Executive Summary

Solid quarter on origination and income: total investment income rose sequentially to $56.9M, pre-tax NII was $34.0M ($0.61/sh), and NII was $32.0M ($0.57/sh) for the quarter ended Sep 30, 2025 (calendar Q3 2025; CSWC FQ2’26) . NAV/share ticked up to $16.62 on ATM accretion despite modest portfolio depreciation .
Balance sheet de-risked: issued $350M 5.950% 2030 notes, then redeemed in full the 2026 and 2028 notes post-quarter with no make‑whole; pro forma regulatory leverage ~0.82x vs reported 0.91x at quarter end .
Credit quality stable with low non-accruals (1.0% of FV) and strong coverage; weighted average yield eased to 11.5% on compression and mix, but fee income offset PIK declines, keeping total income growing QoQ .
Dividends maintained: Board declared regular monthly $0.1934 for Oct/Nov/Dec and $0.06 supplemental for December (total $0.64 for the quarter). UTI increased to $1.13/sh, supporting supplemental capacity .
Near-term catalysts: sustained robust origination pipeline and capital structure extension could support NII resilience; watch spread environment and base rate trajectory per management’s commentary on potential yield pressure .

What Went Well and What Went Wrong

What Went Well
- Robust origination and fee momentum: “approximately $245 million of originations in seven new and ten existing portfolio companies” with weighted average spread ~6.5% on new commitments; fees helped lift total investment income sequentially .
- Balance sheet actions reduced refinancing risk: $350M of 2030 notes issued; 2026 and 2028 notes redeemed with no make‑whole; CFO noted pro forma leverage back to ~0.82x and liquidity >2x unfunded commitments .
- Dividend sustainability: 104% LTM regular dividend coverage and UTI rose to $1.13/sh, supporting continued supplemental dividends .
What Went Wrong
- Yield compression and modest portfolio depreciation: weighted average debt yield fell to 11.5% (from 11.83% in prior quarter) due to non-accruals and spread compression; net realized/unrealized losses of $6.4M (primarily on debt) .
- Higher interest expense with higher borrowings: interest expense increased to $16.0M QoQ .
- Taxes and deferred tax effects weighed: total tax provision rose to $2.0M, including $0.9M deferred tax expense tied to tax basis changes in a taxable subsidiary .

Financial Results

Note: CSWC reports as a BDC; “Total Investment Income” is the closest analogue to revenue. Current quarter is CSWC Q2 FY2026 (calendar Q3 2025).

Metric	Q2 FY2025 (Q3’24 cal)	Q1 FY2026 (Q2’25 cal)	Q2 FY2026 (Q3’25 cal)
Total Investment Income ($M)	$48.706	$55.947	$56.945
Pre-Tax NII ($M)	$30.014	$32.717	$34.017
Pre-Tax NII per share ($)	$0.64	$0.61	$0.61
Net Investment Income ($M)	$31.165	$31.889	$31.984
NII per share ($)	$0.66	$0.59	$0.57
Operating Expenses excl. Interest ($M)	$18.692	$23.230	$22.928
Interest Expense ($M)	$12.587	$15.264	$16.020
Net Realized & Unrealized (Loss)/Gain ($M)	$1.808 (unrealized), $(10.289) realized; net $(8.481)	$(4.888)	$(6.363)
NAV per Share (end of period)	N/A in this table	$16.59	$16.62

Margins and coverage

Margin / Coverage Metric	Q2 FY2025	Q1 FY2026	Q2 FY2026
NII Margin (NII / TII)	~64.0% (31.165/48.706)	~57.0% (31.889/55.947)	~56.2% (31.984/56.945)
LTM Operating Leverage (% Avg Assets)	N/A	1.7%	1.6%
Regulatory Debt/Equity (end)	0.89x (FY end context)	0.82x	0.91x (0.82x pro forma)

Portfolio and credit KPIs

KPI	Q2 FY2025	Q1 FY2026	Q2 FY2026
Investment Portfolio FV ($B)	~$1.7 (Mar context)	$1.780	$1.878
Credit Portfolio FV ($B)	~$1.6 (Mar context)	$1.614	$1.706
Weighted Avg Yield on Debt	12.08% (Dec qtr context)	11.83%	11.54%
Non‑accruals (% FV)	1.7% (Mar)	0.8%	1.0%
UTI per share ($)	$0.79 (Mar)	$1.00	$1.13
Cash & Equivalents ($M)	$43.2 (Mar)	$46.9	$87.4

Estimate comparison

Consensus (S&P Global) EPS/Revenue estimates were unavailable at the time of analysis due to data access limits. Management’s Oct 15 preliminary ranges were: pre‑tax NII $0.60–$0.61/sh and NII $0.56–$0.57/sh; actual came in at $0.61 and $0.57, respectively (high end of ranges) .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Regular Dividend per share	Quarter ending Dec 31, 2025	$0.1934 per month (Jun 11 declaration for Sep quarter)	$0.1934 per month for Oct/Nov/Dec 2025	Maintained
Supplemental Dividend per share	Quarter ending Dec 31, 2025	$0.06 per quarter (prior quarters)	$0.06 payable Dec 2025	Maintained
Capital structure	Debt maturities	N/A	Issued $350M 5.950% 2030 notes; redeemed 2026 & 2028 notes post‑quarter, no make‑whole	Extended maturities / lowered near‑term refi risk
Operating leverage (LTM)	FY26 run‑rate	1.7% LTM; targeted 1.4–1.5% by FY end (prior call)	1.6% LTM in Q2; management reiterates efficiency focus	Improving trend

CSWC does not provide formal revenue/EPS guidance; the above reflects dividends and capital actions disclosed.

