Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
References in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “CSWC,” or the “Company” refer to Capital Southwest Corporation, unless the context requires otherwise.
Organization
Capital Southwest Corporation is an internally managed investment company that specializes in providing customized financing to middle market companies in a broad range of investment segments located primarily in the United States. Our common stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.”
CSWC was organized as a Texas corporation on April 19, 1961. On March 30, 1988, CSWC elected to be regulated as a business development company (“BDC”) under the 1940 Act. In order to comply with the 1940 Act requirements for a BDC, we must, among other things, generally invest at least 70% of our assets in eligible portfolio companies and limit the amount of leverage we incur.
We have elected, and intend to qualify annually, to be treated as a regulated investment company (“RIC”) under Subchapter M of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). As such, we generally will not have to pay corporate-level U.S. federal income tax on any ordinary income or capital gains that we distribute to our shareholders as dividends. To continue to maintain our RIC treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next year and pay a 4% U.S. federal excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year that generated such taxable income.
Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, was the management company for CSWC. Effective December 31, 2020, CSMC merged with and into CSWC, with CSWC continuing as the surviving entity in the merger. Prior to December 31, 2020, CSMC generally incurred all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other administrative costs required for its day-to-day operations (the “Administrative Expenses”). After December 31, 2020, the Administrative Expenses will be directly incurred by CSWC. The Company continues to be internally managed and the merger has no impact on the day-to-day operations of the business.
CSWC also has a direct wholly-owned subsidiary that has been elected to be a taxable entity (the “Taxable Subsidiary”). The primary purpose of the Taxable Subsidiary is to permit CSWC to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities), and still allow us to satisfy the RIC tax requirement that at least 90% of our gross income for U.S. federal income tax purposes must consist of qualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.
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 target senior debt, subordinated debt and equity investments in lower middle market (“LMM”) companies, as well as first and second lien syndicated loans in upper middle market (“UMM”) companies. Our target LMM companies typically have annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million, and our LMM investments generally range in size from $5.0 million to $25.0 million. Our UMM investments generally include syndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million and typically range in size from $5.0 million to $15.0 million. We make available significant managerial assistance to the companies in which we invest as we believe that providing managerial assistance to an investee company is critical to its business development activities.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”). We meet the definition of an investment company and follow the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 – Financial Services – Investment Companies (“ASC 946”). Under rules and regulations applicable to investment companies, we are generally precluded from consolidating any entity other than another investment company, subject to certain exceptions. One of the exceptions to this general principle occurs if the investment company has an investment in an operating company that provides services to the investment company. Accordingly, the consolidated financial statements include CSMC, our management company, and the Taxable Subsidiary.
The consolidated financial statements are presented in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of our management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of consolidated financial statements for the interim periods included herein. The results of operations for the three and nine months ended December 31, 2020 are not necessarily indicative of the operating results to be expected for the full fiscal year. Also, the unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal years ended March 31, 2020 and 2019. Consolidated financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
Portfolio Investment Classification
We classify our investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are generally defined as investments in which we own more than 25% of the voting securities; “Affiliate Investments” are generally defined as investments in which we own between 5% and 25% of the voting securities, and the investments are not classified as “Control Investments”; and “Non-Control/Non-Affiliate Investments” are generally defined as investments that are neither “Control Investments” nor “Affiliate Investments.”
Under the 1940 Act, a BDC must meet certain requirements, including investing at least 70% of our total assets in qualifying assets. As of December 31, 2020, the Company has 86.5% of our assets in qualifying assets. The principal categories of qualifying assets relevant to our business are:
(1)Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the Securities and Exchange Commission ("SEC").
(2)Securities of any eligible portfolio company that we control.
(3)Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
(4)Securities of an eligible portfolio company purchased from any person in a private transaction if there is no readily available market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
(5)Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.
(6)Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
Additionally, in order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things meet the following requirements:
(1) Continue to maintain our election as a BDC under the 1940 Act at all times during each taxable year.
(2) Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities, loans, gains from the sale of stock or other securities, net income from certain "qualified publicly traded partnerships," or other income derived with respect to our business of investing in such stock or securities.
(3) Diversify our holdings in accordance with two Diversification Requirements: (a) Diversify our holdings such that at the end of each quarter of the taxable year at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and such other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and (b) Diversify our holdings such that no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, (i) of one issuer, (ii) of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) of certain "qualified publicly traded partnerships" (collectively, the "Diversification Requirements").
The two Diversification Requirements must be satisfied quarterly. If a RIC satisfies the Diversification Requirements for one quarter, and then, due solely to fluctuations in market value, fails to meet one of the Diversification Requirements in the next quarter, it retains RIC tax treatment. A RIC that fails to meet the Diversification Requirements as a result of a nonqualified acquisition may be subject to excess taxes unless the nonqualified acquisition is disposed of and the Diversification Requirements are satisfied within 30 days of the close of the quarter in which the Diversification Requirements are failed.
For the quarter ended December 31, 2020, we satisfied all RIC requirements and have 7.1% in nonqualified assets according to measurement criteria established in Section 851(d) of the Code.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements of CSWC.
Fair Value Measurements We account for substantially all of our financial instruments at fair value in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. ASC 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. We believe that the carrying amounts of our financial instruments such as cash, receivables and payables approximate the fair value of these items due to the short maturity of these instruments. This is considered a Level 1 valuation technique. The carrying value of our credit facility approximates fair value (Level 3 input). See Note 4 below for further discussion regarding the fair value measurements and hierarchy.
Investments Investments are stated at fair value and are reviewed and approved by our Board of Directors as described in the Notes to the Consolidated Schedule of Investments and Notes 3 and 4 below. Investments are recorded on a trade date basis.
Net Realized Gains or Losses and Net Unrealized Appreciation or Depreciation Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment or a financial instrument and the cost basis of the investment or financial instrument, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period net of recoveries and realized gains or losses from in-kind redemptions. Net unrealized appreciation or depreciation reflects the net change in the fair
value of the investment portfolio and financial instruments and the reclassification of any prior period unrealized appreciation or depreciation on exited investments and financial instruments to realized gains or losses.
Cash and Cash Equivalents Cash and cash equivalents, which consist of cash and highly liquid investments with an original maturity of three months or less at the date of purchase, are carried at cost, which approximates fair value. Cash may be held in a money market fund from time to time, which is a Level 1 security. Cash and cash equivalents includes deposits at financial institutions. We deposit our cash balances in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2020 and March 31, 2020, cash balances totaling $42.2 million and $12.6 million, respectively, exceeded FDIC insurance limits, subjecting us to risk related to the uninsured balance. All of our cash deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote.
Segment Information We operate and manage our business in a singular segment. As an investment company, we invest in portfolio companies in various industries and geographic areas as discussed in Note 3.
Consolidation As permitted under Regulation S-X and ASC 946, we generally do not consolidate our investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to CSWC. Accordingly, we consolidated the results of CSWC’s wholly-owned Taxable Subsidiary and CSWC’s wholly-owned management company, CSMC. All intercompany balances have been eliminated upon consolidation.
Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We have identified investment valuation and revenue recognition as our most critical accounting estimates.
Interest and Dividend Income 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, 2020, we had one investment on non-accrual status, which represents approximately 0.1% of our total investment portfolio's fair value and approximately 0.5% of its cost. As of March 31, 2020, we had four investments on non-accrual status which represented approximately 3.3% of our total investment portfolio's fair value and approximately 5.8% of its cost.
To maintain RIC tax treatment, non-cash sources of income such as accretion of interest income may need to be paid out to shareholders in the form of distributions, even though CSWC may not have collected the interest income. For the three and nine months ended December 31, 2020, approximately 3.5% and 3.4%, respectively, of CSWC's total investment income was attributable to non-cash interest income for the accretion of discounts associated with debt investments, net of any premium reduction. For the three and nine months ended December 31, 2019, 2.9% and 3.0%, respectively, of CSWC’s total investment income was attributable to non-cash interest income for the accretion of discounts associated with debt investments, net of any premium reduction.
Payment-in-Kind Interest The Company currently holds, and expects to hold in the future, some investments in its portfolio that contain payment-in-kind (“PIK”) interest and dividend provisions. The PIK interest and dividends, computed at the contractual rate specified in each loan agreement, are added to the principal balance of the loan, rather than being paid to the Company in cash, and are recorded as interest and dividend income. Thus, the actual collection of PIK interest and dividends may be deferred until the time of debt principal repayment or disposition of the equity investment. PIK interest and dividends, which are non-cash sources of income, are included in the Company’s taxable income and therefore affect the amount the Company is required to distribute to shareholders to maintain its qualification as a RIC for U.S. federal income tax purposes, even though the Company has not yet collected the cash. Generally, when
current cash interest and/or principal payments on a loan become past due, or if the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the investment on non-accrual status and will generally cease recognizing PIK interest and dividend income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest and dividend income is deemed to be collectible. The Company writes off any accrued and uncollected PIK interest and dividends when it is determined that the PIK interest and dividends are no longer collectible. As of December 31, 2020 and March 31, 2020, we have not written off any accrued and uncollected PIK interest and dividends from prior periods. For the three months ended December 31, 2020, we had one investment for which we stopped accruing PIK interest. For the nine months ended December 31, 2020, we had two investments for which we stopped accruing PIK interest. For the three and nine months ended December 31, 2019, we had two investments for which we stopped accruing PIK interest. For the three and nine months ended December 31, 2020, approximately 8.4% and 8.8%, respectively, of CSWC’s total investment income was attributable to non-cash PIK interest and dividend income. For the three and nine months ended December 31, 2019, approximately 5.0% and 3.0%, respectively, of CSWC’s total investment income was attributable to non-cash PIK interest and dividend income.
Warrants In connection with the Company's debt investments, the Company will sometimes receive warrants or other equity-related securities from the borrower. The Company determines the cost basis of warrants based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants received. Any resulting difference between the face amount of the debt and its recorded fair value resulting from the assignment of value to the warrants is treated as original issue discount (“OID”), and accreted into interest income using the effective interest method over the term of the debt investment.
Debt Issuance Costs Debt issuance costs include commitment fees and other costs related to CSWC’s senior secured credit facility and its unsecured notes (as discussed further in Note 5). The costs in connection with the credit facility have been capitalized and are amortized into interest expense over the term of the credit facility. The costs in connection with the unsecured notes are a direct deduction from the related debt liability and amortized into interest expense over the term of the December 2022 Notes (as defined below), the October 2024 Notes (as defined below) and the January 2026 Notes (as defined below).
Deferred Offering Costs Deferred offering costs include registration expenses related to shelf registration statements and expenses related to the launch of the "at-the-market" ("ATM") program through which we can sell, from time to time, shares of our common stock (the "Equity ATM Program"). These expenses consist primarily of SEC registration fees, legal fees and accounting fees incurred related thereto. These expenses are included in other assets on the Consolidated Statements of Assets and Liabilities. Upon the completion of an equity offering or a debt offering, the deferred expenses are charged to additional paid-in capital or debt issuance costs, respectively. If there are any deferred offering costs remaining at the expiration of the shelf registration statement, these deferred costs are charged to expense.
Realized Losses on Extinguishment of Debt Upon the repayment of debt obligations that are deemed to be extinguishments, the difference between the principal amount due at maturity adjusted for any unamortized debt issuance costs is recognized as a loss (i.e., the unamortized debt issuance costs are recognized as a loss upon extinguishment of the underlying debt obligation).
Leases The Company is obligated under an operating lease pursuant to which it is leasing an office facility from a third party with a remaining term of approximately one year. The operating lease is included as an operating lease right-of-use ("ROU") asset and operating lease liability in the accompanying Consolidated Statements of Assets and Liabilities. The Company does not have any financing leases.
The ROU asset represents the Company’s right to use an underlying asset for the lease term and the operating lease liability represents the Company’s obligation to make lease payments arising from such lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the remaining lease term. The Company’s leases do not provide an implicit discount rate, and as such the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of the remaining lease payments. Lease expense is recognized on a straight-line basis over the remaining lease term.
Federal Income Taxes CSWC has elected, and intends to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subsection M of the Code. By meeting these requirements, we will not be subject to
corporate federal income taxes on ordinary income or capital gains timely distributed to shareholders. In order to qualify as a RIC, the Company is required to timely distribute to its shareholders at least 90% of investment company taxable income, as defined by the Code, each year. Investment company taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Investment company taxable income generally excludes net unrealized appreciation or depreciation, as investment gains and losses are not included in investment company taxable income until they are realized.
Depending on the level of taxable income or capital gains earned in a tax year, we may choose to carry forward taxable income or capital gains in excess of current year distributions into the next year and pay a 4% U.S. federal excise tax on such income. Any such carryover taxable income or capital gains must be distributed through a dividend declared on or prior to the later of (1) the filing of the U.S. federal income tax return for the applicable fiscal year and (2) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.
In lieu of distributing our net capital gains for a year, we may decide to retain some or all of our net capital gains. We will be required to pay a 21% corporate-level federal income tax on any such retained net capital gains. We may elect to treat such retained capital gain as a deemed distribution to shareholders. Under such circumstances, shareholders will be required to include their share of such retained capital gain in income, but will receive a credit for the amount of corporate-level U.S. federal income tax paid with respect to their shares. As an investment company that qualifies as a RIC, federal income taxes payable on security gains that we elect to retain are accrued only on the last day of our tax year, December 31. Any net capital gains actually distributed to shareholders and properly reported by us as capital gain dividends are generally taxable to the shareholders as long-term capital gains. See Note 6 for further discussion.
CSMC, a wholly-owned subsidiary of CSWC, and the Taxable Subsidiary are not RICs and are required to pay taxes at the corporate rate of 21%. For tax purposes, CSMC and the Taxable Subsidiary have elected to be treated as taxable entities, and therefore are not consolidated for tax purposes and are taxed at normal corporate tax rates based on taxable income and, as a result of their activities, may generate income tax expense or benefit. The taxable income, or loss, of each of CSMC and the Taxable Subsidiary may differ from its book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements. Effective December 31, 2020, CSMC merged with and into CSWC and, as a result, the calendar year ended December 31, 2020 is the last year in which the Company will incur tax expense or benefit related to CSMC.
Management evaluates tax positions taken or expected to be taken in the course of preparing the Company’s consolidated financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the CSWC level not deemed to meet the “more-likely-than-not” threshold would be recorded as an expense in the current year. Management’s conclusions regarding tax positions will be subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. The Company has concluded that it does not have any uncertain tax positions that meet the recognition of measurement criteria of ASC 740, Income Taxes, ("ASC 740") for the current period. Also, we account for interest and, if applicable, penalties for any uncertain tax positions as a component of income tax expense. No interest or penalties expense was recorded during the three and nine months ended December 31, 2020 and 2019.
Deferred Taxes Deferred tax assets and liabilities are recorded for losses or income at our taxable subsidiaries using statutory tax rates. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation was enacted. See Note 6 for further discussion.
Stock-Based Compensation We account for our stock-based compensation using the fair value method, as prescribed by ASC Topic 718, Compensation – Stock Compensation. Accordingly, we recognize stock-based compensation cost on a straight-line basis for all share-based payments awards granted to employees. The fair value of stock options are determined on the date of grant using the Black-Scholes pricing model and are expensed over the requisite service period of the related stock options. For restricted stock awards, we measure the grant date fair value based upon the market price of our common stock on the date of the grant. For restricted stock awards, we amortize this fair value to share-based compensation expense over the vesting term. We recognize forfeitures as they occur. We issue
new shares upon the exercise of stock options. The unvested shares of restricted stock awarded pursuant to CSWC’s equity compensation plans are participating securities and are included in the basic and diluted earnings per share calculation. On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to our executive officers and certain key employees (the “Original Order”). On August 22, 2017, we received an exemptive order that supersedes the Original Order (the “Exemptive Order”) and, in addition to the relief granted under the Original Order, allows us to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Restricted Stock Award Plan (the “2010 Plan”) and to pay the exercise price of options to purchase shares of our common stock granted pursuant to the 2009 Stock Incentive Plan (the “2009 Plan”).
At both the three and nine months ended December 31, 2020 and 2019, there was no adjustment made for the dilutive effect of stock-based awards as there are no options to acquire shares of common stock outstanding.
Shareholder Distributions Distributions to common shareholders are recorded on the ex-dividend date. The amount of distributions, if any, is determined by the Board of Directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed, although the Company may decide to retain such capital gains for investment.
Presentation Presentation of certain amounts in the Consolidated Financial Statements for the prior year comparative consolidated financial statements is updated to conform to the current period presentation.
