Analyzing Main Street Capital's Results For Q2 2018 (Includes Updated Price Target)

Summary

• This article assesses MAIN’s performance for Q2 2018 and compares results over the trailing 12 months.
• First, MAIN’s income statement is analyzed for the three-months ended 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018.
• This includes comparing how MAIN’s reported results compared to my projections for the second quarter of 2018 regarding NII and NAV per share.
• Second, this article performs an FMV investing rating analysis on MAIN’s portfolio companies over the prior several quarters.
• My summarized thoughts on MAIN’s performance for Q2 2018, current price target, and buy, sell, or hold recommendation are stated in the “Conclusions Drawn” section of the article.

Focus of Article:

The focus of this article is to analyze Main Street Capital Corp.’s (NYSE:MAIN) results for the second quarter of 2018 and compare the company’s performance over the trailing 12 months (“TTM”). First, this article analyzes MAIN’s income statement (technically speaking the company’s “consolidated statement of operations”) for the three-months ended 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018. This includes an analysis of MAIN’s net investment income (“NII”) and earnings per share (“EPS”) (also known as “net increase (decrease) in net assets resulting from operations”). Second, this article provides a fair market value (“FMV”) investment rating analysis on MAIN’s portfolio companies over the prior several quarters.

This assessment article will show past and current data with supporting documentation within two tables. I am writing this article due to the continued requests to provide this type of “in-depth” analysis on MAIN after the company reports quarterly earnings. This assessment article alone is not the only data/information that should be examined to initiate a position within MAIN. However, I believe this analysis would be a good “starting-point” to begin a discussion on the topic. My BUY, SELL, or HOLD recommendation, updated positive and negative catalysts/trends to consider, and current price target for MAIN are stated in the “Conclusions Drawn” section at the end of the article.

1) Assessing MAIN’s Quarterly Consolidated Statement of Operations:

To begin this analysis, Table 1 is provided below. Table 1 shows MAIN’s consolidated statement of operations for the three-months ended 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018. Due to the fact MAIN’s performance is generally not “skewed” due to seasonal trends, I believe comparing the company’s performance over the TTM is the most appropriate type of quantitative analysis for this assessment article. In other words, it is deemed not ideal to compare the quarter of one year to the same quarter of a prior year.

Table 1 – MAIN Consolidated Statement of Operations (Three-Months Ended 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018)

(Source: Table created by me, partially using MAIN data obtained from the SEC’s EDGAR Database)

Income and Expense Accounts:

Using Table 1 above as a reference, MAIN reported interest income of $39.8, $44.6, $39.6, and $44.3 million for the third quarter of 2017, fourth quarter of 2017, first quarter of 2018, and second quarter of 2018, respectively (see boxed blue reference “1a”). When calculated, MAIN increased (decreased) the company’s quarterly interest income by $4.8, ($5.0), and $4.7 million, respectively. I believe readers would agree MAIN notably increased the company’s interest income during the fourth quarter of 2017 while having a notable “drop-off” of accrued interest income during the first quarter of 2018. However, there was a notable “uptick” during the second quarter of 2018 which should be seen as a positive catalyst/trend. I’ll discuss the more notable activities that occurred during the quarter which will help explain this net increase.

First, last quarter MAIN put Access Media Holdings, LLC (Access Media; private cable operator) on non-accrual status. Prior to this non-accrual, MAIN’s debt investment in Access Media was entirely changed to “payment-in-kind” (“PIK”) income. Simply put, this is a type of deferred revenue where income is accrued for under Generally Accepted Accounting Principles (“GAAP”) in the period of occurrence but actually received at a later date (typically when the investment is matured or sold). However, at the time when an investment is placed on non-accrual status, the portion of interest categorized as PIK income (all previously capitalized interest) should be “reversed-out”. As such, a notable one-time reduction in accrued interest income can occur. Simply put, this type of notable cumulative PIK income reversal occurred during the prior quarter while not occurring during the second quarter of 2018.

