Main Street Capital Corporation Q3 2008 Earnings Call Transcript

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Main Street Capital Corporation (NYSE:MAIN)

Q3 2008 Earnings Call

November 11, 2008 10:00 am ET


Vince Foster - Chief Executive Officer

Todd Reppert - President and Chief Financial Officer

Gus Okwu - Managing Director of DRG&E


Vernon Plack - BB&T Capital Markets

Sean Jackson - Avondale Partners


Good morning ladies and gentlemen, thank you for standing by. Welcome to the Main Street Capital third quarter earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for question. (Operator Instructions) At this time I would like to turn the conference over to Mr. Gus Okwu with DRG&E; please go ahead.

Gus Okwu

Thanks, good morning everyone. Thank you joining us for Main Street Capital Corporations third quarter of 2008 conference call. Joining me today on the call are Vince Foster, Main Streets Chairman and CEO and Todd Reppert, company’s President and CFO.

Main Street issued a press release last night with details of the company’s quarterly financial and operating results. This document is available in the News Room section of the company’s website at a replay of today’s call will be available beginning one hour after the completion of this call until 11.59 am Eastern Time on Wednesday, November 19. The replay may be accessed by dialing 303-590-3000 the access code for the reply is 11121586#.

Please note that information reported on this call it is only as of today November 11, 2008 and therefore we advice that time sensitive information will no longer be accurate as of the time of any replay. I should also mention that our comments today will contain forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. Information about potential factors that could affect the company’s financial results are available in the foot note regarding non-GAAP measure in the company’s press release and in Risk Factors section of the company’s filings with the SEC.

I would also advice that this conference call is being broadcast live through an Internet webcast system that can be accessed in the company’s webpage at

Now I would like to turn the call over to Vince Foster.

Vince Foster

Thanks Gus. We’d love to thank all of you for participating in today’s call. I will begin by providing an operational update on our existing portfolio. Next I will comment on our dividend outlook for 2009 and discuss the current investing environment we are seeing. Following my comments Todd will cover our third quarter 2008 financial results after which we will conclude with Q-and-A.

Overall we were pleased with our performance during the third quarter as both our net investment income, the net realized income executed our plan. We ended the quarter with a net asset value per share of $12.49. Our core investment portfolio appreciated modestly from a valuation perspective. At the date of our portfolio, company investments appreciating by a total of $2.8 million and depreciating by a total of $2.2 million.

During that quarter, we completed a $2.6 million investment in Condit Exhibits LLC as part of the management buyout. We obtained a 28% full diluted equity position in Condit, in addition to a $2.3 million first lien debt position. Condit is a Denver-based provider, Premier Tradeshow and other exhibits originally founded in 1945.

Subsequent to the quarters end, we completed three additional investments totaling $7.5 million, all of which have been previously announced. Each of our first lien debt positions to Main’s Street together with equity positions that range from 12% to 29%.

During that quarter, we exited our equity remaining debt position in Travis Aggregates resulting in a realized gain, including transaction fees to $6.4 million. In subsequent to the quarter, we exited our equity remaining debt position in transportation general resulting in a realized gain including transaction fees of $1.2 million. As a result of these gains, we now project 35% to 45% of our calendar 2008 dividend distributions which consists of long-term capital gains for tax purposes.

We are currently projecting 2009 dividends in the range of $1.50 to $1.65 per share. We will continue to make monthly dividend distributions during calendar 2009, pursuant to the monthly payout policy we adopted last month. We expect to achieve the top-end of the range to the extent we generate at least $2 million of net realized gains during 2009.

Our Officers and Directors purchased an excess of 17,000 shares of our stock during the quarter, which brings total Officer and Director Purchases to over 210,000 shares since our IPO.

