Main Street Capital Corp (MAIN) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Main Street Capital's first quarter earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions.

(Operator Instructions)

Today's conference is being recorded, May 10, 2013. I would now like to turn the conference over to Ben Burnham of Dennard Lascar Associates. Please, go ahead.

Thank you, Alicia, and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation first quarter 2013 earnings conference call. Joining me today on the call are Chairman, President, and CEO, Vince Foster, Vice Chairman, Todd Reppert, and Chief Financial Officer, Dwayne Hyzak.

Main Street issued a press release yesterday afternoon 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.mainstcapital.com. If you would like to be added to the company's e-mail list to receive press releases, please call Dennard Lascar Associates at 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 17. 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 that can be accessed on the company's web page.

Please note that information reported on this call speaks only as of today, May 10, 2013. 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. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. 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 which can be found on the company's website or at www.sec.gov. Main Street assumes no obligation to update any these statements unless required by law.

During today's call management will discuss non-GAAP financial measures, including distributable net investment income and distributing net realized income. Please refer to yesterday's press release, which can be found on the company's website, for reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And now, I'd 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 regular monthly dividend announcement and our dividend outlook, highlight our origination activity, and conclude by commenting on the current investing environment in our markets. Following my comments, Todd will cover our portfolio performance in more detail then Dwayne will comment on our first quarter financial results, our current liquidity position, and certain key portfolio statistics, after which we will take your questions.

Our investment portfolio delivered solid performance during the first quarter. Our lower middle market investments appreciated during the quarter by $6 million on a net basis, with 17 of our investments appreciating during the quarter and 10 depreciating. And, our middle market investments appreciated by $4.7 million during the quarter. We finished the quarter with a net asset value per share of $18.55, a sequential decrease of $0.04 per share over the last quarter. Our net asset value per share at March 31, '13 would have been $18.90 a share absent the impact to net asset value of the $0.35 per share special dividend paid during the quarter, reflecting the continued strength of our investment portfolio. Our lower middle market companies ended the quarter with $110 million of cash on their balance sheets and continued to exhibit very conservative leverage and debt service coverage ratios.

Earlier this week we announced that our Board declared our regular monthly dividends for the third quarter of $0.155 a share payable in July, August, and September respectively. The third quarter dividends represent a 7% increase over the second quarter of 2012. In setting our third quarter dividends, our Board targeted a payout percentage in the 90% to 95% range of our net investment income before the impact of our recent senior notes offering, which we currently estimate will decrease our net investment income by $0.03 a share in the second and third quarters. During the course of your last conference call, I referenced our spillover taxable income which we now estimate to be $40 million. To reduce this amount and stay in compliance with the regulated investment company tax rules and reduce the 4% Federal excise tax payable on the spillover amount that carries over into next year, 2014, we will ask our Board early next week to declare another special dividend of $0.20 a share payable in July. This will posture us to request our Board to declare a similar special dividend at the end of this year, assuming our annual dividends continue to be covered by our net investment income. We expect that we will continue to pay any special dividends on a semi-annual basis going forward.

Earlier this year we reported to our shareholders via form 1099 that over 46% of our 2012 dividends will be taxed at the highly favorable 2012 tax rates on long-term capital gains. We currently expect that 90% of our regular monthly dividends paid in February and March of this year will be taxed at the favorable 2013 tax rates on long-term capital gains. We are extremely pleased to once again deliver this level of tax efficiency to our tax-paying shareholders.

I would like to turn now to originations. Our originations for the quarter totalled $56.2 million with the lower middle market producing $43.2 million and, on a net basis, middle market and private loans producing $13 million. As of today, our lower middle market transaction pipeline is consistent with the levels we have historically experienced. The early part of this year was slower, likely being impacted by tax rate change related fourth quarter of 2012 accelerated activity. We continue to see significant equity participation in our lower middle market investments and, as of quarter end, continue to average a 33% fully diluted equity ownership position in the 93% of these investments in which we currently have equity exposure.

Our officer director group is continuing to purchase shares via our dividend reinvestment plan investing over $840,000 via this program during the first quarter. And, at March 31 our officer and director group owned $100 million worth of our shares. With that, I'd like to turn the call over to Todd Reppert to cover our portfolio performance in more detail.