Second, MAIN slightly net increased the company’s investment portfolio during the second quarter of 2018. This includes larger debt investment originations and fundings (proportionately speaking) within the following portfolio companies: 1) Digital Products Holdings LLC (Digital Products); 2) American Nuts, LLC (American Nuts); 3) DTE Enterprises, LLC (“DTE”); 4) EPIC Y-Grade Services, LP (“EPIC”); and 5) JAB Wireless, Inc. (“JAB”). In a nutshell, this increased MAIN’s accrued interest income during the second quarter of 2018.

Third, nearly all of MAIN’s floating-rate debt investments continued to benefit from the recent rise in the London Interbank Offered Rate (“LIBOR”). As of 3/31/2018 and 6/30/2018, 73% and 74% of MAIN’s debt investments had floating-rates, respectively. In addition, basically all of MAIN’s floating-rate debt investments had surpassed their respective cash LIBOR floor. When calculated, MAIN’s debt investment portfolio had a weighted average annualized yield of 10.25% and 10.48% as of 3/31/2018 and 6/30/2018, respectively.

MAIN reported dividend income of $10.1, $9.5, $13.8, and $13.7 million for the third quarter of 2017, fourth quarter of 2017, first quarter of 2018, and second quarter of 2018, respectively (see boxed blue reference “2a”). When calculated, MAIN increased (decreased) the company’s quarterly dividend income by ($0.6), $4.3, and ($0.2) million (rounded), respectively. I believe readers would agree MAIN notably increased the company’s dividend income during the first and second quarters of 2018. A majority of this income came from MAIN’s control and affiliate investments which continue to perform at or above expectations (more on this later in the article). Simply put, this was a positive catalyst/trend.

Continuing to move down Table 1, MAIN reported total expenses of $17.8, $18.3, $19.0, and $20.4 million for the third quarter of 2017, fourth quarter of 2017, first quarter of 2018, and second quarter of 2018, respectively. When calculated, MAIN increased the company’s quarterly expenses by $0.6 (rounded), $0.7, and $1.4 million, respectively. I believe most readers would agree this has been a fairly consistent, gradual increase in expenses. However, this is not surprising as MAIN has continued to gradually increase the company’s investment portfolio (hence total investment income). When compared to some business development company (“BDC”) peers who are externally managed, MAIN is internally managed which has continued to generate quarterly cost savings via lower expense ratios. On a quarterly basis, this continues to positively impact MAIN’s NII. On a cumulative basis, this continues to positively impact MAIN’s net asset value (“NAV”).

When all the amounts above are combined, MAIN reported NII of $34.0, $37.5, $37.0, and $39.5 million for the third quarter of 2017, fourth quarter of 2017, first quarter of 2018, and second quarter of 2018, respectively. When calculated, MAIN increased (decreased) the company’s quarterly NII by $3.5, ($0.5), and $2.5 million, respectively. The following was my MAIN NII per share projection for the second quarter of 2018 versus the company’s actual reported amount:

My Previous MAIN Q2 2018 NII Projection: $0.653 per share

MAIN’s Actual Q2 2018 NII: $0.660 per share

As readers can see, my MAIN NII per share projection for the second quarter of 2018 was “very close” when compared to the company’s actual results. In a nutshell, MAIN’s NII was a very minor outperformance when compared to my expectations. Let us now discuss MAIN’s valuation accounts.

Valuation Accounts:

Still moving down Table 1, MAIN reported a net realized gain (loss) on investments of ($10.7), ($11.7), $6.1, and ($15.5) million for the third quarter of 2017, fourth quarter of 2017, first quarter of 2018, and second quarter of 2018, respectively. As such, after modest net realized losses during MAIN’s third and fourth quarters of 2017, the company reported a nice “bounce back” net realized gain for the first quarter of 2018. However, MAIN once again reported a modest net realized loss for the second quarter of 2018. I would say this realized loss was the lone disappointment during the quarter.

Readers of my MAIN dividend sustainability articles know it is very important for the company to generate net realized gains in order to continue paying out its special periodic dividend twice a year. A detailed “breakdown” of MAIN’s prior period net realized gain (loss) amounts were covered in prior articles. As such, they will not be discussed again here. However, let me highlight what occurred within this account during the second quarter of 2018.

