Main Street Capital Corp (MAIN) 2008 Q3 法說會逐字稿

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 open for questions. (Operator Instructions). This conference is being recorded today, Tuesday, November 11th of 2008.

At this time, I'd like to turn the conference over to Mr. Gus Okwu with DRG&E. Please go ahead.

Thanks. Good morning, everyone. Thank you for joining us for Main Street Capital Corporation's third quarter of 2008 conference call. Joining me today on the call are Vince Foster, Main Street's Chairman and CEO, and Todd Reppert, the Company's President and CFO.

Main Street issued a press release last night with details of the Company's quarterly financials and operating results. This document is available in the Newsroom section of the Company's website at www.mainstcapital.com.

A replay of today's call will be available beginning one hour after the completion of this call until 11:59 a.m. Eastern time on Wednesday November 19. The replay maybe accessed by dialing 303-590-3000. The access code for the replay is 11121586#. Please note information reported on this call speaks only as of today, November 11, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

I should also mention that our comments today will contain forward-looking statements within the meanings 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 footnote regarding non-GAAP measures in the Company's press release and in the Risk Factors section of the Company's filings with the SEC.

I would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be access on the Company's webpage at www.mainstcapital.com.

And now I'd like to turn the call over to Vince Foster.

Thanks, Gus. We'd like to thank all of you for participating in today's call. I will begin by providing an operational update on our existing portfolio, 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&A.

Overall, we were pleased with our performance during the third quarter, as both our net investment income -- the net realized income exceeded 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 with eight of our portfolio company investments appreciating by a total of $2.8 million and six depreciating by a total of $2.2 million.

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

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

During the quarter, we exited our equity and remaining debt position in Travis Aggregates, resulting in a realized gain, including transaction fees of $6.4 million. And subsequent to the quarter, we exited our equity and 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 will consist 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 in excess of 17,000 shares of our stock during the quarter, which brings total officer/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 appreciation. To the extent our 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 the capital structure, as we hold the senior debt position in the vast majority of our companies.

As a self-originating one-stop sponsor, our pipeline of potential investments continues to be strong, but we are being highly selective. We are experiencing stronger negotiating leverage with the continued supply/demand imbalance of available investment opportunities versus investors in our markets.

However, I would characterize our current investing environment as challenging in terms of finding opportunities with either sufficient visibility in the current economic climate or opportunities where we were able to price the risk of poor visibility into the investment. Having said that, we are currently working hard on several transactable opportunities.

This concludes my prepared comments. I'll now hand the call over to Todd Reppert, our President and CFO, who will go over our operating results in greater detail. After Todd's remarks, I'll make some summary comments and then we will be available to take your questions.

Thank 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.

Expand on Vince's comments, we continue to expect slower portfolio growth in the near-term due to our focus on being selective and prudently deploying existing liquidity. In addition, co-investing all new investments with Main Street Capital II pursuant to the SEC exemptive relief is also impacting the net amount 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 flexibility during volatile equity and credit markets like we are seeing in 2008. We're 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 representing 13.6% increase from the dividends paid in the fourth quarter of 2007, which was our first 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 post-IPO dividends by approximately 139% through net realized income, which includes the realized gains we have generated. Since IPO, we have also covered over 83% of our dividends through distributable NII, which does not include our realized gains. Generating realized gains is a fundamental part of Main Street's investment strategy, as demonstrated through our long-term track record, which includes 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 the third quarter operating results. For the third quarter of 2008, total investment income increased approximately 43% over the comparable period in the prior year. As mentioned earlier, we expect a net growth in our portfolio to be somewhat slower, due to our intention to be selective with new investments in the near-term and due to the co-investment requirements with Main Street Capital II.

While slower portfolio growth will impact the growth in interest income, we believe that prudently deploying our capital and extending the horizon 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-accrual status of certain debt investments.

I should note that we have very little non-cash or paid-in-kind 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 amounts will vary and will be dependent 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.

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

During the third quarter of 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 expense, increased 17% compared to prior-year, primarily due to expenses associated with operating as a public entity and slightly higher interest expense. Our annualized year-to-date operating costs, exclusives of interest and share-based compensation, were approximately 1.6% of average assets, which we believe reflects an appropriate level of cost efficiency.

Third quarter net realized income per share was $0.76, which compares to $0.46 per share in the third quarter of 2007. Third quarter net realized income included the gain realized from the Travis Aggregate sale 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, previously recognized net unrealized appreciation related to the Travis Aggregates and MagnaCard exits. These accounting reversals are required to be reflected in net unrealized appreciation for GAAP purposes, but affectively represent an offset to the net realized gain recognized during the quarter.

Excluding these accounting reversals, Main Street recognized gross realized 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 core portfolio was 105% of core portfolio at cost, which reflects reasonable portfolio performance on the whole.

While we have not seen 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 US economy, including many of the industries and end markets represented in our portfolio. However, our strategy of maintaining the first lien position coupled with low portfolio/company leverage will provide us structural flexibility during a period of economic stress.

Now let me turn to liquidity and capital resources. As mentioned previously, we intend to remain conservative in 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 plus short-term highly liquid investments. As of today, we have approximately $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. The 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 that we can continue to grow our net realized income in dividends at a steady pace, while also maintaining our capital flexibility.

We currently have $55 million of 10-year SBIC debt outstanding, bearing fixed interest at 5.8% per year. The first principal maturity of our SBIC leverage is not until 2013, and the weighted average maturity for all tranches 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 provisions of SFAS 159, related to accounting for debt obligations at 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 NAB per share of $12.85 at year-end '07. Our debt-to-equity ratio at September 30 was approximately 0.48 to 1, and our cash to debt ratio was 0.85 to 1. As a reminder, all of our debt, 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 investments held the first lien security position. We continue to maintain a weighted average effective yield on our debt investments well in excess of 13%. 85% of our portfolio debt investments are structured to bear 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 positions in the vast majority of its portfolio companies, and Main Street's average fully diluted equity ownership was 26%. The weighted average net senior debt to EBITDA ratio for the portfolio was 2.5 to 1 on the basis disclosed in the earnings release or 3.1 to 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 a lower underlying risk profile.