Our portfolio was structured such that we can sustain annual declines in overall EBITDA in the mid-to-high single digits before experiencing net unrealized depreciation. The external portfolio experiences double-digit annual declines in EBITDA. We are protected against senior lender blockage and other actions detrimental to investors that are further down to capital structure. As we hold the senior debt position in the vast majority of our companies. As result originating one-stop sponsor, our pipeline of potential investments continues to be strong that we have been highly selective.

We are experiencing strong and negotiating leverage with continues to buy the manage balance of available investment opportunities versus investors in our markets. However, I will characterize our credit investing environment challenging, in terms of finding opportunities with either sufficient visibility in the current economic climate or opportunities where we are able to price the risk to support visibility into the investment.

Having said that we are currently working hard on several transactable opportunities. This concludes my prepared comments. I will now hand it call over to Todd Reppert, our President and CFO, who will go over our operating results in greater detail. After Todd’s remarks I will make some summary comments and then we will be available to take your questions.

Todd Reppert

Thanks you Vince. Good morning everyone. Before I go into my prepared comments I want to note that our third quarter 10-Q will be filed later today. We will also post an updated quarterly investor presentation on our website. To expand on Vince’s comments we continue to expect slower portfolio growth in the near term due to our focus on begin selective and prudently deploy existing liquidity.

In addition co-investing all new investments with Main Street Capital pursuant to the SEC exemptive relief is also impacting the net amount as of new originations. However, in my view the key takeaway from this quarter is that we have intentionally positioned the company with a strong liquidity position and low levels of leverage. Importantly all of our leverage is very stable and not subject to any near-term maturities or refinancing risk.

Our conservative capital position provides significant flexibly during volatile equity and credit markets that we are seeing in 2008. We are comfortable with our 2009 dividend guidance as it reflects a reasonable measured approach to growing our dividends. Regarding dividend growth, the fourth quarter 2008 dividends per share represent a 13.6% increase from the dividends paid in the fourth quarter of 2007, which was our fist quarter as a public company.

The 2009 dividend guidance represents year-over-year dividend growth in the range of 5% to 15%. Regarding our dividend coverage we have covered our first IPO dividends by approximately 139% through net realized income which includes the realized gains we have generated.

This IPO, we have also covered over 83% of our dividends through a distributable NII which does not include our realized gains. Generated realized gains for the fundamental part of Main Streets investment strategy as demonstrated through our long-term track recorded, which include is generating meaningful realized gains during 2008 as recently as last month.

The lower end of our 2009 dividend guidance reflects maintaining the same level of dividends declared in the fourth quarter of 2008. However, the upper end of the 2009 dividend guidance assumes a reasonable level of additional realized gains in 2009 consistent with our investment strategy.

Turning now to our third quarter operating results; from the third quarter of 2008 total investment income increased approximately 43% over the comparable period in the prior year. As mentioned, earlier we expect the net growth in our portfolio to be somewhat slower due to our extension to be selective with investments in the near-term and due to the co-investment requirements with Main Street Capital too.

While slower portfolio growth will impact the growth and interest income, we believe that prudently deploying our capital and extending the Verizon of our existing liquidity are both appropriate strategies in the current environment.

Our third quarter interest income was also impacted by several items including repayments received on several debt investments. Only one new debt investment closed during the quarter and the continuing non-accruals status of certain debt investments. I should note, that we have very little not-cash are paid in time interest income, so virtually all of our interest income is paid in cash on a monthly basis.

As discussed in our earnings release, our third quarter investment income was also positively impacted by $1 million of cash dividend income received from portfolio equity investments, while we expect to continue to receive cash dividend payments. The future announcements vary and will be depended on portfolio company earnings and cash availability.

During the third quarter, we also began reporting on distributable net investment income or distributable NII. Distributable NII simply reflects net investment income, before share-based compensation expense which is a non-cash expense.

Our distributable NII as a non-GAAP measure, we believe distributable NII as of appropriate supplemental disclosure that more probably reflects the cash components of our net investment income. Third quarter distributable NII per share amounted $0.32, which compares to $0.20 per share from the third quarter of 2007. Dollar amount of the third quarter distributable NII increased by 63% over the comparable period of the prior year.