Within MAIN’s control investments, the company reported a net realized loss of ($8.4) million for the second quarter of 2018. This amount was the direct result of a realized gain (loss) of ($8.7) and $0.3 million on MAIN’s investment in Marine Shelters Holdings, LLC (Marine Shelters) and Uvalco Supply, LLC (Uvalco), respectively. Marine Shelters was already a portfolio company that was on non-accrual status for several quarters. As such, this eventual unrealized to realized loss reclassification was not a surprise.

Within MAIN’s non-control/non-affiliate investments, one notable event occurred which was negative in nature. MAIN reported a net realized loss of ($5.7) million in regards to the company’s investment in CapFusion, LLC (CapFusion). Similar to Marine Shelters, CapFusion was a portfolio company which was on non-accrual status for several quarters. As such, the eventual unrealized to realized loss reclassification within this portfolio company was not a surprise either. However, I would have been more pleased to see some more notable realized gains occur during MAIN’s second quarter of 2018 to offset these reductions to the company’s cumulative undistributed taxable income (“UTI”).

In addition, MAIN recorded a ($1.5) million realized loss on the extinguishment of debt in relation to the company’s redemption of its 6.125% Notes during the quarter.

Continuing to move down Table 1, MAIN reported net unrealized appreciation (depreciation) on investments of $16.1, $47.7, ($9.5), and $32.7 million for the third quarter of 2017, fourth quarter of 2017, first quarter of 2018, and second quarter of 2018, respectively. As such, after modest and notable net unrealized appreciation during MAIN’s third and fourth quarters of 2017, the company reported modest unrealized depreciation for the first quarter of 2018. However, I believe MAIN had a nice bounce back with the company’s notable unrealized appreciation during its second quarter of 2018. As discussed in previous MAIN articles, the company’s notable unrealized appreciation during the fourth quarter of 2017 was partially the result of passage of the Tax Cuts and Jobs Act (“TCJA”). This appreciation was also the direct result of CBT Nuggets, LLC’s (CBT Nuggets) gains in the cryptocurrency market. However, this entire gain was reversed out during MAIN’s first quarter of 2018 with the sharp drop in a particular cryptocurrency. This event was fully discussed in prior MAIN articles.

When it comes to MAIN’s $32.7 million net unrealized appreciation for the second quarter of 2018, this was partially the result of the unrealized to realized reversal of $15.5 million which was discussed above. In addition, the following portfolio companies experienced notable valuation fluctuations during the second quarter of 2018: 1) CBT Nuggets ($3) million; 2) Gamber-Johnson Holdings, LLC (Gamber-Johnson) $7 million; 3) GRT Rubber Technologies LLC (GRT Rubber) $2 million; 4) MSC Adviser I, LLC (MSC Adviser I) $14 million; and 5) Drilling Info, Inc. (Drilling) $7 million. As a whole, the remainder of MAIN’s investment portfolio reported minor-modest net unrealized depreciation.

In regards to Drilling, MAIN recently disclosed to the public the company exited its remaining equity position in this portfolio company. Upon this realizable event, MAIN recorded a realized gain of $15.5 million during the third quarter of 2018. Simply put, this reverses out the ($15.5) million realized loss MAIN recorded during the second quarter of 2018. As such, this realized gain helps out when it comes to MAIN’s cumulative UTI.

As a whole, I believe MAIN’s investment portfolio (from a valuation perspective) slightly-modestly outperformed my expectations which ultimately led to the company reporting EPS of $0.927 for the second quarter of 2018. In comparison, I projected MAIN would report EPS of $0.844. Most of this outperformance stems from one particular portfolio company, MSC Adviser I. Simply put, MAIN reported larger unrealized appreciation within this portfolio company versus my expectation. Along with projecting/determining certain accretive equity issuances, the following was my MAIN NAV per share projection as of 6/30/2018 versus the company’s actual reported amount:

My Previous MAIN NAV as of 6/30/2018 Projection: $23.85 per share (range $23.65-$24.05 per share)

MAIN’s Actual NAV as of 6/30/2018: $23.96 per share

Now, let us shift topics a bit and check the overall “health” of MAIN’s investment portfolio.

