net change in the market or fair value of our investment portfolio, compared with the stated cost. The “Net realized (loss) gain on investments before income tax” and “Net unrealized appreciation (depreciation) on investments, net of tax” are directly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from being “unrealized” to being “realized.” Conversely, when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs. The fourth element is the “Realized loss on extinguishment of debt”, which is the acceleration of unamortized deferred fees associated with amendments to the Credit Facility that trigger a debt extinguishment or, in relation to notes payable, the difference between the principal amount due at maturity adjusted for any unamortized debt issuance costs and any "make-whole" premium payable at the time of the debt extinguishment .

Current wording

The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Net increase in net assets from operations” and consists of four elements. The first is “Net investment income,” which is the difference between income from interest, dividends and fees and our combined operating and interest expenses, net of applicable income taxes. The second element is “Net realized (loss) gain on investments, net of tax,” which is the difference between the proceeds received from the disposition of portfolio securities and their stated cost. The third element is the “Net unrealized (depreciation) appreciation on investments, net of tax,” which is the net change in the market or fair value of our investment portfolio, compared with the stated cost. The “Net realized (loss) gain on investments before income tax” and “Net unrealized appreciation (depreciation) on investments, net of tax” are directly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from being “unrealized” to being “realized.” Conversely, when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs.

Previous wording

Total investment income consisted of interest income, dividend income, fee income and other income for each applicable period. For the three months ended December 31, 2023, we reported investment income of $48.6 million, a $15.8 million, or 48.2%, increase as compared to the three months ended December 31, 2022. The increase was primarily due to a $12.8 million increase in interest income generated from our debt investments due to an 18.3% increase in the cost basis of debt investments held by us from $1,013.4 million to $1,198.5 million year-over-year and an increase in weighted average yield on debt investments. The increase in weighted average yield was primarily due to rising benchmark interest rates year-over-year. Additionally, dividend income increased $2.3 million year-over-year due to an increase in distributions received from portfolio companies.

Current wording

Interest income (including PIK interest income and amortization of purchase discounts and fees) for the three months ended June 30, 2024 totaled $46.0 million as compared to $36.5 million for the three months ended June 30, 2023. The increase was primarily due to a 24.3% increase in the average monthly cost basis of debt investments held by us from $1,106.5 million to $1,375.7 million year-over-year and an increase in the weighted average yield on debt investments from 12.9% to 13.3% year-over-year primarily due to an increase in benchmark interest rates. Dividend income for the three months ended June 30, 2024 decreased $0.3 million as compared to the three months ended June 30, 2023 primarily due to the liquidation of I-45 SLF during the quarter ended March 31, 2024, partially offset by an increase in distributions received from our equity investments. Fee income for the three months ended June 30, 2024 increased $1.2 million as compared to the three months ended June 30, 2023 primarily due to an increase in prepayment and amendment fees in the current quarter.

Previous wording

For the three months ended December 31, 2023, our total interest expense was $11.5 million, an increase of $3.5 million, as compared to the total interest expense of $7.9 million for the three months ended December 31, 2022. The increase was primarily attributable to an increase in average borrowings outstanding and an increase in the weighted average interest rate on our total debt from 4.69% to 5.60% for the three months ended December 31, 2022 and December 31, 2023, respectively. This increase in the weighted average interest rate was primarily due to an increase to the base rate on our Credit Facility (as defined below) and the issuance of the August 2028 Notes.

Current wording

For the three months ended June 30, 2024, our total interest expense was $12.4 million, an increase of $2.7 million, as compared to the total interest expense of $9.7 million for the three months ended June 30, 2023. The increase was primarily attributable to an increase in average borrowings outstanding and an increase in the weighted average interest rate on our total debt from 5.23% to 5.60% for the three months ended June 30, 2023 and June 30, 2024, respectively. This increase in the weighted average interest rate was primarily due to an increase to the base rate on our Corporate Credit Facility, the addition of the SPV Credit Facility, and the issuance of the August 2028 Notes.

Previous wording

For the three months ended December 31, 2023, our total employee compensation expense (including both cash and share-based compensation) increased by $0.7 million, or 16.8%, as compared to the total employee compensation expense for the three months ended December 31, 2022. The increase was primarily due to an increase in accrued bonus compensation based on the Company's projected performance compared to its plan. For the three months ended December 31, 2023, our total general and administrative expense was $2.2 million, an increase of $0.4 million or 24.9%, as compared to the total general and administrative expense of $1.8 million for the three months ended December 31, 2022. The increase was attributable to $0.2 million in costs incurred during the three months ended December 31, 2023 associated with a special meeting of shareholders held on October 11, 2023, as well as $0.2 million of individually immaterial increases across several general operating expenses.

