Main Street Capital Corp (MAIN) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Main Street Capital fourth-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 Friday, March 11, 2011. I will turn this over to Mr. Ben Burnham with DRG&L.Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation fourth-quarter 2010 conference call. Joining me today on the call are Vince Foster, Main Street's Chairman and CEO; and Todd Reppert, President and CFO.

Main Street issued a press release last night that details the Company's quarterly financial and operating results. This document is available on the Investor Relations section of the Company's website at www.MainstreetCapital.com. A telephonic replay of today's call will be available beginning about an hour after completion of the call, and will remain available until March 18.Information on how to access the replay is included in yesterday's press release. We also advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed on the Company's web page. Please note that information reported on this call speaks only as of today, March 11, 2011 and, therefore, you will find that time-sensitive information may no longer be accurate as of the time of any replay listening.

Our conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform act of 1995. These statements are based on Management's estimates, assumptions and projections as of the date of this call, and they are not guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements, as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the Company's filings with the Securities and Exchange Commission. During today's call, Management will discuss non-GAAP financial measures. Please refer to yesterday's press release, which can be found on the Company's website, for a reconciliation to the most directly comparable GAAP financial measures.

And now with that, I'd like to turn the call over to Vince.

Thanks, Ben. And thank you all for joining us today.

I'll begin by providing an update on the performance of our investment portfolio, discuss our recent dividend announcement, and conclude by commenting on the current investing environment we are seeing in other recent developments. Following my comments, Todd will cover our fourth-quarter 2010 financial and operational performance in more detail, discuss our balance sheet and certain portfolio metrics that we think are important, and then we will take your questions. Our investment portfolio performed above our expectations during the quarter. Our investments appreciated during the quarter by $1 million on a net basis, with 27 of our investments appreciating during the quarter, and 11 depreciating. Our marketable securities appreciated $700,000 during the quarter. We finished calendar year 2010 with a net asset value per share of $13.06, an increase of $0.33 per share over the third quarter in AB.

Turning to the dividend announcement we made Wednesday, we declared monthly dividends for April, May, and June 2011. We were pleased to be able to increase the monthly dividend rate to $0.13 a share, beginning with the April dividend. This boosts our quarterly payout rate to $0.39. We generated $0.27 per share in dividends in calendar 2010 that will be characterized as long-term capital gains for tax purposes. This represents 18% of our total 2010 payout of $1.50 a share. We also estimate that we began 2011 with an undistributed, or carryover, taxable income position of roughly $1.6 million from 2010.

Our Officer Director Group has continued to increase their ownership of our shares via our dividend reinvestment plan, acquiring over 18,000 shares during the quarter, and over 80,000 shares in 2010. And I think the 80,000 shares is noteworthy because on a dollar basis, that's $1.2 million we collectively invested in the Company through that plan. We completed two -- or, excuse me, we completed three new lower-middle-market transactions during the fourth quarter, investing over $20 million. We also invested $35 million during the quarter in privately-placed debt investments. So far in 2011, we have invested over $25 million in another three lower-middle-market transactions and $5 million in private placements.

Our transaction pipeline is solid and continues to support a pace of new lower-middle-market originations for calendar 2011 in the range of $100 million to $125 million. We have consistently been able to obtain significant equity participation in our lower-middle-market investments, and currently average a 33% fully diluted equity ownership position in these companies. We feel this equity exposure uniquely postures our portfolio for both enhanced returns as the economy recovers, and provides a counterbalance in the event a debt instrument is not fully recovered.

Turning to the current investing environment, from our perspective, the sub-$10 million EBITDA, or what we refer to as the lower-middle-market financing market for both debt and equity, continues to remain stable in terms of leverage multiples, rate, covenants, equity cushion and pipeline. In the last 90 days, however, the broader syndicated debt markets have seen spreads contract and covenants (inaudible) loosen considerably. While it remains to be seen whether the broader markets will impact our lower-middle-market, we have seen no meaningful impact so far, and based on our experience, do not expect that one will occur.

With that, I'd like to turn the call over to Todd to cover our financial results.

Okay, great. Thanks, Vince.

As Vince noted, the fourth quarter of 2010 was an active quarter for new investments, including $21 million of new originations into the lower-middle-market portfolio, and $35 million of new originations into the private placement portfolio. Since year-end, we've also closed $25 million of new originations for the lower-middle-market portfolio, and $5 million of new originations in the private placement portfolio. While this recent new origination activity has been robust, future investment closings are always dynamic and hard to predict.

We also expect somewhat higher levels of refinancing or repayment for existing debt investments in 2011, due to the increasing recovery in the bank and credit markets. This is particularly true for our larger private placement investments, and any portfolio companies that have deleveraged and fit traditional bank-lending structures. Any future repayments will create some nonrecurring income similar to what occurred in the fourth quarter of 2010, as highlighted in our earnings release. Overall, we believe 2011 will be a favorable time to invest, particularly in the lower-middle-market where competition remains relatively subdued, but activity has increased due primarily to increasing comfort with macro economic factors. In addition, viewing the performance of lower-middle-market companies with perfect hindsight under the stress test of the recent recession, is a good tool in assessing new investments.