Recently Issued or Adopted Accounting Standards In March 2020, the FASB issued ASU 2020-04, "Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial reporting." The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and certain lenders, including financial instruments that mature after the end of 2021, when LIBOR will be discontinued. Many of these agreements include language for choosing an alternative successor rate when LIBOR reference is no longer considered to be appropriate. With respect to other agreements, the Company intends to work with its portfolio companies and lenders to modify agreements to choose an alternative successor rate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The standard is effective as of March 12, 2020 through December 31, 2022 and the Company plans to apply the amendments in this update to account for contract modifications due to changes in reference rates. The Company does not believe that it will have a material impact on its consolidated financial statements and disclosures.
In May 2020, the SEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the financial statements of certain of their portfolio companies or certain acquired funds (the “Final Rules”). The Final Rules adopted a new definition of “significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial information, respectively, in such investment company’s periodic reports for any portfolio company that meets the definition of “significant subsidiary.” The Final Rules adopt a new definition of “significant subsidiary” applicable only to investment companies that (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition of “significant subsidiary” in Rule 1-02(w) of Regulation S-X. The new Rule 1-02(w)(2) of Regulation S-X is intended to more accurately capture those portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective on January 1, 2021, but voluntary compliance is permitted in advance of the effective date. The Company evaluated the impact of the Final Rule and concluded it will not have a material impact on its consolidated financial statements.
In November 2020, the SEC issued a final rule that modernized and simplifies Management's Discussion and Analysis and certain financial disclosure requirements in Regulation S-K (the “Amendments”). Specifically, the Amendments: (i) eliminate Item 301 of Regulation S-K (Selected Financial Data); (ii) simplify Item 302 of Regulation S-K (Supplementary Financial Information); and (iii) amend certain aspects of Item 303 of Regulation S-K (Management's Discussion and Analysis of Financial Condition and Results of Operations). The Amendments will become effective on February 10, 2021 and compliance will be required for the registrants' fiscal year ending on or after August 9, 2021. Early adoption of the Amendments is permitted on an item-by-item basis after the effective date; however, a registrant
must fully comply with each adopted item in its entirety. The Company is currently evaluating the impact of the Amendments on its consolidated financial statements.
3. INVESTMENTS
The following table shows the composition of the investment portfolio, at fair value and cost (with corresponding percentage of total portfolio investments) as of December 31, 2020 and March 31, 2020:
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Fair Value
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Percentage of Total Portfolio
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Percentage of Net Assets
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Cost
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Percentage of Total Portfolio
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(dollars in thousands)
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December 31, 2020:
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First lien loans1,2
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$
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482,240
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74.3
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%
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154.2
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%
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$
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490,350
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73.4
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%
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Second lien loans2
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37,756
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5.8
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12.1
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39,954
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6.0
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Subordinated debt3
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11,107
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1.7
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3.6
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11,200
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1.6
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Preferred equity
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20,410
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3.2
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6.5
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15,377
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2.3
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Common equity & warrants
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33,625
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5.2
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10.8
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30,727
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4.6
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I-45 SLF LLC5
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63,635
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9.8
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20.4
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80,800
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12.1
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$
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648,773
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100.0
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%
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207.6
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%
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$
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668,408
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100.0
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%
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March 31, 2020:
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First lien loans1
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$
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427,447
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77.3
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%
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157.0
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%
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$
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446,925
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74.6
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%
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Second lien loans2
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37,139
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6.7
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13.6
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38,580
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6.4
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Subordinated debt
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9,747
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1.8
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|
3.6
|
|
|
9,980
|
|
|
1.7
|
|
Preferred equity
|
16,624
|
|
|
3.0
|
|
|
6.1
|
|
|
12,576
|
|
|
2.1
|
|
Common equity & warrants
|
22,355
|
|
|
4.0
|
|
|
8.2
|
|
|
21,609
|
|
|
3.6
|
|
Financial instruments4
|
—
|
|
|
—
|
|
|
—
|
|
|
1,517
|
|
|
0.3
|
|
I-45 SLF LLC5
|
39,760
|
|
|
7.2
|
|
|
14.6
|
|
|
68,000
|
|
|
11.3
|
|
|
$
|
553,072
|
|
|
100.0
|
%
|
|
203.1
|
%
|
|
$
|
599,187
|
|
|
100.0
|
%
|
1Included in first lien loans are loans structured as first lien last out loans. These loans may, in certain cases, be subordinated in payment priority to other senior secured lenders. As of December 31, 2020 and March 31, 2020, the fair value of the first lien last out loans are $69.6 million and $59.5 million, respectively.
2Included in first lien loans and second lien loans are loans structured as split lien term loans. These loans provide the Company with a first lien priority on certain assets of the obligor and a second lien priority on different assets of the obligor. As of December 31, 2020 and March 31, 2020, the fair value of the split lien term loans included in first lien loans is $10.0 million and $0, respectively. As of December 31, 2020 and March 31, 2020, the fair value of the split lien term loans included in second lien loans is $19.5 million and $19.9 million, respectively.
3Included in subordinated debt is an unsecured convertible note with a fair value of $0.2 million as of December 31, 2020.
4Included in financial instruments is the earnout received in connection with the sale of Media Recovery, Inc.
5I-45 SLF LLC is a joint venture between CSWC and Main Street Capital Corporation. This entity primarily invests in syndicated senior secured loans to the UMM. The portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests directly. See Note 13 for further discussion.
The following tables show the composition of the investment portfolio by industry, at fair value and cost (with corresponding percentage of total portfolio investments) as of December 31, 2020 and March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Fair Value
|
|
Total Portfolio
|
|
Net Assets
|
|
Cost
|
|
Total Portfolio
|
|
(dollars in thousands)
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
Business Services
|
$
|
79,167
|
|
|
12.2
|
%
|
|
25.3
|
%
|
|
$
|
80,246
|
|
|
12.0
|
%
|
Healthcare Services
|
67,231
|
|
|
10.4
|
|
|
21.5
|
|
|
75,841
|
|
|
11.3
|
|
Media, Marketing, & Entertainment
|
66,310
|
|
|
10.2
|
|
|
21.2
|
|
|
62,879
|
|
|
9.4
|
|
I-45 SLF LLC1
|
63,635
|
|
|
9.8
|
|
|
20.4
|
|
|
80,800
|
|
|
12.1
|
|
Software & IT Services
|
49,426
|
|
|
7.6
|
|
|
15.8
|
|
|
48,142
|
|
|
7.2
|
|
Industrial Services
|
38,906
|
|
|
6.0
|
|
|
12.4
|
|
|
39,389
|
|
|
5.9
|
|
Distribution
|
37,559
|
|
|
5.8
|
|
|
12.0
|
|
|
37,214
|
|
|
5.6
|
|
Healthcare Products
|
34,477
|
|
|
5.3
|
|
|
11.0
|
|
|
32,786
|
|
|
4.9
|
|
Financial Services
|
32,809
|
|
|
5.0
|
|
|
10.5
|
|
|
28,366
|
|
|
4.2
|
|
Consumer Products & Retail
|
28,932
|
|
|
4.5
|
|
|
9.3
|
|
|
28,998
|
|
|
4.3
|
|
Food, Agriculture & Beverage
|
27,063
|
|
|
4.2
|
|
|
8.7
|
|
|
29,961
|
|
|
4.5
|
|
Transportation & Logistics
|
23,325
|
|
|
3.6
|
|
|
7.5
|
|
|
19,276
|
|
|
2.9
|
|
Telecommunications
|
19,871
|
|
|
3.1
|
|
|
6.4
|
|
|
23,771
|
|
|
3.6
|
|
Consumer Services
|
16,232
|
|
|
2.5
|
|
|
5.2
|
|
|
16,031
|
|
|
2.4
|
|
Environmental Services
|
12,654
|
|
|
1.9
|
|
|
4.0
|
|
|
14,380
|
|
|
2.2
|
|
Technology Products & Components
|
12,349
|
|
|
1.9
|
|
|
3.9
|
|
|
11,062
|
|
|
1.7
|
|
Commodities & Mining
|
10,486
|
|
|
1.6
|
|
|
3.4
|
|
|
10,564
|
|
|
1.6
|
|
Aerospace & Defense
|
9,793
|
|
|
1.5
|
|
|
3.1
|
|
|
9,572
|
|
|
1.4
|
|
Energy Services (Midstream)
|
9,035
|
|
|
1.4
|
|
|
2.9
|
|
|
9,372
|
|
|
1.4
|
|
Restaurants
|
6,513
|
|
|
1.0
|
|
|
2.1
|
|
|
6,786
|
|
|
1.0
|
|
Paper & Forest Products
|
3,000
|
|
|
0.5
|
|
|
1.0
|
|
|
2,972
|
|
|
0.4
|
|
|
$
|
648,773
|
|
|
100.0
|
%
|
|
207.6
|
%
|
|
$
|
668,408
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Fair Value
|
|
Total Portfolio
|
|
Net Assets
|
|
Cost
|
|
Total Portfolio
|
|
(dollars in thousands)
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
Business Services
|
$
|
92,365
|
|
|
16.7
|
%
|
|
33.9
|
%
|
|
$
|
92,879
|
|
|
15.5
|
%
|
Media, Marketing, & Entertainment
|
54,494
|
|
|
10.0
|
|
|
20.0
|
|
|
45,202
|
|
|
7.5
|
|
Healthcare Services
|
51,037
|
|
|
9.2
|
|
|
18.7
|
|
|
66,744
|
|
|
11.1
|
|
I-45 SLF LLC1
|
39,760
|
|
|
7.2
|
|
|
14.6
|
|
|
68,000
|
|
|
11.3
|
|
Industrial Services
|
35,956
|
|
|
6.5
|
|
|
13.2
|
|
|
35,931
|
|
|
6.0
|
|
Software & IT Services
|
35,690
|
|
|
6.5
|
|
|
13.1
|
|
|
35,353
|
|
|
5.9
|
|
Distribution
|
31,632
|
|
|
5.7
|
|
|
11.6
|
|
|
32,229
|
|
|
5.5
|
|
Financial Services
|
30,586
|
|
|
5.5
|
|
|
11.2
|
|
|
29,651
|
|
|
4.9
|
|
Healthcare Products
|
29,775
|
|
|
5.4
|
|
|
10.9
|
|
|
29,832
|
|
|
5.0
|
|
Food, Agriculture & Beverage
|
25,624
|
|
|
4.6
|
|
|
9.4
|
|
|
30,937
|
|
|
5.2
|
|
Consumer Products and Retail
|
23,157
|
|
|
4.2
|
|
|
8.5
|
|
|
23,549
|
|
|
3.9
|
|
Transportation & Logistics
|
22,218
|
|
|
4.0
|
|
|
8.2
|
|
|
18,903
|
|
|
3.2
|
|
Consumer Services
|
21,403
|
|
|
3.9
|
|
|
7.9
|
|
|
21,118
|
|
|
3.5
|
|
Technology Products & Components
|
14,610
|
|
|
2.6
|
|
|
5.4
|
|
|
14,457
|
|
|
2.4
|
|
Environmental Services
|
12,148
|
|
|
2.2
|
|
|
4.5
|
|
|
13,889
|
|
|
2.3
|
|
Commodities & Mining
|
10,411
|
|
|
1.9
|
|
|
3.8
|
|
|
10,458
|
|
|
1.7
|
|
Energy Services (Midstream)
|
9,445
|
|
|
1.7
|
|
|
3.5
|
|
|
9,532
|
|
|
1.6
|
|
Restaurants
|
5,621
|
|
|
1.0
|
|
|
2.1
|
|
|
8,113
|
|
|
1.4
|
|
Telecommunications
|
4,140
|
|
|
0.7
|
|
|
1.5
|
|
|
7,928
|
|
|
1.3
|
|
Paper & Forest Products
|
3,000
|
|
|
0.5
|
|
|
1.1
|
|
|
2,965
|
|
|
0.5
|
|
Industrial Products
|
—
|
|
|
—
|
|
|
—
|
|
|
1,517
|
|
|
0.3
|
|
|
$
|
553,072
|
|
|
100.0
|
%
|
|
203.1
|
%
|
|
$
|
599,187
|
|
|
100.0
|
%
|
1I-45 SLF LLC is a joint venture between CSWC and Main Street Capital Corporation. This entity primarily invests in syndicated senior secured loans to the UMM. The portfolio companies in I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests directly. See Note 13 for further discussion.
The following tables summarize the composition of the investment portfolio by geographic region of the United States, at fair value and cost (with corresponding percentage of total portfolio investments), as of December 31, 2020 and March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Fair Value
|
|
Total Portfolio
|
|
Net Assets
|
|
Cost
|
|
Total Portfolio
|
|
(dollars in thousands)
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
Southwest
|
$
|
191,793
|
|
|
29.6
|
%
|
|
61.3
|
%
|
|
$
|
193,819
|
|
|
29.0
|
%
|
Northeast
|
153,856
|
|
|
23.7
|
|
|
49.2
|
|
|
153,630
|
|
|
23.0
|
|
Southeast
|
119,660
|
|
|
18.4
|
|
|
38.3
|
|
|
124,071
|
|
|
18.6
|
|
West
|
79,689
|
|
|
12.3
|
|
|
25.5
|
|
|
77,202
|
|
|
11.5
|
|
I-45 SLF LLC1
|
63,635
|
|
|
9.8
|
|
|
20.4
|
|
|
80,800
|
|
|
12.1
|
|
Midwest
|
40,140
|
|
|
6.2
|
|
|
12.9
|
|
|
38,886
|
|
|
5.8
|
|
|
$
|
648,773
|
|
|
100.0
|
%
|
|
207.6
|
%
|
|
$
|
668,408
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020:
|
|
|
|
|
|
|
|
|
|
Southwest
|
$
|
167,082
|
|
|
30.2
|
%
|
|
61.3
|
%
|
|
$
|
167,192
|
|
|
27.9
|
%
|
Northeast
|
124,250
|
|
|
22.4
|
|
|
45.6
|
|
|
121,201
|
|
|
20.2
|
|
Southeast
|
107,541
|
|
|
19.4
|
|
|
39.5
|
|
|
122,547
|
|
|
20.5
|
|
I-45 SLF LLC1
|
39,760
|
|
|
7.2
|
|
|
14.6
|
|
|
68,000
|
|
|
11.3
|
|
West
|
58,985
|
|
|
10.7
|
|
|
21.7
|
|
|
65,135
|
|
|
10.9
|
|
Midwest
|
43,454
|
|
|
7.9
|
|
|
16.0
|
|
|
43,214
|
|
|
7.2
|
|
International
|
12,000
|
|
|
2.2
|
|
|
4.4
|
|
|
11,898
|
|
|
2.0
|
|
|
$
|
553,072
|
|
|
100.0
|
%
|
|
203.1
|
%
|
|
$
|
599,187
|
|
|
100.0
|
%
|
1I-45 SLF LLC is a joint venture between CSWC and Main Street Capital Corporation. This entity primarily invests in syndicated senior secured loans to the UMM. The portfolio companies held by I-45 SLF LLC represent a diverse set of industry classifications, which are similar to those in which CSWC invests directly. See Note 13 for further discussion.
4. FAIR VALUE MEASUREMENTS
Investment Valuation Process
The valuation process is led by the finance department in conjunction with the investment team. The process includes a monthly review of each investment by our executive officers and investment teams. Valuations of each portfolio security are prepared quarterly by the finance department using updated financial and other operational information collected by the investment teams. Each investment valuation is then subject to review by the executive officers and investment teams. In conjunction with the internal valuation process, we have also engaged multiple independent valuation firms specializing in financial due diligence, valuation, and business advisory services to provide third-party valuation reviews of certain investments. The third-party valuation firms provide a range of values for selected investments, which is presented to CSWC’s executive officers and Board of Directors.
CSWC also uses a standard internal investment rating system in connection with its investment oversight, portfolio management, and investment valuation procedures for its debt portfolio. This system takes into account both quantitative and qualitative factors of the portfolio company and the investments held therein.
There is no single standard for determining fair value in good faith, as fair value depends upon the specific circumstances of each individual investment. While management believes our valuation methodologies are appropriate and consistent with market participants, the recorded fair values of our investments may differ significantly from fair values that would have been used had an active market for the securities existed. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. The Board of Directors has the ultimate responsibility for reviewing and approving, in good faith, the fair value of CSWC’s investments in accordance with the 1940 Act.
Fair Value Hierarchy
CSWC has established and documented processes for determining the fair values of portfolio company investments on a recurring basis in accordance with the 1940 Act and ASC 820. As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). CSWC conducts reviews of fair value hierarchy classifications on a quarterly basis. We also use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement.
The three levels of valuation inputs established by ASC 820 are as follows:
•Level 1: Investments whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2: Investments whose values are based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•Level 3: Investments whose values are based on unobservable inputs that are significant to the overall fair value measurement.