Current wording

For the three months ended June 30, 2024, our total employee compensation expense (including both cash and share-based compensation) increased by $1.2 million, or 35.0%, as compared to the total employee compensation expense for the three months ended June 30, 2023. The increase was primarily due to an increase in headcount and an increase in accrued bonus compensation based on the Company's projected performance compared to its plan. For the three months ended June 30, 2024, our total general and administrative expense was $2.9 million, an increase of $0.7 million or 33.0%, as compared to the total general and administrative expense of $2.2 million for the three months ended June 30, 2023. The increase was attributable to an increase in professional fees incurred in connection with the compensation consultant engaged by the Compensation Committee and an increase in audit fees, as well as individually immaterial increases across several general operating expenses.

Previous wording

For the three months ended December 31, 2023, income before taxes increased by $11.1 million, or 59.4%. Net investment income increased from the prior year period by $9.4 million, or 48.6%, to $28.9 million as a result of a $15.8 million increase in total investment income, partially offset by a $3.5 million increase in interest expense and a $1.7 million increase in income tax provision.

Current wording

For the three months ended June 30, 2024, income before taxes increased by $6.3 million, or 25.1%. Net investment income increased from the prior year period by $4.3 million, or 17.5%, to $28.9 million as a result of an $11.0 million increase in total investment income, partially offset by a $2.7 million increase in interest expense and a $2.0 million increase in income tax provision.

Previous wording

1 Includes a deferred tax benefit of $1.0 million associated with the Taxable Subsidiary.

Current wording

1 Includes a deferred tax benefit of $0.3 million associated with the Taxable Subsidiary.

Previous wording

1 Includes a deferred tax provision of $3.4 million associated with the Taxable Subsidiary.

Current wording

1 Includes a deferred tax provision of $20.0 thousand associated with the Taxable Subsidiary.

Previous wording

Our liquidity and capital resources are generated primarily from cash flows from operations, the net proceeds of public offerings of debt and equity securities, advances from the Credit Facility and our continued access to the debentures guaranteed by the Small Business Administration (the "SBA Debentures"). Management believes that the Company’s cash and cash equivalents, cash available from investments, and commitments under the Credit Facility are adequate to meet its needs for the next twelve months. We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, cash flows generated through our ongoing operating activities, utilization of available borrowings under our Credit Facility and future issuances of debt and equity on terms we believe are favorable to the Company and our shareholders (including the Equity ATM Program, as described below). Our primary uses of funds will be investments in portfolio companies and operating expenses. Due to the diverse capital sources available to us at this time, we believe we have adequate liquidity to support our near-term capital requirements. In light of current market conditions, we will continually evaluate our overall liquidity position and take proactive steps to maintain that position based on the current circumstances. This "Financial Liquidity and Capital Resources" section should be read in conjunction with the notes of our consolidated financial statements.

Current wording

Our liquidity and capital resources are generated primarily from cash flows from operations, the net proceeds of public offerings of debt and equity securities, advances from our credit facilities and our continued access to the debentures guaranteed by the Small Business Administration (the "SBA Debentures"). Management believes that the Company’s cash and cash equivalents, cash available from investments, and commitments under our credit facilities are adequate to meet its needs for the next twelve months. We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, cash flows generated through our ongoing operating activities, utilization of available borrowings under our credit facilities and future issuances of debt and equity on terms we believe are favorable to the Company and our shareholders (including our Equity ATM Program, as described below). Our primary uses of funds will be investments in portfolio companies and operating expenses. Due to the diverse capital sources available to us at this time, we believe we have adequate liquidity to support our near-term capital requirements. We continually evaluate our overall liquidity position and take proactive steps to maintain that position based on the current circumstances. This "Financial Liquidity and Capital Resources" section should be read in conjunction with the notes of our consolidated financial statements.

Previous wording

In accordance with the 1940 Act, effective April 25, 2019, the Company is only allowed to borrow amounts such that its asset coverage (i.e., the ratio of assets less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940 Act, is at least 150% after such borrowing. The Board of Directors also approved a resolution that limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, which became effective April 25, 2019. On August 11, 2021, we received an exemptive order from SEC to permit us to exclude the senior securities issued by SBIC I or any future SBIC subsidiary of the Company from the definition of senior securities in the asset coverage requirement applicable to the Company under the 1940 Act. As of December 31, 2023, the Company’s asset coverage was 253%.