2) FMV Investment Rating Analysis on MAIN’s Debt and Equity Investments:

Since FMV depreciation (whether unrealized or realized) directly impact MAIN’s EPS in the quarter of occurrence, this analysis has a direct impact on the company’s future NAV sustainability. I believe this analysis will bring some added clarity to readers to better understand how MAIN’s investment portfolio was rated, regarding valuations and credit risk, over the prior several quarters. To begin this analysis, Table 2 is provided below.

Table 2 – MAIN Investment Rating Analysis as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018 (Based on FMV)

(Source: Table created by me, partially using MAIN data obtained from the SEC’s EDGAR Database [link provided below Table 1])

Using Table 2 above as a reference, I classify MAIN’s debt and equity investments within one of the following three portfolios: 1) control (dark blue coloring); 2) affiliate (olive green coloring); or 3) non-control/non-affiliate (purple coloring). A control investment is where MAIN owns (through an equity investment) at or greater than 25% of a portfolio company’s outstanding voting securities. An affiliate investment is where MAIN owns (through an equity investment) at or greater than 5% but less than 25% of a portfolio company’s outstanding voting securities. Within these three classifications, five different investment ratings are shown based on each portfolio’s recent FMV. I am including four separate points in time to better highlight movements within each classification.

In my professional opinion, this specific analysis is a good forward-looking metric to spot potential portfolio companies that would have a higher probability for an eventual loss of principal and/or non-accrual. In addition, spotting certain past/recent trends within a BDC’s investment portfolio provides additional insight regarding accurate, reliable projections in the future (which I believe I have continued to provide to readers through periodic articles/analysis).

An investment rating of “1” describes the portion of MAIN’s debt and equity investments that were performing at or above expectations. An investment rating of “2” describes the portion of investments that were performing near expectations. An investment rating of “3”, “4”, and “5” describes the portion of investments that were performing slightly, modestly, and materially below expectations, respectively.

Investment Rating 1 and 2 (Performing Near, At, or Above Expectations):

Still using Table 2 as a reference, I have classified 82%, 82%, 84%, and 84% of MAIN’s investment portfolio performing at or above expectations as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018, respectively (based on FMV). As such, MAIN’s investment portfolio experienced a fairly consistent/steady performance over the company’s prior several quarters. The percentage increase during the first quarter of 2018 was mainly attributable to various debt and equity investments being reclassified from an investment rating of 2 to an investment rating of 1 (a positive catalyst/trend). As of 6/30/2018, this investment rating had an FMV of $1.99 billion.

I would also point out that I have classified 93%, 93%, 95%, and 92% of MAIN’s control investment portfolio performing at or above expectations as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018, respectively. When analyzing control investments, this percentage continues to be the highest out of the fifteen BDC peers I currently cover. Simply put, this continues to be a very high percentage. This is one of the main reasons why I have gradually increased my price target for MAIN over time. I also believe this is one of the main reasons why MAIN’s stock price has continued to trade at a substantial premium to most of the company’s BDC peers.

I believe the following MAIN control portfolio companies were performing materially above expectations as of 6/30/2018: 1) Café Brazil, LLC (Café Brazil); 2) CBT Nuggets (even with the recent decrease in valuation; tied to cryptocurrencies and not the underlying business model); 3) Gulf Manufacturing, LLC (“Gulf”); 4) Harrison Hydra-Gen, Ltd. (Harrison); 5) MSC Adviser I; 6) OMi Holdings, Inc. (“OMi”); 7) Pegasus Research Group, LLC (Pegasus); and 8) River Aggregates, LLC (River Aggregates).

Next, I have classified 9%, 10%, 7%, and 8% of MAIN’s investment portfolio performing near expectations as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018, respectively. As such, MAIN’s investment portfolio had a minor percentage net decrease regarding debt and equity investments performing near expectations over the prior several quarters. This percentage net decrease was mainly attributable to various debt and equity investments being reclassified from an investment rating of 2 to an investment rating of 1 (a positive catalyst/trend). As of 6/30/2018, this investment rating had an FMV of $194 million.

