Main Street Capital Corp (MAIN) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Main Street Capital fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Wednesday the 10th of March 2010

I would now like to turn the conference over to Ken Dennard of DRG&E. Please go ahead.

Thank you and good morning, everyone. Thanks for joining us for Main Street Capital Corporation's fourth quarter 2009 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 that detailed the Company's quarterly financial operating and operating results. This document is available in the Investor Relations section of the Company's website, and that's www.mainSTcapital.com. A replay of today's call will begin about an hour after the completion of call and will be available until March 17th. Information on how to access the replay is included in the press release released yesterday.

Please note that information reported on this call speaks only as of today, March 10, 2010 and therefore, you will find that time-sensitive information may no longer be accurate as of the time of any replay listing. I should also mention that our conference call today will contain forward-looking statements 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 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. We finally advise you that this conference call is being broadcast live over the internet webcast system that can be accessed on the Company's web page at www.mainSTcapital.com. With that, I'd like to turn the call over to Vince.

Thanks, Ken, and thank you all for joining us today. I'll provide a brief update on our investment portfolio, then discuss our [given] outlook and conclude by commenting on the current investing environment and the completion of our Main Street Capital II exchange offer. Following my comments, Todd will cover our fourth quarter 2009 financial and operational performance, and then we will take your questions. Overall, our portfolio performed about as we expected during the fourth quarter. Nine of our portfolio company investments appreciated during the quarter while eight depreciated. The net amount of unrealized depreciation resulting from these investments during the quarter was $2.5 million. We finished the quarter with a net asset value per share of $11.96, a decrease of $0.05 per share over the third quarter. Pro forma for the exchange offer and the related [call one] offering, our net asset value per share at 12/31 was $12.04. While Todd will discuss our fourth quarter results in greater detail, I do not want to spend more much time on it during this presentation, given the completion of the exchange offer and the pro forma impact on our balance sheet and income statement.

Turning next to our dividend outlook, we declared monthly dividends for April, May and June yesterday. We kept the dividend unchanged at $0.125 per month, equal to $0.375 for the quarter. We currently expect to maintain a $0.125 per month payout for the balance of the year. Our Officer Director Group has continued to increase their ownership of our shares via our dividend reinvestment plan or DRIP, acquiring over 20,000 shares during the fourth quarter. The current investing environment we are seeing continues to be favorable from a supply demand perspective. We completed two new investments so far this quarter, deploying about $11.5 million. We will issue a press release providing more details regarding our first quarter investing activity in the near future. Our backlog of investments we are working on and expect to close is consistent with our objective of adding $100 million of gross investment assets during this calendar year.

On January 7th, we completed the Main Street Capital II exchange offer, issuing 1.24 million of our shares in exchange for 88% of a limited partnership interest in the that SBIC fund. We also acquired the GP interest of that fund. As a result, we now manage and consolidated into our financial statements both SBIC funds. This entitles us to the full amount of the recently increased SBIC leveraged GAAP of $225 million of which the two funds combined only have $135 million drawn as of today. We added $71 million of core portfolio investments and and nearly $12 million in cash and liquid investments as part of this transaction, which will be reflected on our balance sheet when we announce our first quarter 2010 results. We were required by SBA rules to fund $24 million in cash into the newly controlled fund, which we did at the time of closing. We financed this with existing cash, liquid investments and by drawing on our bank line of credit.

On January 9th, we completed a follow-on equity offering of 2.875 million shares to, in effect, replenish our cash and liquid asset position and repay our line of credit. We were pleased to be able to issue the shares at a premium to our net asset value after after deducting all underwriting cost related expenses such that the offering was accretive to our existing shareholders from a net asset value perspective. We are now plastered with more than enough liquidity to accommodate our 2010 investment objectives. With that, I would like to turn the call over to Todd to cover our financial results.

Great. Thank you, Vince. Just briefly, I want to note that the 200910-K will be filed later today and we'll post an updated investor presentation, as we always do, on our website. Please prefer to both of those documents for more detailed information about our 2009 results. Main Street continues to build on its strong liquidity position and long-term capital structure. The recently completed Main Street Capital II exchange offer, stock offering that Vince referenced, provides additional liquidity for growth and reinforces the strength of our capital structure. Main Street's focus on liquidity and a conservative capital structure has served our shareholders well during the recent recession and will remain a priority for the Company.

We project to have adequate liquidity for our investment and operational needs throughout all of 2010 and 2011 with well over $170 million of total liquidity including available SBIC leverage. We currently have over $50 million of executed term sheets that have moved the due diligence or documentation phase of the investment process. Based on historical closure rates, we would expect at least 50% of the term sheets would result in closed transactions within the next 60 days. As Vince noted, based on our current expectations for origination activity, we project to close around $100 million of new investments for all of 2010.