Current wording

In accordance with the 1940 Act, effective April 25, 2019, the Company is only allowed to borrow amounts such that its asset coverage (i.e., the ratio of assets less liabilities not represented by senior securities to senior securities such as borrowings), calculated pursuant to the 1940 Act, is at least 150% after such borrowing. The Board of Directors also approved a resolution that limits the Company’s issuance of senior securities such that the asset coverage ratio, taking into account any such issuance, would not be less than 166%, which became effective April 25, 2019. On August 11, 2021, we received an exemptive order from SEC to permit us to exclude the senior securities issued by SBIC I or any future SBIC subsidiary of the Company from the definition of senior securities in the asset coverage requirement applicable to the Company under the 1940 Act. As of June 30, 2024, the Company’s asset coverage was 232%.

Previous wording

For the nine months ended December 31, 2022, we experienced a net increase in cash and cash equivalents in the amount of $10.3 million. During that period, our operating activities used $193.6 million in cash, consisting primarily of new portfolio investments of $343.4 million, partially offset by $106.6 million from sales and repayments received from debt investments in portfolio companies and $2.7 million from sales and return of capital of equity investments in portfolio companies. In addition, our financing activities provided cash of $204.1 million, consisting primarily of net proceeds from the Equity ATM Program of $130.1 million, net proceeds from an underwritten equity offering of $44.1 million, net proceeds from the issuance of SBA debentures of $62.4 million and net borrowings on our Credit Facility of $20.0 million, partially offset by cash dividends paid in the amount of $50.2 million. At December 31, 2022, the Company had cash and cash equivalents of approximately $21.7 million.

Current wording

For the three months ended June 30, 2024, we experienced a net increase in cash and cash equivalents in the amount of $1.0 million. During the foregoing period, our operating activities provided $31.1 million in cash, consisting primarily of $95.4 million from sales and repayments received from debt investments in portfolio companies, partially offset by new portfolio investments made by the Company of $91.2 million. In addition, our financing activities used cash of $30.1 million, consisting primarily of net repayments on our Credit Facilities of $36.0 million and cash dividends paid in the amount of $29.5 million, partially offset by net proceeds from the Equity ATM Program of $37.8 million. At June 30, 2024, the Company had cash and cash equivalents of approximately $33.3 million.

Previous wording

For the nine months ended December 31, 2023, we experienced a net increase in cash and cash equivalents in the amount of $2.0 million. During the foregoing period, our operating activities used $86.4 million in cash, consisting primarily of new portfolio investments of $317.9 million, partially offset by $154.5 million from sales and repayments received from debt investments in portfolio companies and $4.1 million from sales and return of capital of equity investments in portfolio companies. In addition, our financing activities provided cash of $88.4 million, consisting primarily of net proceeds from the issuance of the August 2028 Notes (as defined below) of $69.7 million, net proceeds from the Equity ATM Program of $132.9 million, and net proceeds from the issuance of SBA Debentures of $9.8 million, partially offset by cash dividends paid in the amount of $74.5 million and net repayments on our Credit Facility of $40.0 million. At December 31, 2023, the Company had cash and cash equivalents of approximately $23.6 million.

Current wording

For the three months ended June 30, 2023, we experienced a net decrease in cash and cash equivalents in the amount of $0.3 million. During that period, our operating activities used $55.6 million in cash, consisting primarily of new portfolio investments made by the Company of $104.1 million, partially offset by $24.7 million from sales and repayments received from debt investments in portfolio companies and $3.4 million from sales and return of capital relating to our equity investments in portfolio companies. In addition, our financing activities provided cash of $55.3 million, consisting primarily of net proceeds from the issuance of the August 2028 Notes of $69.7 million, net proceeds from the Equity ATM Program of $44.9 million and net proceeds from the issuance of SBA debentures of $4.9 million, partially offset by net repayments on our Corporate Credit Facility of $40.0 million and cash dividends paid in the amount of $22.9 million. At June 30, 2023, the Company had cash and cash equivalents of approximately $21.3 million.