As of December 31, 2020 and March 31, 2020, 100% of the CSWC investment portfolio consisted of debt and equity instruments of privately held companies for which inputs falling within the categories of Level 1 and Level 2 are generally not readily available. Therefore, CSWC determines the fair value of its investments (excluding investments for which fair value is measured at net asset value ("NAV") in good faith using Level 3 inputs, pursuant to a valuation policy and process that is established by the management of CSWC, with assistance from multiple third-party valuation advisors, which is subsequently approved by our Board of Directors.
Investment Valuation Inputs
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date excluding transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market as of the measurement date.
The Level 3 inputs to CSWC’s valuation process reflect our best estimate of the assumptions that would be used by market participants in pricing the investment in a transaction in the principal or most advantageous market for the asset.
The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:
•Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the most recent period available as compared to budgeted numbers;
•Current and projected financial condition of the portfolio company;
•Current and projected ability of the portfolio company to service its debt obligations;
•Type and amount of collateral, if any, underlying the investment;
•Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio and net debt/EBITDA ratio) applicable to the investment;
•Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);
•Indicative dealer quotations from brokers, banks, and other market participants;
•Market yields on other securities of similar risk;
•Pending debt or capital restructuring of the portfolio company;
•Projected operating results of the portfolio company;
•Current information regarding any offers to purchase the investment;
•Current ability of the portfolio company to raise any additional financing as needed;
•Changes in the economic environment which may have a material impact on the operating results of the portfolio company;
•Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;
•Qualitative assessment of key management;
•Contractual rights, obligations or restrictions associated with the investment; and
•Other factors deemed relevant.
CSWC uses several different valuation approaches depending on the security type including the Market Approach, the Income Approach, the Enterprise Value Waterfall Approach, and the NAV Valuation Method.
Market Approach
Market Approach is a qualitative and quantitative analysis of the aforementioned unobservable inputs. It is a combination of the Enterprise Value Waterfall Approach and Income Approach as described in detail below. For investments recently originated (within a quarterly reporting period) or where the value has not departed significantly from its cost, we generally rely on our cost basis or recent transaction price to determine the fair value, unless a material event has occurred since origination.
Income Approach
In valuing debt securities, CSWC typically uses an Income Approach model, which considers some or all of the factors listed above. Under the Income Approach, CSWC develops an expectation of the yield that a hypothetical market participant would require when purchasing each debt investment (the “Required Market Yield”). The Required Market Yield is calculated in a two-step process. First, using quarterly market data we estimate the current market yield of similar debt securities. Next,
based on the factors described above, we modify the current market yield for each security to produce a unique Required Market Yield for each of our investments. The resulting Required Market Yield is the significant Level 3 input to the Income Approach model. If, with respect to an investment, the unobservable inputs have not fluctuated significantly from the date the investment was made or have not fluctuated significantly from CSWC’s expectations on the date the investment was made, and there have been no significant fluctuations in the market pricing for such investments, we may conclude that the Required Market Yield for that investment is equal to the stated rate on the investment. In instances where CSWC determines that the Required Market Yield is different from the stated rate on the investment, we discount the contractual cash flows on the debt instrument using the Required Market Yield in order to estimate the fair value of the debt security.
In addition, under the Income Approach, CSWC also determines the appropriateness of the use of third-party broker quotes, if any, as a significant Level 3 input in determining fair value. In determining the appropriateness of the use of third-party broker quotes, CSWC evaluates the level of actual transactions used by the broker to develop the quote, whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes, the source of the broker quotes, and the correlation of changes in broker quotes with underlying performance of the portfolio company and other market indices. To the extent sufficient observable inputs are available to determine fair value, CSWC may use third-party broker quotes or other independent pricing to determine the fair value of certain debt investments.
Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in the Required Market Yield for a particular debt security may result in a lower (higher) fair value for that security. A significant increase (decrease) in a third-party broker quote for a particular debt security may result in a higher (lower) value for that security.
Enterprise Value Waterfall Approach
In valuing equity securities (including warrants), CSWC estimates fair value using an Enterprise Value Waterfall valuation model. CSWC estimates the enterprise value of a portfolio company and then allocates the enterprise value to the portfolio company’s securities in order of their relative liquidation preference. In addition, CSWC assumes that any outstanding debt or other securities that are senior to CSWC’s equity securities are required to be repaid at par. Additionally, we may estimate the fair value of non-performing debt securities using the Enterprise Value Waterfall approach as needed.
To estimate the enterprise value of the portfolio company, CSWC uses a weighted valuation model based on public comparable companies, observable transactions and discounted cash flow analyses. A main input into the valuation model is a measure of the portfolio company’s financial performance, which generally is either earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”) or revenues. In addition, we consider other factors, including but not limited to (1) offers from third parties to purchase the portfolio company and (2) the implied value of recent investments in the equity securities of the portfolio company. For certain non-performing assets, we may utilize the liquidation or collateral value of the portfolio company's assets in our estimation of its enterprise value.
The significant Level 3 inputs to the Enterprise Value Waterfall model are (1) an appropriate multiple derived from the comparable public companies and transactions, (2) discount rate assumptions used in the discounted cash flow model and (3) a measure of the portfolio company’s financial performance, which generally is either Adjusted EBITDA or revenues. Inputs can be based on historical operating results, projections of future operating results or a combination thereof. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and may require adjustments for certain non-recurring items. CSWC also may consult with the portfolio company’s senior management to obtain updates on the portfolio company’s performance, including information such as industry trends, new product development, loss of customers and other operational issues. Fair value measurements using the Enterprise Value Waterfall model can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in either the multiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher (lower) fair value for that security.
NAV Valuation Method
Under the NAV valuation method, for an investment in an investment fund that does not have a readily determinable fair value, CSWC measures the fair value of the investment predominately based on the NAV of the investment fund as of the measurement date. However, in determining the fair value of the investment, we may consider whether adjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions on redemption of our investment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, expected future cash flows available to equity holders, or other uncertainties surrounding CSWC’s ability to realize the full NAV of its interests in the investment fund.
Option Pricing Model Method
In certain situations, CSWC will acquire financial instruments which are most appropriately valued using an option pricing model. Typically, option pricing models will use the Black Scholes model methodology and attempt to replicate the features of the underlying derivative instrument. The significant Level 3 input to the Option Pricing Model is the assumed volatility of the underlying portfolio company cash flows. Other inputs into the model are the current price of the security, the strike price of the security, and the time to maturity.
The following fair value hierarchy tables set forth our investment portfolio by level as of December 31, 2020 and March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
at December 31, 2020 Using
|
Asset Category
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
First lien loans
|
$
|
482,240
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
482,240
|
|
Second lien loans
|
37,756
|
|
|
—
|
|
|
—
|
|
|
37,756
|
|
Subordinated debt
|
11,107
|
|
|
—
|
|
|
—
|
|
|
11,107
|
|
Preferred equity
|
20,410
|
|
|
—
|
|
|
—
|
|
|
20,410
|
|
Common equity & warrants
|
33,625
|
|
|
—
|
|
|
—
|
|
|
33,625
|
|
Investments measured at net asset value1
|
63,635
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Investments
|
$
|
648,773
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
585,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
at March 31, 2020 Using
|
Asset Category
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
First lien loans
|
$
|
427,447
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
427,447
|
|
Second lien loans
|
37,139
|
|
|
—
|
|
|
—
|
|
|
37,139
|
|
Subordinated debt
|
9,747
|
|
|
—
|
|
|
—
|
|
|
9,747
|
|
Preferred equity
|
16,624
|
|
|
—
|
|
|
—
|
|
|
16,624
|
|
Common equity & warrants
|
22,355
|
|
|
—
|
|
|
—
|
|
|
22,355
|
|
Investments measured at net asset value1
|
39,760
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Investments
|
$
|
553,072
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
513,312
|
|
1Certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in Consolidated Statements of Assets and Liabilities. For the investment valued at net asset value per share at December 31, 2020 and March 31, 2020, the redemption restrictions dictate that we cannot withdraw our membership interest without unanimous approval. We are permitted to sell or transfer our membership interest and must deliver written notice of such transfer to the other member no later than 60 business days prior to the sale or transfer.
The tables below present the Valuation Techniques and Significant Level 3 Inputs (ranges and weighted averages) used in the valuation of CSWC’s debt and equity securities at December 31, 2020 and March 31, 2020. Significant Level 3 Inputs were weighted by the relative fair value of the investments. The tables are not intended to be all inclusive, but instead capture the significant unobservable inputs relevant to our determination of fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Significant
|
|
|
|
|
|
Valuation
|
|
December 31, 2020
|
|
Unobservable
|
|
|
|
Weighted
|
Type
|
Technique
|
|
(in thousands)
|
|
Inputs
|
|
Range
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
First lien loans
|
Income Approach
|
|
$
|
404,783
|
|
|
Discount Rate
|
|
7.6% - 41.4%
|
|
11.5%
|
|
Market Approach
|
|
77,457
|
|
|
Cost
|
|
97.0 - 100.0
|
|
98.1
|
|
|
|
|
|
Exit Value
|
|
20.6 - 101.0
|
|
98.1
|
Second lien loans
|
Income Approach
|
|
36,969
|
|
|
Discount Rate
|
|
10.2% - 39.2%
|
|
15.1%
|
|
|
|
|
|
Third Party Broker Quote
|
|
93.2 - 93.2
|
|
93.2
|
|
Market Approach
|
|
787
|
|
|
Cost
|
|
100.0
|
|
100.0
|
Subordinated debt
|
Income Approach
|
|
11,107
|
|
|
Discount Rate
|
|
6.22% - 27.1%
|
|
15.1%
|
Preferred equity
|
Enterprise Value Waterfall Approach
|
|
18,410
|
|
|
EBITDA Multiple
|
|
6.9x - 11.0x
|
|
8.7x
|
|
|
|
|
|
Discount Rate
|
|
14.7% - 20.8%
|
|
19.2%
|
|
Market Approach
|
|
2,000
|
|
|
Cost
|
|
100.0
|
|
100.0
|
Common equity & warrants
|
Enterprise Value Waterfall Approach
|
|
33,625
|
|
|
EBITDA Multiple
|
|
5.4x - 11.5x
|
|
8.4x
|
|
|
|
|
|
Discount Rate
|
|
15.1% - 27.1%
|
|
19.7%
|
Total Level 3 Investments
|
|
|
$
|
585,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
Significant
|
|
|
|
|
|
Valuation
|
|
March 31, 2020
|
|
Unobservable
|
|
|
|
Weighted
|
Type
|
Technique
|
|
(in thousands)
|
|
Inputs
|
|
Range
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
First lien loans
|
Income Approach
|
|
$
|
401,266
|
|
|
Discount Rate
|
|
7.0% - 52.5%
|
|
12.0%
|
|
|
|
|
|
Third Party Broker Quote
|
|
43.8 - 56.5
|
|
49.9
|
|
Market Approach
|
|
26,181
|
|
|
Cost
|
|
98.0 - 98.2
|
|
98.1
|
|
|
|
|
|
|
|
|
|
|
Second lien loans
|
Income Approach
|
|
37,139
|
|
|
Discount Rate
|
|
10.3% - 19.8%
|
|
12.7%
|
|
|
|
|
|
Third Party Broker Quote
|
|
37.5
|
|
37.5
|
Subordinated debt
|
Income Approach
|
|
9,747
|
|
|
Discount Rate
|
|
13.3%
|
|
13.3%
|
Preferred equity
|
Enterprise Value Waterfall Approach
|
|
16,624
|
|
|
EBITDA Multiple
|
|
7.4x - 11.4x
|
|
9.3x
|
|
|
|
|
|
Discount Rate
|
|
17.2% - 22.9%
|
|
19.3%
|
Common equity & warrants
|
Enterprise Value Waterfall Approach
|
|
22,355
|
|
|
EBITDA Multiple
|
|
5.3x - 11.4x
|
|
8.2x
|
|
|
|
|
|
Discount Rate
|
|
15.4% - 22.7%
|
|
19.2%
|
Financial Instruments
|
Option Pricing Model
|
|
—
|
|
|
Assumed Volatility
|
|
2.0%
|
|
2.0%
|
Total Level 3 Investments
|
|
|
$
|
513,312
|
|
|
|
|
|
|
|
Changes in Fair Value Levels
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model based valuation techniques may require the transfer of financial instruments from one fair value level to another. We recognize the transfer of financial instruments between levels at the end of each quarterly reporting period. During the three and nine months ended December 31, 2020 and 2019, we had no transfers between levels.
The following tables provide a summary of changes in the fair value of investments measured using Level 3 inputs during the nine months ended December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value March 31, 2020
|
|
Realized & Unrealized Gains (Losses)
|
|
Purchases of Investments1
|
|
Repayments
|
|
PIK Interest Capitalized
|
|
Divestitures
|
|
Conversion/Reclassification of Security
|
|
Fair Value December 31, 2020
|
|
YTD Unrealized Appreciation (Depreciation) on Investments held at period end
|
First lien loans
|
$
|
427,447
|
|
|
$
|
(572)
|
|
|
$
|
132,279
|
|
|
$
|
(71,102)
|
|
|
$
|
3,880
|
|
|
$
|
—
|
|
|
$
|
(9,692)
|
|
|
$
|
482,240
|
|
|
$
|
(987)
|
|
Second lien loans
|
37,139
|
|
|
(758)
|
|
|
143
|
|
|
(188)
|
|
|
642
|
|
|
—
|
|
|
778
|
|
|
37,756
|
|
|
(758)
|
|
Subordinated debt
|
9,747
|
|
|
141
|
|
|
534
|
|
|
—
|
|
|
685
|
|
|
—
|
|
|
—
|
|
|
11,107
|
|
|
141
|
|
Preferred equity
|
16,624
|
|
|
7,485
|
|
|
3,915
|
|
|
—
|
|
|
—
|
|
|
(7,614)
|
|
|
—
|
|
|
20,410
|
|
|
2,971
|
|
Common equity & warrants
|
22,355
|
|
|
2,143
|
|
|
2,381
|
|
|
—
|
|
|
—
|
|
|
(2,168)
|
|
|
8,914
|
|
|
33,625
|
|
|
1,731
|
|
Financial instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Investments
|
$
|
513,312
|
|
|
$
|
8,439
|
|
|
$
|
139,252
|
|
|
$
|
(71,290)
|
|
|
$
|
5,207
|
|
|
$
|
(9,782)
|
|
|
$
|
—
|
|
|
$
|
585,138
|
|
|
$
|
3,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value March 31, 2019
|
|
Realized & Unrealized Gains (Losses)
|
|
Purchases of Investments1
|
|
Repayments
|
|
PIK Interest Capitalized
|
|
Divestitures
|
|
Conversion/Reclassification of Security
|
|
Fair Value December 31, 2019
|
|
YTD Unrealized Appreciation (Depreciation) on Investments held at period end
|
First lien loans
|
$
|
317,544
|
|
|
$
|
(9,247)
|
|
|
$
|
148,601
|
|
|
$
|
(46,944)
|
|
|
$
|
954
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
410,908
|
|
|
$
|
(9,427)
|
|
Second lien loans
|
35,896
|
|
|
(704)
|
|
|
120
|
|
|
(188)
|
|
|
448
|
|
|
—
|
|
|
—
|
|
|
35,572
|
|
|
(704)
|
|
Subordinated debt
|
14,287
|
|
|
(153)
|
|
|
38
|
|
|
$
|
(4,569)
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
9,615
|
|
|
(217)
|
|
Preferred equity
|
17,936
|
|
|
1,291
|
|
|
4,563
|
|
|
—
|
|
|
55
|
|
|
(8,081)
|
|
|
1,597
|
|
|
17,361
|
|
|
1,738
|
|
Common equity & warrants
|
72,665
|
|
|
2,147
|
|
|
1,003
|
|
|
—
|
|
|
—
|
|
|
(48,933)
|
|
|
(1,597)
|
|
|
25,285
|
|
|
5,221
|
|
Financial instruments
|
—
|
|
|
—
|
|
|
1,517.00
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,517.00
|
|
|
—
|
|
Total Investments
|
$
|
458,328
|
|
|
$
|
(6,666)
|
|
|
$
|
155,842
|
|
|
$
|
(51,701)
|
|
|
$
|
1,469
|
|
|
$
|
(57,014)
|
|
|
$
|
—
|
|
|
$
|
500,258
|
|
|
$
|
(3,389)
|
|
1Includes purchases of new investments, as well as discount accretion on existing investments.
5. BORROWINGS
In accordance with the 1940 Act, with certain limitations, 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 which 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. As of December 31, 2020, the Company’s asset coverage was 181%.