Okay, thanks, Vince, and good morning, everyone. We are pleased to report another strong quarter which supports our key long-term goals for sustainable growth in dividends per share while also generating meaningful growth in book value per share. We think the combination of steady long-term growth in our dividend payout and meaningful book value per share growth are a two-pronged value proposition that differentiates Main Street and has clearly generated the premium total returns realized by our investors. In the five plus years since our IPO, Main Street's performance has supported this value proposition. Since the IPO, Main Street has been able to cumulatively grow its announced recurring quarterly dividends per share by 41%, while never decreasing our dividend payout, and has grown NAV per share from approximately $12.85 to $18.55. These increases are even more notable given that two of the first five years as a public company involved a recessionary economic environment and substantially all of the BDC sector experienced reductions in book value per share from 2007 to now. In our experience, many investment companies or funds discuss capital preservation as a key goal, but few have consistently achieved that goal over the economic cycles.

We expect that our proven investment strategy, combined with a conservative capital structure, will allow us to continue our history of meaningful NAV growth over the long term. In addition, the significant amount of undistributed taxable income, or spillover, generated to date has allowed us to begin paying periodic special dividends in addition to our regular monthly dividends. The large spillover amount means that we have significantly out earned our dividends paid to date which gives us a lot of future flexibilities to support both regular, recurring, and special dividends. The equity component of our lower middle market investment strategy remains a significant differentiating advantage for Main Street. It is the primary driver behind approximately $3.30 per share of gross net unrealized appreciation within our investment portfolio at March 31, as well as our cumulative NAV growth per share. These equity positions support growth in our taxable income and, therefore, our dividends paid, through current dividend income received and periodic realized gains harvested from the $3 plus per share of net unrealized appreciation.

Due to our spillover position and our appreciating equity portfolio, we are not solely reliant on growth or yield trends in our debt portfolio in order to grow and cover the dividends paid to shareholders. These factors also put us in the position to not have to reach for risk or make investments outside of our historical credit parameters to grow and cover our dividends. This is differentiated from many other investment companies who are experiencing flat or declining earnings, and potentially dividends, based on the impact of market trends on yields and portfolio growth. I'm also pleased to report that our overall portfolio performance remains strong and the portfolio continues to improve its diversification by issuer, industry, end markets, geography, and vintage. At March 31, we had investments in 147 portfolio companies that are in approximately 50 different industries across the lower middle market, middle market, and private loan components of our portfolio. Our largest portfolio company investment represents less than 3% of our total investment income and the vast majority of our portfolio investments represent less than 1% of our assets. This increasing diversity adds structural protection to our portfolio, our revenue sources, and our cash flow which translates into structural protection for our shareholders.

I would also characterize the bulk of our lower middle market portfolio as seasoned in that we have been in a majority of these investments for at least two years and many for significantly longer. The seasoned nature of lower middle market portfolio is reflected in a deleveraged, or lower risk position, for many of these investments and an expanding list of equity investments with growing or accelerating unrealized depreciation. At March 31, our equity investment portfolio had a blended fair value that is well over 2 times its cost basis, reflecting over $105 million of net unrealized appreciation. Importantly, these equity positions have a low cost basis relative to ownership involved since they are a combination of nominally priced warrants and lower basis, lower multiple direct equity investments. This is a benefit of our direct origination platform in the lower middle market and is the starting point for the meaningful unrealized appreciation we have experienced in most equity investments.

In summary, Main Street continues to perform at a high level and deliver upon our long-term goals of sustaining and growing our dividends as well as generating meaningful growth in book value per share. Our investors should derive great comfort that they are invested in a very capable and broad team at Main Street with all of our personnel being directly aligned with continuing to generate significant shareholder returns over the long term. With that, I'll turn the call over to Dwayne for more detailed comments on our financial performance.