When combined, I have classified 91%, 92%, 91%, and 92% of MAIN’s investment portfolio performing near, at, or above expectations as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018, respectively. As such, I believe a vast majority of MAIN’s investment portfolio continued to be performing near, at, or above expectations. However, the proportion of investments that exhibited varying levels of underperformance/non-performance still needs to be analyzed/discussed.

When calculated, I have determined 9%, 8%, 9%, and 8% of MAIN’s investment portfolio was experiencing varying levels of underperformance/non-performance as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018, respectively. When compared to the fourteen other BDC peers I currently cover, MAIN had a low percentage of debt and equity investments performing either slightly, modestly, or materially below expectations as of 6/30/2018 (a positive catalyst/trend).

To put things in better perspective, the following “FMV versus cost ratios” were for MAIN and fourteen other BDC peers as of 3/31/2018 (in order of highest to lowest ratio): 1) NEWTEK Business Services Corp. (NEWT) 1.2307x; 2) MAIN 1.0725x; 3) Gladstone Investment Corp. (GAIN) 1.0245x; 4) FS Investment Corp. (FSIC) 1.0206x; 5) Golub Capital BDC Inc. (GBDC) and Solar Capital Ltd. (SLRC) 1.0122x; 7) TPG Specialty Lending (TSLX) 1.0066x; 8) Ares Capital Corp. (ARCC) 0.9946x; 9) Apollo Investment Corp. (AINV) 0.9909x*; 10) TCP Capital Corp. (TCPC) 0.9836x; 11) Prospect Capital Corp. (PSEC) 0.9752x; 12) American Capital Senior Floating Ltd. (OTC:ACSF) 0.9599x; 13) Oaktree Strategic Income Corp. (OCSI) 0.9317x; 14) Medley Capital Corp. (MCC) 0.8573x; and 15) Oaktree Specialty Lending Corp. (OCSL) 0.8425x.

* = wrote-off many non-accruals during calendar Q2 2017

Investment Rating 3 (Performing Slightly Below Expectations):

I have classified 4%, 3%, 4%, and 3% of MAIN’s investment portfolio performing slightly below expectations as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018, respectively. All debt and equity investments within this classification should be carefully monitored each quarter to watch for future FMV write-downs and possible eventual non-accruals. As of 6/30/2018, this investment rating had an FMV of $66 million. When calculated, this analysis shows MAIN’s investment portfolio had a decreased FMV balance of ($28) million regarding the company’s debt and equity investments performing slightly below expectations over the prior several quarters. This decrease was mainly attributable to several debt and equity investments being reclassified from an investment rating of 3 to an investment rating of 2 (a positive catalyst/trend).

Investment Rating 4 (Performing Modestly Below Expectations):

I have classified 2%, 1%, 2%, and 2% of MAIN’s investment portfolio performing modestly below expectations as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018, respectively. All debt investments within this classification should be CONSIDERED for non-accruals. In other words, heightened monitoring should occur. Also, debt and equity investments within this classification have a modest probability of a partial non-recovery of one’s remaining principal/cost basis. As of 6/30/2018, this investment rating had an FMV of $52 million. When calculated, this analysis shows MAIN’s investment portfolio had an increased FMV balance of $3 million regarding the company’s debt and equity investments performing modestly below expectations over the prior several quarters.

Investment Rating 5 (Performing Materially Below Expectations):

Finally, I have classified 3%, 4%, 3%, and 3% of MAIN’s investment portfolio performing materially below expectations as of 9/30/2017, 12/31/2017, 3/31/2018, and 6/30/2018, respectively. All debt investments within this classification should be on non-accrual status unless there is a specific reason otherwise (exceptions can [and do] occur). Also, certain debt and equity investments within this classification have a modest-high probability of a partial non-recovery of one’s remaining principal/cost basis (including a possible total write-off). As of 6/30/2018, this investment rating had an FMV of $66 million. When calculated, this analysis shows MAIN’s investment portfolio had a decreased FMV balance of ($2) million regarding the company’s debt and equity investments performing materially below expectations over the prior several quarters.