During the third quarter 2008, Main Street recognized approximately 300,000 of share-based compensation expense related to the restricted share grants made in July of 2008. Other operating expenses including general and administrative and interest expenses increased 17% compared to prior year primarily due to expenses associated with operating as a public entity and slightly higher interest expenses.

Our annualized year-to-date operating cost exclusive of interest and share-based compensation were approximately 1.6% of average asset, which we believe reflects and appropriate level of cost efficiency.

Third quarter net realized income per share was $0.76, which compares to $0.46 per share of the third quarter of 2007. Third quarter net realized income included the gain realized from Travis Aggregates sales transaction, partially offset by the realized loss on the final exit of the MagnaCard investment. Third quarter net increase and net assets was approximately $2.7 million, which was flat compared to the third quarter of 2007.

The net unrealized depreciation reflected during the third quarter was significantly impacted by accounting reversals, the previously recognized net unrealized appreciation related to the Travis Aggregates and MagnaCard exits. These accounting reversals are required to be reflected in net unrealized depreciation for GAAP purposes, but effectively represent an offset to the net realized gain recognized during the quarter.

Excluding these accounting reversals, Main Street recognized gross unrealized appreciation of $2.8 million on eight investments and gross unrealized depreciation of $2.2 million on six investments. As well as $240,000 of unrealized depreciation related to the affiliated investment manager. At September 30, the total fair value of our four portfolios was 105%, our four portfolios at cost, which reflects reasonable portfolio performance on the whole.

While we have not been any broad based deterioration in our portfolio to-date, we remain concerned that the recent economic indicators may signal an extended economic downturn. An extended economic downturn would undoubtedly have a negative impact on a broad section of the U.S. economy, including many of the industries and end markets represented in our portfolio. However, our strategy of maintaining the first lien position, coupled with lower portfolio company leverage, will provide a structural flexibility during a period of the economic stress.

Now, let me turn to liquidity and capital resources; as mentioned previously we intend to remain conservative and deploying our available liquidity in an effort to maintain flexibility. We believe that our strong liquidity position and conservative capital structure are distinct advantages in the current environment. At September 30, 2008, we had approximately $46.8 million of cash and cash equivalents which includes cash for our short-term highly liquid investments. As of today, we have appropriately $44 million of cash and cash equivalents.

In October 2008, we closed a three year $30 million investment credit facility. This credit facility was established to provide additional liquidity for future investment and operational activities. Three year term of this facility was critical in our analysis and the facility provides us with meaningful incremental flexibility.

Due to our existing cash and the capacity under the investment credit facility we project to have sufficient liquidity to fund our investment and operational activities through the remainder of 2008 and throughout all of calendar year 2009. Thus we remain comfortable, but we can continue to grow our net realized income and dividends at a steady phase while also maintaining our capital flexibility.

We currently have $55 million of 10 year SBIC debt outstanding varying a fixed interest of 5.8% per year. The first principal maturity of our SBIC leverage is not until 2013 and the weighted average maturity for all trenches of our SBIC leverage was approximately 6.5 years from September 30.

Our stable long-term financing remains a strategic advantage. In addition we believe the embedded value of our SBIC facility would be significant if we had adopted the provision of SFAS 159 related to accounting for debt obligations of their fair value.

At September 30, 2008 our net asset value was $115.4 million or $12.49 per share. This represents a 3% decrease from NAV per share of $12.85 at year end ’07. Our debt-to-equity ratio at September 30 was approximately 0.48:1 and our cash to debt ratio was 0.85:1. As a remainder all of our SBIC debt is excluded from the 200% asset coverage requirements under the BDC regulations providing Main Street with additional capital flexibility.

Now let me turn to a few key portfolio statistics, all as of September 30, 2008. We continue to provide these statistics for better transparency regarding some important metrics related to our portfolio. Consistent with our investment strategy approximately 84% of our investments at cost were in the form of secured debt investments and virtually all of our debt investment held the first lien security position.

