Chris Rehberger - Vice President of Finance Bowen Diehl - Chief Executive Officer Michael Sarner - Chief Financial Officer.

Thank you for joining today's Capital Southwest First Fiscal Quarter Earnings Call. Participating on the call today is Bowen Diehl, CEO; Michael Sarner, CFO; and Chris Rehberger, VP of Finance. I will now turn the call over to Chris Rehberger..

Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information, and management's 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 such statements. For information concerning these risks and uncertainties, see Capital Southwest's publicly available filings with the SEC.

The company does not undertake any obligation to 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 except as required by law. I will now hand the call off to our President and Chief Executive Officer, Bowen Diehl..

Thanks, Chris. And thanks to everyone for joining us for our first quarter fiscal year 2017 earnings call. Throughout my prepared remarks, I will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com.

During the quarter and during the weeks subsequent to quarter end, we have continued executing on the investment strategy we set forth last year. Our two-pronged strategy as seen on Slide 6 with investing capability in both the upper-middle market and lower-middle market is playing out as planned.

During the quarter, we saw spreads in the upper-middle market tighten significantly. We have seen leverage levels on average increase, and we have seen the re-emergence of covenant life deals.

We remain vigilant in our credit discipline, passing on deals where we believe the leverage levels are not appropriate for business model that have proven in the past to be cyclical or volatile for various other reasons.

With that said, our I-45 senior loan fund as seen on Slide 7 with its 2:1 leverage structure, provides us the vehicle in which to fund the credit investments in strong fundamental businesses while generating attractive returns on our equity dollars even in a tightening spread environment.

To put this change in perspective, spreads seen on the I-45 investments made during the December and March quarters were well in excess of our original I-45 business plan driven by disruptions in the capital markets during these quarters.

Spreads on the more recent upper-middle market investments have tightened back down to our original plan, as M&A volume year-over-year is down and there remains a significant amount of capital chasing a more limited set of deal opportunities.

Therefore I-45 continues to prove out as a valuable component to our overall upper-middle market strategy, even in the current borrower-friendly environment.

Indeed during the June quarter, I-45’s invested credit assets increased to $134 million as compared to $99 million at the end of the previous quarter, and are now over halfway to our initial fund-size target of approximately $250 million. 98% of I-45's invested assets are first lien, and all are senior secured.

Our average loan hold size in I-45 is approximately $4 million. We also continue to put upper-middle market assets on the Capital Southwest balance sheet where the risk-adjusted returns fit our business plan. Our recent investments in InfoGroup and Imagine! Print Solutions, as seen on Slide 8 are examples of this.

Our lower-middle market strategy is core to Capital Southwest. With its highly attractive risk-adjusted returns, we believe it is a premium asset for our shareholders. But as you know, the timing to close deals in the lower-middle market can be lumpy.

Transactions often take over 90 days to execute from a original review to final closing and funding, as we often are running alongside our sponsor relationships, helping them first to win a transaction, followed by completion of the diligence and negotiating and drafting documentation and closing.

As we mentioned on our last earnings call, we saw a slowdown in quality deal flow early in the June quarter with a pickup in quality deal flow late in the quarter. This activity also seen on Slide 8 resulted in two transactions closing subsequent to quarter end.

A $13 million first lien loan to Amware, a B2C fulfillment company, announced last week and a $10 million middle market club last out unitranche loan that we expect to be in a position to announce shortly.

We are also seeing significant competition in the lower-middle markets including many situations where other lenders are simply willing to lever cyclical or otherwise volatile businesses to levels we are not and at pricing that we find unattractive on a risk-adjusted basis.

We are maintaining our investment discipline, having closed about 1% of the lower-middle-market deals we have seen over the last 12 months. That said, we have strong deal source relationships and are finding some interesting opportunities for our capital.

Our current pipeline continues to be robust and we are optimistic about our deal flow as we look toward the balance of this year. During the quarter, our total invested assets decreased slightly from $178 million to $176 million of fair value due primarily to $11 million of prepayments on two of our credit investment.

These prepayments included complete exits of our lower-middle market loan to Freedom Truck Finance in which we received $6 million in proceeds and earned a 14.3% IRR on our investment. And our upper-middle market loan to Bob's Discount Furniture in which we received $5 million in proceeds and earned a 15.1% IRR on our investment.

Overall, we saw $2.3 million in net unrealized depreciation and gains in our investment portfolio for the quarter, as portfolio company fundamentals improved and quoted loans saw improved market technicals.

