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CAPITAL SOUTHWEST CORP (CSWC)·Q1 2026 Earnings Summary

Executive Summary

  • Q1 FY26 delivered higher total investment income ($55.9M) and stronger pre-tax NII ($32.7M; $0.61/share) sequentially, with non-accruals reduced to 0.8% of fair value and weighted average debt yield at 11.8% .
  • Results beat Wall Street consensus: EPS $0.59 vs $0.586* and revenue $55.9M vs $54.3M*, driven by higher cash interest and increased average investment cost basis; PIK income fell to 5.8%* .
  • Management shifted regular dividends from quarterly to monthly (three payments of $0.1934 each for Jul–Sep plus $0.06 supplemental), maintaining total $0.64 per quarter; later extended monthly cadence for Oct–Dec with total $0.64 .
  • Strategic positioning improved: corporate leverage at 0.82x, $397M unused credit facility capacity, second SBIC license enabling up to $175M of additional debentures, and $41.7M raised via ATM at ~123% of NAV—supporting continued originations and dividend sustainability .

Note: Asterisk (*) indicates values retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

  • Non-accruals declined to 0.8% of the portfolio at fair value (from 1.7% in Q4), and weighted average leverage through the security improved to 3.4x, indicating lower portfolio risk .
  • Realized gains of ~$27.2M from two equity exits increased Undistributed Taxable Income (UTI) to $1.00/share, bolstering supplemental dividend capacity: “we were able to increase our undistributed taxable income balance to $1 per share” .
  • Operating leverage remained best-in-class and is tracking lower: quarterized 1.5% in Q1 with LTM 1.7%, trending 1.4–1.5% by year-end; management emphasized benefits of the internally managed model .

What Went Wrong

  • Spread compression persists amid competitive lending and bank “risk-on” posture; management noted weighted average spreads around “7% over…as SOFR comes down, spreads will probably widen out,” but near-term compression continues .
  • Net realized/unrealized losses of $4.9M reflect credit mark dynamics despite equity appreciation; debt marks produced $9.6M depreciation in the quarter .
  • Sensitivity to base rate cuts: management modeled ~100 bps decline over 15 months; while they expect to maintain regular dividend coverage, larger-than-expected rate declines could pressure NII and require use of UTI buffer .

Financial Results

Sequential Performance (Q3 2025 → Q4 2025 → Q1 2026)

MetricQ3 2025Q4 2025Q1 2026
Total Investment Income ($USD Millions)$51.973 $52.406 $55.947
Pre-Tax Net Investment Income ($USD Millions)$30.683 $28.464 $32.717
Pre-Tax NII per Share ($)$0.64 $0.56 $0.61
NAV per Share ($)$16.59 $16.70 $16.59
Non-Accruals (% of FV)2.7% 1.7% 0.8%
Weighted Avg Yield on Debt (%)12.1% 11.7% 11.8%
Regulatory Debt/Equity (x)0.90x 0.89x 0.82x

YoY Performance (Q1 2025 → Q1 2026)

MetricQ1 2025Q1 2026
Total Investment Income ($USD Millions)$51.354 $55.947
Pre-Tax NII ($USD Millions)$31.286 $32.717
Pre-Tax NII per Share ($)$0.69 $0.61
NII per Share ($)$0.63 $0.59
Net Realized & Unrealized Gains/Losses ($USD Millions)$(14.824) $(4.888)

Margins (Derived from reported figures)

MetricQ3 2025Q4 2025Q1 2026
NII Margin (% of Total Investment Income)58.3% (30.316/51.973) 53.1% (27.842/52.406) 57.0% (31.889/55.947)

Segment/Portfolio Composition

MetricQ3 2025Q4 2025Q1 2026
Credit Portfolio First Lien (%)98% 99% 99%
Equity Co-investments (% of total FV)9.3% 10% 9.3%
Weighted Avg Debt-to-EBITDA (x)3.6x 3.5x 3.4x

KPIs

KPIQ3 2025Q4 2025Q1 2026
New Committed Investments ($MM)$317.5 $149.9 $115.2
Exit/Prepayment Proceeds ($MM)$26.7 (two debt prepayments) $40.6 $80.6
Realized Gains ($MM)—$5.1 $27.1
UTI per Share ($)$0.68 $0.79 $1.00
PIK Income (% of Total Investment Income)——5.8%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Regular Dividend FrequencyQ2 FY26 (quarter ending Sep 30, 2025)Quarterly $0.58/share Monthly $0.1934/share in Jul, Aug, Sep (=$0.58/qtr) Frequency changed, amount maintained
Supplemental DividendQ2 FY26$0.06/share $0.06/share Maintained
Regular Dividend FrequencyQ3 FY26 (quarter ending Dec 31, 2025)Monthly cadence begun in Q2 FY26 Monthly $0.1934 Oct–Dec; total $0.58; $0.06 supplemental in Dec Maintained amounts/frequency
Operating Leverage (OpEx/Avg Assets)FY26 run-rate1.4–1.5% by FY-end Quarterized 1.5%; LTM 1.7%; tracking 1.4–1.5% by March Maintained trajectory
Regulatory Leverage TargetNext 1–2 quartersTarget 0.8–0.95x Expect 0.85–0.9x range Maintained, narrowed
SBIC Debentures CapacityMulti-yearSecond license received; up to $175M additional debentures Final approval received; access up to $175M over time Affirmed financing flexibility