The Company had the following borrowings outstanding as of December 31, 2020 and March 31, 2020 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
March 31, 2020
|
Credit Facility
|
$
|
150,000
|
|
|
$
|
154,000
|
|
|
|
|
|
December 2022 Notes
|
37,136
|
|
|
77,136
|
|
Less: Unamortized debt issuance costs and debt discount
|
(447)
|
|
|
(1,324)
|
|
Total December 2022 Notes
|
36,689
|
|
|
75,812
|
|
|
|
|
|
October 2024 Notes
|
125,000
|
|
|
75,000
|
|
Less: Unamortized debt issuance costs and debt discount
|
(2,225)
|
|
|
(1,516)
|
|
Total October 2024 Notes
|
122,775
|
|
|
73,484
|
|
|
|
|
|
January 2026 Notes
|
75,000
|
|
|
—
|
|
Less: Unamortized debt issuance costs and debt discount
|
(1,590)
|
|
|
—
|
|
Total January 2026 Notes
|
73,410
|
|
|
—
|
|
|
|
|
|
Total Borrowings
|
$
|
382,874
|
|
|
$
|
303,296
|
|
Credit Facility
In August 2016, CSWC entered into a senior secured credit facility (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Facility”) to provide additional liquidity to support its investment and operational activities, which included total commitments of $100 million. The Credit Facility contained an accordion feature that allowed CSWC to increase the total commitments under the Credit Facility up to $150 million from new and existing lenders on the same terms and conditions as the existing commitments. In August 2017, we increased our total commitments by $15 million through adding an additional lender using the accordion feature.
On November 16, 2017, CSWC entered into Amendment No. 1 (the “Amendment”) to its Credit Facility. Prior to the Amendment, borrowings under the Credit Facility accrued interest on a per annum basis at a rate equal to the applicable LIBOR rate plus 3.25% with no LIBOR floor. CSWC paid unused commitment fees of 0.50% to 1.50% per annum, based on utilization, on the unused lender commitments under the Credit Facility. The Amendment (1) increased the total borrowing capacity under the Credit Facility to $180 million, with commitments from a diversified group of eight lenders, (2) increased the Credit Facility’s accordion feature that allows for an increase in total commitments of up to $250 million under the Credit Facility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.25% down to LIBOR plus 3.00%, with a further step-down to LIBOR plus 2.75% at the time the Company’s net worth exceeds $325 million, (4) reduced unused commitment fees from a utilization-based grid of 0.50% to 1.5% down to a range of 0.50% to 1.0% per annum, and (5) extended the Credit Facility’s revolving period that ended on August 30, 2019 through November 16, 2020. Additionally, the final maturity of the Credit Facility was extended from August 30, 2020 to November 16, 2021.
On April 16, 2018 and May 11, 2018, CSWC entered into Incremental Assumption Agreements, which increased the total commitments under the Credit Facility by $20 million and $10 million, respectively. The increases were executed in accordance with the accordion feature of the Credit Facility, increasing total commitments from $180 million to $210 million.
On December 21, 2018, CSWC entered into the Amended and Restated Senior Secured Revolving Credit Agreement (the "Credit Agreement"), and a related Amended and Restated Guarantee, Pledge and Security Agreement, to amend and restate its Credit Facility. The Credit Agreement (1) increased the total commitments by $60 million from $210 million to an aggregate total of $270 million, provided by a diversified group of nine lenders, (2) increased the Credit Facility's accordion feature to $350 million under the Credit Facility from new and existing lenders on the same terms and conditions as the existing commitments, (3) reduced the interest rate on borrowings from LIBOR plus 3.00% to LIBOR plus 2.50%, subject to certain conditions as outlined in the Credit Agreement, (4) reduced the minimum asset coverage with respect to senior securities representing indebtedness from 200% to 150% after the date on which such minimum asset coverage is permitted to be reduced by the Company under applicable law, and (5) extended the Credit Facility's revolving period from November 16, 2020 to December 21, 2022 and the final maturity was extended from November 16, 2021 to December 21, 2023.
The Credit Agreement modified certain covenants in the Credit Facility, including: (1) to provide for a minimum senior coverage ratio of 2-to-1 (in addition to the asset coverage ratio noted below), (2) to increase the minimum obligors’ net worth test from $160 million to $180 million, (3) to reduce the minimum consolidated interest coverage ratio from 2.50-to-1 to 2.25-to-1 as of the last day of any fiscal quarter, and (4) to provide for the fact that the Company will not declare or pay a dividend or distribution in cash or other property unless immediately prior to and after giving effect thereto the Company's asset coverage ratio exceeds 150% (and certain other conditions are satisfied). The Credit Facility also contains certain affirmative and negative covenants, including but not limited to: (1) certain reporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum shareholders’ equity, (4) maintaining a minimum consolidated net worth, and (5) at any time the outstanding advances exceed 90% of the borrowing base, maintaining a minimum liquidity of not less than 10% of the covered debt amount.
On May 23, 2019, CSWC entered into an Incremental Assumption Agreement, which increased the total commitments under the Credit Facility by $25 million. The increase was executed under the accordion feature of the Credit Facility and increased total commitments from $270 million to $295 million.
On March 19, 2020, CSWC entered into an Incremental Assumption Agreement that increased the total commitments under the accordion feature of the Credit Facility by $30 million, which increased total commitments from $295 million to $325 million.
On December 10, 2020, CSWC entered into Amendment No. 1 to the Credit Agreement, which expanded the accordion feature from $350 million to $400 million. In addition, on December 10, 2020, the Company entered into an Incremental Commitment Agreement that increased the total commitments under the Credit Agreement from $325 million to $340 million.
The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, bankruptcy, and change of control, with customary cure and notice provisions. If the Company defaults on its obligations under the Credit Facility, the lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests. There are no changes to the covenants or the events of default in the Credit Facility as a result of the Amendment.
The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Company and the guarantors and (2) 100% of the equity interests in the Company’s wholly-owned subsidiaries. As of December 31, 2020, substantially all of the Company’s assets were pledged as collateral for the Credit Facility.
At December 31, 2020, CSWC had $150.0 million in borrowings outstanding under the Credit Facility. CSWC recognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs, of $1.8 million and $5.3 million, respectively, for the three and nine months ended December 31, 2020. For the three and nine months ended December 31, 2019, CSWC recognized interest expense of $1.7 million and $6.3 million, respectively. The weighted average interest rate on the Credit Facility was 2.91% and 3.13%, respectively, for the three and nine months ended December 31, 2020. For the three and nine months ended December 31, 2019, the weighted average interest rate on the Credit Facility was 4.67% and 4.96%, respectively. Average borrowings for the three and nine months ended December 31, 2020 were $184.1 million and $129.5 million, respectively. For the three and nine months ended December 31, 2019, average borrowings were $106.5 million and $102.9 million, respectively. As of December 31, 2020, CSWC was in compliance with all financial covenants under the Credit Facility.
December 2022 Notes
In December 2017, the Company issued $57.5 million in aggregate principal amount, including the underwriters’ full exercise of their option to purchase additional principal amounts to cover over-allotments, of 5.95% Notes due 2022 (the “December 2022 Notes”). The December 2022 Notes mature on December 15, 2022 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 December 15, 2019. The December 2022 Notes bear interest at a rate of 5.95% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on March 15, 2018. The December 2022 Notes are an unsecured obligation, rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.
On June 11, 2018, the Company entered into an ATM debt distribution agreement, pursuant to which it may offer for sale, from time to time, up to $50 million in aggregate principal amount of December 2022 Notes through B. Riley FBR, Inc., acting as its sales agent (the “2022 Notes Agent”). Sales of the December 2022 Notes may be made in negotiated transactions or transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on The Nasdaq Global Select Market, or similar securities exchanges or sales made through a market maker other than on an exchange at prices related to prevailing market prices or at negotiated prices.
The 2022 Notes Agent receives a commission from the Company equal to up to 2% of the gross sales of any December 2022 Notes sold through the 2022 Notes Agent under the debt distribution agreement. The 2022 Notes Agent is not required to sell any specific principal amount of December 2022 Notes, but will use its commercially reasonable efforts consistent with its sales and trading practices to sell the December 2022 Notes. The December 2022 Notes trade “flat,” which means that purchasers in the secondary market will not pay, and sellers will not receive, any accrued and unpaid interest on the December 2022 Notes that is not reflected in the trading price. All issuances of December 2022 Notes rank equally in right of payment and form a single series of notes.
The Company has no current intention of issuing additional December 2022 Notes under this ATM debt distribution agreement. Accordingly, during the three months ended June 30, 2019, the Company amortized $0.2 million of the remaining debt issuance costs associated with the ATM debt distribution agreement, which is included in interest expense in the Consolidated Statement of Operations for the quarter ended June 30, 2019.
On each of September 29, 2020 and December 10, 2020 (the "Redemption Dates"), the Company redeemed $20,000,000 in aggregate principal, $40,000,000 in total, of the $77,136,175 in aggregate principal amount of issued and outstanding December 2022 Notes. The December 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon, through, but excluding the Redemption Dates. Accordingly, the Company recognized realized losses on extinguishment of debt, equal to the write-off of the related unamortized debt issuance costs, of $0.3 million and $0.5 million, respectively, during the three and nine months ended December 31, 2020. Subsequent to the fiscal quarter ended December 31, 2020, the Company redeemed the remaining $37,136,175 issued and outstanding December 2022 Notes. See Note 14 for more information.
As of December 31, 2020, the carrying amount of the December 2022 Notes was $36.7 million on an aggregate principal amount of $37.1 million at a weighted average effective yield of 5.93%. As of December 31, 2020, the fair value of the December 2022 Notes was $37.3 million. The fair value is based on the closing price of the security on The Nasdaq Global Select Market, which is a Level 1 input under ASC 820. The Company recognized interest expense related to the December 2022 Notes, including amortization of deferred issuance costs of $0.9 million and $3.4 million, respectively, for the three and nine months ended December 31, 2020. For the three and nine months ended December 31, 2019, the Company recognized interest expense of $1.3 million and $4.1 million, respectively. Average borrowings for the three and nine months ended December 31, 2020 were $52.4 million and $68.7 million, respectively. Average borrowings for both the three and nine months ended December 31, 2019 were $77.1 million.
The indenture governing the December 2022 Notes contains certain covenants including but not limited to (i) a requirement that the Company comply with the asset coverage requirement of Section 18(a)(1)(A) of the 1940 Act as modified by Section 61(a) of the 1940 Act or any successor provisions thereto, after giving effect to any exemptive relief granted to the Company by the SEC, (ii) a requirement, subject to limited exception, that the Company will not declare any cash dividend, or declare any other cash distribution, upon a class of its capital stock, or purchase any such capital
stock, unless, in every such case, at the time of the declaration of any such dividend or distribution, or at the time of any such purchase, the Company has the minimum asset coverage required pursuant to Section 61(a) of the 1940 Act, or any successor provision thereto, after deducting the amount of such dividend, distribution or purchase price, as the case may be, giving effect to any exemptive relief granted to the Company by the SEC and (iii) a requirement to provide financial information to the holders of the December 2022 Notes and the trustee under the indenture if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The indenture and supplement relating to the December 2022 Notes also provides for customary events of default. As of December 31, 2020, the Company was in compliance with all covenants of the December 2022 Notes.
October 2024 Notes
In September 2019, the Company issued $65.0 million in aggregate principal amount of 5.375% Notes due 2024 (the “Existing October 2024 Notes”). In October 2019, the Company issued an additional $10.0 million in aggregate principal amount of the October 2024 Notes (the "Additional October 2024 Notes"). In August 2020, the Company issued an additional $50.0 million in aggregate principal amount of the October 2024 Notes (the "New Notes" together with the Existing October 2024 Notes and the Additional October 2024 Notes, the "October 2024 Notes"). The Additional October 2024 Notes and the New Notes are being treated as a single series with the Existing October 2024 Notes under the indenture and have the same terms as the Existing October 2024 Notes. The October 2024 Notes mature on October 1, 2024 and may be redeemed in whole or in part at any time prior to July 1, 2024, at par plus a “make-whole” premium, and thereafter at par. The October 2024 Notes bear interest at a rate of 5.375% per year, payable semi-annually on April 1 and October 1 of each year, beginning on April 1, 2020. The October 2024 Notes are the direct unsecured obligations of the Company and rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.
As of December 31, 2020, the carrying amount of the October 2024 Notes was $122.8 million on an aggregate principal amount of $125.0 million at a weighted average effective yield of 5.375%. As of December 31, 2020, the fair value of the October 2024 Notes was $124.7 million. This is a Level 3 fair value measurement under ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to the October 2024 Notes, including amortization of deferred issuance costs, of $1.8 million and $4.4 million, respectively, for the three and nine months ended December 31, 2020. For the three and nine months ended December 31, 2019, the Company recognized interest expense of $1.1 million and $1.2 million, respectively. For the three and nine months ended December 31, 2020, average borrowings were $125.0 million and $100.8 million, respectively. Since the issuance of the Existing October 2024 Notes on September 27, 2019 through December 31, 2019, average borrowings were $73.9 million.
The indenture governing the October 2024 Notes contains certain covenants, including certain covenants requiring the Company to comply with Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not the Company continues to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to the Company by the SEC, to comply with Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, after giving effect to any exemptive relief granted to the Company by the SEC and subject to certain other exceptions, and to provide financial information to the holders of the October 2024 Notes and the trustee under the indenture if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to important limitations and exceptions that are described in the indenture and the second supplemental indenture relating to the October 2024 Notes.
In addition, holders of the Notes can require the Company to repurchase some or all of the October 2024 Notes at a purchase price equal to 100% of their principal amount, plus accrued and unpaid interest to, but not including, the repurchase date upon the occurrence of a “Change of Control Repurchase Event,” as defined in the second supplemental indenture relating to the October 2024 Notes.
January 2026 Notes
In December 2020, the Company issued $75.0 million in aggregate principal amount of 4.50% Notes due 2026 (the "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, beginning
on July 31, 2021. The January 2026 Notes are the direct unsecured obligations of the Company and rank pari passu with our other outstanding and future unsecured unsubordinated indebtedness and are effectively subordinated to all of our existing and future secured indebtedness, including borrowings under our Credit Facility.
As of December 31, 2020, the carrying amount of the January 2026 Notes was $73.4 million on an aggregate principal amount of $75.0 million at a weighted average effective yield of 4.50%. As of December 31, 2020, the fair value of the January 2026 Notes was $75.0 million. This is a Level 3 fair value measurement under ASC 820 based on a valuation model using a discounted cash flow analysis. The Company recognized interest expense related to the January 2026 Notes, including amortization of deferred issuance costs, of $0.1 million for both the three and nine months ended December 31, 2020. Since the issuance of the January 2026 Notes on December 29, 2020 through December 31, 2020, average borrowings were $75.0 million.
The indenture governing the January 2026 Notes contains certain covenants, including certain covenants requiring the Company to comply with Section 18(a)(1)(A) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, whether or not the Company continues to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to the Company by the SEC, to comply with Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions, after giving effect to any exemptive relief granted to the Company by the SEC and subject to certain other exceptions, and to provide financial information to the holders of the January 2026 Notes and the trustee under the indenture if the Company is no longer subject to the reporting requirements under the Exchange Act. These covenants are subject to important limitations and exceptions that are described in the indenture and the third supplemental indenture relating to the January 2026 Notes.
In addition, holders of the Notes can require the Company to repurchase some or all of the January 2026 Notes at a purchase price equal to 100% of their principal amount, plus accrued and unpaid interest to, but not including, the repurchase date upon the occurrence of a “Change of Control Repurchase Event,” as defined in the third supplemental indenture relating to the January 2026 Notes.
6. INCOME TAXES
We have elected, and intend to qualify annually, to be treated as a RIC under Subchapter M of the Code and have a tax year end of December 31. In order to qualify as a RIC, we must annually distribute at least 90% of our investment company taxable income, as defined by the Code, to our shareholders in a timely manner. Investment company income generally includes net short-term capital gains but excludes net long-term capital gains. A RIC is not subject to federal income tax on the portion of its ordinary income and capital gains that is distributed to its shareholders, including “deemed distributions” as discussed below. As part of maintaining RIC tax treatment, undistributed taxable income and capital gain, which is subject to a 4% non-deductible U.S. federal excise tax, pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (1) the filing of the U.S. federal income tax return for the applicable fiscal year and (2) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated. We intend to distribute to our stockholders, after consideration and application of our ability under the Code to carry forward certain excess undistributed taxable income from one tax year into the next tax year, substantially all of our taxable income.
