Capital Southwest Receives Affirmed Investment Grade Rating from Fitch Ratings

Rhea-AI Summary

Fitch affirms Capital Southwest 's BBB- long-term issuer rating with a stable outlook. The rating is supported by factors like first lien senior focus, improving portfolio diversification, strong asset coverage, consistent performance, and funding flexibility.

Insights

Credit Analyst

The affirmation of Capital Southwest's BBB- long-term issuer rating by Fitch Ratings is a significant indicator of the company's creditworthiness. This rating, being on the lower end of investment grade, suggests that the company maintains a sufficient level of stability and low default risk, which is paramount for investors and creditors seeking reliable returns. The emphasis on first lien senior focus in the portfolio enhances the security for debt holders, as these are typically the first to be repaid in the event of a bankruptcy or liquidation, thereby reducing credit risk.

Moreover, the improving portfolio diversification is a positive sign that the company is actively managing risk by not over-concentrating in any single investment or sector. This strategy can provide resilience against market volatility. The above-average asset coverage cushion further indicates that the company has more assets than legally required to cover its debt, which provides an additional layer of protection for debt investors. A consistent operating performance and strong funding flexibility are key for sustaining growth and meeting financial obligations. Access to public debt and equity markets implies that the company can raise capital efficiently, which is important for a business development company that relies on external financing to support its investment activities.

Market Research Analyst

From a market perspective, the stable outlook awarded by Fitch can be interpreted as a signal that Capital Southwest is expected to maintain its current credit profile in the medium term. This can influence investor sentiment by providing a degree of assurance regarding the company's financial health. For a business development company like Capital Southwest, which relies heavily on market perceptions to secure funding, such stability is valuable.

Investors might also interpret the diversified investment portfolio and the balance between first lien debt and equity investments as an indicator of strategic asset allocation aimed at optimizing returns while managing risk. This balance is essential for long-term sustainability and can affect the company's ability to attract further investments. The market will also note the company's ability to generate core earnings consistently, as this reflects its operational efficiency and potential to provide steady returns. These factors combined could contribute to a positive perception among investors and analysts, potentially impacting the company's stock performance and market valuation.

Fitch affirms BBB- long-term issuer rating with a stable outlook

DALLAS, March 27, 2024 (GLOBE NEWSWIRE) -- Capital Southwest Corporation (“Capital Southwest”) (Nasdaq: CSWC), an internally managed business development company focused on providing flexible financing solutions to support the acquisition and growth of middle market businesses, today announced that Fitch Ratings, Inc. (“Fitch”) has affirmed Capital Southwest’s investment grade long-term issuer rating of BBB- with a stable outlook.  

Factors cited by Fitch in support of its affirmed rating include the first lien senior focus of Capital Southwest’s investment portfolio, improving portfolio diversification, above-average asset coverage cushion, consistent operating performance, and strong funding flexibility with demonstrated access to the public debt and equity markets. The stable rating outlook reflects Fitch’s expectations for a relatively consistent portfolio mix between first lien debt and equity investments, relatively consistent core earnings generation, and the maintenance of sufficient asset coverage cushion and unsecured funding mix.

About Capital Southwest

Capital Southwest Corporation (Nasdaq: CSWC) is a Dallas, Texas-based, internally managed business development company with approximately $1.4 billion in investments at fair value as of December 31, 2023. Capital Southwest is a middle market lending firm focused on supporting the acquisition and growth of middle market businesses with $5 million to $35 million investments across the capital structure, including first lien, second lien and non-control equity co-investments. As a public company with a permanent capital base, Capital Southwest has the flexibility to be creative in its financing solutions and to invest to support the growth of its portfolio companies over long periods of time.

Forward-Looking Statements

This press release contains historical information and forward-looking statements with respect to the business and investments of Capital Southwest, including, but not limited to, the statements about Capital Southwest’s future performance, financial performance, and financial condition. Forward-looking statements are statements that are not historical statements and can often be identified by words such as "will," "believe," "expect" and similar expressions and variations or negatives of these words. These statements are based on management's current expectations, assumptions and beliefs. They are not guarantees of future results and are subject to numerous risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. These risks include risks related to: changes in the markets in which Capital Southwest invests; changes in the financial, capital, and lending markets; changes in the interest rate environment and its impact on Capital Southwest’s business and its portfolio companies; regulatory changes; tax treatment; Capital Southwest’s ability to operate its wholly owned subsidiary, Capital Southwest SBIC I, LP, as a small business investment company; an economic downturn and its impact on the ability of Capital Southwest’s portfolio companies to operate and the investment opportunities available to Capital Southwest; the impact of supply chain constraints and labor shortages on Capital Southwest’s portfolio companies; and the elevated levels of inflation and its impact on Capital Southwest’s portfolio companies and the industries in which Capital Southwest invests.

Readers should not place undue reliance on any forward-looking statements and are encouraged to review Capital Southwest's Annual Report on Form 10-K for the year ended March 31, 2023 and any subsequent filings, including the “Risk Factors” sections therein, with the Securities and Exchange Commission for a more complete discussion of the risks and other factors that could affect any forward-looking statements. Except as required by the federal securities laws, Capital Southwest does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other reason after the date of this press release.

Investor Relations Contact:

Michael S. Sarner, Chief Financial Officer
214-884-3829

FAQ

What is the long-term issuer rating of Capital Southwest according to Fitch?

Fitch has affirmed Capital Southwest 's investment grade long-term issuer rating of BBB- with a stable outlook.

What are the factors supporting the affirmed rating by Fitch?

Factors supporting the affirmed rating include first lien senior focus, improving portfolio diversification, strong asset coverage, consistent operating performance, and strong funding flexibility.

What does the stable rating outlook reflect according to Fitch?

The stable rating outlook reflects Fitch's expectations for a relatively consistent portfolio mix between first lien debt and equity investments, consistent core earnings generation, and sufficient asset coverage cushion and unsecured funding mix.