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2025)Previous Mentions (Q4 2025)Current Period (Q1 2026)Trend
Competitive spreads & bank postureSpread compression 50–100 bps over prior 6–9 months; structure intact Banks still competing; expect mix-driven compression Banks “boom…risk on”; weighted spreads ~7% over; near-term compression persists Flat–slightly worse
Tariffs/macro uncertaintyMonitoring tariff impacts; diversified exposure Identified moderate risk; expect lower M&A but lower prepayments; temporary 90-day U.S.–China deal Conservative underwriting; risk review continues; limited direct exposure Stabilizing vigilance
Originations pipelineStrong new platforms and add-ons ($317.5M commitments) Expect $125–$150M baseline; still active “Closed $110M” already in September quarter; seeing ~$150M+ pipeline Improving
Operating leverageLTM 1.6%; internally managed advantages LTM 1.7%; adjusted 1.6%; guide to 1.4–1.5% Quarterized 1.5%; continue down to 1.4–1.5% LTM Improving
SBIC programGreen light letter; imminent approval Final approval expected; draw timing outlined Second SBIC approved; access up to $175M debentures Positive
Dividend sustainability vs rate cutsSet regular dividend to avoid cuts as rates fall UTI building to support supplemental Plan to maintain $0.58 regular even with ~100 bps cuts; use UTI buffer if needed Confident

Management Commentary

  • “Our investment portfolio currently has a weighted average debt to EBITDA of 3.4x, non-accruals represent less than 1%…and PIK interest income represents only 5.8% of our total investment income…illustrate both our exceptional portfolio performance as well as our conservative approach to underwriting” — Michael Sarner, CEO .
  • “We generated pre-tax net investment income of $0.61 per share…harvesting $27.2M in realized gains…increased our undistributed taxable income balance to $1 per share” — Michael Sarner, CEO .
  • “Operating leverage…quarterized was 1.5. We expect…1.4% to 1.5% range by the end of our current fiscal year” — Chris Rehberger, CFO .
  • “Our equity portfolio…80 investments…fair value of $166M…embedded unrealized appreciation…this quarter we harvested two sizable equity exits…$27.2M in realized gains” — Josh Weinstein, CIO .

Q&A Highlights

  • Competitive dynamics: Banks are “risk on” and contributing to spread compression; CSWC is holding structure discipline (loan-to-value, covenants) while competing via relationships .
  • Pipeline strength: Management disclosed $110M originations already in September quarter with ~$40M signed up, indicating a robust near-term outlook tilted to new platforms (~75% new vs 25% add-ons) .
  • Leverage strategy & ATM: Target regulatory leverage 0.85–0.9x; continue consistent ATM issuance ($40–$60M/quarter) to manage leverage and fund growth .
  • Dividend sustainability under rate cuts: Plan to maintain the $0.58 regular dividend with ~100 bps base rate decline using operating efficiencies, SBIC debentures, and UTI buffer .
  • Non-accrual dynamics: A large position returned to accrual; overall risk ratings converged toward higher quality (1–2), supporting the decline in non-accruals .

Estimates Context

  • Q1 FY26 results beat consensus: Revenue $55.947M vs $54.323M* and EPS $0.59 vs $0.586*, driven by higher cash interest income and improved weighted average yields; PIK revenue mix declined to 5.8%* .
  • Forward quarters imply stable EPS near ~$0.56–$0.58* with revenue ~$57–$60M*, consistent with management’s confidence in dividend coverage and originations pipeline *.
MetricConsensus EstimateActualSurprise
EPS ($) – Q1 20260.586*0.59 +0.004 (beat)
Revenue ($USD Millions) – Q1 202654.323*55.947 +1.624 (beat)

Values retrieved from S&P Global.

Key Takeaways for Investors

  • Sequential acceleration with stronger investment income and pre-tax NII, alongside lower non-accruals and improved portfolio leverage metrics; supports dividend continuity and potential supplemental increases over time .
  • The shift to monthly regular dividends with unchanged quarterly totals suggests confidence and shareholder-friendly cadence, now extended into the December quarter .
  • Robust liquidity and diversified liabilities (unsecured notes, expanded credit facilities, second SBIC license) provide capacity to fund originations, smooth rate-cycle impacts, and maintain leverage within targeted ranges .
  • Competitive spread pressure is real, but CSWC’s discipline on structure and sponsor relationships mitigates pricing pressure while preserving risk-adjusted returns .
  • Equity co-investments are an important return driver; realized gains growing UTI underpin supplemental dividends and partially offset base-rate headwinds .
  • Watch catalysts: legislative progress on AFFE rule could expand institutional fund participation in BDCs, potentially supporting sector multiples/trading volume .
  • Near-term: expect active originations and stable EPS; medium-term: operating leverage and SBIC funding should help sustain NII amid base-rate declines .