Main Street Capital Corp (MAIN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Main Street first-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, Friday, May 4, 2012. I would now like to turn the conference over to Ben Burnham of DRG&L. Please go ahead, sir.

Thank you, Alicia and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation first-quarter 2012 earnings conference call. Joining me today on the call are Chairman and CEO, Vince Foster; President, Todd Reppert; and Chief Financial Officer, Dwayne Hyzak.

Main Street issued a press release yesterday afternoon that detailed the Company's quarterly financial and operating results. The document is available on the Investor Relations section of the Company's website at www.MainStreetCapital.com. If you would like to be added to the Company's e-mail list to receive press releases, please call 713-529-6600.

A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until May 11. 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 webpage.

Please note that information reported on this call speaks only as of today, May 4, 2012 and therefore, you are advised 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 out of the way, I would like to turn the call over to Vince.

Thanks, Ben and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recent dividend increase and portfolio company exit announcements and conclude by commenting on the current investing environment.

Following my comments, Todd will cover our first-quarter portfolio activity in more detail and our current liquidity position. Then Dwayne will comment on our first-quarter financial results, after which we will take your questions.

Our investment portfolio continued to deliver strong performance during the first quarter. Our lower middle-market investments appreciated during the quarter by $7.9 million on a net basis with 19 of our investments appreciating during the quarter and five depreciating. And our middle-market investments appreciated by $3.7 million during the quarter.

We finished the quarter with a net asset value per share of $15.72, a sequential increase of $0.53 over the last quarter. Our lower middle-market portfolio companies ended the quarter with $56 million in cash on the balance sheets and averaged a very conservative net debt to EBITDA ratio of 2.0 to 1 through our debt position and 2.4 to 1, including all debt.

Earlier this week, we announced that our Board declared an increase in our monthly dividend payout to $0.145 a share beginning with the July dividend. This brings our quarterly dividend payout rate to $0.435 a share, an 11.5% increase over the third quarter of 2011's payout rate. This was also our second dividend increase so far in 2012. We have increased our quarterly dividend payout nearly 32% from $0.33 per quarter at the time of our 2007 IPO and have never decreased our dividend payout or made a return on capital distribution, thus demonstrating our commitment to sustainability and growth in our dividends.

We currently expect to ask our Board to declare an increase in the fourth-quarter dividend payout equal to the increase that we just announced for the third quarter.

We made an announcement in March regarding our two portfolio company exit events, which will contribute to produce a significant long-term capital gain that will flow through to our shareholders during 2012 -- during the 2012 tax year. At this point, we predict that about 100% of our second-quarter dividends will be taxed at the maximum 15% rate for long-term capital gains for individuals.

This reduces the blended max on tax rate for our taxable individual shareholders by a meaningful 5 percentage points, thereby magnifying the importance of our exit-related gains. As a reminder, in 2011, 26% of our dividends qualified for the 15% rate for long-term capital gains.

Turning to our dividend outlook going forward, we estimate that we began the second quarter with cumulative spillover taxable income of $24 million or roughly $0.90 a share. We further estimate that we will continue to be able to earn or exceed our current dividend payout rate. Although due to the significant exit activity so far this year and the resulting cash that needs to be reinvested, we currently expect to only earn a few cents more than our payout rate this quarter.

Our officer director group has continued to increase their ownership of our shares via our dividend reinvestment plan and open-market purchases investing over the $380,000 in our shares during the first quarter and over $1.8 million during calendar 2011.

Our lower middle-market transaction pipeline is consistent with the levels we have experienced over the last several quarters. However, the size of the individual transactions we are reviewing is somewhat larger. I would characterize the environment as improving in terms of transactional activity. We continue to see significant equity participation in our lower middle-market investments and as of the end of the second quarter, we averaged a 33% fully diluted equity ownership position in these over 50 companies.