We continue to maintain a weighted average effective yield on our debt investment well in excess of 13%, 85% of our portfolio debt investment restructured to bare fixed rates of interest which allows us to lock in approximately 800 basis points of net interest margin over the low fixed rate on our SBIC debt.

Main Street held equity position from the vast majority of this portfolio company’s and Main Street average fully diluted equity ownership as 26%. Weighted average net senior debt-to-EBITDA ratio for the portfolio was 2.5:1 on the basis disclosed in the earnings release or 3.1:1 including portfolio company debt which is junior to Main Street’s debt position. These portfolio level credit metrics are very favorable compared to the broader credit markets which we believe reflects our lower underlying risk profile.

Now, I’ll turn the discussion back to Vince for a quick summary prior to taking your questions. Vince.

Vince Foster

Thanks Todd. So, in summary, we are encountering a challenging investing environment, which we are approaching very selectively. We have sufficient liquidity through the end of 2009 and are potentially longer depending upon repayments and exits. Our portfolio is performing relatively well taken as a whole and we currently have a solid backlog with investment opportunities.

I’d like to thank our shareholders for their continued support and I will now open the call for Q-and-A.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Vernon Plack - BB&T Capital Markets.

Vernon Plack - BB&T Capital Markets

Vince I had a question just in terms of [Magna] a big picture philosophical standpoint and that given the type of environment that we are currently in and the belief of many that things will get more challenging before they get less challenging. I’m Interested in maybe a little more color in terms of portfolio growth. You mentioned limited, I know you have capital available and you could actually vary your investment portfolio quite a bit. I’m just trying to get sense; I know at least at this point why even bother to grow the portfolio a whole lot, if at all given that we are headed into, what appears to be tougher times?

Vince Foster

That’s a good question. We continue to look at opportunities at a pace that is as robust as I’ve ever seeing, because we have money, we don’t represent a financing continuity with respect to debt etc. and so, what we are doing is we’re trying to be opportunistic. If we can find really good companies that we can buy inexpensively, we think it’s a great time to be transacting.

So, the challenge is making sure that you don’t put too much debt on these companies. Making sure that the investment is structured such as they can make it through the 2010 or 2011 or what have you, but if you think about it you’d rather be buying at the bottom of the cycle with a modest multiple of EBITDA and modest leverages as opposed to at the top and so that’s just kind of our philosophy.

A lot of the companies we are seeing, we just don’t have the visibility to conclude that they can make it through the cycle. A lot of the companies we are seeing due, so we are just being enough. Again another way of saying hi is very opportunistic and we may very well though a couple of quarters without closing the deal, but the other thing too is the constituents that we have out there that are showing that deal flow. We do wanted to be respectful of them and continue to look the opportunities they bring us and give it a honest look, but they know that they nearly have to be a perfect candidate, before we’re going to want to move forward.

Vernon Plack - BB&T Capital Markets

With the cash that you have available plus availability on the line which is a little over at $76 million I think, $76 million to $77 million, is the thought now that you will have put most of that to work or maybe part of that, I’m just trying to get a sense what you fully expect at this point to put all that money to work between now and the end of 2009?

Vince Foster

I think the cash probably gets put to work and the question would be, to what degree are you going to be in to the credit facility or not, but I think probably my best guess is the cash gets put to work.


(Operator Instructions) Your next question comes from Sean Jackson - Avondale Partners.

Sean Jackson - Avondale Partners

On the unrealized losses you said, most of that was accounting reversals, is that correct?

Vince Foster

That’s correct.

Sean Jackson - Avondale Partners

So, other than that, the portfolio I guess was a discount that you had an unrealized gain of about $600,000?

Vince Foster

That’s right and that’s on our investment portfolio and then with respect to our management company, we had kind of a regular couple of hundred thousand dollar decline each quarter.