Previous wording

In December 2020, the Company issued $75.0 million in aggregate principal amount of 4.50% Notes due 2026 (the "Existing January 2026 Notes"). The Existing January 2026 Notes were issued at par. In February 2021, the Company issued an additional $65.0 million in aggregate principal amount of the January 2026 Notes (the "Additional January 2026 Notes" together with the Existing January 2026 Notes, the "January 2026 Notes"). The Additional January 2026 Notes were issued at a price of 102.11% of the aggregate principal amount of the Additional January 2026 Notes, resulting in a yield-to-maturity of approximately 4.0% at issuance. The Additional January 2026 Notes are treated as a single series with the Existing January 2026 Notes under the indenture and have the same terms as the Existing January 2026 Notes. The January 2026 Notes mature on January 31, 2026 and may be redeemed in whole or in part at any time prior to October 31, 2025, at par plus a "make-whole" premium, and thereafter at par. The January 2026 Notes bear interest at a rate of 4.50% per year, payable semi-annually on January 31 and July 31 of each year. The January 2026 Notes are the direct unsecured obligations of the Company, rank pari passu with the Company's other outstanding and future unsecured unsubordinated indebtedness and are effectively or structurally subordinated to all of the Company's existing and future secured indebtedness, including borrowings under the Credit Facility and the SBA Debentures.

Current wording

In December 2020, the Company issued $75.0 million in aggregate principal amount of 4.50% Notes due 2026 (the "January 2026 Notes"). In February 2021, the Company issued an additional $65.0 million in aggregate principal amount of the January 2026 Notes. The outstanding aggregate principal amount of January 2026 Notes was $140.0 million as of both June 30, 2024 and March 31, 2024.

Previous wording

In August 2021, the Company issued $100.0 million in aggregate principal amount of 3.375% Notes due 2026 (the "Existing October 2026 Notes"). The Existing October 2026 Notes were issued at a price of 99.418% of the aggregate principal amount of the Existing October 2026 Notes, resulting in a yield-to-maturity of 3.5%. In November 2021, the Company issued an additional $50.0 million in aggregate principal amount of the October 2026 Notes (the "Additional October 2026 Notes" together with the Existing October 2026 Notes, the "October 2026 Notes"). The Additional October 2026 Notes were issued at a price of 99.993% of the aggregate principal amount, resulting in a yield-to-maturity of approximately 3.375% at issuance. The Additional October 2026 Notes are treated as a single series with the Existing October 2026 Notes under the indenture and have the same terms as the Existing October 2026 Notes. The October 2026 Notes mature on October 1, 2026 and may be redeemed in whole or in part at any time prior to July 1, 2026, at par plus a "make-whole" premium, and thereafter at par. The October 2026 Notes bear interest at a rate of 3.375% per year, payable semi-annually in arrears on April 1 and October 1 of each year. The October 2026 Notes are the direct unsecured obligations of the Company, rank pari passu with the Company's other outstanding and future unsecured unsubordinated indebtedness and are effectively or structurally subordinated to all of the Company's existing and future secured indebtedness, including borrowings under the Credit Facility and the SBA Debentures.

Current wording

In August 2021, the Company issued $100.0 million in aggregate principal amount of 3.375% Notes due 2026 (the "October 2026 Notes"). In November 2021, the Company issued an additional $50.0 million in aggregate principal amount of the October 2026 Notes. The outstanding aggregate principal amount of October 2026 Notes was $150.0 million as of both June 30, 2024 and March 31, 2024.

Previous wording

In June 2023, the Company issued approximately $71.9 million in aggregate principal amount, including the underwriters' full exercise of their option to purchase an additional $9.4 million in aggregate principal amount to cover over-allotments, of 7.75% notes due 2028 (the "August 2028 Notes"). The August 2028 Notes mature on August 1, 2028 and may be redeemed in whole or in part at any time, or from time to time, at the Company’s option on or after August 1, 2025. The August 2028 Notes bear interest at a rate of 7.75% per year, payable quarterly on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2023. The August 2028 Notes are the direct unsecured obligations of the Company, rank pari passu with the Company's other outstanding and future unsecured unsubordinated indebtedness and are effectively or structurally subordinated to all of the Company's existing and future secured indebtedness, including borrowings under the Credit Facility and the SBA Debentures. The August 2028 Notes are listed on the Nasdaq Global Select Market under the trading symbol "CSWCZ."

Current wording

In June 2023, the Company issued approximately $71.9 million in aggregate principal amount, including the underwriters' full exercise of their option to purchase an additional $9.4 million in aggregate principal amount to cover over-allotments, of 7.75% notes due 2028 (the "August 2028 Notes"). The outstanding aggregate principal amount of August 2028 Notes was $71.9 million as of both June 30, 2024 and March 31, 2024.