Our middle-market investing activity continues to grow. Our originations have been increasing and we continue to see attractive yields and structures. We expect to meet or exceed our target lower middle-market origination levels for 2012. Our lower middle-market portfolio activity has centered around three significant exits so far this year. However, we expect originations to be our primary focus for the balance of the year. With that, I would like to turn the call over to Todd Reppert, our President, to cover our portfolio activity and liquidity position in more detail.

Okay, great. Thanks, Vince and good morning, everyone. We are pleased to report a good start to calendar year 2012 in terms of our operational and financial results. Our first-quarter 2012 investment activity reflected total gross investments of approximately $80 million, including one new lower middle-market investment and 13 new middle-market investments.

As previously announced, Main Street exited several debt and equity investments during the first quarter of 2012, which collectively generated total net realized gains of just over $8 million for the quarter.

During the first quarter, we received just over $85 million of total cash repayments from full exits, partial exits or debt refinancing within the portfolio. We expect the increase in credit availability in 2012, combined with improving credit statistics within our portfolio, will lead to increased levels of refinancing for our portfolio debt investments.

In addition to the exits and debt repayments realized year-to-date, we are aware of several additional portfolio companies that are exploring the refinancing of our depositions with cheaper alternatives. While generating realized gains on exits and being repaid on debt investments are very healthy events for a portfolio, it creates the near-term need to reinvest those proceeds into qualified new investments. This is simply part of the normal cycle within our investment strategy and one we have been through and successfully managed many times before.

Our current investment pipeline for new investment opportunities is robust and we currently have four executed term sheets for new lower middle-market investments and several additional middle-market investments actively in progress. Since March 31, we have also closed one new $5 million lower middle-market investment and $24 million in net middle-market debt investments.

Based on the $0.08 per share of nonrecurring income generated during the first quarter of 2012 as discussed in our earnings release and the expected level of exits and repayments for the first half of 2012, we currently expect our distributable net investment income per share to be lower in the second quarter of 2012 compared to the first quarter. The actual amount of second-quarter distributable NII per share will be determined based upon many factors that have yet to play out during the remainder of May and through next month.

These factors include the actual amount and timing of additional exits or repayments, as well as the amount, timing and mix for new portfolio investments. I am also pleased to report that our overall portfolio performance remains strong and the portfolio continues to improve its diversification by issuer, industry end market and geography.

At March 31, we had investments in 115 portfolio companies across both the lower middle-market and middle-market components of the portfolio. As Dwayne will discuss further, we adjusted our portfolio terminology and the term middle-market debt investments has replaced what we used to call the private placement portion of the portfolio. There were also some reclassifications of investments to align with the suggested terminology.

The largest portfolio company investment represents just over 2% of our assets and the majority of our portfolio investments represent less than 1% of our assets. This increasing diversity adds structural protection to our portfolio, our revenue sources, our income and our cash flow, which translates into structural protection for our shareholders.

So far during 2012, most of our portfolio companies are experiencing sequential quarterly and annual growth in metrics such as revenues, earnings and backlog with the level of such growth being highly dependent upon specific factors for each Company. These operating trends are reflected in the improving portfolio company credit statistics that Vince referenced in his comments and our net portfolio appreciation.

As Dwayne will discuss further, our portfolio quality continues to improve and the portfolio has a very low non-accrual rate within the portfolio. The equity component of our investment strategy is a significant differentiating advantage for Main Street. It has been paying off in the form of meaningful dividend income received on portfolio equity investments and over $11 million of net unrealized portfolio appreciation during the first quarter before the accounting reversals related to realized gains.

This portfolio appreciation combined with underdistributing our net realized income allowed us to grow our NAV per share by $0.53 in the quarter or approximately 3.5% total growth from year-end. This followed a $2.13 gain in NAV per share during 2011. Moreover, 16% growth for all of last year.

The appreciation of equity investments in our portfolio, the realized gains generated by equity exits and our ability to conduct accretive stock offerings have allowed us to grow book value at a rapid pace compared to other funds, which are predominantly debt-oriented.