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

Thanks, Todd. So in summary, we're encountering a challenging investing environment, which we are approaching very selectively. We have sufficient liquidity through the end of 2009 or potentially longer, depending upon repayments and exits.

Our portfolio is performing relatively well taken as a whole, and we currently have a solid backlog of investment opportunities. I'd like to thank our shareholders for their continued support and I will now open the call for Q&A.

(Operator Instructions). Vernon Plack, BB&T Capital Markets.

Vince, I had a question just in terms of more in a sort of 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, interested in maybe a little more color in terms of portfolio growth.

You mentioned limited -- I know you have capital available that you could actually grow your investment portfolio quite a bit. And just trying to get a sense -- I know, at least at this point, why even bother to grow the portfolio a whole lot, if at all, given that we're headed into what appears to be tougher times?

Yes. That's a good question. We continue to look at opportunities at a pace that is as robust as I've ever seen. Because we have money, we don't represent a financing contingency with respect to debt, et cetera. And so what we're doing is, Vernon, 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 that 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 leverage as opposed to at the top. And so that's just kind of our philosophy.

A lot of the companies we're seeing we just don't have the visibility to conclude that they can make it through this cycle. A lot of the companies we're seeing do. So, we're just being -- again, another way of saying highly selective, which is very opportunistic. We may very well go a couple of quarters without closing a deal, but the other thing too is with the constituents that we have out there that are showing us deal flow, we do want to be respectful of them and continue to look at the opportunities they bring us and give it a good honest look. But they know that they nearly have to be a perfect candidate before we're going to want to move forward.

Okay. And do you -- with the cash that you have available plus availability on the line, which is a little over $76 million, I think, $76 million, $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 of where if you full expect at this point to put all that money to work between now and the end of 2009.

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

Okay, thank you very much.

(Operator Instructions). Sean Jackson, Avondale Partners.

Yes. On the -- let me get this straight -- on the unrealized losses, you said most of that was accounting reversals, is that correct?

That's correct.

Okay, and so the -- so, other than that, the portfolio of -- I guess was a -- if you discount that, you had an unrealized gain of about $600,000?

That's right. And that's on our investment portfolio. And then with respect to our management company, you kind have a regular, couple hundred thousand dollar decline each quarter.

Okay. And what is exactly your visibility as to getting realized gains for '09? Given that the dividend payments are, again, somewhat dependent on some gains going forward?

Right. The reason we have pretty good visibility on that is that we structure our investments with management such that the management team/the portfolio company is really our exit. Because when you're transacting at four times EBITDA and you have 2.5, 3 times in debt, after three, four, five years, the Company is postured to take out our investment. The Company is performing well with a little bit of bank debt. And there's generally room under a more traditional credit facility to not only take out our debt but take out our equity.

And in addition, as an incentive to management, you will see frequently that we allow them, if they're performing well, to take out our equity ahead of our debt. And so -- 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 some -- we still have -- we have investments that we made in '03, '04, that we're in preliminary discussions with how that's going to happen.

Okay. Thank you.

Vernon Plack, BB&T Capital Markets.

Todd, I'm trying to get a sense for the cash flow, the EBITDA for your underlying portfolio of companies. Either -- I don't know 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 companies are doing in this type of environment.

Well, I mean, the answer is, we do look at it. Obviously, it's -- in a portfolio, you have some up, some down. But the portfolio on the whole, year-over-year, if you look at kind of trailing 12 months 9/30 or whatever the latest financials 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 may be a little different ballgame as far as going forward. So we're very cognizant of that and remain kind of cautious in our outlook, not only for new investments, but for what's going on in our existing portfolio. And I think we'll just have to see how that plays out over the next year or so.

Yes, the TTM at 9/30 includes fourth quarter of '07, which is not terribly relevant right now, so we're keeping an eye on it.

Okay. And I think you mentioned, you have one loan on -- one investment on non-accrual. Is that -- what's the cost basis on that loan?

It's around -- it's called global, so it's around $4 million.

All right. Okay, great. Thank you very much.

(Operator Instructions). Sean Jackson, Avondale Partners.

Yes, just real quickly. Typically when you said the management team is your exit typically in investment -- now, are they -- are the management team somewhat dependent upon the credit markets to get the cash to take it out? Or typically how do they get the money to do that?

Generally, they will go to a local or regional bank. They're trying to get a $3 million, $4 million, $5 million credit facility. It's 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 a personal guarantee of the managers. So that's kind of their decision. And if they need -- 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're really going from 2.5 times EBITDA to our debt, and two, three, four years down the road, you get that down to maybe one-half or one times EBITDA that a bank is comfortable coming in on an ABL basis, maybe with a little stretch piece from the bank or us to complete the transaction.

Okay. No, that's helpful. Thanks.

(Operator Instructions). And at this time, there are no additional questions. I'd like to turn it back to Mr. Foster for any closing remarks.

I don't have any closing remarks, so we will see you all again next quarter.

Thank you for participating in Main Street Capital Corporation's third quarter 2008 earnings 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 a.m. Eastern time on November 19. Dialing 1-303-590-3000 can access the replay, and the access code to the replay is 11121586#. Thanks.

Thank you, sir. Ladies and gentlemen, that does conclude our conference. Thank you for your participation and for using ACT teleconferencing. You may now disconnect.