As of December 31, 2020, CSWC qualified to be taxed as a RIC. We intend to meet the applicable qualifications to be taxed as a RIC in future periods. However, the Company’s ability to meet certain portfolio diversification requirements of RICs in future years may not be controllable by the Company.
Book and tax basis differences relating to dividends and distributions to our shareholders and other permanent book and tax differences are typically reclassified among the CSWC’s capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from U.S. GAAP; accordingly, for the nine months ended December 31, 2020 and 2019, CSWC reclassified for book purposes amounts arising from permanent book/tax differences related to the tax treatment of return of capital and/or deemed distributions, tax treatment of investments upon disposition, and non-deductible expenses, as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
2020
|
|
2019
|
Additional capital
|
$
|
(1,341)
|
|
|
$
|
11,262
|
|
Total distributable earnings (loss)
|
1,341
|
|
|
(11,262)
|
|
The determination of the tax attributes for CSWC’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Therefore, any determination made on an interim basis is forward-looking based on currently available facts, rules and assumptions and may not be representative of the actual tax attributes of distributions for a full year.
During the quarter ended March 31, 2020, CSWC declared total dividends of $9.5 million, or $0.51 per share ($0.41 per share in regular dividends and $0.10 in supplemental dividends). During the quarter ended June 30, 2020, CSWC declared total dividends of $9.5 million, or $0.51 per share ($0.41 per share in regular dividends and $0.10 in supplemental dividends). During the quarter ended September 30, 2020, CSWC declared total dividends of $9.5 million, or $0.51 per share ($0.41 per share in regular dividends and $0.10 in supplemental dividends). During the quarter ended December 31, 2020, CSWC declared total dividends of $10.0 million, or $0.51 per share ($0.41 per share in regular dividends and $0.10 in supplemental dividends).
Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for distributions will generally include both ordinary income and capital gains, but may also include qualified dividends or return of capital.
The tax character of distributions paid for the years ended December 31, 2020 and 2019 was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2020
|
|
2019
|
Ordinary income
|
$
|
37,517
|
|
|
$
|
22,405
|
|
Distributions of long term capital gains
|
—
|
|
|
25,703
|
|
Distributions on tax basis
|
$
|
37,517
|
|
|
$
|
48,108
|
|
The following reconciles net increase in net assets resulting from operations to estimated RIC taxable income for the nine months ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
Reconciliation of RIC Taxable Income1
|
2020
|
|
2019
|
Net increase in net assets from operations
|
$
|
40,666
|
|
|
$
|
9,442
|
|
Net unrealized (appreciation) depreciation on investments
|
(24,512)
|
|
|
6,233
|
|
(Expense/loss) income/gain recognized for tax on pass-through entities
|
(8,937)
|
|
|
121
|
|
Loss (gain) recognized on dispositions
|
2,206
|
|
|
(930)
|
|
Capital loss carryover
|
14,227
|
|
|
—
|
|
Net operating loss - management company and taxable subsidiary
|
577
|
|
|
395
|
|
Non-deductible tax expense
|
587
|
|
|
317
|
|
Other book/tax differences
|
(320)
|
|
|
230
|
|
Estimated taxable income before deductions for distributions
|
$
|
24,494
|
|
|
$
|
15,808
|
|
1The calculation of taxable income for each period is an estimate and will not be finally determined until the Company files its tax return each year. Final taxable income may be different than this estimate.
A RIC may elect to retain all or a portion of its net capital gains by designating them as a “deemed distribution” to its shareholders and paying a federal tax on the net capital gains for the benefit of its shareholders. Shareholders then report their share of the retained capital gains on their income tax returns as if it had been received and report a tax credit for tax paid on their behalf by the RIC. Shareholders then add the amount of the “deemed distribution” net of such tax to the basis of their shares.
For the tax year ended December 31, 2020, we distributed all long-term capital gains and therefore had no deemed distributions to our shareholders or federal taxes incurred related to such items. "Deemed distributions" are generally reclassified from accumulated net realized gains into additional capital after our tax year ends each December 31. For the tax year ended December 31, 2019, we had net long-term capital gains of $42.2 million, of which $25.7 million was distributed to shareholders as capital gains dividends. We elected to retain net long-term capital gains of $16.5 million and designate the retained amount as a "deemed distribution" to our shareholders. As a result, we incurred federal taxes on the retained amount on behalf of our shareholders in the amount of $3.5 million for the tax year ended December 31, 2019.
CSMC and the Taxable Subsidiary, wholly-owned subsidiaries of CSWC, are not RICs and are required to pay taxes at the current corporate rate. For tax purposes, CSMC and the Taxable Subsidiary have elected to be treated as taxable entities, and therefore are not consolidated for tax purposes and are taxed at normal corporate tax rates based on their taxable income and, as a result of their activities, may generate income tax expense or benefit. The taxable income, or loss, of CSMC and the Taxable Subsidiary may differ from book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements. CSMC records bonus accruals on a quarterly basis. Deferred taxes related to the changes in the restoration plan and bonus accruals are also recorded on a quarterly basis. The Taxable Subsidiary records valuation adjustments related to its investments on a quarterly basis. Deferred taxes related to the unrealized gain/loss on investments are also recorded on a quarterly basis. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Establishing a valuation allowance of a deferred tax asset requires management to make estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from CSMC’s operations. Effective December 31, 2020, CSMC merged with and into CSWC, which is not subject to corporate federal income taxes. As such, the deferred tax asset was written off. As of March 31, 2020, CSMC had a deferred tax asset of approximately $1.4 million. As of December 31, 2020 and March 31, 2020, the Taxable Subsidiary had a deferred tax liability of $2.7 million and $1.0 million, respectively.
Based on our assessment of our unrecognized tax benefits, management believes that all benefits will be realized and they do not contain any uncertain tax positions.
The following table sets forth the significant components of the deferred tax assets and liabilities as of December 31, 2020 and March 31, 2020 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
March 31, 2020
|
Deferred tax asset:
|
|
|
|
Net operating loss carryforwards
|
$
|
—
|
|
|
$
|
—
|
|
Compensation
|
—
|
|
|
776
|
|
Pension liability
|
—
|
|
|
647
|
|
Net unrealized depreciation on investments
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
(21)
|
|
Total deferred tax asset
|
—
|
|
|
1,402
|
|
Less valuation allowance
|
—
|
|
|
—
|
|
Total net deferred tax asset
|
—
|
|
|
1,402
|
|
Deferred tax liabilities:
|
|
|
|
Net unrealized appreciation on investments
|
(2,708)
|
|
|
(963)
|
|
Total deferred tax liabilities
|
(2,708)
|
|
|
(963)
|
|
Total net deferred tax assets (liabilities)
|
$
|
(2,708)
|
|
|
$
|
439
|
|
In addition, the Taxable Subsidiary holds a portion of one or more of our portfolio investments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiary is consolidated for financial reporting purposes in accordance with U.S. GAAP, so that our consolidated financial statements reflect our investments in the portfolio companies owned by the Taxable Subsidiary. The purpose of the Taxable Subsidiary is to permit us to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of our gross income for U.S. federal income tax purposes must consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionate amount of any gross income of a partnership or LLC (or other pass-through entity) portfolio investment would flow through directly to us. To the extent that our income did not consist of investment income, it could jeopardize our ability to qualify as a RIC and therefore cause us to incur significant amounts of corporate-level U.S. federal income taxes. Where interests in LLCs (or other pass-through entities) are owned by the Taxable Subsidiary, however, the income from those interests is taxed to the Taxable Subsidiary and does not flow through to us, thereby helping us preserve our RIC tax treatment and resultant tax advantages. The Taxable Subsidiary is not consolidated for U.S. federal income tax purposes and may generate income tax expense as a result of their ownership of the portfolio companies. The income tax expense, or benefit, and the related tax assets and liabilities, if any, are reflected in our Statement of Operations.
The income tax expense, or benefit, and the related tax assets and liabilities, generated by CSWC, CSMC and the Taxable Subsidiary, if any, are reflected in CSWC’s consolidated financial statements. For the three months ended December 31, 2020, we recognized net income tax expense of $1.5 million, principally consisting of a deferred expense for U.S. federal income taxes of $1.3 million (all of which is related to the write off of the deferred tax asset at CSMC) and a $0.2 million accrual for a 4% U.S. federal excise tax on our estimated undistributed taxable income. For the nine months ended December 31, 2020, we recognized net income tax expense of $1.6 million, principally consisting of a deferred expense for U.S. federal income taxes of $1.3 million (all of which is related to the write off of the deferred tax asset at CSMC), a $0.6 million accrual for U.S. federal excise tax on our estimated undistributed taxable income and $0.3 million of tax benefit (of which $0.1 million is current and $0.2 million is deferred) relating to the Taxable Subsidiary. For the three months ended December 31, 2019, we recognized net income tax expense of $0.8 million, principally consisting of a benefit for current U.S. federal income taxes of $0.1 million, deferred U.S. federal income tax expense of $0.3 million, a $0.5 million accrual for U.S. federal excise tax on our estimated undistributed taxable income and $0.1 million of deferred tax expense relating to our Taxable Subsidiary. For the nine months ended December 31, 2019, we recognized net income tax expense of $1.7 million, principally consisting of an expense for current U.S. federal income taxes of $0.1 million, deferred U.S. federal income tax expense of $0.4 million, a $0.9 million accrual for U.S. federal excise tax on our estimated undistributed taxable income and $0.3 million of deferred tax expense relating to our Taxable Subsidiary.
Although we believe our tax returns are correct, the final determination of tax examinations could be different from what was reported on the returns. In our opinion, we have made adequate tax provisions for years subject to examination. Generally, we are currently open to audit under the statute of limitations by the Internal Revenue Service as well as state taxing authorities for the years ended December 31, 2016 through December 31, 2019.
The following table sets forth the significant components of income tax expense as of December 31, 2020 and 2019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
Components of Income Tax Expense
|
|
2020
|
|
2019
|
Statutory federal income tax
|
|
$
|
—
|
|
|
$
|
273
|
|
162(m) limitation
|
|
92
|
|
|
1,115
|
|
Excise tax
|
|
587
|
|
|
847
|
|
Write-off of deferred tax asset
|
|
1,389
|
|
|
—
|
|
Tax benefit related to Taxable Subsidiary
|
|
(325)
|
|
|
317
|
|
Compensation benefits
|
|
(155)
|
|
|
(911)
|
|
Other
|
|
2
|
|
|
10
|
|
Total income tax expense
|
|
$
|
1,590
|
|
|
$
|
1,651
|
|
7. SHAREHOLDERS' EQUITY
On October 26, 2010, we received an exemptive order from the SEC permitting us to issue restricted stock to our executive officers and certain key employees, or the Original Order. On August 22, 2017, we received the Exemptive Order that supersedes the Original Order and in addition to the relief granted under the Original Order, allows us to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Restricted Stock Award Plan, or the 2010 Plan, and to pay the exercise price of options to purchase shares of our common stock granted pursuant to the 2009 Stock Incentive Plan, or the 2009 Plan. During the three months ended December 31, 2020, the Company repurchased 15,105 shares at an aggregate cost of $0.2 million and a weighted average price per share of $15.63 in connection with the vesting of restricted stock awards. During the nine months ended December 31, 2020, the Company repurchased 15,309 shares at an aggregate cost of $0.2 million and a weighted average price per share of $15.62 in connection with the vesting of restricted stock awards. During the three months ended December 31, 2019, the Company repurchased 17,570 shares at an aggregate cost of $0.4 million and a weighted average price per share of $20.93 in connection with the vesting of restricted stock awards. During the nine months ended December 31, 2019, the Company repurchased 19,828 shares at an aggregate cost of $0.4 million and a weighted average price per share of $21.04 in connection with the vesting of restricted stock awards.
On March 4, 2019, the Company established an "at-the-market" offering (the "Equity ATM Program") 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 $50,000,000. 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 $100,000,000 from $50,000,000 and (ii) added two additional sales agents to the Equity ATM Program.
During the three months ended December 31, 2020, the Company sold 1,264,776 shares of its common stock under the Equity ATM Program at a weighted-average price of $16.64 per share, raising $21.1 million of gross proceeds. Net proceeds were $20.6 million after commissions to the sales agents on shares sold. During the nine months ended December 31, 2020, the Company sold 1,673,065 shares of its common stock under the Equity ATM Program at a weighted-average price of $16.33 per share, raising $27.3 million of gross proceeds. Net proceeds were $26.8 million after commissions to the sales agents on shares sold.
During the three months ended December 31, 2019, the Company sold 623,111 shares of its common stock under the Equity ATM Program at a weighted-average price of $22.07 per share, raising $13.8 million of gross proceeds. Net proceeds were $13.5 million after commissions to the sales agents on shares sold. During the nine months ended December 31, 2019, the Company sold 1,049,932 shares of its common stock under the Equity ATM Program at a weighted-average price of $21.90 per share, raising $23.0 million of gross proceeds. Net proceeds were $22.5 million after commissions to the sales agents on shares sold.
Cumulative to date, the Company has sold 3,168,153 shares of its common stock under the Equity ATM Program at a weighted-average price of $18.85, raising $59.7 million of gross proceeds. Net proceeds were $58.5 million after commissions to the sales agents on shares sold. As of December 31, 2020, the Company has $40.3 million available under the Equity ATM Program.
On August 1, 2019, after receiving the requisite shareholder approval, the Company filed an amendment to its Amended and Restated Articles of Incorporation to increase the amount of authorized shares of common stock from 25,000,000 to 40,000,000.
Share Repurchase Program
In January 2016, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $10 million of its outstanding common stock in the open market at certain thresholds below its NAV per share, in accordance with guidelines specified in Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the Exchange Act. On March 1, 2016, the Company entered into a share repurchase agreement, which became effective immediately and terminated on March 26, 2020 upon the Company's purchase of the aggregate gross dollar amount (inclusive of commission fees) of its common stock under the share repurchase program meeting the threshold set forth in the share repurchase agreement.
8. EMPLOYEE STOCK BASED COMPENSATION PLANS
Stock Awards
Pursuant to the Capital Southwest Corporation 2010 Plan, our Board of Directors originally reserved 188,000 shares of restricted stock for issuance to certain of our employees. At our annual shareholder meetings in August 2015 and August 2018, our shareholders approved an increase of an additional 450,000 and 850,000 shares, respectively, to our 2010 Plan. A restricted stock award is an award of shares of our common stock, which generally have full voting and dividend rights but are restricted with regard to sale or transfer. Restricted stock awards are independent of stock grants and are generally subject to forfeiture if employment terminates prior to these restrictions lapsing. Unless otherwise specified in the award agreement, these shares vest in equal annual installments over a four- to five-year period from the grant date and are expensed over the vesting period starting on the grant date.
On August 28, 2014, our Board of Directors amended the 2010 Plan, as permitted pursuant to Section 14 of the 2010 Plan (the “First Amendment to the 2010 Plan”). The First Amendment to the 2010 Plan provides that an award agreement may allow an award to remain outstanding after a spin-off or change in control of one or more wholly-owned subsidiaries of the Company. In addition, on August 28, 2014, the Board of Directors granted 127,000 shares of restricted stock under the Spin-off Compensation Plan. On August 10, 2015, the Second Amendment to the 2010 Plan increased the number of shares of Company common stock available for issuance by 450,000 shares.
On August 22, 2017, we received the Exemptive Order from the SEC that supersedes the Original Order and, in addition to the relief granted under the Original Order, allows the Company to withhold shares to satisfy tax withholding obligations related to the vesting of restricted stock granted pursuant to the 2010 Plan. The Third Amendment to the 2010 Plan, which became effective on August 22, 2017, reflects amendments relating to the Exemptive Order.
On August 2, 2018, the Fourth Amendment to the 2010 Plan increased the number of shares of Company common stock available for issuance by 850,000 shares. The Fourth Amendment also includes revisions regarding change in control provisions, minimum vesting periods, incorporation of a clawback policy and other technical revisions.
The following table summarizes the restricted stock available for issuance for the nine months ended December 31, 2020:
|
|
|
|
|
|
Restricted stock available for issuance as of March 31, 2020
|
579,932
|
|
Additional restricted stock approved under the plan
|
—
|
|
Restricted stock granted during the nine months ended December 31, 2020
|
(239,574)
|
|
Restricted stock forfeited during the nine months ended December 31, 2020
|
27,580
|
|
Restricted stock available for issuance as of December 31, 2020
|
367,938
|
|
We expense the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stock award at the date of grant on a straight-line basis over the requisite service period. For these purposes, the fair value of the restricted stock award is determined based upon the closing price of our common stock on the date of the grant.