On the capital front, Main Street's liquidity and overall capitalization remains strong. As of today, we have over $80 million of cash, which is almost all held at our SBIC subsidiaries and also maintain approximately $13 million of marketable securities investments. As a reminder, the cash held at our SBIC subsidiaries is subject to the applicable regulatory requirements pertaining to short-term idle fund investments and the reinvestment of such cash into SBIC-qualified portfolio companies.

We also recently expanded the total commitments under our three-year credit facility, the $277.5 million from $235 million. In conjunction with these commitment increases, we upsized the accordion feature of the credit facility to allow for future growth up to $350 million in commitments. As of today, we have just over $150 million borrowed under our credit facility, which is bearing annual interest at approximately 2.8%.

While we continue to explore various financing sources to support our future operational and investment activities, we remain focused on maintaining a liquidity cushion and duration alignment with all borrowing arrangements.

We also continue to monitor the relative matching of fixed and floating-rate debt investments with a relative amount of fixed and floating rate borrowing arrangements in order to create organic matched funding on our balance sheet. We also have $220 million of outstanding SBIC debentures with a weighted average fixed interest cost of around 5% and a remaining weighted average maturity of just under 6.5 years.

In addition to our goals regarding liquidity and capital flexibility, we remain focused on maintaining a very low operating cost structure, which we view as a real structural advantage. During the first quarter of 2012, Main Street's total cash operating and administrative expenses remained around 2% of our average assets and other related cost deficiency statistics are equally favorable. This is part of the operating leverage and being structured as an internally managed BDC and this operating leverage allows us to deliver a greater proportion of the gross portfolio of returns to our shareholders.

We believe the market recognizes the benefit of this operating leverage by generally requiring lower current yields from internally managed funds, which further applies a greater ability to grow net earnings and dividends.

In summary, Main Street continues to perform at a very high level and deliver upon our long-term goals of sustaining and growing our earnings, dividends and book value per share. We are pleased that this high level of corporate performance continues to translate into a high level of total returns for our shareholders. With that, I will turn the call over to Dwayne Hyzak, Main Street's CFO, to cover our detailed financial results and certain key portfolio statistics.

Thanks, Todd. As Vince and Todd previously mentioned, we are happy to report significant increases in both total investment income and net investment income and significant realized gains for the first quarter ended March 31, 2012. Total investment income for the first quarter increased by 54% over the same period in 2011 to a total of $20.6 million for the quarter. This increase was primarily driven by increased amounts of interest income associated with higher average levels of portfolio debt investments and interest-bearing marketable securities investments.

The increase in investment income in the first quarter also included approximately $1.8 million of nonrecurring investment income associated with repayment and financing activities associated with two lower middle-market portfolio investments and an increase of approximately $300,000 in investment income associated with higher levels of accelerated prepayment activity with certain middle-market debt investments and marketable securities investments.

First-quarter 2012 operating expenses, excluding non-cash share-based compensation expense, increased by $1.6 million over the first quarter of 2011 to a total of $7.1 million. The operating expense increase was primarily due to higher interest expense as a result of the issuance of $40 million of SBIC debentures after the beginning of the first quarter of 2011 and increased borrowing activity under our credit facility.

The increase also included higher accrued compensation and other operating expenses related to the increase in investment income and portfolio investment activity compared to the first quarter of prior year. The ratio of total operating expenses, excluding interest expense as a percentage of average total assets, which we believe is a key metric in evaluating our operating efficiency, was 2% on an annualized basis for the first quarter of 2012 compared to 2.5% on an annualized basis for the first quarter of 2011 and 2.2% for the full year ended December 31, 2011.

Before providing more details on our operating results, I want to remind everyone why in our earnings release and conference call comments we reference distributable net investment income, which is net investment income, excluding the impact of non-cash share-based compensation expense, when discussing our profitability. We utilize this measure as we believe it is an important disclosure for analyzing our financial performance since the share-based compensation expense does not require settlement in cash and does not reduce our taxable income.

In addition, the economic impact of restricted stock issued is already accounted for in our earnings-per-share calculations as the restricted shares are considered outstanding when granted. As a result, we believe that distributable net investment income has been an important measure when evaluating our operating performance in comparison to our dividends.