Previous wording

On April 20, 2021, SBIC I received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended. The license allows SBIC I to obtain leverage by issuing SBA Debentures, subject to the issuance of a leverage commitment by the SBA. SBA Debentures are loans issued to an SBIC which have interest payable semi-annually and a ten-year maturity. The interest rate is fixed shortly after issuance at a market-driven spread over U.S. Treasury Notes with ten-year maturities. Interest on SBA Debentures is payable semi-annually on March 1 and September 1. Current statutes and regulations permit SBIC I to borrow up to $175 million in SBA Debentures with at least $87.5 million in regulatory capital (as defined in the SBA regulations).

Current wording

On April 20, 2021, SBIC I received a license from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended. The license allows SBIC I to obtain leverage by issuing SBA Debentures, subject to the issuance of a leverage commitment by the SBA. Current SBA regulations permit SBIC I to borrow up to $175 million in SBA Debentures with at least $87.5 million in regulatory capital (as defined in the SBA regulations). As of June 30, 2024, SBIC I had a total leverage commitment from the SBA in the amount of $175.0 million, of which $153.0 million is outstanding. SBA Debentures have interest payable semi-annually and a ten-year maturity. The interest rate is fixed shortly after issuance at a market-driven spread over U.S. Treasury Notes with ten-year maturities. Interest on SBA Debentures is payable semi-annually on March 1 and September 1. The first maturity related to the SBA Debentures occurs in September 2031.

Previous wording

On March 4, 2019, the Company established an at-the-market offering (the "Equity ATM Program") pursuant to which the Company may offer and sell, from time to time through sales agents, shares of its common stock having an aggregate offering price of up to $50.0 million. On February 4, 2020, the Company (i) increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $100.0 million from $50.0 million and (ii) added two additional sales agents to the Equity ATM Program. On May 26, 2021, the Company (i) increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $250.0 million from $100.0 million and (ii) reduced the commission paid to the sales agents for the Equity ATM Program to 1.5% from 2.0% of the gross sales price of shares of the Company's common stock sold through the sales agents pursuant to the Equity ATM Program on and after May 26, 2021. On August 2, 2022, the Company increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $650.0 million from $250.0 million.

Current wording

On March 4, 2019, the Company established an at-the-market offering (the "Equity ATM Program") pursuant to which the Company may offer and sell, from time to time through sales agents, shares of its common stock having an aggregate offering price of up to $50.0 million. On February 4, 2020, the Company (i) increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $100.0 million from $50.0 million and (ii) added two additional sales agents to the Equity ATM Program. On May 26, 2021, the Company (i) increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $250.0 million from $100.0 million and (ii) reduced the commission paid to the sales agents for the Equity ATM Program to 1.5% from 2.0% of the gross sales price of shares of the Company's common stock sold through the sales agents pursuant to the Equity ATM Program on and after May 26, 2021. On August 2, 2022, the Company increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $650.0 million from $250.0 million. On May 21, 2024, the Company (i) increased the maximum amount of shares of its common stock to be sold through the Equity ATM Program to $1.0 billion from $650.0 million and (ii) amended the term "Settlement Date" to reflect that, on or after May 28, 2024, the settlement of shares will occur on the first trading day following the date on which such sales were made.

Previous wording

1 Net proceeds reflects proceeds after deducting commissions to the sales agents on shares sold and offering expenses. As of December 31, 2023 and 2022, $0.9 million and $2.7 million in proceeds remained receivable, respectively, and were included in other receivables in the Consolidated Statements of Assets and Liabilities.

Current wording

1 Net proceeds reflects proceeds after deducting commissions to the sales agents on shares sold and offering expenses. As of June 30, 2024 and 2023, no amounts remained receivable.

Previous wording

Cumulative to date, the Company has sold 23,276,814 shares of its common stock under the Equity ATM Program at a weighted-average price of $20.61, raising $479.6 million of gross proceeds. Net proceeds were $472.0 million after commissions to the sales agents on shares sold. As of December 31, 2023, the Company has $170.4 million available under the Equity ATM Program.

Current wording

Cumulative to date, the Company has sold 26,845,418 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.13, raising $567.3 million of gross proceeds. Net proceeds were $558.3 million after commissions to the sales agents on shares sold. As of June 30, 2024, the Company has $432.7 million available under the Equity ATM Program.