Thanks, Todd. We are pleased to report that we generated significant increases from the prior year in both total investment income and net investment income, and continued appreciation in our investment portfolio during the first quarter of 2013. For the first quarter, our total investment income increased by 25% over the same period in 2012 to a total of $25.6 million. This increase was primarily driven by a $3.6 million increase in interest income associated with higher levels of portfolio debt investments and a $1 million increase in dividend income from portfolio equity investments. The increase in investment income in the first quarter included a net decrease of approximately $1.2 million of investment income related to accelerated prepayment and repricing activity for certain portfolio debt investments and marketable securities investments when compared to the first quarter of 2012. The decrease was primarily related to $1.8 million of nonrecurring investment associated with two lower middle market debt investments in the first quarter of 2012, which was partially offset by an increase in investment income from higher accelerated prepayment and repricing activity of certain middle market debt investments in the first quarter of 2013 when compared to prior year.

First quarter 2013 operating expenses, excluding non-cash, share-based compensation expense, increased by $700,000 over the first quarter of 2012 to a total of $7.8 million. The operating expense increase was a result of higher compensation and related expenses primarily due to increases in personnel and higher other general and administrative expenses in comparison to prior year. The ratio of our total operating expenses, excluding interest expense, as a percentage of average total asset, which we believe is a key metric in evaluating our operating efficiency, was 1.7% on an annualized basis for the first quarter of 2013 compared to 2% on an annualized basis for the first quarter of 2012. We believe that this metric continues to compare very favorably to other BDCs and is approximately one-third of the same metric for the externally managed BDCs of size similar to Main Street. This low cost internally managed operating structure allows us to deliver a greater portion of the gross portfolio returns to our shareholders. And, we believe that it provides for greater alignment of the interest of our management with the interest of our shareholders.

Due to our increased total investment income, and the continued leverage of our low-cost operating structure, distributable net investment income for the first quarter of 2013 increased by 33% over the first quarter of prior year to $17.9 million, or $0.52 per share, and exceeded our dividends paid for the first quarter by $0.07 per share. While the dollar amount of distributable net investment income increased by 33% over the prior year, the per share percentage increase was approximately 4% due to the higher average number of shares outstanding compared to the corresponding period in the prior year, primarily due to the impact of the June and December 2012 follow-on stock offerings. All other first quarter 2013 per share measures were similarly affected by the higher weighted average shares outstanding. During the first quarter of 2013, we had total net unrealized appreciation of $8.8 million. As Vince previously mentioned, this total net unrealized appreciation included $10 million of net appreciation on our portfolio investments, which was partially offset by $1.2 million of unrealized depreciation on the SBIC debentures held by our wholly-owned subsidiary Main Street Capital II. We also recognized a net tax provision of $2.1 million, $1.4 million of which was related to deferred taxes on the net unrealized appreciation on equity investments held in our taxable subsidiaries.

The operating results for the first quarter of 2013 resulted in a net increase in net assets from operations of $23.6 million or $0.68 per share. As a result of our increase in net assets from operations for the first quarter, our net asset value per share at quarter end was $18.55, or an increase of $0.32, or 2%, from December 31 after excluding the impact of the $0.35 per share special dividend we paid in January of 2013. On the capital resources front, our liquidity and overall capitalization remains strong and our positions were further strengthened by several recent activities. As of March 31, we had $26.2 million of cash and $146.5 million of unused capacity under our credit facility. At quarter end we continue to have $225 million of SBIC leverage outstanding which bears a weighted average, fixed interest rate of approximately 4.8% and matures ten years from the original issue date. The weighted average remaining duration for the existing SBIC leverage is approximately 6.1 years as of March 31.

Since the end of the first quarter, we have made several material improvement to our capital structure to provide significant additional liquidity and additional long-term source of capital. The first such improvement is our recent increase in the total commitments under our credit facility, which we completed earlier this week, and through which we expanded the total commitments under our credit facility by $65 million to a total of $352.5 million with increases from four of the existing lenders in our lending group. As a result, we currently have over $230 million of unused capacity under the facility with this facility available to us through September 2017. The second improvement was the completion of our first senior notes offering in April, which further diversified our capital base and provided us an additional long-term source of financing.

