Moody's assigns Capital Southwest Baa3

Moody's Investors Service said it assigned a first-time Baa3 long-term issuer rating to Capital Southwest Corp. (CSWC) with a stable outlook.

“CSWC's Baa3 long-term issuer rating reflects the company's strong capitalization, first-lien-oriented investment portfolio and good recurring earnings generation. CSWC has a debt (excluding small business administration [SBA] debt) to equity target of 0.9x–1.1x, which translates to an asset coverage ratio (ACR) cushion of at least 27%, based on the company's regulatory and covenant minimum required ACR of 150%. This is modestly stronger than most rated peers that often target leverage up to 1.25x, translating to an ACR cushion of about 20%. Further, the company had 83% of its investments in first-lien securities as of Dec. 31, 2022, which compares favorably to the peer median of 71%.

“Moody's believes that the company's investments should continue to yield good recurring profitability while also protecting creditors from the downside volatility that can result from a higher proportion of junior investments,” the agency said in a press release.

However, the agency noted CSWC is exposed to the lower middle market companies, which it considers a riskier sector.

“In Moody's view, smaller companies tend to have greater concentrations, less management depth, and weaker market positions. CSWC also has a concentrated debt maturity schedule with 83% of its debt coming due in 2026 (47% excluding its revolving credit facility which Moody's expects to be extended well before then), which Moody's views negatively,” the agency said.

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