For the three months ended December 31, 2020 and 2019, we recognized total share based compensation expense of $0.8 million and $0.7 million, respectively, related to the restricted stock issued to our employees and officers. For the nine months ended December 31, 2020 and 2019, we recognized total share based compensation expense of $2.3 million and $2.2 million, respectively, related to the restricted stock issued to our employees and officers.
During the three months ended June 30, 2019, the Company modified restricted stock awards to accelerate vesting of the unvested awards as of the retirement date for one employee. The Company accounted for this as a modification of awards and recognized incremental compensation cost of $0.2 million. The incremental compensation cost is measured as the excess of the fair value of the modified award over the fair value of the original award immediately before its terms were modified and recognized as compensation cost on the date of modification for vested awards.
As of December 31, 2020, the total remaining unrecognized compensation expense related to non-vested restricted stock awards was $6.6 million, which will be amortized over the weighted-average vesting period of approximately 2.8 years.
The following table summarizes the restricted stock outstanding as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
|
|
Fair Value Per
|
|
Remaining Vesting
|
Restricted Stock Awards
|
Number of Shares
|
|
Share at grant date
|
|
Term (in Years)
|
Unvested at March 31, 2020
|
359,586
|
|
|
$
|
18.64
|
|
|
2.4
|
|
Granted
|
239,574
|
|
|
15.18
|
|
|
3.4
|
|
Vested
|
(141,804)
|
|
|
17.61
|
|
|
2.0
|
|
Forfeited
|
(27,580)
|
|
|
18.63
|
|
|
—
|
|
Unvested at December 31, 2020
|
429,776
|
|
|
$
|
17.05
|
|
|
2.8
|
|
9. OTHER EMPLOYEE COMPENSATION
We established a 401(k) plan (“401K Plan”) effective October 1, 2015. All full-time employees are eligible to participate in the 401K Plan. The 401K Plan permits employees to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and eligibility. We made contributions to the 401K Plan of up to 4.5% of the Internal Revenue Service’s annual maximum eligible compensation, all of which is fully vested immediately. During the three months ended December 31, 2020 and 2019, we made matching contributions of approximately $19.5 thousand and $20.7 thousand, respectively. During the nine months ended December 31, 2020 and 2019, we made matching contributions of approximately $112.3 thousand and $111.9 thousand, respectively.
10. COMMITMENTS AND CONTINGENCIES
Commitments
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk, consisting primarily of unused commitments to extend financing to the Company’s portfolio companies. Since commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
The balances of unused commitments to extend financing as of December 31, 2020 and March 31, 2020 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
March 31,
|
Portfolio Company
|
Investment Type
|
|
2020
|
|
2020
|
Acceleration Partners, LLC
|
Delayed Draw Term Loan
|
|
$
|
382
|
|
|
$
|
—
|
|
AG Kings Holdings Inc.
|
First Lien - DIP
|
|
952
|
|
|
—
|
|
American Nuts Operations LLC
|
Term Loan C
|
|
384
|
|
|
384
|
|
|
|
|
|
|
|
Broad Sky Networks LLC
|
Revolving Loan
|
|
2,500
|
|
|
—
|
|
|
|
|
|
|
|
Central Medical Supply LLC
|
Revolving Loan
|
|
1,200
|
|
|
—
|
|
Central Medical Supply LLC
|
Delayed Draw Capex Term Loan
|
|
1,400
|
|
|
—
|
|
Clickbooth.com, LLC
|
Revolving Loan
|
|
1,086
|
|
|
—
|
|
Danforth Advisors, LLC
|
Revolving Loan
|
|
—
|
|
|
500
|
|
Dynamic Communities, LLC
|
Revolving Loan
|
|
500
|
|
|
500
|
|
Electronic Transaction Consultants LLC
|
Revolving Loan
|
|
3,704
|
|
|
—
|
|
Environmental Pest Service Management Company, LLC
|
Delayed Draw Term Loan
|
|
525
|
|
|
525
|
|
ESCP DTFS Inc.
|
Delayed Draw Term Loan
|
|
4,250
|
|
|
5,250
|
|
Fast Sandwich, LLC
|
Revolving Loan
|
|
3,100
|
|
|
4,150
|
|
|
|
|
|
|
|
Ian, Evan, & Alexander Corporation
|
Revolving Loan
|
|
2,000
|
|
|
—
|
|
ITA Holdings Group, LLC
|
Revolving Loan
|
|
2,000
|
|
|
2,000
|
|
Klein Hersh, LLC
|
Revolving Loan
|
|
938
|
|
|
—
|
|
NinjaTrader, LLC
|
Revolving Loan
|
|
1,500
|
|
|
400
|
|
NinjaTrader, LLC
|
Delayed Draw Term Loan
|
|
2,655
|
|
|
—
|
|
Roseland Management, LLC
|
Revolving Loan
|
|
2,000
|
|
|
1,500
|
|
RTIC Subsidiary Holdings LLC
|
Revolving Loan
|
|
1,096
|
|
|
—
|
|
Zenfolio Inc.
|
Revolving Loan
|
|
1,000
|
|
|
—
|
|
Total unused commitments to extend financing
|
|
|
$
|
33,172
|
|
|
$
|
15,209
|
|
As of December 31, 2020, total revolving and delayed draw loan commitments included commitments to issue letters of credit through a financial intermediary on behalf of certain portfolio companies. As of December 31, 2020, the Company had $3.5 million in letters of credit issued and outstanding under these commitments on behalf of portfolio companies. For all of these letters of credit issued and outstanding, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. Of these letters of credit, $3.1 million expire in May 2021 and $0.4 million expire in July 2021. As of December 31, 2020, none of the letters of credit issued and outstanding were recorded as a liability on the Company's balance sheet as such letters of credit are considered in the valuation of the investments in the portfolio company.
Effective April 1, 2019, ASC 842 required that a lessee to evaluate its leases to determine whether they should be classified as operating or financing leases. The Company identified one operating lease for its office space. The lease commenced on October 1, 2014 and expires February 28, 2022.
As CSWC classified this lease as an operating lease prior to implementation, ASC 842 indicates that a right-of-use asset and lease liability should be recorded based on the effective date. CSWC adopted ASC 842 effective April 1, 2019 and recorded a right-of-use asset and a lease liability as of that date. After this date, the Company has recorded lease expense on a straight-line basis, consistent with the accounting treatment for lease expense prior to the adoption of ASC 842.
Total lease expense incurred for the three and nine months ended December 31, 2020 was $58.1 thousand and $174.4 thousand, respectively. For the three and nine months ended December 31, 2019, total lease expense incurred was $58.1 thousand and $170.7 thousand, respectively. As of December 31, 2020, the asset related to the operating lease was $0.2 million and the lease liability was $0.3 million. As of December 31, 2020, the remaining lease term was 1.1 years and the discount rate was 2.74%.
The following table shows future minimum payments under the Company's operating lease as of December 31, 2020 (in thousands):
|
|
|
|
|
|
Year ending March 31,
|
Rent Commitment
|
2021
|
$
|
68
|
|
2022
|
248
|
|
Total
|
$
|
316
|
|
Contingencies
We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. To our knowledge, we have no currently pending material legal proceedings to which we are party or to which any of our assets are subject.
11. RELATED PARTY TRANSACTIONS
As a BDC, we are obligated under the 1940 Act to make available to our portfolio companies significant managerial assistance. “Making available significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companies that we control, either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us will vary according to the particular needs of each portfolio company.
During both the three and nine months ended December 31, 2020, we did not receive any management fees from our portfolio companies. During the three and nine months ended December 31, 2019, we received management and other fees from certain of our portfolio companies totaling $0.1 million and $0.2 million, respectively, which were recognized as Fees and other income on the Consolidated Statements of Operations. Additionally, as of December 31, 2020 and March 31, 2020, we had dividends receivable from I-45 SLF LLC of $1.7 million and $2.1 million, respectively, which were included in dividends and interest receivables on the Consolidated Statements of Assets and Liabilities.
12. SUMMARY OF PER SHARE INFORMATION
The following presents a summary of per share data for the three and nine months ended December 31, 2020 and 2019 (share amounts presented in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
December 31,
|
|
December 31,
|
Per Share Data:
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Investment income1
|
$
|
0.99
|
|
|
$
|
0.88
|
|
|
$
|
2.73
|
|
|
$
|
2.64
|
|
Operating expenses1
|
(0.47)
|
|
|
(0.44)
|
|
|
(1.37)
|
|
|
(1.35)
|
|
Income taxes1
|
(0.07)
|
|
|
(0.04)
|
|
|
(0.09)
|
|
|
(0.09)
|
|
Net investment income1
|
0.45
|
|
|
0.40
|
|
|
1.27
|
|
|
1.20
|
|
Net realized (loss) gain1
|
(0.01)
|
|
|
2.26
|
|
|
(0.37)
|
|
|
2.38
|
|
Net unrealized appreciation (depreciation) on investments, net of tax1
|
0.37
|
|
|
(3.03)
|
|
|
1.31
|
|
|
(3.43)
|
|
Realized losses on extinguishment of debt1
|
(0.01)
|
|
|
—
|
|
|
(0.03)
|
|
|
—
|
|
Total increase from investment operations
|
0.80
|
|
|
(0.37)
|
|
|
2.18
|
|
|
0.15
|
|
Accretive effect of share issuances and repurchases
|
0.04
|
|
|
0.11
|
|
|
—
|
|
|
0.19
|
|
Dividends to shareholders
|
(0.51)
|
|
|
(1.25)
|
|
|
(1.53)
|
|
|
(2.19)
|
|
Issuance of restricted stock1,2
|
—
|
|
|
(0.11)
|
|
|
(0.17)
|
|
|
(0.11)
|
|
Common stock withheld for payroll taxes upon vesting of restricted stock
|
—
|
|
|
(0.02)
|
|
|
—
|
|
|
(0.02)
|
|
Share based compensation expense
|
0.04
|
|
|
0.04
|
|
|
0.11
|
|
|
0.12
|
|
Other3
|
0.01
|
|
|
0.04
|
|
|
0.02
|
|
|
(0.02)
|
|
Increase (decrease) in net asset value
|
0.38
|
|
|
(1.56)
|
|
|
0.61
|
|
|
(1.88)
|
|
Net asset value
|
|
|
|
|
|
|
|
Beginning of period
|
15.36
|
|
|
18.30
|
|
|
15.13
|
|
|
18.62
|
|
End of period
|
$
|
15.74
|
|
|
$
|
16.74
|
|
|
$
|
15.74
|
|
|
$
|
16.74
|
|
|
|
|
|
|
|
|
|
Ratios and Supplemental Data
|
|
|
|
|
|
|
|
Ratio of operating expenses to average net assets4
|
3.05
|
%
|
|
2.53
|
%
|
|
9.00
|
%
|
|
7.43
|
%
|
Ratio of net investment income to average net assets4
|
2.87
|
%
|
|
2.22
|
%
|
|
8.30
|
%
|
|
6.58
|
%
|
Portfolio turnover
|
6.89
|
%
|
|
10.96
|
%
|
|
13.39
|
%
|
|
19.88
|
%
|
Total investment return4,5
|
29.96
|
%
|
|
1.19
|
%
|
|
71.42
|
%
|
|
9.43
|
%
|
Total return based on change in NAV4,6
|
5.79
|
%
|
|
(1.69)
|
%
|
|
14.14
|
%
|
|
1.93
|
%
|
|
|
|
|
|
|
|
|
Per share market value at the end of the period
|
$
|
17.75
|
|
|
$
|
20.81
|
|
|
$
|
17.75
|
|
|
$
|
20.81
|
|
Weighted-average common shares outstanding
|
19,135
|
|
|
18,100
|
|
|
18,629
|
|
|
17,803
|
|
Weighted-average fully diluted shares outstanding
|
19,135
|
|
|
18,100
|
|
|
18,629
|
|
|
17,803
|
|
Common shares outstanding at end of period
|
19,868
|
|
|
18,628
|
|
|
19,868
|
|
|
18,628
|
|
1Based on weighted average of common shares outstanding for the period.
2Reflects impact of the different share amounts as a result of issuance or forfeiture of restricted stock during the period.
3Includes the impact of the different share amounts as a result of calculating certain per share data based on the weighted-average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end. The balance increases with the increase in variability of shares outstanding throughout the year due to share issuance and repurchase activity.
4Not annualized.
5Total investment return based on purchase of stock at the current market price on the first day and a sale at the current market price on the last day of each period reported on the table and assumes reinvestment of dividends at prices obtained by
CSWC’s dividend reinvestment plan during the period. The return does not reflect any sales load that may be paid by an investor.
6Total return based on change in NAV was calculated using the sum of ending NAV plus dividends to shareholders and other non-operating changes during the period, as divided by the beginning NAV, and has not been annualized.
13. SIGNIFICANT SUBSIDIARIES
I-45 SLF LLC
In September 2015, we entered into an LLC agreement with Main Street Capital Corporation to form I-45 SLF LLC. I-45 SLF LLC began investing in UMM syndicated senior secured loans during the quarter ended December 31, 2015. The initial equity capital commitment to I-45 SLF LLC totaled $85.0 million, consisting of $68.0 million from CSWC and $17.0 million from Main Street Capital Corporation. On April 30, 2020, pursuant to the terms of an amendment to the I-45 LLC Agreement, each of CSWC and Main Street made an additional equity capital commitment of $12.8 million and $3.2 million, respectively, which resulted in a total equity capital commitment to I-45 SLF LLC of $80.8 million and $20.2 million, respectively, all of which was funded as of December 31, 2020. CSWC owns 80% of I-45 SLF LLC and has a profits interest of 75.6%, while Main Street Capital Corporation owns 20% and has a profits interest of 24.4%. I-45 SLF LLC's Board of Managers makes all investment and operational decisions for the fund, and consists of equal representation from CSWC and Main Street Capital Corporation.
As of December 31, 2020 and March 31, 2020, I-45 SLF LLC had total assets of $167.0 million and $177.8 million, respectively. I-45 SLF LLC had approximately $159.6 million and $170.9 million of credit investments at fair value as of December 31, 2020 and March 31, 2020, respectively. The portfolio companies in I-45 SLF LLC are in industries similar to those in which CSWC may invest directly. As of December 31, 2020, none of the credit investments were unsettled trades. During the three months ended December 31, 2020, I-45 SLF LLC declared a total dividend of $2.2 million of which $1.7 million was paid to CSWC in October 2020.
Additionally, I-45 SLF LLC closed on a $75.0 million 5-year senior secured credit facility (the “I-45 credit facility”) in November 2015. The I-45 credit facility includes an accordion feature which will allow I-45 SLF LLC to achieve leverage of approximately 2x debt-to-equity. Borrowings under the I-45 credit facility are secured by all of the assets of I-45 SLF LLC and bear interest at a rate equal to LIBOR plus 2.5% per annum. During the year ended March 31, 2017, I-45 SLF LLC increased debt commitments outstanding by an additional $90.0 million by adding three additional lenders to the syndicate, bringing total debt commitments to $165.0 million. In July 2017, the I-45 credit facility was amended to extend the maturity to July 2022. Additionally, the amendment reduced the interest rate on borrowings to LIBOR plus 2.4% per annum. In November 2019, the I-45 credit facility was amended to extend the maturity to November 2024 and to reduce the interest rate on borrowings to LIBOR plus 2.25% per annum. On April 30, 2020, the I-45 credit facility was amended to permanently reduce the I-45 credit facility amount through a prepayment of $15.0 million and to change the minimum utilization requirements. Under the I-45 credit facility, $85.0 million has been drawn as of December 31, 2020.