During 2009, a few portfolio investments experienced higher than average revenue and earnings reductions, based on specific end market deterioration. At year end, we had three portfolio companies on nonaccrual status which were Hayden, Advantage and Quest, representing just over 1% of the core portfolio at fair value and approximately 8% at cost. In response to the under-performing situation in our portfolio company Quest, we exited our investment during January 2010 and will realize a $4 million loss in the first quarter of 2010, which is consistent with our prior unrealized depreciation for that investment. While our nonaccrual investments have increased given the economic climate, they continue to represent a small portion of the portfolio and the portfolio continues to perform well on the whole. The total fair value of our core portfolio remains above cost at 112% of cost for year end 2009, which we believe is reflective of reasonable portfolio performance during a recession.

During late 2009, we also started to see revenue and earnings stabilization in most of our portfolio companies, which is consistent with the broader economic fundamentals. In several portfolio companies we are seeing meaningful revenue growth, which is also encouraging. Thus, we are could cautiously optimistic that these positive trends at the portfolio level will continue. As Vince noted, the recently closed Main Street Capital II exchange offer was a transformative event for our financial statements. The impact of the exchange offer will be fully reflected in our first quarter 2010 financial statements, which will be the first set of financial statements to be presented on a combined basis. For more detailed information related to the exchange offer, please refer to the pro forma and other financial information included in our form 8-K filing dated January 8, 2010, which is available on our website.

Now let me turn to a few high-level comments regarding the fourth quarter 2009 operating results. Highlights for the full year of 2009 are covered in the earnings release. For the fourth quarter of 2009, total investment income decreased approximately 7% over the same period of 2008. This decrease was principally driven by lower dividend income due to portfolio company retention of earnings in 2009 and lower relative fee income. Both of these items are always more lumpy or transactional in nature. The lower dividend income and fee income for the fourth quarter of 2009 was partially offset by higher interest expense from the core portfolio, as well as interest bearing marketable securities and idle funds investments.

Fourth quarter 2009 operating expenses decreased approximately 6% compared with the same period of 2008, primarily due to lower net, general and administrative and overhead expenses, partially offset by higher share-based compensation expense. During 2009, our net operating expenses excluding interest are running at approximately 1.5% of our total assets. Attributable net investment income for the fourth quarter of 2009 was $0.26 per share and decreased 3% from the same period in 2008.

Per share decrease in distributable net investment income for the fourth quarter was also impacted by higher average shares outstanding due to the June 2009 follow-on stock offering. Distributable net realized loss for the fourth quarter of 2009 was $0.60 per share. Large net realized loss for the fourth quarter of 2009, principally related to the final exit of our investments in Universal Scaffolding and Carlton Global Resources. After a careful situational analysis and review of the alternatives, a decision was made to not risk additional capital and exit both of these investments at a loss, given the continuing uncertainty regarding their revenue prospects and their end markets.

The $6.9 million of net unrealized appreciation recognized in the fourth quarter of 2009 principally consisted of accounting reversals related to the net realized losses just discussed. In addition, we recognized unrealized appreciation on nine core portfolio company investments and unrealized depreciation on eight core portfolio company investments. The $1.5 million tax benefit recognized during the fourth quarter of 2009 related to deferred taxes on unrealized depreciation of several portfolio investments held by our taxable subsidiary.

Let me turn to liquidity and capital resources. As of year end, we had approximately $49 million of cash, marketable securities and idle funds investments. Subsequent to year end, we completed a follow-up stock offering, which raised $40 million of net proceeds at a price to the public equal to 123% of our latest reported NAB per share. At the end of the year, we had $65 million in tenured SBIC debt outstanding varying fixed interest at approximately 5% per year.

As we have stressed many times before, this long-term SBIC leverage provides proper matching of duration and cost compared with our portfolio investments. The applicable provisions of the stimulus bill and a completion of the Main Street Capital II exchange offer give us access to an incremental $90 million in low-cost long-term SBIC borrowing capacity. As discussed in the press release, we are also hopeful that HR 3854 or similar legislation will further increase our SBIC funding capacity. At December 31, 2009, our net asset value was approximately $129.7 million or approximately $11.96 per share. Year end 2009 NAB per share is down roughly 2% compared to year end 2008, and it is down approximately 1% from September 3rd.

Now let me finish with a few core portfolio statistics; all as of December 31, 2009. Consistent with our investment strategy, approximately 80% of our investments at cost were in the form of secured debt investments, and over 87% of our debt investments held the first lien security position. The weighted average effective yield on our net investments was 14.3%. Main Street continues to hold meaningful equity position at 91% of its portfolio companies with an average fully diluted equity ownership of 24%.

At the portfolio level, the weighted average net senior-debt-to-EBITDA ratio was 2.4 to 1 on the basis disclosed in the earnings release or 3.2 to 1 including portfolio company debt, which is junior to Main Street's debt position. The portfolio level weighted average EBITDA to senior interest coverage was also 3.4 to 1. Given that most of our investments since 2006 have been coinvestments with Main Street Capital II, the pro forma portfolio statistics after giving affect of combination with Main Street Capital II looked very similar to the statistics I just discussed. The one exception is that our average equity percentage and the combined portfolio is closer to 35% on a fully diluted basis, compared with 24% on a stand alone basis prior to the exchange offer. With that, I'll turn the call back to Luke so that we may open the lines for Q&A.

Thank you. (Operator Instructions). Our first question comes from the line of [Robert Todd]. Please go ahead.

