Key Highlights

  • Total Investment income rose to USD 67.2 million from USD 56.9 million, an increase of about 18%.
  • Net investment income rose to USD 36.3 million from USD 32.0 million, an increase of about 13%.
  • Interest expense rose USD 5.0 million to USD 21.0 million on USD 339.6 million of added average borrowings.
  • Fee income rose USD 1.9 million on higher arranger fees, and payment-in-kind interest income rose USD 2.2 million.

Investment Income

Capital Southwest Corporation (NASDAQ:CSWC), a business development company, reported total investment income of USD 67.2 million for the three months ended September 30, 2026, its fiscal second quarter, compared with USD 56.9 million. Cash interest income from non-control and non-affiliate investments rose to USD 47.2 million from USD 40.7 million, and from affiliate investments to USD 7.4 million from USD 6.8 million. Payment-in-kind interest income increased USD 2.2 million, because more amendments allowed portfolio companies to elect to pay interest in kind, and totaled about USD 5.0 million by our calculation.

Dividend income fell USD 0.7 million on lower distributions from portfolio companies, while fee income rose USD 1.9 million to about USD 4.4 million, mainly on higher arranger fees. For the six months, total investment income was USD 128.2 million versus USD 112.9 million.

Expenses and Net Investment Income

Total operating expenses rose to USD 30.0 million from USD 22.9 million. Interest expense rose USD 5.0 million to USD 21.0 million, because average borrowings increased USD 339.6 million and the weighted average Interest Rate on total Debt rose to 5.61% from 5.49%. Compensation rose to USD 3.2 million from USD 2.6 million and share-based compensation to USD 1.9 million from USD 1.3 million; total employee compensation expense rose 32.7%, or USD 1.3 million. General and administrative expense, including professional fees, rose 27.5%, or USD 0.8 million.

Income before taxes rose 9.3% to USD 37.2 million from USD 34.0 million. The income tax provision fell to USD 0.9 million from USD 2.0 million, and net investment income was USD 36.3 million versus USD 32.0 million. For the six months, net investment income was USD 72.0 million versus USD 63.9 million, while operating expenses were USD 56.1 million versus USD 46.2 million, a 21% increase by our calculation, and interest expense was USD 39.5 million versus USD 31.3 million. Realized gains on non-control and non-affiliate investments were USD 3.7 million in the quarter versus USD 3.5 million.

Margin Analysis

By our calculation, net investment income was 54.0% of total investment income, compared with 56.2% a year earlier, as operating expenses grew 31% against income growth of 18%. Interest expense represented about 31% of total investment income versus 28% last year. The pattern shows a larger portfolio generating more income, with funding costs absorbing a rising share.

The company also recognized a loss on extinguishment of debt of USD 1.4 million in the quarter, a realized item that falls outside net investment income.

Funding and Credit Indicators

Net investment income benefited from growth in the credit portfolio, while borrowing costs and compensation rose faster than revenue. Items to track include the weighted average cost of debt, further debt extinguishment charges, the proportion of income received in kind, fee income tied to originations and Dividend income from portfolio companies.