It is never a positive trend when a company has any part of its investment portfolio within this rating classification. With that being said, when compared to the fourteen other BDC peers I currently cover, MAIN’s percentage of investments classified as performing materially below expectations continued to remain relatively low. The following MAIN portfolio companies had debt investments on non-accrual status as of 6/30/2018: 1) Access Media; 2) Datacom, LLC (Datacom); 3) Rocacela, LLC (Rocacela); 4) Clarius BIGS, LLC (Clarius); and 5) Ospemifene Royalty Sub LLC (Ospemifene).

Readers should understand any future non-accruals would bring the risk of a decrease in interest income per GAAP (as we saw in the first quarter of 2018 regarding Access Media) and the risk of decreases in NAV from future FMV write-offs. In addition, it should be noted MAIN completed a couple minor (proportionately speaking) oil and gas debt-to-equity exchanges during 2016 and recent restructurings with Charlotte Russe, Inc. (Charlotte Russe) and GST Autoleather, Inc. (GST Autoleather; which was subsequently sold) during the first quarter of 2018. This typically has a minor negative impact on NII as the prior accrued interest income does not exist anymore while the probability of an investment generating consistent dividend income is low.

I believe the debt and equity investments within these lower classifications should continue to be monitored to a greater degree as they are the most susceptible to FMV write-downs, non-performance (which would lead to non-accruals), and ultimately a probable partial (in some cases total) loss of principal/cost basis. This would negatively impact MAIN’s future NAV sustainability. This analysis also identifies certain portfolio companies that are performing above expectations. This provides direct evidence for possible continued net investment appreciation. This would positively impact MAIN’s future NAV sustainability. From the analysis above, I believe MAIN’s investment portfolio as of 6/30/2018 remains “in good health” (especially when compared to most sector peers).

Conclusions Drawn:

Readers have requested that I provide these types of assessment articles showing how my quarterly projections “stacked-up” to MAIN’s actual results. I believe the analysis above accomplishes this request. Since a company’s operating performance (quarterly earnings) is one of the key drivers to stock price valuations, I believe these types of assessment articles are appreciated by most readers (owners and non-owners of MAIN alike). In addition, this article provides my overall thoughts on the quarter which I believe most readers see as beneficial when assessing certain investing strategies.

From the analysis provided above, I believe it was determined MAIN’s NII was basically “as expected” (some could argue a very minor outperformance). MAIN’s EPS and NAV per share figures were a minor-modest outperformance when compared to my expectations. This outperformance was mainly centered around one particular portfolio company, MSC Adviser I (larger valuation gain versus my projection). However, all three metrics were still within my projected range. Simply put, I believe MAIN reported another good/attractive quarter.

My next MAIN dividend sustainability article will be available to readers prior to the company’s next set of dividend declarations (prior to November 2018). This future article will include MAIN’s quarterly net investment company taxable income (“ICTI”) and cumulative UTI metrics.

My BUY, SELL, or HOLD Recommendation:

In my opinion, the following positive factors/catalysts should be highlighted for existing and potential MAIN shareholders: 1) continued relative price stability within the high yield debt market (positively impacts valuations where credit risk remains low; even with broader market volatility in January-February 2018); 2) very attractive quarterly economic returns being generated in recent quarters; 3) continued strong cumulative performance regarding many control and affiliate investments (including positive impacts from recent passage of the TCJA); 4) modest exposure to the oil and gas sector (positive since crude oil prices have rebounded from depressed prices over the past several years); 5) fairly low exposure to the retail sector (some parts negatively impacted by continued change in consumer behavior/trends); 6) continued gradual increase in percentage of floating-rate debt investments (74% as of 6/30/2018 versus 67% as of 6/30/2017); 7) continued high percentage of fixed-rate liabilities (70% as of 6/30/2018); 8) recent redemption of higher-cost debt/issuance of lower-cost debt; 9) strong track record of management’s financial expertise/underwriting skills; 10) continued gradual increase in the company’s monthly dividend per share rate (unlike most sector peers); 11) continued periodic generation of net realized gains (which equate to capital gains per taxation metrics) which has led to the continued declaration of special periodic dividends; 12) shareholder-friendly internalized management structure which continues to lead to low operating expenses when compared to sector peers; 13) continued generation of dividend income over multiple credit cycles; 14) 0.5% increase in company’s weighted average annualized yield regarding its debt investments over the prior two quarters; and 15) prudent/non-excessive use of the company’s “at-the-market” (“ATM”) equity offering program (management has not rapidly expanded the company’s investment portfolio at the risk/to the detriment of credit quality).