Distributable net investment income for the first quarter of 2012 increased by 71% to $13.4 million, or $0.50 per share, in comparison to $7.8 million, or $0.40 per share, for the same period in the prior year. Our distributable net investment income for the first quarter exceeded our dividends paid by $0.095 and together with our realized gains for the first quarter resulted in estimated spillover taxable income of approximately $23.8 million, or $0.88 per share at March 31, 2012.

While the dollar amount of distributable net investment income increased by 71% over the prior year, the per-share percentage increase was 25% due to the higher average number of shares outstanding compared to the corresponding period in prior year primarily due to the impact of the March and October 2011 follow-on stock offerings. All other first-quarter 2012 per-share measures were similarly impacted by the higher weighted average shares outstanding.

Distributable net realized income for the first quarter of 2012 was $21.6 million, or $0.80 per share, which represented an increase of $13.8 million, or a percentage increase of 175% in comparison to the first quarter of prior year. This increase was due to the higher level of distributable net investment income during the first quarter of 2012 and the total net realized gains from investment during the first quarter totaling $8.1 million.

The net realized gain from investments was primarily due to realized gains totaling $9.2 million on the partial exit of our equity investments and drilling info, $1.7 million on the full exit of our investments in NTS Holdings and net realized gains [showing] $1 million on our middle-market and marketable securities investments. These realized gains were partially offset by realized losses totaling $3.8 million on the full exit of equity investments and one lower middle-market portfolio company and a loss on a debt investment related to the full exit of another lower middle-market portfolio company.

As Vince previously mentioned, during the first quarter of 2012, we recognized $11.6 million of net unrealized appreciation on our portfolio investments. This increase included net unrealized appreciation totaling $7.9 million in our lower middle-market portfolio resulting from appreciation on 19 portfolio companies totaling $9.6 million partially offset by depreciation on five portfolio companies totaling $1.7 million. And $3.7 million of net unrealized appreciation on our middle-market investment portfolio.

The net change in realized appreciation for the first quarter also included approximately $7.1 million of accounting reversals of net unrealized appreciation related to the net realized gains recognized during the first quarter. Approximately $300,000 of net unrealized appreciation related to our SBIC debentures held by Main Street Capital II and unrealized appreciation of approximately $100,000 related to Main Street's investment in the affiliated Investment Manager.

As we previously indicated on our fourth-quarter of 2011 conference call, during the first quarter 2012, we acquired all of the limited partnership interest of our subsidiary, SBIC Main Street Capital II, that were not previously owned by Main Street. These acquisitions were accretive to both net investment income and net asset value. And we believe the elimination of this minority interest provides for better clarity in our financial reporting to our shareholders in future periods.

Now let me finish with a few portfolio statistics all as of March 31. In our lower middle-market portfolio, we had 53 investments representing approximately $388.1 million of fair value as of March 31 or approximately 20.4% above the cost basis of approximately $322.3 million. Consistent with our investment strategy, approximately 77% of our lower middle-market portfolio investment at cost were in the form of secure debt investments and approximately 98% of those debt investments held the first lien security position.

The weighted average effective yield on our lower middle-market portfolio debt investments as of March 31, 2012 was 14.9%. We hold equity positions in 92% of our lower middle-market portfolio companies with an average fully diluted equity ownership of approximately 33%. The fair value of our lower middle-market portfolio company equity investments as of March 31, 2012 was approximately 195% of the cost of such equity investments.

As Vince previously mentioned, at the lower middle-market portfolio level, the weighted average net senior debt to EBITDA ratio was 2 to 1 or 2.4 to 1, including the portfolio company debt, which is junior and priority to Main Street's debt position. We expect that these lower middle-market portfolio level statistics on a same-store basis should generally continue to improve over time based upon the continued favorable operating performance of our portfolio companies and as our companies naturally delever.

Based upon our internal investment rating system with a rating of 1 being the highest and 5 being the lowest, the weighted average investment ranking for our lower middle-market investment portfolio was 2.1 on March 31, 2012 compared to 2.2 on December 31, 2011. And during the quarter, we had four portfolio companies improve their rating and one portfolio company decrease its rating from prior quarter.