Sean Jackson - Avondale Partners

And what is exactly your visibility as to getting realized gains for ’09 given that the dividend payments are somewhat depended on some gains going forward?

Vince Foster

Right, the reason we have pretty good visibility on that is that we structure our investments with management such that the management teams plus the portfolio company is really our exit, because when you are transacting a four time EBITDA and you have two and a half, three times in debt; after three, four, five years the company’s pasture to takeout our investment, the company’s performing well with a little bit of bank debt and there’s generally room under a more traditional credit facility, not only to takeout our debt, but takeout our equity.

In addition as an incentive to management you will see frequently that we allow them if they are performing well to take out our equity ahead of our debt on a negotiated basis and so that really attracts the type of management teams that we want because they want to get as much equity as soon as they can.

So, we have pretty good visibility for those better performing companies. With respect to taking out our equity ahead of the debt or with the debt, particularly we have investments that we made in ‘03, ‘04 that were preliminary discussions with how that’s going to happen.


Your next question comes from Vernon Plack - BB&T Capital Markets.

Vernon Plack - BB&T Capital Markets

Todd, I’m trying to get a sense for the cash flow, the EBITDA for your underlying portfolio companies. If you look at that on a weighted-average basis or average basis, but trying to get a sense for if that number -- cash flow at this point is actually stable, increasing, decreasing, just trying to get a sense for how your company’s doing in this type of environment?

Todd Reppert

The answer is, we do look at it. Obviously, in our portfolio we have some up, some down, but the portfolio on a whole year-over-year if you look at kind of trailing 12 months to 930, whatever latest finances we have is effectively flat to slightly up, last time we looked at it, but our concern which we mentioned in our comments is that we are concerned that what has happened in September and October maybe a little different ball game as far as going forward. So, we are very cognizant of that and remain kind of cautious in our outlook not only for new investments, but for what is going on our existing portfolio and I think we’ll just have to see how that plays out over the next year or so.

Vince Foster

The TTM at 930 includes fourth quarter of ’07, which is not certainly relevant right now. So, we are keeping an eye on it.

Vernon Plack - BB&T Capital Markets

I think you mention, you have one investment on non-accrual. What is the cost basis on that loan?

Todd Reppert

It’s around $4 million.


(Operator Instructions) Your final question comes from Sean Jackson - Avondale Partners.

Sean Jackson - Avondale Partners

Yes, very quickly; typically when you said that the management team is you’re exit typically and then investment. Now, are the management teams somewhat dependent upon on the credit markets to get the cash to tick it out or typically, how do they get the money to do that?

Todd Reppert

Generally, they will go to a local or regional bank; they are trying to get a $3 million, $4 million, and $5 million credit facility. It is generally going to be asset-based. In the lower middle market where we transact, the banks really aren’t providing credit on a multiple of EBITDA, even on a modest multiple of EBITDA. So, it’s really ABL, potentially with the personal guarantee of the managers, so that’s kind of their decision and if that doesn’t quite get it done, we will consider providing some additional financing to affect that and so that’s generally how it’s done.

So you are really going from 2.5 times EBITDA to our debt and two, three, four years down the road, you get that down to maybe a half or one times EBITDA, but the bank is comfortable coming in on an ABL basis, maybe with a little stretch piece when the banker asks to complete the transaction.


(Operator Instruction) and at this time there are no additional questions. I’d like to turn it back to Mr. Foster for any closing remarks.

Vince Foster

I don’t have any closing remarks. So we will see all of you next quarter.

Gus Okwu

Thank you for participating in Main Street Capital Corporation’s third quarter 2008 earning conference call. As a reminder, this call will be available for replay beginning an hour after the call has ended and may be accessed until 11.59 am Eastern Time on November 19. Dialing 1303-590-3000 you can access the replay and the access code for the replay is 11121586#. Thanks.


Thank you ladies and gentlemen. That does conclude our conference. Thank you for your participation and for using ACT Teleconferencing. You may now disconnect.

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