Below is a summary of I-45 SLF LLC’s portfolio, followed by a listing of the individual loans in I-45 SLF LLC’s portfolio as of December 31, 2020 and March 31, 2020 (in thousands):
I-45 SLF LLC Loan Portfolio as of December 31, 2020
|
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|
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|
|
|
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|
|
|
|
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|
|
|
|
|
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|
|
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|
|
|
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|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maturity
|
|
Interest
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type
|
|
Date
|
|
Rate1
|
|
Principal
|
|
Cost
|
|
Fair Value2
|
AAC New Holdco Inc.
|
|
Healthcare services
|
|
First Lien
|
|
6/25/2025
|
|
10.00%, 8.00% PIK
|
|
$
|
1,717
|
|
|
$
|
1,717
|
|
|
$
|
1,717
|
|
|
|
|
|
304,075 shares common stock
|
|
—
|
|
—
|
|
—
|
|
|
1,449
|
|
|
1,449
|
|
|
|
|
|
Warrants (Expiration - December 11, 2025)
|
|
—
|
|
—
|
|
—
|
|
|
482
|
|
|
482
|
|
ADS Tactical, Inc.
|
|
Aerospace & defense
|
|
First Lien
|
|
7/26/2023
|
|
L+6.25%
(Floor 0.75%)
|
|
4,908
|
|
|
4,894
|
|
|
4,908
|
|
ALKU, LLC
|
|
Business services
|
|
First Lien
|
|
7/29/2026
|
|
L+5.50%
|
|
2,840
|
|
|
2,816
|
|
|
2,843
|
|
American Teleconferencing Services, Ltd.
|
|
Telecommunications
|
|
First Lien
|
|
6/8/2023
|
|
L+6.50%
(Floor 1.00%)
|
|
6,762
|
|
|
6,680
|
|
|
3,719
|
|
ATX Canada Acquisitionco Inc.
|
|
Technology products & components
|
|
First Lien
|
|
6/11/2021
|
|
L+6.25%, 1.50% PIK
(Floor 1.00%)
|
|
4,508
|
|
|
4,504
|
|
|
4,125
|
|
California Pizza Kitchen, Inc.
|
|
Restaurants
|
|
First Lien
|
|
11/23/2024
|
|
L+10.00%
(Floor 1.50%)
|
|
937
|
|
|
913
|
|
|
913
|
|
|
|
|
|
First Lien Rolled Up
|
|
11/23/2024
|
|
1.00%, L+11.00% PIK
(Floor 1.50%)
|
|
1,007
|
|
|
1,004
|
|
|
1,004
|
|
|
|
|
|
Second Lien
|
|
5/23/2025
|
|
1.00%, L+12.50% PIK
(Floor 1.50%)
|
|
1,089
|
|
|
1,089
|
|
|
1,089
|
|
|
|
|
|
67,841 shares common stock
|
|
—
|
|
—
|
|
—
|
|
|
1,845
|
|
|
1,845
|
|
Corel Inc.
|
|
Software & IT services
|
|
First Lien
|
|
7/2/2026
|
|
L+5.00%
|
|
4,875
|
|
|
4,631
|
|
|
4,805
|
|
Geo Parent Corporation
|
|
Building & infrastructure products
|
|
First Lien
|
|
12/19/2025
|
|
L+5.25%
|
|
4,913
|
|
|
4,878
|
|
|
4,900
|
|
Go Wireless Holdings, Inc.
|
|
Consumer products & retail
|
|
First Lien
|
|
12/22/2024
|
|
L+6.50%
(Floor 1.00%)
|
|
5,950
|
|
|
5,916
|
|
|
5,902
|
|
Hunter Defense Technologies, Inc.
|
|
Aerospace & defense
|
|
First Lien
|
|
3/29/2023
|
|
L+7.00%
(Floor 1.00%)
|
|
6,212
|
|
|
6,133
|
|
|
6,181
|
|
Imagine! Print Solutions, LLC
|
|
Media, marketing & entertainment
|
|
Second Lien3
|
|
6/21/2023
|
|
L+8.75%
(Floor 1.00%)
|
|
2,851
|
|
|
2,834
|
|
|
78
|
|
InfoGroup Inc.
|
|
Software & IT services
|
|
First Lien
|
|
4/3/2023
|
|
L+5.00%
(Floor 1.00%)
|
|
2,888
|
|
|
2,877
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maturity
|
|
Interest
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type
|
|
Date
|
|
Rate1
|
|
Principal
|
|
Cost
|
|
Fair Value2
|
Integro Parent Inc.
|
|
Business services
|
|
First Lien
|
|
10/31/2022
|
|
L+5.75%
(Floor 1.00%)
|
|
3,265
|
|
|
3,234
|
|
|
3,167
|
|
Intermedia Holdings, Inc.
|
|
Software & IT services
|
|
First Lien
|
|
7/21/2025
|
|
L+6.00%
(Floor 1.00%)
|
|
5,750
|
|
|
5,725
|
|
|
5,745
|
|
Isagenix International, LLC
|
|
Consumer products & retail
|
|
First Lien
|
|
6/14/2025
|
|
L+5.75%
(Floor 1.00%)
|
|
1,857
|
|
|
1,846
|
|
|
1,207
|
|
KORE Wireless Group Inc.
|
|
Telecommunications
|
|
First Lien
|
|
12/20/2024
|
|
L+5.50%
|
|
4,718
|
|
|
4,690
|
|
|
4,653
|
|
Lab Logistics, LLC
|
|
Healthcare services
|
|
First Lien
|
|
9/25/2023
|
|
L+6.50%
(Floor 1.00%)
|
|
5,930
|
|
|
5,877
|
|
|
5,924
|
|
Lift Brands, Inc.
|
|
Consumer services
|
|
Tranche A
|
|
6/29/2025
|
|
L+3.25%
(Floor 1.00%)
|
|
2,521
|
|
|
2,521
|
|
|
2,370
|
|
|
|
|
|
Tranche B
|
|
6/29/2025
|
|
9.50% PIK
|
|
518
|
|
|
518
|
|
|
415
|
|
|
|
|
|
Tranche C
|
|
6/29/2025
|
|
—
|
|
565
|
|
|
565
|
|
|
452
|
|
|
|
|
|
Equity
|
|
—
|
|
—
|
|
—
|
|
|
749
|
|
|
749
|
|
Lightbox Intermediate, L.P.
|
|
Software & IT services
|
|
First Lien
|
|
5/9/2026
|
|
L+5.00%
|
|
2,955
|
|
|
2,921
|
|
|
2,866
|
|
LOGIX Holdings Company, LLC
|
|
Telecommunications
|
|
First Lien
|
|
12/23/2024
|
|
L+5.75%
(Floor 1.00%)
|
|
5,905
|
|
|
5,876
|
|
|
5,463
|
|
LSF9 Atlantis Holdings, LLC
|
|
Telecommunications
|
|
First Lien
|
|
5/1/2023
|
|
L+6.00%
(Floor 1.00%)
|
|
6,300
|
|
|
6,275
|
|
|
6,280
|
|
Lulu's Fashion Lounge, LLC
|
|
Consumer products & retail
|
|
First Lien
|
|
8/26/2022
|
|
L+9.50%, 2.50% PIK
(Floor 1.00%)
|
|
3,748
|
|
|
3,690
|
|
|
3,205
|
|
Mills Fleet Farm Group LLC
|
|
Consumer products & retail
|
|
First Lien
|
|
10/24/2024
|
|
L+6.00%
(Floor 1.00%)
|
|
4,625
|
|
|
4,567
|
|
|
4,533
|
|
NBG Acquisition, Inc.
|
|
Wholesale
|
|
First Lien
|
|
4/26/2024
|
|
L+5.50%
(Floor 1.00%)
|
|
2,756
|
|
|
2,730
|
|
|
2,301
|
|
Novetta Solutions, LLC
|
|
Software & IT services
|
|
First Lien
|
|
10/17/2022
|
|
L+5.00%
(Floor 1.00%)
|
|
4,857
|
|
|
4,800
|
|
|
4,847
|
|
PaySimple, Inc.
|
|
Software & IT services
|
|
Delayed Draw Term Loan
|
|
8/23/2025
|
|
L+5.50%
|
|
1,372
|
|
|
1,349
|
|
|
1,345
|
|
|
|
|
|
First Lien
|
|
8/23/2025
|
|
L+5.50%
|
|
4,231
|
|
|
4,182
|
|
|
4,146
|
|
Peraton Corp. (fka MHVC Acquisition Corp.)
|
|
Aerospace & defense
|
|
First Lien
|
|
4/29/2024
|
|
L+5.25%
(Floor 1.00%)
|
|
6,280
|
|
|
6,265
|
|
|
6,296
|
|
Pet Supermarket, Inc.
|
|
Consumer products & retail
|
|
First Lien
|
|
7/5/2022
|
|
L+5.50%
(Floor 1.00%)
|
|
4,773
|
|
|
4,761
|
|
|
4,546
|
|
PT Network, LLC
|
|
Healthcare products
|
|
First Lien
|
|
11/30/2023
|
|
L+5.50%, 2.00% PIK
(Floor 1.00%)
|
|
4,453
|
|
|
4,453
|
|
|
4,453
|
|
Signify Health, LLC
|
|
Healthcare services
|
|
First Lien
|
|
12/23/2024
|
|
L+4.50%
(Floor 1.00%)
|
|
5,057
|
|
|
5,028
|
|
|
4,905
|
|
Tacala, LLC
|
|
Consumer products & retail
|
|
Second Lien
|
|
2/7/2028
|
|
L+7.50%
(Floor 0.75%)
|
|
5,000
|
|
|
4,988
|
|
|
4,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maturity
|
|
Interest
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type
|
|
Date
|
|
Rate1
|
|
Principal
|
|
Cost
|
|
Fair Value2
|
TestEquity, LLC
|
|
Capital equipment
|
|
First Lien
|
|
4/28/2022
|
|
L+5.50%
(Floor 1.00%)
|
|
3,816
|
|
|
3,806
|
|
|
3,053
|
|
|
|
|
|
First Lien - Term Loan B
|
|
4/28/2022
|
|
L+5.50%
|
|
952
|
|
|
949
|
|
|
761
|
|
TGP Holdings III LLC
|
|
Durable consumer goods
|
|
Second Lien
|
|
9/25/2025
|
|
L+8.50%
(Floor 1.00%)
|
|
2,500
|
|
|
2,478
|
|
|
2,413
|
|
Time Manufacturing Acquisition
|
|
Capital equipment
|
|
First Lien
|
|
2/3/2023
|
|
L+5.00%
(Floor 1.00%)
|
|
4,810
|
|
|
4,794
|
|
|
4,666
|
|
UniTek Global Services, Inc.
|
|
Telecommunications
|
|
First Lien
|
|
8/26/2024
|
|
L+5.50%, 1.00% PIK
(Floor 1.00%)
|
|
2,724
|
|
|
2,708
|
|
|
2,440
|
|
U.S. TelePacific Corp.
|
|
Telecommunications
|
|
First Lien
|
|
5/2/2023
|
|
L+5.50%
(Floor 1.00%)
|
|
5,200
|
|
|
5,168
|
|
|
4,713
|
|
Vida Capital, Inc.
|
|
Financial services
|
|
First Lien
|
|
10/1/2026
|
|
L+6.00%
|
|
3,860
|
|
|
3,812
|
|
|
3,735
|
|
YS Garments, LLC
|
|
Consumer products & retail
|
|
First Lien
|
|
8/9/2024
|
|
L+6.00%
(Floor 1.00%)
|
|
4,666
|
|
|
4,637
|
|
|
4,304
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
|
|
$
|
170,624
|
|
|
$
|
159,591
|
|
1Represents the interest rate as of December 31, 2020. All interest rates are payable in cash, unless otherwise noted. The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) which reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime in effect at December 31, 2020. Certain investments are subject to a LIBOR or Prime interest rate floor.
2Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is determined by the Board of Managers of I-45 SLF LLC. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.
3Investment is on non-accrual status as of December 31, 2020, meaning the Company has ceased to recognize interest income on the investment.
I-45 SLF LLC Loan Portfolio as of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maturity
|
|
Interest
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type
|
|
Date
|
|
Rate1
|
|
Principal
|
|
Cost
|
|
Fair Value2
|
AAC Holdings, Inc.
|
|
Healthcare services
|
|
First Lien - Priming Facility
|
|
3/31/2020
|
|
P+13.50%
(Floor 1.00%)
|
|
$
|
1,598
|
|
|
$
|
1,598
|
|
|
$
|
1,598
|
|
|
|
|
|
First Lien5
|
|
6/30/2023
|
|
L+ 6.75%
(Floor 1.00%),
4.00% PIK
|
|
7,371
|
|
|
7,264
|
|
|
3,225
|
|
ADS Tactical
|
|
Aerospace & defense
|
|
First Lien
|
|
7/26/2023
|
|
L+6.25%
(Floor 0.75%)
|
|
4,948
|
|
|
4,928
|
|
|
4,735
|
|
ALKU, LLC
|
|
Business services
|
|
First Lien
|
|
7/29/2026
|
|
L+5.50%
(Floor 1.00%)
|
|
3,000
|
|
|
2,972
|
|
|
2,820
|
|
American Teleconferencing Services, Ltd.
|
|
Telecommunications
|
|
First Lien
|
|
6/8/2023
|
|
L+6.50%
(Floor 1.00%)
|
|
6,771
|
|
|
6,623
|
|
|
3,825
|
|
ATX Canada Acquisitionco Inc.
|
|
Technology products & components
|
|
First Lien
|
|
6/11/2021
|
|
L+7.00%
(Floor 1.00%),
1.0% PIK
|
|
4,573
|
|
|
4,561
|
|
|
3,796
|
|
California Pizza Kitchen, Inc.5
|
|
Restaurants
|
|
First Lien
|
|
8/23/2022
|
|
L+6.00%
(Floor 1.00%)
|
|
6,760
|
|
|
6,741
|
|
|
3,418
|
|
Corel
|
|
Software & IT services
|
|
First Lien
|
|
7/2/2026
|
|
L+5.00%
|
|
4,969
|
|
|
4,720
|
|
|
4,410
|
|
Geo Parent Corporation
|
|
Building & infrastructure products
|
|
First Lien
|
|
12/19/2025
|
|
L+5.25%
|
|
4,950
|
|
|
4,909
|
|
|
4,678
|
|
Go Wireless Holdings, Inc.
|
|
Consumer products & retail
|
|
First Lien
|
|
12/22/2024
|
|
L+6.50%
(Floor 1.00%)
|
|
6,213
|
|
|
6,170
|
|
|
5,042
|
|
Hunter Defense Technologies, Inc.
|
|
Aerospace & defense
|
|
First Lien
|
|
3/29/2023
|
|
L+7.00%
(Floor 1.00%)
|
|
5,856
|
|
|
5,772
|
|
|
5,870
|
|
Imagine! Print Solutions, LLC
|
|
Media, marketing & entertainment
|
|
Second Lien
|
|
6/21/2023
|
|
L+8.75%
(Floor 1.00%)
|
|
3,000
|
|
|
2,976
|
|
|
413
|
|
InfoGroup Inc.
|
|
Software & IT services
|
|
First Lien
|
|
4/3/2023
|
|
L+5.00%
(Floor 1.00%)
|
|
2,910
|
|
|
2,895
|
|
|
2,610
|
|
Integro Parent Inc.
|
|
Business services
|
|
First Lien
|
|
10/31/2022
|
|
L+5.75%
(Floor 1.00%)
|
|
3,301
|
|
|
3,256
|
|
|
3,252
|
|
Intermedia Holdings, Inc.
|
|
Software & IT services
|
|
First Lien
|
|
7/21/2025
|
|
L+6.00%
(Floor 1.00%)
|
|
5,794
|
|
|
5,765
|
|
|
5,301
|
|
Isagenix International, LLC
|
|
Consumer products & retail
|
|
First Lien
|
|
6/14/2025
|
|
L+5.75%
(Floor 1.00%)
|
|
1,953
|
|
|
1,939
|
|
|
728
|
|
JAB Wireless, Inc.
|
|
Telecommunications
|
|
First Lien
|
|
5/2/2023
|
|
L+8.00%
(Floor 1.00%)
|
|
7,840
|
|
|
7,791
|
|
|
7,703
|
|
KORE Wireless Group Inc.
|
|
Telecommunications
|
|
First Lien
|
|
12/20/2024
|
|
L+5.50%
|
|
4,754
|
|
|
4,721
|
|
|
4,398
|
|
Lab Logistics, LLC
|
|
Healthcare services
|
|
First Lien
|
|
9/25/2023
|
|
L+6.50%
(Floor 1.00%)
|
|
5,402
|
|
|
5,361
|
|
|
4,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maturity
|
|
Interest
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type
|
|
Date
|
|
Rate1
|
|
Principal
|
|
Cost
|
|
Fair Value2
|
Lift Brands, Inc.
|
|
Consumer services
|
|
First Lien
|
|
4/16/2023
|
|
L+7.00%
(Floor 1.00%),
1.0% PIK
|
|
4,810
|
|
|
4,785
|
|
|
3,689
|
|
Lightbox Intermediate, L.P.
|
|
Software & IT services
|
|
First Lien
|
|
5/9/2026
|
|
L+5.00%
|
|
2,978
|
|
|
2,938
|
|
|
2,933
|
|
LOGIX Holdings Company, LLC
|
|
Telecommunications
|
|
First Lien
|
|
12/23/2024
|
|
L+5.75%
(Floor 1.00%)
|
|
5,953
|
|
|
5,918
|
|
|
4,911
|
|
LSF9 Atlantis Holdings, LLC
|
|
Telecommunications
|
|
First Lien
|
|
5/1/2023
|
|
L+6.00%
(Floor 1.00%)
|
|
6,519
|
|
|
6,485
|
|
|
5,382
|
|
Lulu's Fashion Lounge, LLC
|
|
Consumer products & retail
|
|
First Lien
|
|
8/26/2022
|
|
L+9.00%
(Floor 1.00%)
|
|
3,778
|
|
|
3,707
|
|
|
3,231
|
|
Mills Fleet Farm Group LLC
|
|
Consumer products & retail
|
|
First Lien
|
|
10/24/2024
|
|
L+6.25%
(Floor 1.00%),
0.75% PIK
|
|
4,958
|
|
|
4,883
|
|
|
4,214
|
|
NBG Acquisition, Inc.