Just a question about anything on the watch list. Obviously we know there are non-accruals. Has anything been added to your monitoring lists for credit quality and potential risks there. And as a follow-up to that, can you give us the cash balance at your portfolio company?

Yes I don't really -- we might have one company that I would say we're watching more and we're -- basically we're trying to do a landlord renegotiation, because it can't -- it's not using all of the space. Depending on how that goes, we might put some more cap on, we might not, et cetera. That's more ordinary course. I don't think there's anything -- we have most of the recession related restructuring issues behind us. We feel pretty good about what we have.

And, frankly, with the merger and the follow-on offering and everything else, we haven't really done the cash balances at the portfolio company level. I will tell you that they're probably higher than they've been just because the portfolio -- we've had several portfolio companies that have elected to accumulate cash rather than delever, just because there's still some uncertainty out there, and -- but that -- we will calculate that and get back with you.

Okay. Thank you.

Yes. I think it's in the range of about $30 million, plus or minus a couple of million.

Thanks, guys.

Thank you. Our next question comes from the line of Vernon Plack with BB&T Capital Markets. Please go ahead.

Thanks very much. Vince, you mentioned that several companies, I believe you mentioned, you were seeing meaningful revenue growth. I would just like a little more color behind that, if you could.

Yes. I think I have it in my comments.

Yes.

What we're seeing, Vernon, is that -- the first piece of that comment was that we're seeing stabilization pretty much across the portfolio. We still have a couple of companies, the signed company in Vegas is a good example, where we're starting to see stabilization, but it's at a pretty low level. Most of our companies are still at reasonable levels of earnings and revenues and starting to see stabilization. Again, there's a handful or more of companies where we're starting to see order flow and backlog and those types of forward indicators really pick up, and some of that is end market specific. But I think in general, we're feeling a lot more bullish about where the companies are headed over the last quarter or so than we were earlier in 2009.

I think, specifically, Vernon, the industries that you would probably expect, we're seeing revenue growth in. Some of the energy end markets are picking up. There's a lot going on in the Marcellus shale, which we have a relative concentration in the Gulf Coast, and things are picking up there. Some of the more defensive industries that we are in, like health care, are continuing to do well and training, that type of thing. We don't see a lot of meaningful pickup in our basic industrial services type sectors.

Okay. And what was the reversal number, Todd?

For the quarter or the year?

For the quarter, please.

I'll get the exact number for you, but I think it's somewhere in the range of 6.9.

6.9 to match the gains. Okay. Just one more. I'm not sure if you mentioned what investment activity there was in the fourth quarter in terms of [new] investments.

Yes. The fourth quarter -- the main one was drilling info, which we previously announced.

Okay. Thanks.

Thank you. Our next question comes from the line of [Aaron Skananovich with Waden Burg]. Please go ahead.

Good morning, guys. I was wondering -- a quick question on the $50 million of executed term sheets. That is on top of the $11.5 million that you said you already invested in the quarter?

Yes, that's correct. That's what we would call our backlog, where we have term sheets executed We have, where appropriate, expense deposits. We're conducting diligence, and we're in various stages of documentation.

Okay. And then, it seemed like you had a fairly high level of cash and cash equivalence, and then you raised equity and also borrowed on the SBIC. I'm also wondering, pro forma, all of that activity, is your cash balance very high at the moment? Maybe you can explain why all those actions? .

Let me hit the first part of that, and then Todd will give you the cash balance number. The one issue you have with the SBIC funds is what I would call a cash geography issue. You have to overinvest cash down in those funds, and those -- the cash -- there are pretty severe restrictions with respect to how that cash can be invested. I think just treasuries and CDs, so you're really not earning anything on that. And when you're BDC like we are, SBA has more restrictive rules in terms of when and how you fund the equity component in those funds' capitalizations.

It basically, simplistically, you have to pre-fund your equity in those funds before you can leverage that equity with SBA guaranteed debentures. Whereas if you weren't a BDC, you could obtain leverage with the security -- a future equity contributions or limited partner draws. You can't really do that so when we bought the second fund into the fold, we had to go ahead, and from our parent company, transfer $24 million down into that subsidiary. It left us with -- while we had plenty of cash overall in the consolidated balance sheet, it left us with a shortfall at the parent company. That's really what we needed to replenish. It was really what I would call more of a geography issue on the balance sheet.

Do you have that number?

I think it's around $80 million currently and that includes marketable securities. We're obviously trying to earn a yield on that cash while we have it. But beyond some of the geography of cash mechanics that Vince just talked about, we are seeing a lot of opportunities to invest in the market. There certainly was an exchange offer element of the offering, but we're also positioning ourselves to take advantage of what we think will be a strong origination market in 2010 and beyond.

Okay. The potential drag on that investment income might just be more of a short-term thing.

Yes. It's going to be a couple of quarters, something like that.

Thanks, guys.

It certainly going to be a drag, but we are doing some marketable security investing to try to offset some of the drag.

Okay. Thank you.

And there are no further questions in the queue. Ladies and gentlemen, this concludes the Main Street Capital fourth quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 with the access code 424557. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3030 with the access code 4244557. Your may now disconnect.