Capital Southwest (CSWC)

Risks

• Item 1A. Risk Factors
• RISKS RELATED TO OUR BUSINESS AND STRUCTURE
• Our financial condition and results of operations will depend on our ability to effectively allocate and manage capital.
• Any unrealized losses we experience may be an indication of future realized losses, which could reduce our income available to make distributions.
• Our business model depends to a significant extent upon strong referral relationships. Our inability to develop or maintain these relationships, as well as the potential failure of these relationships to generate investment opportunities, could adversely affect our business.
• All of our assets are subject to security interests under our secured Credit Facility and if we default on our obligations under the Credit Facility, we may suffer adverse consequences, including foreclosure on our assets.
• In addition to regulatory limitations on our ability to raise capital, our current debt obligations contain various covenants, that, if not complied with, could accelerate our repayment obligations under the Credit Facility—thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions.
• Because we borrow money to make investments, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.
• If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.
• A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.
• Even if the Company qualifies as a regulated investment company, it may face tax liabilities that reduce its cash flow.
• Our portfolio investments generally are not publicly traded. As a result, the fair value of these investments may not be readily determinable and will be recorded at fair value as determined in good faith and under the direction of our Board of Directors. As a result, there may be uncertainty as to the value of our portfolio investments.
• We are currently operating in a period of capital markets disruptions and economic uncertainty. Such market conditions may materially and adversely affect debt and equity capital markets, which may have a negative impact on our business, financial condition and results of operations.
• Events outside of our control, such as the COVID-19 pandemic, could negatively affect our portfolio companies and our results of our operations and financial condition.
• Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies, which may, in turn, impact the valuation of such portfolio companies.
• Political, social and economic uncertainty, including uncertainty related to the COVID-19 pandemic, creates and exacerbates risks.
• The effect of global climate change may impact the operations of our portfolio companies, which may, in turn, impact the valuation of such portfolio companies.
• Environmental, social and governance factors may adversely affect our business or cause us to alter our business strategy.
• Downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our liquidity, financial condition, and results of operations.
• Changes in the laws or regulations governing our business or the operations of our portfolio companies, changes in the interpretations thereof or of newly enacted laws or regulations, and any failure by us to comply with these laws or regulations could require changes to certain business practices of us or our portfolio companies, negatively affect the
• profitability of the operations, cash flows or financial condition of us or our portfolio companies, impose additional costs on us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies.
• Our success depends on attracting and retaining qualified personnel in a competitive environment.
• Effective April 25, 2019, our asset coverage requirement was reduced from 200% to 150%, which could increase the risk of investing in the Company.
• We expend significant financial and other resources to comply with the requirements of being a public company.
• Our ability to enter into transactions with our affiliates is restricted.
• Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital.
• SBIC I has an SBIC license and is subject to SBA regulations, and any failure to comply with SBA regulations could have an adverse effect on our operations.
• Shareholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current NAV per share of our common stock or issue securities to convert to shares of our common stock.
• Legislative or other actions relating to taxes could have a negative effect on us.
• We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our shareholders.
• Terrorist attacks, acts of war or natural disasters may affect any market for our common stock, impact the businesses in which we invest and harm our business, operating results and financial condition.
• Our business and operations may be negatively affected if we become subject to securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of our investment strategy and impact our stock price.
• RISKS RELATED TO OUR INVESTMENTS
• Our investments in portfolio companies involve a number of significant risks.
• The lack of liquidity in our investments may adversely affect our business.
• Defaults by our portfolio companies could harm our operating results.
• Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.
• Changes in interest rates may affect our cost of capital, the value of investments and net investment income.
• There may be circumstances in which our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
• As a RIC, we may have certain regulatory restrictions that could preclude us from making additional investments in our portfolio companies.
• The interest rates of our loans to our portfolio companies, any LIBOR-linked securities, and other financial obligations that extend beyond 2021 might be subject to change based on recent regulatory changes, including the decommissioning of LIBOR.
• We generally will not control our portfolio companies.
• Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. Further, in cases where we invest in unsecured subordinated debt, we would not have any lien on the collateral. In each of these cases, if there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
• Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in those companies.
• Changes in healthcare laws and other regulations, or the enforcement or interpretation of such laws or regulations, applicable to some of our portfolio companies’ businesses may constrain their ability to offer their products and services.
• RISKS RELATED TO OUR SECURITIES
• Investing in shares of our common stock may involve an above average degree of risk.
• Shares of closed-end investment companies, including BDCs, may trade at a discount to their net asset value.
• The January 2026 Notes and the October 2026 Notes are unsecured and therefore are effectively subordinated to any existing and future secured indebtedness, including indebtedness under our Credit Facility.
• The indenture under which the January 2026 Notes and the October 2026 Notes were issued contain limited protection for holders of the January 2026 Notes and the October 2026 Notes.
• We may not be able to repurchase the January 2026 Notes and the October 2026 Notes upon a Change of Control Repurchase Event.
• If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the January 2026 Notes and the October 2026 Notes.
• We currently intend to pay quarterly dividends. However, in the future we may not pay any dividends depending on a variety of factors.
• Terms relating to redemption may materially adversely affect the return on our debt securities.
• We currently pay dividends in cash. However, in the future we may choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.
• We may not be able to invest a significant portion of the net proceeds from future capital raises on acceptable terms, which could harm our financial condition and operating results.
• Provisions of the Texas law and our charter could deter takeover attempts and have an adverse impact on the price of our common stock.