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 FY2025; Q1 FY2026)	Current Period (Q3 2025 cal; Q2 FY2026)	Trend
Origination pipeline	Conservative underwriting amid macro noise; pipeline strengthening; $115M new commitments in Q1	~$245M commitments; 7 new/10 add‑ons; spread ~6.5%	Accelerating
Competition & spreads	Banks/non‑banks aggressive; spreads compressed but structures tight; ~7% over benchmark on deals	Spreads tight; yield down partly due to non‑accruals and compression	Persistent pressure
Credit quality	Non‑accruals down to 0.8% in Q1; coverage ~3.5x	Non‑accruals 1.0% FV; coverage at multi‑year highs; idiosyncratic watchlist	Stable/strong
Operating leverage	1.7% LTM; aiming 1.4–1.5% run‑rate	1.6% LTM in Q2; internally managed model emphasized	Improving
Capital structure & liquidity	$25M CC Facility upsizing; SBIC II license	$350M 2030 notes; redeemed 2026/2028; >2x liquidity over unfunded commitments	De‑risked maturities
Regulatory/legislative	AFFE reform potential tailwind discussed	Not a focus this quarter	Neutral

Management Commentary

“The September quarter was an incredibly active quarter on the origination front... approximately $245 million of originations in seven new and ten existing portfolio companies.”
“We successfully raised $350 million at 5.950% in our inaugural index‑eligible unsecured bond transaction… used a portion of the proceeds… to redeem both our October 2026 Notes and August 2028 Notes… no make‑whole premium.”
“The weighted average spread on our new commitments this quarter was approximately 6.5%… in a tight spread deal environment.”
“PIC… decreased to 4.9% of total investment income… non‑accruals represented 1% of our investment portfolio at fair value.”
“We are confident in our ability to continue to distribute quarterly supplemental dividends based upon our current UTI balance of $1.13 per share.”

Q&A Highlights

Pipeline strength and activity: Management expects originations in the December quarter to be similar to September, reflecting increased sponsor engagement and sustained add‑on activity .
Credit outlook: Portfolio performance remains broad‑based with idiosyncratic watchlist names but no sectoral concentration; PE backing and conservative leverage cushion risks .
Spread/yield dynamics: Spreads have compressed; weighted average yield declined ~30 bps due to prior quarter OID noise, modest non‑accrual impact, and compression; new deal spreads ranged 5.50%–7.25% .
Sector stance: More discerning in healthcare and government‑linked revenues given policy risk; mitigate via sponsor expertise, tighter structure, and lower leverage .
Capital & leverage: Pro forma leverage 0.82x post redemptions; ongoing ATM issuance (~$40–$60M/quarter typical) balances growth with conservative leverage targets (0.8x–0.95x) .

Estimates Context

S&P Global consensus for EPS/Revenue was unavailable due to access limits at the time of analysis. As a proxy, management’s preliminary ranges were pre‑tax NII $0.60–$0.61 and NII $0.56–$0.57 per share; actual results were at the high end ($0.61 and $0.57) .
Implication: With fee income offsetting PIK declines and robust originations, model revisions may keep near‑term NII around dividend‑covering levels, but watch for further spread compression and base rate cuts cited by management as potential headwinds .

Key Takeaways for Investors

Income resilience with disciplined growth: Sequential increase in total investment income and stable pre‑tax NII per share despite yield compression underscores fee contribution and origination strength .
De‑risked liability stack: 2030 unsecured issuance and redemption of 2026/2028 notes reduce near‑term refinancing risk; pro forma leverage comfortably within target .
Dividend durability: LTM regular dividend coverage 104% and UTI at $1.13/sh support continued $0.06 supplemental alongside $0.58 regular quarterly cadence .
Credit quality stable: Non‑accruals at 1.0% FV; strong debt service coverage and granular first‑lien book (99% first‑lien) mitigate idiosyncratic risks .
Watch spread/base rate path: Management flags spread compression and potential base rate cuts as key variables; ongoing SBIC draw availability and operating leverage gains can partially offset .
Pipeline supports deployment: Management expects December quarter originations similar to September; sustained sponsor access is a competitive advantage .
Medium‑term optionality: Potential monetization of investment platform/asset management initiatives could provide fee income upside over time .

Supporting Data (Additional Detail)

Operating drivers QoQ (Sep vs Jun)

Total investment income up $1.0M QoQ on higher cash interest and higher amendment/arranger fees; PIK declined ~$0.5M .
Operating expenses ex‑interest fell $1.1M QoQ on lower compensation accruals; interest expense rose $0.8M on higher average borrowings .
Net realized/unrealized losses widened to $6.4M, driven by $10.3M debt losses, partly offset by $5.7M equity gains and $1.8M tax provision .

Dividends (current quarter declared)

Regular monthly dividends: $0.1934 per share for Oct, Nov, Dec 2025; supplemental $0.06 in Dec 2025 (total $0.64) .

Liquidity and leverage

Quarter‑end cash $87.4M; unused capacity $632.2M; regulatory debt/equity 0.91x (0.82x pro forma after redemptions) .

Portfolio composition (as of Sep 30, 2025)

89.9% first‑lien, 0.9% second‑lien, 9.1% equity; 91% of rated debt investments in top two risk categories; non‑accruals 1.0% FV .

CAPITAL SOUTHWEST CORP (CSWC)·Q3 2025 Earnings Summary