Upon completion of this senior notes offering we raised total net proceeds of $89 million after deducting underwriting discounts and estimated offering expenses. These senior notes bearing interest rate of 6.125% and mature in April 2023. In addition to the benefits of their long-term duration, the senior notes provide us with additional capital flexibility as they may be redeemed in whole or in part at any time, at our option, on or after April 1, 2018. While we will continue to explore various financing sources to support our future operational and investment activities, we remain focused on maintaining significant liquidity and matching the expected duration of our borrowing arrangements with our investment assets. As we look forward to this second quarter of 2013, and consider the impact of our current quarter estimates for total investment income and the impact of our recent senior notes offering, which will increase our quarterly interest expense by approximately $0.03 per share when compared to the interest rate on our credit facility, we expect that these factors will result in second quarter 2013 net investment income per share, which is approximately $0.01 to $0.02 above our previously announced dividends for the second quarter of $0.465 per share.

Now, let me finish with a few portfolio statistics, all as of March 31. In our lower middle market portfolio we had 57 investments representing approximately $520 million of fair value or approximately 25% above the cost basis of approximately $412 million. Consistent with our investment strategy, approximately 76% of our lower middle market portfolio investment at cost were in the form of secured debt investments and approximately 93% of those debt investments held a first lean security position. The weighted average effective yield on our lower middle market portfolio debt investments was 14.2%. We hold equity positions in 93% of our lower middle market portfolio companies with an average fully diluted equity ownership of approximately 33%. At the lower middle market portfolio level, the portfolio's median net senior debt to EBITDA ratio was 2 to 1 -- or 2.3 to 1 including portfolio company debt which is junior in priority to our debt position.

Based upon our internal investment rating system, with a rating of 1 being the highest and 5 being the lowest, the weighted average investment rating for our lower middle market investment portfolio was 2.2 on March 31, 2013, compared to 2.1 on December 31, 2012. And, during the first quarter we had three portfolio companies improve their rating and two portfolio companies decrease their rating. In our middle market portfolio, we had investments in 80 companies representing approximately $362 million of fair value that were generating a weighted average yield of approximately 8.2%. Our middle market portfolio investments are primarily in the form of debt investments and approximately 91% of our middle market portfolio debt investments at cost held a first lien security position. The weighted average revenues for the 80 companies in the middle market portfolio was approximately $557 million.

In our private loan portfolio, we had investments in 10 companies collectively totaling approximately $74.5 million in fair value with a total cost basis of approximately $73.8 million. The weighted average revenues for the 10 companies in our private loan portfolio was approximately $194 million. Our private loan portfolio investments are primarily in the form of debt investments and all such debt investments held a first lien security position. The weighted average annual effective yield on our private loan portfolio debt investments was approximately 14%. The total investment portfolio at fair value at March 31, 2013, was approximately 113% of the related cost basis. And, we have one portfolio investment on non-accrual status and one fully impaired portfolio investment which together represent approximately 0.7% of the total investment portfolio at cost. With that, I will now turn the call back to the operator so that we may take any questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions)

Bryce Rowe, Robert W. Baird.

Thank you, good morning. Just noticed in the press release that the EBITDA to senior interest expense fell pretty meaningfully from 4 times down to 3 times. I just wanted to get some color behind that, if there is any?

Yes, Bryce. We went from mean to median. Isn't that right, Dwayne?

That's correct.

This quarter, because what was happening is we were getting less comfortable that a mean statistic is going to be as meaningful in that you have different size companies. A lot of them have deleveraged to a significant extent. And, we thought what's more meaningful to us is at the mean level we have 50% the companies that have more conservative statistics, 50% that have aggressive statistics, that we were just getting less and less comfortable with the mean.

And, in addition, I think where the accounting profession is headed is probably to start wanting to get into these statistics more and more in terms of -- even though they are investments, wanting to get into potentially start auditing all these companies, et cetera. So, again, we felt less and less comfortable with median -- or mean, and went to median. And, when we looked around at the space, no one was remotely disclosing anything like this. So, that's the change we made. Dwayne, did you have anything else?

Yes, I think it's just we, as has been said, Bryce, it's we thought it was a more meaningful metric because of the outliers that you would have when you looked at the mean.

And, there are several different ways to do the mean.

Got it. Yes, that makes sense. Second question just, Vince, around the concept the broken out private loan portfolio now -- I think in the past you guys have talked about a 50/50 split on the high side in terms of the lower middle market portfolio and then what was the middle market portfolio. Can you help us think about what that split will look like between the three groups now in terms of fair value of the portfolio?

Yes, I think on the high side I'd group middle market and private loan in the same basket.

