Capital Southwest reported another decent quarter, but I don't think this is one to celebrate without looking at the risks. What I liked: 1) Total investment income increased to $61.0M 2) Investment portfolio grew to roughly $2.2B 3) Weighted-average yield on debt investments remains strong at 10.9% 4) Regular $0.58 dividend was covered by NII 5) CSWC still has $1.06/share in undistributed taxable income 6) Leverage remains reasonable at 0.91x debt-to-equity What I didn't like: 1) NAV slipped from $16.69 to $16.61 2) NII of $0.58 only covers the regular dividend, not the full $0.64 distribution including the supplemental 3) Non-accruals are 2.4% of the portfolio at cost 4) CSWC is still lending into an uncertain environment where higher rates and slower economic growth can pressure borrowers. In general, private equity has been struggling with slower exits and a difficult deal environment. My takeaway: $CSWC had a solid quarter, but I'm not ignoring what's happening underneath the surface. The 10%+ yield is attractive because there is real risk attached to it. For now, the regular dividend looks sustainable, And the balance sheet remains in good shape. But NAV, non-accruals, and dividend coverage should be watched, And when it comes to BDCs, the sustainability of the dividend is what matters.
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