From a capital standpoint, Main Street is well-positioned to take advantage of new investment opportunities. As of yesterday, we have over $100 million of cash, marketable securities and idle funds investments. However, over $70 million of this liquidity is positioned in marketable securities with attractive yields and, all things being equal, we would intend to hold these marketable securities until rotation of that liquidity is required. We have also recently expanded our credit facility to $100 million, with the ability to flex the size of the facility up to $150 million. Since year-end, we have drawn down an additional $30 million of SBIC debt, bringing the cumulative SBIC borrowings to $210 million. The recent SBIC borrowings will be pooled later this month at what will likely be very attractive, fixed long-term interest rates. We also continue to have access to the capital markets for NAV-accretive equity or other offerings on an as-needed basis.

We're very pleased with our portfolio diversity, and the performance of our portfolio on the whole. The majority of our portfolio companies continue to see both sequential and annual growth in revenues, earnings, order flow and backlog. Total portfolio fair value was approximately 109% of cost at year-end, and we had two portfolio debt investments on nonaccrual status, representing 2.6% of the portfolio at fair value and 3.6% at cost. There were no new non-accrual investments during the fourth quarter of 2010. Overall, calendar 2010 was a transformational period for Main Street, including an increase in total assets from $196 million to $449 million, and an increase in market capitalization from $175 million to $342 million at year-end. In addition, net asset value per share at year-end 2010 increased approximately 9% over the prior year, and sequentially increased 2.6% over the third quarter.

Now, let me turn to a few comments regarding the fourth-quarter operating results. For the fourth quarter 2010, total investment income increased approximately 171% over the same period in 2009. This increase was principally driven by Main Street Capital II's contribution subsequent to the January 2010 exchange offer, as well as higher levels of interest income from growth in our debt investment portfolio. The increase also included somewhat higher levels of dividend income from portfolio companies, and $500,000 of nonrecurring original issue discount recognition from two debt investments that repaid at-par during the quarter. Fourth-quarter 2010 operating expenses increased by $3.2 million, compared to the same period of 2009. The operating expense increase was primarily due to interest and other operating expenses related to Main Street Capital II, subsequent to the exchange offer, and higher crude compensation compared to 2009. The Main Street Capital II exchange offer continues to be a very accretive acquisition, and has meaningfully impacted our 2010 results.

Distributable net investment income for the fourth quarter of 2010 was $0.36 per share, which increased from $0.26 per share in the same period of 2009. Excluding the impact of approximately $0.03 per share of nonrecurring interest income from early debt repayments, fourth quarter 2010 distributable NII was $0.33 per share. While the dollar amount of distributable NII increased 150% over the prior year, the per-share increase was lower due to higher average shares outstanding, given the two 2010 follow-on stock offerings, as well as the shares issued to complete the exchange offer. All other 2010 per-share measures were similarly affected by higher-weighted average shares outstanding.

Distributable net realized income for the fourth quarter of 2010 was $0.37 per share, and during the fourth quarter, we recognized $6.4 million of unrealized appreciation in 27 portfolio investments, and $5.4 million of unrealized depreciation in 11 portfolio Company investments. The net change in unrealized depreciation for the fourth quarter also included $2.1 million of unrealized depreciation from the fair value adjustment of SBIC debentures issued by Main Street Capital II, and $700,000 of appreciation in our marketable securities portfolio.

Now, let me finish with a few portfolio statistics, all as of December 31, that are summarized in the earnings release. Consistent with our investment strategy, approximately 77% of our lower-middle-market portfolio investments at cost were in the form of secured debt investments, and approximately 91% of those debt investments held the first lien security position. The weighted average effective yield on our lower-middle-market portfolio debt investments was 14.5%. Main Street holds equity positions in 91% of its lower-middle-market portfolio companies, with an average fully diluted equity ownership of 33%.

At the portfolio level, the weighted average net senior debt-to-EBITDA ratio was 2.5 to 1, or 3.2 to 1, including portfolio Company debt which is junior in priority to Main Street's debt position. These portfolio level statistics continue to improve as the operating results of our portfolio companies grow, and they naturally de-lever. In the private placement portfolio, we had 16 predominantly first lien debt investments representing approximately $67 million of fair value as of year-end that were generating a weighted average yield of approximately 12.5%.

With that, I'll turn the call back to the operator so that we may take any questions.

Thank you, sir. We'll now begin the question and answer session. (Operator Instructions) Please ask one question and one follow-up and re-queue for additional questions. One moment, please. And our first question comes from the line of Vernon Plack with BB&T Capital Markets.

Thanks very much. Todd, Interested in the amount of cash that you are carrying on the balance sheet, which was $22 million. Is that the level that you -- or the approximate level that you hope to carry going forward? Can we expect more of those funds to go into marketable securities? What are you thinking there?

