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Business development company Main Street (NYSE:MAIN) reported solid first-quarter results Thursday afternoon, marked by a strong increase in net investment income and book value. Net investment income per share rose 35% year-over-year to $0.50 per share, easily eclipsing consensus estimates. Book value per share rose 2% sequentially to $18.55.

During the first quarter, investment income rose 25% year-over-year to $25.6 million, driven largely by an increase in interest income as the company put more capital to work in debt investments. Dividends received from equity investments also increased $1 million. Although Main Street's cash position isn't very strong, sitting at $26.2 million, the firm recently expanded its credit facility by $65 million to $352.5 million, giving it ample opportunity to expand its investment footprint. The company also diversified its debt capital base away from SBIC (small business investment company) capital by offering $92 million of 6.125% senior notes that mature in April of 2023. We're neutral on this capital allocation decision, but it helps buffer the company against potential government cuts.

Given its niche player status, Main Street is able to achieve debt yields on its investments that are envious in the current low interest rate environment. Debt instruments in the firm's lower middle market portfolio have an average effective yield of 14.2%, while its middle market portfolio, which carries less risk, yields 8.2%. Although we are seeing some modest downward yield pressure from the low interest rate environment, we think Main Street's realized yields will remain attractive relative to other opportunities. On the equity side, the firm's lower middle market portfolio currently resides at 209% of cost based on fair value estimates.

Ultimately, we continue to like Main Street's business model as a niche capital provider to lower middle market and middle market businesses that otherwise may not be able to raise capital. A 2% increase in book value may not be robust, but we think book value growth could accelerate as broader economic performance improves. Still, we aren't interested in adding shares to either of our actively managed portfolios at this time.

Source: Main Street's Solid Run Continues