You will note that, in our earnings release and Form 10-Q for the first quarter, we have revised our investment portfolio descriptions to include a new middle-market category, which replaces our historical private placement investment portfolio category and also includes a significant portion of our historical marketable securities investments, which are investments in middle-market companies.

We made this change in an effort to provide our shareholders with additional clarity regarding the differences between our middle-market and marketable securities investments. In general, going forward, our middle-market investments will represent debt investments in middle-market businesses that are generally larger in size than our lower middle-market portfolio companies.

In our middle-market portfolio, we had investments in 62 companies representing approximately $251 million of fair value as of quarter-end that were generating a weighted average yield of approximately 9.2%. Main Street's middle-market portfolio investments are primarily in the form of debt investments and approximately 86% of our middle-market portfolio debt investments at cost held a first lien security position with most of the remaining investments representing second lien secured investments.

The weighted average revenues for the 62 middle-market portfolio company investments was approximately $476 million. The total investment portfolio fair value at March 31, 2012 was approximately 111% of the related cost basis and we had no portfolio investments on non-accrual status and two fully impaired portfolio investments representing approximately 0.9% of the total investment portfolio at cost. With that, I will never turn the call back to the operator so that we may take any questions.

(Operator Instructions). Robert Dodd, Raymond James.

Hi, guys. Just first on the credit side, obviously, credit is very robust. (inaudible) in the portfolio right now is not, of course, very low. But can you give us any detail on the couple of assets that are on non-accrual right now? What is the status and have there been any changes? What are you working through at the moment?

The way we published our results, Robert, we have nothing on non-accrual because we base it upon the fair value of the Company. So the only things that we have that would fit the category you're talking about are two investments that we have fully impaired and they continue to be two investments that we've previously talked about in prior quarters. So it would be Hayden, which is a precast company in Arizona and Schneider Sales Management, which is a consulting company in Denver, Colorado.

Okay, got it. And then just on the market environment right now, I mean we have heard some comment -- Q1 was a little weak in activity in the lower middle-market. Obviously your middle-market stuff did quite well. Have you seen any increase in activity recently there and what are the terms like right now in terms of obviously unit deployment yields, pricing? Is anything changing there? And if you can contrast that between what you see in the opportunities there in that lower middle-market right now versus the middle-market, which is a little bit more liquid, but a little bit more competitive in terms of pricing as well?

Yes, Robert, we always have a fair amount of activity in the lower middle-market. What causes volatility in our originations is simply our due diligence process. We really can't predict how many transactions we have under LOI that close or have executed terms on the close with any degree of accuracy because we do full-blown several hundred man hour diligence exercises and we might have five in a row close and then go zero for five.

I do think the teams in the first quarter were somewhat distracted working on the exit transactions, exit activities that we had. It was real unusual to have three exits in one quarter, particularly when two of them were some of our larger investments, more meaningful investments. That is just kind of a coincidence how it happened.

I do think though as our portfolio companies grow organically and as we are closing larger transactions, the regular way private equity universe is becoming much more interested in talking to us about our companies as potential add-ons or platforms for their strategy as evidenced by the two large exits we had in the last quarter.

So again, I don't think we characterize the lower middle-market activity as being materially different than it has been. The transactions are larger; the terms aren't really changing. As you go up the chain in terms of size, your opportunity for equity participation decreases kind of by definition, but the yields really don't.

Okay, got it. And just one more if I can. You mentioned some of your portfolio companies are looking to refinance at lower cost. What is your appetite -- obviously the risk profiles are different and things like that, but you are clearly on the middle-market side willing to do some lower yield things. So what is your appetite for refinancing your own portfolio companies at lower yield? If they are a good asset that you know, you understand, you understand the credit risk, do you have an appetite to do that yourselves rather than get taken out by somebody else?

Yes, Todd has a couple that he worked very closely with that he is in the process of evaluating that right now.