Okay. And, are they -- can you talk a little bit about -- I assume the private loans are originated in a bit of the same way that lower middle market loans are? Or am I thinking about that --?

Yes. I mean, what has happened -- it really is a third category because on the syndicated side you're going to have an agent. They're going to attempt to make it as broadly syndicated as they can. You don't really know who is going to deal with you and the agent really has a lot of control.

On the other hand, these are typically rated by the rating agencies. They're audited. There is all kinds of information prepared on the investments, et cetera, from a diligence standpoint. Then in the lower middle market it's the polar opposite. It's just self-originated. We have to do everything ourselves, unrated.

And then, there is an emerging class, at least for us, in the middle where it's -- I would characterize it more as a club deal, right? It's a handful of lenders. It's like the banks used to do where three or four banks, or however many, would club together and do a financing. It is -- it truly is a category in the middle because it is not widely syndicated. It's typically not rated. You can't get a price for it, typically, on market or Bloomberg. And, it's highly a liquid, yet there typically is an agent bank or one of the lenders is agenting the deal, and it's several participants. So, as we thought about it, it really didn't fit either category. We really like the category. We want to increase our exposure to it and we felt like it was time to break it out.

Okay. And so, then you guys -- are some of those investments in that private loan portfolio, will you guys act as agent in some of those, or are you typically just part of the group?

Dwayne, why don't you answer that?

Bryce, that's a good question. I think today it has been us more as a participant. But, one of the things, as Vince said, we find that market very attractive. One of the things that we would like to see over time, as we continue to look for debt investments that have a higher yield or are more proprietary in nature, is the opportunity for us to originate and syndicate and be the agent as opposed to a participant. We expect that will happen over the next three to four quarters.

As we think about that role, Bryce, which I think we could easily do, it could carry with it broker/dealer registration and some compliance issues that we are not quite ready for. So, right now we're content to be a significant participant, but not necessarily be the agent.

Got it. Okay. All right, thank you, guys. Appreciate it.

Sure. Thanks, Bryce.

Thank you.

(Operator Instructions)

Robert Dodd, Raymond James.

Hi, guys. Questions about the environment, not so much necessarily competitive, but first on the lower middle market. We're hearing expectations that M&A activity is going to pick up in the back half of this year. Obviously, that's not necessarily the thing that drives your originations.

But, is it going to be the thing where we could expect you to maybe be a seller of companies in the second half -- or rather the companies to be sellers of themselves and you benefiting from it in the second half of the year? Do you think that's going to be a meaningful delta for you this year? Not necessarily a negative origination. I am not talking about that.

Sure. Yes, I think that one thing that we've noticed is our bigger companies tend to be more popular candidates for inbound calls from the smaller sponsors, et cetera. And, as we increase our exposure to the larger end of the lower middle market, I would expect that there would be more activity. It's not necessarily that we or our management teams would be the catalyst for the activity.

But, if someone calls and puts an attractive price/structure on the table, and our management -- most importantly our management team is interested, then we're definitely interested. So, yes, I think -- I think so. But, again, not as much because you're hearing about more frothy activity, et cetera. For us it's just more the larger companies we're seeing are generating a lot more inbound, unsolicited interest.

Okay, thanks. And then, the follow-up to that, and you mentioned it, the frothiness, when we get to the middle market portfolio on the upper end, obviously it's marked above cost. It's done very well, it's performing well. And, some of the valuations out in the market for some of the upper end loans seem to be getting, arguably, a little rich. What is the thought process for you right now as to whether you are going to be a net seller of those ones?

Yes, and so, in the middle market portfolio there is really a couple different issues. As it relates to appreciation, these loans will -- they get call constrained. They are only going to appreciate up to what they can be called at. If it's callable at 101 within a year, it's not going to trade above 101, realistically. Or not for very long or not for very much. They have been getting originated at 99 and trade up to par, par and a half. Something like that.

So, when you look at $4 million of appreciation on a $400 million portfolio, that's the 1% that you're seeing. So, there is a limit to that. And, frankly, structures are weakening and the prepayment penalties are weakening. The duration is shorter, et cetera. So, I see less of an opportunity for continued appreciation there.