However, the following cautionary/negative factors should cause heightened awareness for existing and potential MAIN shareholders: 1) recent elevated amount of loan repayments due to refinancing with other market participants or impacts with current corporate interest deductibility (including negotiated lower stated interest rates with existing portfolio companies [negatively impacts NII]); 2) continued unrealized depreciation within several control/non-control investments and recent slight “uptick” in non-accruals (Datacom); 3) continued below average percentage of floating-rate debt investments when compared to sector peers (however, the company continues to have an attractive weighted average cash LIBOR floor); and 4) continued large premium to most sector peers when comparing stock price to the company’s NAV (some market participants [including myself] would argue this premium is justified).

MAIN recently closed at $40.42 per share as of 8/3/2018. This was a $16.46 per share premium to MAIN’s NAV as of 6/30/2018 of $23.96 per share. This calculates to a price to NAV ratio of 1.6868 or a premium of 68.68%. When calculated, MAIN currently has a price to annualized NII per share ratio of 15.30x.

With the analysis above as support, I currently rate MAIN as a SELL when the company’s stock price is trading at or greater than a 75% premium to its NAV as of 6/30/2018, a HOLD when trading at greater than a 55% but less than a 75% premium to its NAV as of 6/30/2018, and a BUY when trading at or less than a 55% premium to its NAV as of 6/30/2018. These ranges are unchanged when compared to my last MAIN article (approximately one month ago).

As such, I currently rate MAIN as a HOLD. My current price target for MAIN is approximately $41.95 per share. This is currently the price where my recommendation would change to a SELL. The current price where my recommendation would change to a BUY is approximately $37.15 per share. Long-term holders of MAIN should gain comfort that I continue to believe MAIN’s dividend and NAV sustainability is currently very high and fairly high, respectively.

Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader’s current investing strategy. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions.

Current BDC Sector Stock Disclosures:

On 9/6/2017, I re-entered a position in PSEC at a weighted average purchase price of $6.765 per share. On 10/16/2017 and 11/6/2017, I increased my position in PSEC at a weighted average purchase price of $6.285 and $5.66 per share, respectively. When combined, my PSEC position has a weighted average purchase price of $6.077 per share. This weighted average per share price excludes all dividends received/reinvested. Each PSEC trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 2/2/2018, I re-entered a position in MAIN at a weighted average purchase price of $37.425 per share. On 2/5/2018, I increased my position in MAIN at a weighted average purchase price of $35.345 per share. My second purchase was approximately triple the monetary amount of my initial purchase. On 3/1/2018, I increased my position in MAIN at a weighted average purchase price of $35.365 per share. When combined, my MAIN position has a weighted average purchase price of $35.729 per share. This weighted average per share price excludes all dividends received/reinvested. Each MAIN trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 6/5/2018, I initiated a position in TSLX at a weighted average purchase price of $18.502 per share. On 6/14/2018, I increased my position in TSLX at a weighted average purchase price of $17.855 per share. My second purchase was approximately double the monetary amount of my initial purchase. When combined, my TSLX position has a weighted average purchase price of $18.071 per share. This weighted average per share price excludes all dividends received/reinvested. Each TSLX trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

All trades/investments I have performed over the past few years have been disclosed to readers in real time (that day at the latest) via the StockTalks feature of Seeking Alpha (which cannot be changed/altered). Through this resource, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered). Through StockTalk disclosures, as of July 2018, I had an unrealized/realized gain “success rate” of 97.0% and a total return (includes dividends received) success rate of 100% out of 33 positions (see my profile for more detailed investing statistics). The slight increase in percentages, when compared to last month, was due to the fact my re-entered position in Altria Group Inc. (MO) recently turned positive. I encourage other Seeking Alpha contributors to provide real time buy and sell updates for their readers which would ultimately lead to greater transparency/credibility.