Yes, what I would say is absolutely and we have done that before where we have got -- let's say you've got a company that's deleveraged down to 1 time debt to EBITDA or below. We know the management team. We are in an incumbent position; we like that position. So absolutely the problem is, Robert, we are willing to do that maybe to 9% from 12% or 13% coupons to 9% or 8%, but we are not willing to do that to 3%.

And so with the bank options that a lot of these companies have at those levels, particularly in today's market, you let them refinance at 3% and you let the debt go. The good news is we have equity in most all these companies and the equity is -- the day they do 3% debt instead of 12% debt, the equity is naturally worth a lot more as well and there is more free cash flow to deleverage, pay dividends or grow.

Okay, got it. Thanks, guys.

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

Thanks. Todd, I was curious, you may have talked about this and I missed it, but just in terms of a strategy, an active portfolio management strategy as it relates to the middle-market portfolio. In particular, I noticed that the weighted average effective yield on the portfolio quarter-over-quarter declined from I think 10.6% down to I think 9.2%. Just what is the thought there? Once you get to a certain point though, some of the markets have been strong. What about rotation within the portfolio? So just what are you thinking there?

Well, the middle-market portfolio yields are kind of a function of two things. One thing is the credit spreads that change day-to-day that are available and there is not too much you can do about that and the credit spreads this quarter have come down. The good news is that that gives rise to appreciation in what you own because of the floating rate and the prices get bid up. But probably the more meaningful thing that we evaluate is, as you go down the food chain in the middle-market and you start investing in facility sizes that are less than $200 million, then you see a premium, a liquidity premium or lack of liquidity premium of maybe 50 to 100 basis points.

So when the markets improve and companies refinance and flex down their pricing, etc. or pay you off or do IPOs, you might have a disproportionate amount of higher-yielding credits that refinance you out versus lower yielding credits. So we don't really see a trend there. We continue to be attracted to the smaller side of the middle-market where we pick up some additional yield because we don't really value the liquidity like the overall market does because we don't really trade the loans. And after that, there is just not too much you can really do about refinancing. So I don't think there is any -- there is no particular strategic thrust that would result in a lower yield. It is really just kind of responding to the market, what gets repaid and how you redeploy.

This is Todd. One other thing on the stats you were quoting is that we did change our terminology, as I mentioned and Dwayne talked about in a little more detail. So (technical difficulty) is that some of what you are looking at now in the middle-market portfolio encompasses what we had traditionally called marketable securities because they are (technical difficulty). So I think the former stats were -- the marketable securities were earning around 8% on average and the private placement portfolio, which is the old vernacular, was earning around 10.6% or 11%. And so when you blend those assets together into those pools that gets you to the 9% (multiple speakers).

That's a good point, yes.

You will see in our 10-Q the detail for that and that comparable number at 12/31 was 9.5%.

Okay, all right. That's helpful. Thanks very much.

Mickey Schleien, Ladenburg Thalmann & Co.

Good morning and thank you for taking my question. Vince, I wanted to get a sense from you of the activity in the middle-market portfolio, which was the bulk of the activity in the quarter. Was any of that with the private equity sponsors and are you moving more toward that channel as opposed to historically doing your own deals?

I don't think we deliberately target private equity sponsors. When we evaluate a new loan opportunity, one of the things we look at is whether it is sponsored or whether or not it is just kind of independent. Some of the companies are actually very small publicly-traded entities whose equity is traded on one of the major exchanges.

I would say that probably the bulk of the issuers are sponsored, but we don't take a lot of incremental comfort if a company is sponsored versus not sponsored. The sponsorship almost by definition is transitory because these are limited funds or limited life funds and frequently, they take out as an IPO. So no, we are not deliberately targeting sponsors. If you are in the lower end of the middle-market loan area, you are going to -- certainly you are going to encounter a lot of sponsors. So it is probably over half. I don't know if we have that stat, Dwayne. We can probably give it to you.

We can get it to you. We don't have it with us here, but we can get it.