As of the end of the quarter, our on-balance sheet loan portfolio was $84 million at fair value, consisting of 17 credits, 82% of which are senior secured. The loan portfolio is marked at 99% of costs and none of the investments are on non-accrual.

As we have discussed, our lending activity is aimed at building a balanced credit portfolio of cash income-generating securities that is diverse and granular.

As seen on Slide 9 and Slide 10, we have achieved significant migration of the portfolio since launching our credit strategy, from a portfolio of which 1% of the assets were in income-generating securities to a portfolio of which 58% of the assets are in income-generating securities.

This portfolio is not only attractive for our shareholders, but it is also proving to be an attractive collateral base for the lending market as we build the right side of our balance sheet.

Michael Sarner, our Chief Financial Officer and his team have done a great job raising capital during the quarter as well as making significant progress towards a Capital Southwest balance sheet credit facility, which I will let him speak more about. I will now hand the call over to Michael to review our financial performance for the quarter..

Thanks, Bowen.

For the quarter, our NAV increased by $600,000 to $273.3 million, which was primarily due to $2.3 million of net portfolio appreciation in gain offset by $500,000 of income tax expense and $1.2 million of expense related to the acceleration of spinoff compensation paid to the company's former CFO of up on her separation from CSW industrials.

At quarter end, we had $97 million in cash available for investment activity and no debt outstanding. As of June 30, 2016, excluding our equity investment in I-45, our investment portfolio mix was 62% debt and 38% equity. Our current mix of debt investment assets at June 30, 2016, was 42% first lien, 40% second lien, and 18% subordinated debt.

The weighted average yield on our debt investments for the quarter was 10.1% versus 10.7% for the previous quarter. Overall, 90% of our portfolio currently generates a recurring cash yield and 98% of our investment income is paid in cash.

Our investment portfolio produced $4.2 million in investment income with a weighted average yield on all investments of 9.4%. This represented an increase of $400,000 or 11% from the previous quarter's investment income of $3.8 million.

We incurred $3.2 million in operating expenses this quarter, an increase of $100,000 versus $3.1 million in the previous quarter. This increase was primarily due to an increase in legal and accounting fees incurred in connection with the 2016 fiscal year audit.

For the quarter, we earned pretax net investment income of $900,000 or $0.06 per share, compared to $700,000 or $0.04 per share in the previous period. We paid $0.06 per share dividend on July 1 for the quarter ended June 30. From a financing perspective, as Bowen mentioned, we continue to make progress toward our overall capitalization strategy.

We increased our commitments to the Deutsche Bank-led credit facility within the I-45 senior loan fund, growing commitments from $75 million to $120 million. As of June 30, we had $73 million outstanding on the credit facility and are currently in the process of raising additional commitments to support the fund's growth.

The facility includes an accordion feature allowing for up to two times debt to equity at a cost of funding of LIBOR plus 250. We are currently in negotiations toward originating an on balance sheet revolving credit facility, led by a well-known and respected lender to BDC in the middle market.

We are extremely pleased with the interests we have received thus far from our potential bank syndicate and fully expect to close and announced the details of the facility in the coming weeks. Additionally, we continue to work toward the goal of receiving approval from the SBA for a new SBIC license with participation in the SBIC debenture program.

We continue our dialog with the SBA and the preparation and submittal of materials required for them to consider our participation in the program. As a reminder, Capital Southwest has held an SBIC license for the past 50-plus years.

This quarter, as part of the plan, put in place in conjunction with the SBA, we formally surrendered our legacy SBIC license with the SBA. The license we surrendered did not participate in the SBIC debenture program and was originally approved based on the legacy equity investment strategy.

Given our new middle-market lending strategy and the newness of the investment team to Capital Southwest, we and the SBA determined that the most appropriate and efficient path for us to achieve our goal of participation in the SBIC debenture program was to apply for a new SBIC license.

Finally, in regards to the share repurchase program currently in place, we did not repurchase any shares during the quarter ended June 30, 2016. I will now hand the call back to Bowen for some final comments..

Thanks, Michael. And thank you to our shareholders for giving us the opportunity to be stewards of your capital, a responsibility that we take very seriously. We continue to thoughtfully and carefully execute our investment strategy with the creation of long-term sustainable shareholder value as our most important goal.

This concludes our prepared remarks. I would like to turn the call over to the operator to open up the lines for Q&A..

Operator:.

Thank you, operator and thank you for all participating, who participated on today's call. We look forward to keeping you apprised of our progress on future quarterly calls. Again, shareholder value creation is our absolute first priority and we tend to work hard to make that happen. Thank you very much. We hope everyone has a great week..

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day..