On the other hand, spreads are dropping, yields are dropping. It's really quite dramatic right now out there. The better companies that did a financing in the fourth quarter of last year are repricing, refinancing now. And, even in the first quarter they're coming back. It's pretty striking.

And so, the outlook is not particularly good for if you have a bunch of capital to deploy in the middle -- in what we're characterizing as the middle market. The spreads are really coming down. And, participants in that market are having to either accept lower yields or go down the balance sheet to maintain the same returns.

Okay, got it. Thank you, guys. Really helpful color.

Sure. Thanks, Robert.

Vernon Plack, BB&T Capital Markets.

Thanks. I noticed that the average annual effective yield on the middle market portfolio was -- went down from 8.8% to 8.2%. It was 8.8% last quarter. Was that the result of -- or did the breakout of the private loan portfolio impact that number?

I'd say it was a combination of the two. Some of it was definitely movement of the -- some of those investments to the private loan portfolio. But, you're also, as Vince said, you are seeing the rates in that market continue to drop on a quarter-over-quarter basis. So, it would be a combination of the two, Vernon.

Okay. And, I noticed, and you may have mentioned this, but your marketable securities in idles funds investments that you had none this quarter. Just curious in terms of your thoughts there in terms of why that -- why it is where it is?

Well, we -- we've been pretty opportunistic there.

Sure.

And, some of the marketable securities had appreciated.

Yes.

And, we tend to like doubles and singles and not try to wait around and get real aggressive as it relates to that type of appreciation. Since we did, Vernon, the senior notes within a week or two after the end of the quarter, you will see a lot more of that as we've had to deploy that capital.

And, Vernon, this is Todd, I would say at year end that you saw a similar dynamic because we did the equity offering in December.

Yes.

And, we had to put some money to work quickly to earn a better yield. And so, that's a lot of the marketable securities that you are looking at was related to that.

It's a cash management tool at the end of the day.

Okay, all right. That's helpful. Thank you.

Thanks, Vernon.

Thank you.

(Operator Instructions)

JT Rogers, Janney Capital Markets.

I know you talked a little bit about it before, but I was wondering if you could talk a little bit more about the lower middle market, what kind of competition you are seeing there? Are banks being more aggressive, less aggressive, and where you are seeing deals come from?

Yes, I would say -- I'll let Dwayne and Todd provide their observations, too. But, when you look at our target market of 3% to 15% in EBITDA, there is going to be more competition as you go up the food chain, as you get in between 10% and 15%, I think it's fair to say it's more competitive. You might see some banks coming in and being competitive.

Although, at the end of the day, if you are looking at senior cash flow lending, the banks really aren't -- don't really like that with Basel II and Basel III. They have a hard time with that in those size companies. And then, when you get below 10% in EBITDA we hardly see them at all, unless there is a lot of asset intensity.

What they want to do is provide revolvers and maybe some lease finance, plant and equipment, maybe some real estate finance. But, they don't want to do enterprise lending or take cash flow risk. And so, we really don't see them there. Dwayne or Todd do you --?

Yes, I think the only other thing I would point out, JT, is that, as you've heard us talk about in the past, the solution we offer in the lower middle market really is different than most pure financial sponsors would. Most of our transactions are highly structured. They are not necessarily a change of control.

They, in a lot of situations, offer us an opportunity for significant minority equity investment. But, it's really a highly customized solution and that customized solution typically does not involve competition from a traditional senior bank or commercial bank. That would be the only thing I'd add.

Okay, that's a good point. Wondering about just what you're seeing from other lenders in the market. Are there other folks out there -- hear about there are a number of SBIC funds out there who maybe do something a little bit similar to what you do. Are they more active? Are you seeing any competition? I know you guys are a little bit different, as you said.

So, we will get inquiries about sponsor mezzanine finance or sponsored unitranche finance, and we had noticed that that part of the business, which we're not particularly active in, we will do it, but we are not particularly interested in providing a commoditized product. That's getting more competitive.

The equity component that you are able to receive really isn't there any more to any significant extent. That might have been a 12% current rate plus 2% pick market a few quarters ago. It may be 10% plus 2% or 12% plus zero now. We're hearing things. But, since we are not really active in that market we're not the best to really observe or make observations about it. But, clearly, there is more competitive -- competition there. I think the most popular and most competitive type of financing is a -- is providing junior capital to a sponsored deal. Do you guys agree?