But just to make sure I understand, it sounds like a majority of the deal flow that closed in the first quarter did have sponsors, is that what you are saying?

On the middle-market side probably.

Okay, thank you.

(Operator Instructions). JB Rogers, Janney Capital Markets.

Thank you. Good morning, guys. I had a question for you on equity multiples in the lower middle-market. I think you mentioned that sponsors are looking -- increasingly looking for add-ons. How is that affecting both your new deals and potential exits?

Well, I guess -- we don't, in the lower middle-market where we are the sponsor, we are not really -- we are really targeting negotiated transactions, really not participating at least intentionally in auctions or white auctions. And so I would say that we are not really impacted by the multiples that are being paid for the larger companies by the larger sponsors.

On the other hand, what we are seeing is that when a sponsor group is interested in one of our companies, generally, we are able to target valuations at higher multiples than we are carrying them. And what we will do from a mark-to-market standpoint is, as those negotiations become more definitive, we will slowly bring up our multiple to those approaching those that we believe we are going to transact at. Dwayne was working on both the large exits we had in Q1. Do you want to elaborate on that, Dwayne?

Yes, I think one of the things that we have talked about historically is when you look at the EBITDA multiples in the lower middle-market, we think there is two thresholds that you cross that result in significant increases in EBITDA multiples and the first one is at $5 million of EBITDA and the second is at $10 million. And in both of the cases for the two exits we had in the first quarter, they were companies that have performed extremely well, had grown their EBITDA and as a result of their growth started getting a lot of attention from private equity sponsors.

And as you cross both that $5 million and then in the case of Drilling Info, the $10 million of EBITDA threshold, that asset became much more attractive to larger private equity sponsors and they are just willing to pay a much higher multiple from an EBITDA standpoint than what we typically transact at in the lower middle-market, which is why both of those exits were attractive opportunities for us.

Okay, great. Just if I can distill down what you said maybe, you are not seeing a tremendous amount of competition or at least the deals that you focus on in the lower middle-market don't have a lot of competition, so equity multiples are staying relatively attractive. But on your exits, these are generally companies that have matured and grown EBITDA and are now sort of moving into that more traditional middle-market and are seeing better valuations because of, I guess, competition from private equity sponsors. (multiple speakers)

We have historically seen and expect to continue to see multiple expansion as the companies grow into the high single digits of EBITDA or higher. Certainly low double digits, you see even more dramatic multiple expansion. But when you are down in the mid to low single digits of EBITDA where we will evaluate companies there frequently where kind of 5 times EBITDA is not an unusual valuation for us to be transacting at and it has been that way for 15 years.

Okay, great. And then I am sorry if you all touched on this before; I got on the call late. But what is your outlook towards the back half of the year? Some other BDCs have been talking about the potential for tax law changes to drive owners to sell their businesses. Are you seeing any of that?

Well, I certainly think that has to be motivating some of the individually-owned companies. But we've kind of been expecting that for the last few years and it hasn't really shown up. Maybe it will show up this year as we get more visibility on what the tax law changes are. But I think that as the economy improves and these companies are performing better, I think the owners are thinking this is probably as good a time to exit as any given the uncertainty on whether or not there is going to be a new administration, the same administration, what the tax laws are. So yes, I think it is reasonable to assume it is going to get more active as the year goes on.

Okay, great. And then (multiple speakers)

Our outlook was simply -- our operating outlook was simply that we took the dividend to $0.435 for Q3 and the outlook was that we expect it to continue to earn or outearn that in Q3 or Q4. And based upon the amount of spillover we have, the gains we have and the fact that we have to pay it out for tax purposes, we expect to ask the Board to take the dividend up by a similar amount in Q4. So that was kind of the outlook we provided.

Okay, great. Thanks a lot.

Thank you. There are no further questions at this time. I will turn the conference back over to management for any closing remarks.

Well, again, thank you all for joining us and we look forward to talking to you again next quarter. Bye.

Ladies and gentlemen, this concludes the Main Street first-quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 and entering the access code of 4532846. Thank you for your participation. You may all disconnect.