Capital Southwest (CSWC) risk factors, FY2025 10-K

Other

1. 01The following is a summary of the principal risk factors associated with an investment in us. Further details regarding each risk included in the below summary list can be found further below

RISKS RELATED TO OUR BUSINESS AND STRUCTURE

1. 02Our financial condition and results of operations will depend on our ability to effectively allocate and manage capital
2. 03Any unrealized losses we experience may be an indication of future realized losses, which could reduce our income available to make distributions
3. 04Our business model depends to a significant extent upon strong referral relationships. Our inability to develop or maintain these relationships, as well as the failure of these relationships to generate investment opportunities, could adversely affect our business
4. 05Because 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
5. 06Our ability to achieve our investment objective may depend in part on our ability to access additional leverage on favorable terms by borrowing from banks or insurance companies or by issuing debt securities and there can be no assurance that such additional leverage can in fact be achieved
6. 07(27.29)% (16.64)% (5.98)% 4.67% 15.32%
7. 08As a BDC, we are not permitted to acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets
8. 09A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility
9. 10We will become subject to U.S. federal income tax imposed at corporate rates if we are unable to qualify as a RIC under subchapter M of the Code
10. 11Even if the Company qualifies as a RIC, it may face tax liabilities that reduce its cash flow
11. 12We are currently operating in a period of 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
12. 13Inflation 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
13. 14Political, social and economic uncertainty creates and exacerbates risks
14. 15Changes to U.S. tariff and import/export regulations may have a negative effect on the operations of our portfolio companies and, in turn, negatively impact us
15. 16The effect of global climate change may impact the operations and valuation of our portfolio companies
16. 17Environmental, social and governance factors may adversely affect our business or cause us to alter our business strategy
17. 18Downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our liquidity, financial condition, and results of operations
18. 19Our business is dependent on bank relationships and recent strain on the banking system may adversely impact us
19. 20We operate in a highly competitive market for investment opportunities
20. 21Our success depends on attracting and retaining qualified personnel in a competitive environment
21. 22Our asset coverage requirement is 150%, which could increase the risk of investing in the Company
22. 23We expend significant financial and other resources to comply with the requirements of being a public company
23. 24Our ability to enter into transactions with our affiliates is restricted
24. 25Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital
25. 26additional debt securities, which would be senior to our common stock upon liquidation, or equity securities, which could dilute our existing shareholders, may harm the value of our common stock
26. 27On April 20, 2021 and April 17, 2025, SBIC I and SBIC II, respectively, received licenses from the SBA to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended, and are regulated by the SBA
27. 28Shareholders 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 that are convertible to shares of our common stock
28. 29Legislative or other actions relating to taxes could have a negative effect on us
29. 30A failure of cybersecurity systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively
30. 31Our portfolio companies also rely on similar information systems and face similar risks. A disruption or compromise of these systems could have a material adverse effect on the value of these businesses
31. 32Terrorist 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
32. 33In addition, the recent outbreak of hostilities in the Middle East and escalating tensions in the region may create volatility and disruption of global markets
33. 34Our 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

1. 35Our investments in portfolio companies involve a number of significant risks
2. 36substantial additional capital to support their operations, finance expansion or maintain their competitive position
3. 37We are subject to risks associated with our investments in senior loans
4. 38The lack of liquidity in our investments may adversely affect our business
5. 39We may be subject to risks associated with “covenant-lite” loans
6. 40Defaults by our portfolio companies could harm our operating results
7. 41We may not realize gains from our equity investments
8. 42Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity
9. 43The loans we make in portfolio companies may become non-performing
10. 44We are exposed to risks associated with changes in interest rates
11. 45There 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
12. 46As a RIC, we may have certain regulatory restrictions that could preclude us from making additional investments in our portfolio companies
13. 47We generally will not control our portfolio companies
14. 48Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in those companies
15. 49Changes 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
16. 50We may be subject to risks associated with our investments in the business services industry

RISKS RELATED TO OUR SECURITIES

1. 51The market price of our common stock may fluctuate significantly
2. 52Investing in shares of our common stock may involve an above average degree of risk
3. 53Shares of closed-end investment companies, including BDCs, may trade at a discount to their NAV
4. 54The Notes are unsecured and therefore are effectively subordinated to any existing and future secured indebtedness, including indebtedness under our Corporate Credit Facility
5. 55The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries, including the SBA-guaranteed debentures and the SPV Credit Facility
6. 56The respective indentures under which the October 2026 Notes, the August 2028 Notes and the 2029 Convertible Notes were issued contain limited protection for holders of the October 2026 Notes, the August 2028 Notes and the 2029 Convertible Notes
7. 57We may not be able to repurchase the October 2026 Notes upon a Change of Control Repurchase Event
8. 58We may not have the ability to raise the funds necessary to settle conversions of the 2029 Convertible Notes in cash or to repurchase the 2029 Convertible Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the 2029 Convertible Notes
9. 59The Corporate Credit Facility may limit our ability to pay any cash amount upon the conversion or repayment of the 2029 Convertible Notes
10. 60Conversion of the 2029 Convertible Notes may dilute the ownership interest of our stockholders or may otherwise depress the price of our common stock
11. 61While a trading market developed after issuing the October 2026 Notes, August 2028 Notes and the 2029 Convertible Notes, we cannot assure you that an active trading market for the October 2026 Notes, the August 2028 Notes and the 2029 Convertible Notes will be maintained
12. 62If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes
13. 63Terms relating to redemption may materially adversely affect the return on our debt securities
14. 64We currently intend to pay quarterly dividends. However, in the future we may not pay any dividends depending on a variety of factors
15. 65We 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
16. 66We 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
17. 67Provisions of Texas law and our charter could deter takeover attempts and have an adverse impact on the price of our common stock