Capital Southwest (NASDAQ:CSWC) reported third-quarter fiscal 2026 results that management said were supported by “strong recurring earnings across the portfolio,” while highlighting a growing undistributed taxable income balance, active originations in the lower middle market, and a new joint venture aimed at improving competitiveness in tighter-spread deals.
Earnings, income trends, and dividend declarations
For the quarter, the company generated pre-tax net investment income (NII) of $0.60 per share, or $34.6 million. Total investment income rose to $61.4 million from $56.9 million in the prior quarter. Chief Financial Officer Chris Rehberger said the increase was driven primarily by higher PIK income, fees and other income, and dividend income.
Management emphasized the company’s undistributed taxable income (UTI) position. CEO Michael Sarner said UTI stood at $1.02 per share, supported by realized gains from equity exits. Over the last 12 months, the company harvested $44.5 million in realized gains from equity exits, which Sarner said helped lift UTI from $0.68 per share in December 2024. Subsequent to quarter-end, the company realized an additional $6.8 million gain from another equity exit.
The board declared $0.58 per share in regular dividends for the March 2026 quarter, payable monthly in January, February, and March 2026, and declared a $0.06 per share quarterly supplemental dividend payable in March. Total dividends declared for the March quarter are $0.64 per share. Rehberger said the company has delivered 110% cumulative dividend coverage since launching its credit strategy and said management remains confident it can continue distributing quarterly supplemental dividends over time, citing both the UTI balance and unrealized appreciation in the equity portfolio.
Originations and portfolio composition
Management described deal flow in the lower middle market as healthy. During the quarter, the company closed $244 million of total new commitments across eight new portfolio companies and 16 existing portfolio companies. Chief Investment Officer Josh Weinstein said the company deployed $199 million of new committed capital into eight new portfolio companies, consisting of $197 million in first lien senior secured debt and $2 million of equity. Add-on financings for 16 existing portfolio companies totaled $44 million in first lien senior secured debt and about $405,000 in equity.
Sarner said add-on financings have remained an important source of originations, representing 29% of total new commitments over the last 12 months. He also cited a weighted average spread on new commitments of approximately 6.4% for the quarter, calling it attractive in a competitive environment.
Weinstein said the on-balance sheet credit portfolio ended the quarter at $1.8 billion, representing 19% year-over-year growth from $1.5 billion as of December 2024. He added that 100% of new portfolio company debt originations were first lien senior secured, and 99% of the credit portfolio remained first lien senior secured at quarter-end. The company’s weighted average exposure per company was 0.9%, which management pointed to as evidence of portfolio granularity and disciplined risk management.
Weinstein said approximately 93% of the credit portfolio is sponsor-backed. In response to analyst questions, Sarner reiterated that the portfolio is roughly 93% sponsored and 7% non-sponsored, though he added that the sponsored mix has typically ranged between 85% and 95%.
Equity co-investments, yields, and credit metrics
Weinstein said the company’s equity co-investment portfolio totaled 86 investments with a fair value of $183 million, representing 9% of the total portfolio at fair value. The equity co-investment portfolio was marked at 133% of cost, representing $45.2 million of embedded unrealized appreciation, or $0.76 per share.
Across the credit portfolio, Weinstein reported a weighted average yield of 11.3% and weighted average leverage through the company’s security of 3.6x EBITDA. He said 90% of the portfolio at fair value was rated in the top two categories under the company’s five-point internal rating system. Cash flow coverage was 3.4x, improving from a 2.9x low observed during peak base rates, and the company’s loans represented, on average, 44% of portfolio company enterprise value.
For new platform deals closed during the December quarter, Weinstein said weighted average senior leverage was 3x and weighted average loan-to-value was 36%. Over the past 12 months, new platform originations averaged 3.3x senior leverage and 37% loan-to-value.
Rehberger said non-accruals represented 1.5% of the investment portfolio at fair value as of quarter-end.
Balance sheet actions, NAV, and liquidity
Management discussed refinancing and capital-raising activity. Sarner said the company previously issued $350 million of 5.95% notes due 2030, and during the quarter used part of the proceeds to redeem its $150 million notes due 2026 and $71.9 million notes due 2028, extending maturities at what he described as an attractive cost of capital. Rehberger added that the redemptions did not require make-whole payments and said the refinancing strengthened the balance sheet.
The company also raised approximately $53 million in gross equity proceeds through its equity ATM program at a weighted average share price of $21.11, or 127% of NAV per share, which Sarner said was accretive.
Net asset value per share increased to $16.75 from $16.62 in the prior quarter, which Rehberger said was driven primarily by the equity ATM program. Liquidity totaled about $438 million in cash and undrawn commitments across two credit facilities, plus $20 million available on SBA debentures. Rehberger said this represents more than 1.5x coverage of $285 million in unfunded commitments. Regulatory leverage ended the quarter at 0.89-to-1 debt-to-equity, down slightly from 0.91-to-1, with a target range of 0.8-0.95.
Competitive landscape and new first-out joint venture
On the call, Sarner characterized the lower middle market as highly competitive, citing both bank and non-bank lenders and noting that some regional banks have moved into underwriting unitranche loans. He also said recent BDC dividend cuts have reduced some competitive pressure from peers.
Management also detailed a first-out senior loan joint venture with a private credit asset manager that was announced after quarter-end. Sarner said the JV is intended to help the company participate in larger, higher-quality deals with tighter spreads while maintaining disciplined hold sizes. He said the first-out loans in the JV are expected to be conservatively levered at approximately 1.5x debt-to-EBITDA or less and that once fully ramped, the JV is expected to generate a low- to mid-teens equity return for Capital Southwest.
In Q&A, Sarner said the JV has already begun ramping, with three deals expected to be contributed in coming weeks, and management said it was close to closing a $150 million credit facility for the JV. He said each party has committed $50 million of equity to date and that it may take at least a year to reach full leverage. Management described the JV’s assets as primarily first-out positions and indicated fund-level leverage could be around ±2.5 turns.
Sarner also discussed how the JV could allow the company to compete for deals priced at 5% or above spreads that may have previously been less attractive under its return thresholds, while still benefiting from economics such as arranger fees and other allocations. Separately, he said the company has incorporated AI disruption considerations into underwriting, including forming an AI committee and adding an AI-risk segment to its investment committee process.
About Capital Southwest (NASDAQ:CSWC)
Capital Southwest (NASDAQ: CSWC) is a publicly traded investment firm structured as a business development company (BDC) that provides customized financing solutions to middle-market companies across the United States. The firm offers a spectrum of debt and equity capital, including senior secured loans, mezzanine debt, and both preferred and common equity investments. By partnering with corporate management teams, Capital Southwest seeks to support growth initiatives, recapitalizations, acquisitions, and ownership transitions.
Founded in 1961 and headquartered in Dallas, Texas, Capital Southwest has cultivated a track record of long-term partnerships with privately held businesses and select public companies.
