Capital Southwest Q2 2027 NII Rises as Portfolio Reaches $2.4 Billion

Capital Southwest Corporation reported higher fiscal second-quarter investment income and pre-tax net investment income as strong origination activity expanded its portfolio to about $2.4 billion. The business development company also maintained its regular dividend and declared another supplemental payout, though investment losses and a higher non-accrual rate tempered the quarter’s portfolio growth.

For the quarter ended September 30, 2026, total investment income rose to $67.2 million from $61.0 million in the preceding quarter. Pre-tax net investment income increased to $37.2 million, or $0.58 per weighted-average basic share, from $35.0 million, or $0.57 per share.

Net investment income after taxes was $36.3 million, or $0.56 per share. Net realized and unrealized losses totaled $13.4 million, while a $1.4 million realized loss on debt extinguishment further reduced the net increase in assets resulting from operations to $21.4 million, or $0.33 per share.

Cash income represented 92.6% of investment income, and recurring sources accounted for 93.4%. Cash interest increased to $53.1 million from $48.1 million in the previous quarter, while payment-in-kind income was broadly stable at $5.0 million.

Portfolio expands on active deployment

Capital Southwest originated $391.0 million of new committed investments during the quarter, with $268.6 million funded at closing. The commitments covered 14 new portfolio companies and 16 existing borrowers. Investments in new portfolio companies included $314.2 million of first-lien debt and $12.9 million of equity.

The company also committed $25 million of equity to Desert Star 2026 LLC, a new joint venture with Trinity Capital. It exited four debt investments and one equity investment during the quarter, generating $74.2 million in proceeds and a weighted-average internal rate of return of 14.5%.

New originations had weighted-average leverage of 3.4 times, a weighted-average loan-to-value ratio of 33% and a weighted-average spread of 6.5% at closing. The 14 new platform investments spanned 11 industries, with each representing less than 1% of the portfolio at fair value on average.

The total investment portfolio reached $2.41 billion at fair value at quarter-end, up from $2.20 billion on June 30. The number of portfolio companies increased to 153 from 141. First-lien investments represented 89.4% of the total portfolio, while equity accounted for 8.0% and joint-venture investments represented 1.5%.

The weighted-average yield on debt investments was 10.9%, essentially unchanged from the prior quarter, while the yield on the overall portfolio increased to 11.1% from 10.8%.

Credit metrics remain broadly stable, with non-accruals higher

Approximately 89% of debt investments were assigned Capital Southwest’s two highest internal ratings at September 30. Investments rated 1, the lowest-risk category, increased to 20.7% of the rated debt portfolio from 18.8% in the prior quarter. Rating 2 investments declined to 68.0% from 69.8%.

Investments on non-accrual represented 1.4% of the portfolio at fair value, compared with 1.1% at June 30. Debt investments were valued at 95% of par, down from 96% in the previous quarter.

Net asset value was $16.64 per share, compared with $16.61 three months earlier. Accretion from shares issued above NAV added $0.31 per share, helping offset a $0.21-per-share reduction related to portfolio performance and taxes, as well as dividends exceeding quarterly pre-tax NII by $0.06 per share.

Dividends and funding capacity

Capital Southwest declared a regular quarterly dividend of $0.58 per share for the quarter ending December 31, 2026, payable in monthly installments of $0.1934 in October, November and December. It also declared a $0.06-per-share supplemental dividend. Estimated undistributed taxable income stood at $0.92 per share at September 30.

During the quarter, the company raised $67.0 million in gross proceeds through its at-the-market equity program at a weighted-average price of $24.50 per share, equivalent to 148% of prevailing NAV per share.

Capital Southwest also amended its corporate credit facility, increasing commitments to $595 million from $510 million, reducing the applicable margin to 2.00% from 2.15% and extending maturity to September 2031. It issued $350 million of 6.750% notes due in 2031 and entered into an interest-rate swap that effectively converted the notes to a floating rate of SOFR plus approximately 2.16%.

The company ended the quarter with regulatory debt to equity of 1.00 times, up from 0.91 times at June 30. It had $599 million of availability under its credit facilities and $48.0 million of cash and cash equivalents.

Interest rates remain a material sensitivity because 96.1% of the credit portfolio carries floating rates. Based on the company’s illustrative analysis, a 50-basis-point decline in base rates would reduce annual net investment income by about $8.1 million, or $0.12 per share. The estimate does not account for potential changes in portfolio size, credit quality, originations, repayments or broader credit-market conditions.