Yes. And, the SBICs tend to club -- most of them tend to do sponsored finance and club deals together. And, the benefit of our grassroots direct at origination platform is that we built it over 12 plus years. And, it's real hard to replicate if you are a new SBIC unless you have been doing it for 12 years. So, it's a barrier to entry, and it gets better every year. I don't want to overstate it because we have lumpiness to our deal activity. But, the platform and the network gets better every year, which should, on balance, create more deal flow every year.

Okay, great. Just one last question. Just historically, when there was a lot of frothiness in the traditional middle market, when, if ever, do you see that frothiness start creeping down into the markets you are targeting? And, does that ever affect what you guys are focused on? Does it affect pricing on new deals both on the equity and debt side?

Yes. What we're seeing is that if a middle market loan is CLO eligible it is going to be very competitively priced in structure, right? If it's not, it's a different world. There is virtually a fraction of the interest in it. And so, we're -- in a perfect world we will -- that's what we would focus on is the non-CLO eligible.

So, what we're monitoring is are the -- is CLO eligibility broadening to include our types of loans. And, based on our research, there have been very few CLOs in the past few years that have attempted to do that. There have been isolated incidences. If that ever happened, if that ever came back, yes, that would be not a good competitive development for us.

But, we don't see it happening because almost everything that goes into a CLO has to be rated by the rating agencies. And, almost everything we do in the lower middle market is unrated. And so, that's the big barrier. But, if you have a credit rating, even a Triple-C, and there are some CLO eligibility, even a 5.3% or 5% basket or 7% or something like that, there is just a lot more demand. That's how we look at it.

Sure, great. Just one follow-up to that. So, what about the guy -- so the CLOs obviously are driving a lot of the activity. What about the guys who -- the non-CLO participants, it would make sense that they would be going -- avoiding CLO-eligible deals, so you are pushing -- obviously, the CLOs are the big driver of the frothiness. But, you have got -- everyone else is getting pushed out of that market into potentially a smaller market, the non-rated market?

No, I think that's why the sponsor-financed market, the non-rated smaller sponsor-financed market is more competitive. But, again, that's what Todd was trying to point out. Most of our competition has shown reluctance to be the sponsor, right? To write a big equity check, to put the deal together. If it's a big deal to go find co-investors, et cetera. It's just a lot of work.

It's a completely different model than having a sponsor spend six months on a deal. And, there are sponsors here in town that we know well that do one deal a year and they've got, I don't know, 15, 20, 25 guys working on it. So, all your work's done. And, they just -- they bid out the participation.

And so, that's a much more popular model rather than ours, which is go out and find a deal, diligence it yourself and everything. We hire the legal, we hire the accounting, we perform the operational diligence, we structure it. We do all the work. Not too many people are -- they are not staffed to do it. They don't have experience to do it.

So, it sounds like this is -- I guess, historically when markets were frothy you continued to see -- you didn't really see anybody move into this market just because they were unable to?

I would say the best analogy was there were a couple of hedge funds that moved into our regional area that deployed a bunch of capital in the, what, '06, '07 time frame, Todd? They were a flash in the pan.

The two that he is talking about are gone because the hedge funds are gone.

Yes. And, we had an opportunity -- they probably took some small deals from us. We had an opportunity to buy them back at a discount. So, it just -- yes, that kind of thing happens. And, probably there is more family office activity. There is a lot of wealth down here and companies or families want to create their own -- they don't want to be promoted. They don't want to be LPs. They want to find their own opportunities.

So, yes, there is always going to be some competition. But, we want to be the ones that can -- that have the broadest array of solutions that can act very quickly, that can play whatever role is needed, and just offer a highly customized situation. So, we don't see a lot of that. On any given thing we might do, you see some competition. But, we don't see any one that has just taken our entire business model and try to replicate it.

Okay, great. Thanks a lot for taking my questions.

Thank you. I am showing no further questions in the queue at this time. I would like to turn the conference back to management for any final remarks.

Great. We appreciate everyone attending, we appreciate all the continued support of our shareholders and look forward to talking to you again in August. Bye.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.