|
|
Wholesale
|
|
First Lien
|
|
4/26/2024
|
|
L+5.50%
(Floor 1.00%)
|
|
2,813
|
|
|
2,780
|
|
|
1,598
|
|
Nomad Buyer, Inc.
|
|
Healthcare services
|
|
First Lien
|
|
8/1/2025
|
|
L+5.00%
|
|
2,955
|
|
|
2,819
|
|
|
2,748
|
|
Novetta Solutions, LLC
|
|
Software & IT services
|
|
First Lien
|
|
10/17/2022
|
|
L+5.00%
(Floor 1.00%)
|
|
4,896
|
|
|
4,813
|
|
|
4,365
|
|
PaySimple - Delayed Draw3
|
|
Software & IT services
|
|
First Lien
|
|
8/23/2025
|
|
L+5.50%
|
|
934
|
|
|
920
|
|
|
850
|
|
PaySimple, Inc.
|
|
Software & IT services
|
|
First Lien
|
|
8/23/2025
|
|
L+5.50%
|
|
4,263
|
|
|
4,206
|
|
|
3,879
|
|
Peraton Corp. (fka MHVC Acquisition Corp.)
|
|
Aerospace & defense
|
|
First Lien
|
|
4/29/2024
|
|
L+5.25%
(Floor 1.00%)
|
|
6,329
|
|
|
6,310
|
|
|
5,918
|
|
Pet Supermarket, Inc.
|
|
Consumer products & retail
|
|
First Lien
|
|
7/5/2022
|
|
L+5.50%
(Floor 1.00%)
|
|
4,810
|
|
|
4,792
|
|
|
4,425
|
|
PT Network, LLC
|
|
Healthcare products
|
|
First Lien
|
|
11/30/2023
|
|
L+5.50%
(Floor 1.00%),
2.0% PIK
|
|
4,418
|
|
|
4,418
|
|
|
4,024
|
|
Signify Health, LLC
|
|
Healthcare services
|
|
First Lien
|
|
12/23/2024
|
|
L+4.50%
(Floor 1.00%)
|
|
5,096
|
|
|
5,061
|
|
|
4,281
|
|
Tacala, LLC
|
|
Consumer products & retail
|
|
Second Lien
|
|
2/7/2028
|
|
L+7.50%
|
|
4,500
|
|
|
4,492
|
|
|
3,521
|
|
TestEquity, LLC
|
|
Capital equipment
|
|
First Lien
|
|
4/28/2022
|
|
L+5.50%
(Floor 1.00%)
|
|
3,816
|
|
|
3,800
|
|
|
3,186
|
|
TestEquity, LLC - Term Loan B
|
|
Capital equipment
|
|
First Lien
|
|
4/28/2022
|
|
L+5.50%
|
|
959
|
|
|
955
|
|
|
801
|
|
TGP Holdings III LLC
|
|
Durable consumer goods
|
|
Second Lien
|
|
9/25/2025
|
|
L+8.50%
(Floor 1.00%)
|
|
2,500
|
|
|
2,474
|
|
|
1,838
|
|
The Hoover Group, Inc.
|
|
Energy services (midstream)
|
|
First Lien
|
|
1/28/2021
|
|
L+7.25%
(Floor 1.00%)
|
|
6,370
|
|
|
6,306
|
|
|
5,892
|
|
Time Manufacturing Acquisition
|
|
Capital equipment
|
|
First Lien
|
|
2/3/2023
|
|
L+5.00%
(Floor 1.00%)
|
|
4,848
|
|
|
4,825
|
|
|
4,436
|
|
UniTek Global Services, Inc.
|
|
Telecommunications
|
|
First Lien
|
|
8/26/2024
|
|
L+5.50%
(Floor 1.00%),
1.0% PIK
|
|
2,970
|
|
|
2,949
|
|
|
2,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maturity
|
|
Interest
|
|
|
|
|
|
|
Portfolio Company
|
|
Industry
|
|
Type
|
|
Date
|
|
Rate1
|
|
Principal
|
|
Cost
|
|
Fair Value2
|
U.S. TelePacific Corp.
|
|
Telecommunications
|
|
First Lien
|
|
5/2/2023
|
|
L+6.00%
(Floor 1.00%)
|
|
5,200
|
|
|
5,158
|
|
|
4,056
|
|
Vida Capital, Inc.
|
|
Financial services
|
|
First Lien
|
|
10/1/2026
|
|
L+6.00%
|
|
3,965
|
|
|
3,910
|
|
|
3,668
|
|
VIP Cinema Holdings, Inc.
|
|
Hotel, gaming & leisure
|
|
First Lien - Superiority DIP5
|
|
5/20/2020
|
|
L+8.00%
|
|
719
|
|
|
708
|
|
|
129
|
|
|
|
|
|
First Lien5
|
|
3/1/2023
|
|
P+7.00%
(Floor 1.00%)
|
|
4,375
|
|
|
4,364
|
|
|
788
|
|
Wireless Vision Holdings, LLC4
|
|
Telecommunications
|
|
First Lien
|
|
9/29/2022
|
|
L+8.91%
(Floor 1.00%),
1.0% PIK
|
|
7,327
|
|
|
7,253
|
|
|
6,264
|
|
YS Garments, LLC
|
|
Consumer products & retail
|
|
First Lien
|
|
8/9/2024
|
|
P+6.00%
|
|
4,813
|
|
|
4,777
|
|
|
4,355
|
|
Total Investments
|
|
|
|
|
|
|
|
|
|
|
|
$
|
207,768
|
|
|
$
|
170,860
|
|
1Represents the interest rate as of March 31, 2020. All interest rates are payable in cash, unless otherwise noted. The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”) which reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime in effect at March 31, 2020. Certain investments are subject to a LIBOR or Prime interest rate floor.
2Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the determination of such fair value is determined by the Board of Managers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.
3The investment has approximately $0.5 million in an unfunded delayed draw commitment as of March 31, 2020.
4The investment is structured as a first lien last out term loan and may earn interest in addition to the stated rate.
5Investment was on non-accrual as of March 31, 2020, meaning the Company has ceased to recognize interest income on the investment.
Below is certain summarized financial information for I-45 SLF LLC as of December 31, 2020 and March 31, 2020 and for the three and nine months ended December 31, 2020 and 2019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
March 31, 2020
|
Selected Balance Sheet Information:
|
|
|
|
Investments, at fair value (cost $170,624 and $207,768)
|
$
|
159,591
|
|
|
$
|
170,860
|
|
Cash and cash equivalents
|
5,131
|
|
|
3,739
|
|
Due from broker
|
152
|
|
|
38
|
|
Deferred financing costs and other assets
|
1,534
|
|
|
2,095
|
|
Interest receivable
|
628
|
|
|
1,076
|
|
Total assets
|
$
|
167,036
|
|
|
$
|
177,808
|
|
|
|
|
|
Senior credit facility payable
|
$
|
85,000
|
|
|
$
|
125,000
|
|
Other liabilities
|
2,380
|
|
|
3,029
|
|
Total liabilities
|
$
|
87,380
|
|
|
$
|
128,029
|
|
Members’ equity
|
79,656
|
|
|
49,779
|
|
Total liabilities and members' equity
|
$
|
167,036
|
|
|
$
|
177,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2020
|
|
December 31, 2019
|
Selected Statement of Operations Information:
|
|
|
|
|
|
|
|
Total revenues
|
$
|
3,539
|
|
|
$
|
4,910
|
|
|
$
|
10,858
|
|
|
$
|
15,836
|
|
Total expenses
|
(1,049)
|
|
|
(1,948)
|
|
|
(3,450)
|
|
(6,270)
|
Net investment income
|
2,490
|
|
|
2,962
|
|
|
7,408
|
|
9,566
|
|
Net unrealized appreciation (depreciation)
|
14,769
|
|
|
(4,709)
|
|
|
25,876
|
|
(9,171)
|
Net realized (losses) gains
|
(12,315)
|
|
|
64
|
|
|
(12,602)
|
|
|
425
|
|
Net increase (decrease) in members’ equity resulting from operations
|
$
|
4,944
|
|
|
$
|
(1,683)
|
|
|
$
|
20,682
|
|
|
$
|
820
|
|
14. SUBSEQUENT EVENTS
On January 20, 2021, the Board of Directors declared a total dividend of $0.52 per share, comprised of a regular dividend of $0.42 and a supplemental dividend of $0.10, for the quarter ended March 31, 2021. The record date for the dividend is March 15, 2021. The payment date for the dividend is March 31, 2021.
On January 21, 2021, the Company redeemed the remaining $37,136,175 in aggregate principal amount of the issued and outstanding December 2022 Notes. The December 2022 Notes were redeemed at 100% of their principal amount, plus the accrued and unpaid interest thereon, through but excluding January 21, 2021.
COVID-19
Subsequent to quarter ended December 31, 2020, the global outbreak of the coronavirus (“COVID-19”) pandemic continues to have adverse consequences on the U.S. and global economies. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, remains uncertain. As of February 2, 2021, there is no indication of a reportable subsequent event impacting the Company’s financial statements for the quarter ended December 31, 2020. The Company cannot predict the extent to which its financial condition and results of operations will be affected at this time. The potential impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19. The Company continues to observe and respond to the evolving COVID-19 environment and its potential impact on areas across its business.
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES
Consolidated Schedule of Investments in and Advances to Affiliates (Unaudited)
Nine Months Ended December 31, 2020
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
Type of Investment (1)
|
|
Amount of Interest or Dividends Credited in Income (2)
|
|
Fair Value at March 31, 2020
|
|
Gross Additions (3)
|
|
Gross Reductions (4)
|
|
Amount of Realized Gain/(Loss) (5)
|
|
Amount of Unrealized Gain/(Loss)
|
|
Fair Value at December 31, 2020
|
Control Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I-45 SLF LLC
|
80% LLC equity interest
|
|
$
|
5,144
|
|
|
$
|
39,760
|
|
|
$
|
12,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,075
|
|
|
$
|
63,635
|
|
Total Control Investments
|
|
|
$
|
5,144
|
|
|
$
|
39,760
|
|
|
$
|
12,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,075
|
|
|
$
|
63,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Medical Supply LLC
|
Revolving Loan
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
274
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
286
|
|
|
First Lien
|
|
423
|
|
|
—
|
|
|
7,365
|
|
|
—
|
|
|
—
|
|
|
(225)
|
|
|
7,140
|
|
|
Delayed Draw Term Loan
|
|
10
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
95
|
|
|
875,000 Preferred Units
|
|
—
|
|
|
—
|
|
|
875
|
|
|
—
|
|
|
—
|
|
|
(234)
|
|
|
641
|
|
Chandler Signs, LLC
|
1,500,000 units of Class A-1 common stock
|
|
—
|
|
|
3,110
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(218)
|
|
|
2,892
|
|
Delphi Intermediate Healthco LLC
|
First Lien
|
|
126
|
|
|
—
|
|
|
1,397
|
|
|
—
|
|
|
—
|
|
|
(16)
|
|
|
1,381
|
|
|
First Lien
|
|
118
|
|
|
—
|
|
|
1,561
|
|
|
—
|
|
|
—
|
|
|
(79)
|
|
|
1,482
|
|
|
1,681.04 Common Units
|
|
—
|
|
|
—
|
|
|
3,615
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,615
|
|
Dynamic Communities, LLC
|
Revolving Loan
|
|
3
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
First Lien
|
|
885
|
|
|
9,928
|
|
|
244
|
|
|
(140)
|
|
|
—
|
|
|
(256)
|
|
|
9,776
|
|
|
Senior subordinated debt
|
|
6
|
|
|
—
|
|
|
350
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
350
|
|
|
2,000,000 Preferred units
|
|
—
|
|
|
1,850
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(576)
|
|
|
1,274
|
|
GrammaTech, Inc.
|
Revolving Loan
|
|
188
|
|
|
2,460
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
2,483
|
|
|
First Lien
|
|
860
|
|
|
11,316
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
78
|
|
|
11,419
|
|
|
1,000 Class A units
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
455
|
|
|
1,455
|
|
ITA Holdings Group, LLC
|
Revolving loan
|
|
63
|
|
|
—
|
|
|
2,205
|
|
|
(2,200)
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
First Lien - Term Loan
|
|
797
|
|
|
9,900
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
10,016
|
|
|
First Lien - Term Loan B
|
|
513
|
|
|
5,136
|
|
|
40
|
|
|
—
|
|
|
—
|
|
|
(62)
|
|
|
5,114
|
|
|
First Lien - PIK Note A
|
|
191
|
|
|
2,233
|
|
|
240
|
|
|
—
|
|
|
—
|
|
|
120
|
|
|
2,593
|
|
|
First Lien - PIK Note B
|
|
61
|
|
|
88
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
102
|
|
|
Warrants
|
|
—
|
|
|
2,762
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
206
|
|
|
2,968
|
|
|
9.25% Class A membership interest
|
|
—
|
|
|
2,099
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
433
|
|
|
2,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
Type of Investment (1)
|
|
Amount of Interest or Dividends Credited in Income (2)
|
|
Fair Value at March 31, 2020
|
|
Gross Additions (3)
|
|
Gross Reductions (4)
|
|
Amount of Realized Gain/(Loss) (5)
|
|
Amount of Unrealized Gain/(Loss)
|
|
Fair Value at December 31, 2020
|
Roseland Management, LLC
|
Revolving loan
|
|
15
|
|
|
500
|
|
|
2
|
|
|
(500)
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
First lien
|
|
244
|
|
|
10,369
|
|
|
7
|
|
|
(10,368)
|
|
|
—
|
|
|
(8)
|
|
|
—
|
|
|
10,000 Class A Units
|
|
—
|
|
|
1,334
|
|
|
—
|
|
|
(1,334)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
SIMR, LLC
|
First lien
|
|
1,782
|
|
|
11,190
|
|
|
671
|
|
|
—
|
|
|
—
|
|
|
(1,121)
|
|
|
10,740
|
|
|
9,374,510.2 Class B Common Units
|
|
—
|
|
|
1,742
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,742)
|
|
|
—
|
|
Sonobi, Inc.
|
First Lien
|
|
245
|
|
|
—
|
|
|
8,338
|
|
|
—
|
|
|
—
|
|
|
162
|
|
|
8,500
|
|
|
500,000 Class A Common Units
|
|
—
|
|
|
—
|
|
|
500
|
|
|
—
|
|
|
—
|
|
|
458
|
|
|
958
|
|
Zenfolio Inc.
|
Revolving Loan
|
|
53
|
|
|
1,888
|
|
|
1
|
|
|
(1,844)
|
|
|
—
|
|
|
(45)
|
|
|
—
|
|
|
First Lien
|
|
384
|
|
|
13,127
|
|
|
21
|
|
|
(12,821)
|
|
|
—
|
|
|
(327)
|
|
|
—
|
|
|
190 shares of common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(272)
|
|
|
(1,628)
|
|
|
1,900
|
|
|
—
|
|
Total Affiliate Investments
|
|
|
$
|
6,980
|
|
|
$
|
92,032
|
|
|
$
|
27,899
|
|
|
$
|
(29,479)
|
|
|
$
|
(1,628)
|
|
|
$
|
(1,012)
|
|
|
$
|
87,812
|
|
Total Control & Affiliate Investments
|
|
|
$
|
12,124
|
|
|
$
|
131,792
|
|
|
$
|
40,699
|
|
|
$
|
(29,479)
|
|
|
$
|
(1,628)
|
|
|
$
|
10,063
|
|
|
$
|
151,447
|
|
(1)The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.
(2)Represents the total amount of interest or dividends credited to income for the portion of the year an investment was included in the Control or Affiliate categories, respectively.
(3)Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments, accrued PIK interest, and accretion of OID. Gross additions also include movement of an existing portfolio company into this category and out of a different category.
(4)Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include movement of an existing portfolio company out of this category and into a different category.
(5)The schedule does not reflect realized gains or losses on escrow receivables for investments which were previously exited and were not held during the period presented. Gains and losses on escrow receivables are classified in the Consolidated Statements of Operations according to the control classification at the time the investment was exited.