As I mentioned in my comments, Vernon, the -- we've got about $100 million of total cash in marketable securities currently, as of today. About $70 million -- just a little over $70 million of that is marketable securities and the rest is cash. I would think we'd keep somewhere between $10 million and $20 million of cash at all times.

Okay.

And some of that is down in the SBIC subsidiaries, too, which has some other limitations on how we can invest excess cash. So, I think that's a reasonable number. The other part of the comment is, of the $70 million of marketable securities we have, we're averaging a very healthy yield on those marketable securities. So, I think we're going be somewhat reticent to rotate that until we really need it, because those investments were made at a pretty good time in the market, and we've got very attractive yields on that. And some of the current cash was also driven by the fact that we borrowed $30 million of additional SBIC money during the first quarter to date, and part of that was maybe borrowing ahead a little bit just to get ahead of some pipeline that we see, and go ahead and get that money priced at what we think is very attractive rates that'll happen in the pooling this month.

Okay. And the marketable securities, what's the effective yield on that portfolio right now?

It's right in between 7% and 7.5% on a weighted average.

Okay. And I know that during the quarter there was a $0.5 million increase in dividend income from portfolio equity investments. Can we assume that is not a recurring item, at least on a quarterly basis, but annually it could impact results?

Yes. I mean, what we're seeing -- Vernon, this is Vince, is the companies are starting to generate more taxable income, and innate distributions to cover taxes, that's just dividend income to us because we're not really taxpayers. So, that's kind of what we saw. Some of the companies will tend to pay in Q4 rather than each year. Some will pay in Q1. So, I think that number's going to stay pretty healthy as we go through 2011 and on.

One other thing to add to that, Vernon, is it's kind of a rudimentary way to look at it, but the cash on the balance sheet of our portfolio Companies increased about 18% quarter-over-quarter in the fourth quarter. That's something we look at for the health of our Companies. That cash ultimately is going to go somewhere, either they're going to keep it, they're going to pay down our debt or they're going to pay dividends. So, that's a good sign when that continues to go up.

Okay. Can we assume that SG&A is at a level that will be somewhat consistent into 2011? I know that you've added a lot of investments, just curious in terms of your adding staff. And if SG&A for Q4 was a reasonable or representative type of number that we should look at in 2011?

I think we're going to continue to add some people.

Okay.

I think it'll be in the more junior levels of the organization.

Sure.

I think if the Company continues to perform, I think our accrued compensation will continue to go up. If you go back in time, we -- for, the top executives in 2009, we accrued $0 bonuses for the top six people, just because of the time period we were in. I think 2010, obviously we accrued more compensation, and I think that will continue if we continue to perform.

Okay, great. Thanks very much.

Thank you. (Operator Instructions) Our next question comes from Brian Harvey with Ladenburg Thalmann Financial Services. Please go ahead.

Hi, good morning, Vince. I had a question if you could address what you began discussing in the third quarter. You started talking about the registered Investment Advisor Registration, and if you could talk about any progress you've made on that and where you see that moving in 2011?

Sure. We've signed a contract to sub-advise a non-traded BDC just to summarize what we've already announced, that has gone effective with the SEC. I should say non-listed, publicly registered non-listed BDC.It's gone effective with the SEC, and now they're in the process of signing up selling agreements with various broker dealers in order to sign those selling agreements, which were a prerequisite to having their wholesalers begin to meet with the broker dealers' representatives. Generally requires broker dealers to conduct a lot of diligence on the Company, and on us, the sub-advisor. Sometimes that diligence is done by the broker dealers' due diligent staff, sometimes it's done by third-party due diligence firms that are contracted. So, we probably had three to five outside diligence firms have been through our offices, have conducted their diligence. They're starting to issue their reports. So, really what's happening is the broker dealers are satisfying these federal requirements to conduct diligence, then sign selling agreements and then the selling can actually start. So, the way we've looked at it is 2011, we don't think is going to be meaningfully impacted by this activity, and we expect to see some -- begin to see some meaningful impact in 2012. We're not experts on how this fundraising process goes but there's another non-listed BDC out there, and when you look at its fundraising, it's in its third year. It's significantly back-ended because of the up-front diligence requirement. So, we're spending some time helping them get through the diligence process, and we think this is more of a 2012.

Okay, we shouldn't model then anything until, at best, the second half of 2011?

Yes, to be conservative, I don't think so. We'll have more visibility on that as the year progresses.

Okay, great. Thank you.

You bet.

(Operator Instructions) And there are no further questions at this time. I'll turn the call back to management for any closing remarks.

I would just say thank you all for joining us, and we look forward talking to you again in about 60 days.

Thank you, sir. Ladies and gentlemen, this does conclude the Main Street Capital's fourth quarter earnings conference call. If you'd like to listen to a replay of this conference, please dial 303-590-3030 and enter in the access code 4414348. We thank you for your participation and you may now disconnect.