Analyst’s Disclosure: I am/we are long MAIN, MO, PSEC, TSLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I currently have no position in ACSF, AINV, ARCC, FSIC, GAIN, GBDC, MCC, NEWT, OCSI, OCSL, SLRC, or TCPC.

Comments

[peteF]

Interesting price target for MAIN at approx' 41.95 vs 41.21 previous HIGH. This article fills me with many thoughts as I see a money pouring in to a 'successful' 10 yr Treasury auction even though it is of record issuance....amidst an overall tightening environment with QT and interest rates rising. Major US indexes are, like MAIN, near all time highs...but many measures of breadth on market prices are not as favorable as the FMV stats given here for MAIN. On balance, investors seem more eager to buy Treasuries than stocks.

[deltadunarii]

Thank you for the thorough analysis which reinforce my own beliefs. Long holder of MAIN and adding in small increments. Also much appreciate the price target estimates. I have my BUY target at a lot lower price ($35) but now I might nudge it higher based on your advice.

All the best,
delta

[G. Blair Bauer]

Live this company and always buying more for the long term.

[Scott Kennedy]

Hi readers,

I appreciate all the positive feedback on the analysis.

Due to the fact 40+ companies that I cover have reported earnings (or will soon report), I will not be responding to most comments within this particular article (but I read all the positive feedback).

If you have a specific question when it comes to this analysis or MAIN in general, please send me a personal message (“pm”) through the inbox feature of S.A.

Thanks.

Scott

[BartAtTheRanch]

Scott,

I am really impressed! I have never seen the historical credit quality tables presented as you have herein. Thanks for the incredibly great job! I just wish you had time to review yet more BDCs!

Bart

[MyJourney]

Scott, nearly all of your reviews result in HOLD. Just saying. Not a bad place to be for most companies we've already invested in.

Long MAIN, and appreciate your current analysis.

[Scott Kennedy]

Hi My Journey,

In the end, it all depends on where a particular stock is trading. I would point out recent / fairly recent articles on CHMI / TSLX / and BMNM recommended a BUY or a STRONG BUY.

So, while some stocks I have covered are currently within my HOLD range, I do have some in my BUY range as well. You just need to find each applicable stock / article.

Scott

[UncleFred]

Where’s the “Conclusions” section after all that??

[Scott Kennedy]

Hi Uncle Fred,

I would suggest to type in the search term "conclusions drawn" on this page and you should find that section of the article (it's towards the end of the article).

Scott

[onetusk]

A heart felt thank you.

[SleepyInSeattle]

Excellent article...thanks. I appreciate every article you have provided and look forward to more.

[eaglebear]

Scott:
Appreciate your work!

[zogs]

Great update thanks.

[AMcCausland]

Thanks for the update.

[3 beach dogs]

solid look under the hood. excellent work. appreciated.

[nicholas davout]

Excellent article, very well done. Thank you. Long MAIN in all my accounts from $25+.

[robmceachran]

Great read scott,Looking forward to the article on two.

[MDN1]

Thanks for the update Scott. I know Main's quality is visible and quantifiable vs. its peers as you have demonstrated, however, I can't ever seem to get my head around the current premium to BV at current levels, and have not bought into their story. On another note it is interesting see the blow away "fmv vs. cost" that NEWT currently enjoys vs. the field. This gives me added faith in their story.

Long NEWT

[mbn]

His Scott;

Thanks as always. It is amazing how quickly you are able to get these analysis out. I mean, earnings were just announced a short time ago.

[tricksible]

brilliant

[peacewarrior]

awesome

[Uncle Ted]

Thanks ! Excellent analytics .