Main Street Capital Corp (MAIN) 2015 Q2 法說會逐字稿

Greetings, and welcome to the Main Street Capital Second Quarter 2015 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Jenny Zhou. Thank you. You may begin.

Thank you, Matt, and good morning everyone. Thanks for joining us for the Main Street Capital Corporation Second Quarter 2015 Earnings Conference Call. Joining me today on the call are Chairman, President, and CEO, Vince Foster; Chief Operating Officer, Dwayne Hyzak; and Chief Financial Officer, Brent Smith.

Main Street issued a press release yesterday afternoon that details the Company's second quarter 2015 financial and operating results. This document is available on the Investor Relations section of the Company's website at mainstcapital.com. A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until August 14. 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 Internet webcast that can be accessed on the Company's webpage.

Please note that information reported on this call speaks only as of today, August 7, 2015, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listenings.

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 sec.gov. Main Street assumes no obligation to update any of these statements unless required by law.

During today's call, management will discuss non-GAAP financial measures, including distributable net investment income and distributable net realized income. Please refer to yesterday's press release for a 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'll turn the call over to Vince.

Thanks Jenny and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recent dividend increase, and conclude by commenting on our investment pipeline. Following my comments, Dwayne and Brent will cover our operating performance in more detail and comment on our second quarter financial results and originations, recent announcements, our current liquidity position, and certain key portfolio statistics after which, we will take your questions.

We were pleased with our operating performance during the second quarter. Our lower middle market investments, our primary area of focus, appreciated by $16.7 million on a net basis with 22 of our investments appreciating during the quarter and seven depreciating. Our middle market loans appreciated by $100,000 during the quarter on a net basis and our private loans depreciated by $5.9 million during the quarter.

Lastly, our investment in our External Investment Manager and our other investment assets appreciated by $3.4 million on a net basis during the quarter. We finished the quarter with a net asset value per share of $21.84, a sequential decrease of $0.03 per share over the first quarter. However, excluding the impact of the $0.275 per share semi-annual dividend we paid in June, our net asset value per share increased $0.24 during the second quarter. Our lower middle market companies with nearly $125 million of cash on their balance sheets collectively continued to exhibit highly conservative leverage ratios, which Dwayne will cover in greater detail.

Earlier this week, our Board declared an increase in our regular monthly dividends for the fourth quarter to $0.18 a share in each of October, November, and December, our second dividend increase this year. The [ex dates] for these dividends are September 17, October 19, and November 18 respectively. These dividends represent an increase of 6% over the monthly payout of $0.17 per share during the fourth quarter of last year. We continue to expect that we will pay semi-annual supplemental dividends in addition to our regular monthly dividends as long as we are in a significant undistributed taxable income position.

We began the third quarter of 2015 with roughly the same dollar amount of undistributed taxable income that we enjoyed at the end of calendar 2014. We therefore anticipate asking our Board in October to declare a semi-annual supplemental dividend payable in December of $0.275 a share. As of today, I characterize our investment pipeline as about average posturing us to achieve our combined lower middle market and private loan origination target of $250 million to $300 million for calendar 2015.

We continue to seek and receive significant equity participation in our lower middle market investments and as of quarter-end, we owned an average of a 36% fully diluted equity ownership position in 96% of these investments in which we currently have equity exposure. After having our shelf registration statement declared effective in mid-July, we obtained Board approval for an ATM or at the money offering program earlier this week. While we have not definitively decided to launch the program, we wanted the flexibility to be able to do so.

Our sole rationale for considering this is to be able to more effectively accommodate current and prospective institutional shareholders who have had difficulty participating in our historical overnight follow-on offerings. Our officer director group has continued to be regular purchasers of our shares investing approximately $1.1 million during the second quarter. And with that, I'd like to turn the call over to Dwayne Hyzak, our Chief Operating Officer and Senior Managing Director to cover our portfolio performance in more detail.

Thanks Vince and good morning everyone. We are pleased to report another quarter during which we generated distributable net investment income in excess of our recurring monthly dividends and continued net appreciation in our investment portfolio. As we've discussed in prior quarters, we believe that the primary driver of our success continues to be our focus on the under-served lower middle market and specifically our investment strategy of investing in both the debt and equity in the lower middle market and acting as a sponsor and a partner to the management teams of our lower middle market portfolio companies and not just as a financing source.

We believe that our lower middle market equity investments provide significant value to our shareholders and this value is primarily provided in two ways. First, these lower middle market equity investments are the primary driver behind our significant net unrealized [appreciation of greater than $150 million, over $3 per share] in our lower middle market portfolio, another primary driver behind our long-term growth in net asset value per share. We believe it is important to note that this unrealized appreciation is well diversified across our lower middle market portfolio, with 41 of our 66 lower middle market equity investments having appreciation as of June 30 with a median appreciation of approximately $4 million.

Second, these equity investments also support growth in our realized income and therefore our total dividends paid to our shareholders through the dividend income we received from these investments and the periodic gains realized upon the exit of these investments. Our dividend income from these lower middle market equity investments is also well diversified across the lower middle market portfolio with 30 companies or approximately 77% of our investments in float through entities for tax purposes, contributing to our dividend income.

We believe that this diversity is very important when analyzing the dividend income, net appreciation, and realized gains from our lower middle market equity investments and we believe that this diversity provides support for the strength of our historical performance and visibility to the recurring nature of these benefits in the future. We are pleased that since the end of the second quarter, we've already announced another favorable exit of one of our long-term lower middle market equity investments for a $6 million realized gain and as discussed on our prior conference calls over the last few quarters, we continue to have ongoing exit activity discussions given the nature of our large and diversified lower middle market portfolio and the current robust nature of the M&A market.

Now turning specifically to our investment portfolio at quarter-end and our investment activity in the second quarter. We are pleased to report that our overall portfolio performance remained strong and the portfolio continues to improve on its diversification each quarter by issuer, industry, end markets, geography, and vintage. Our investment activity in the second quarter included total investments in our lower middle market portfolio of approximately $36 million primarily as a result of our investment in one new portfolio company, which after aggregate repayments on debt investments and return of invested equity capital resulted in a net increase in our lower middle market portfolio of approximately $17 million.

We also had a net increase in our middle market portfolio of approximately $23 million and a net decrease in our private loan portfolio of approximately $9 million. As a result, at June 30, we had with investments in 190 portfolio companies that are in more than 50 different industries across the lower middle market, middle market, and private loan components of our investment portfolio.

The largest portfolio company investment is approximately 2.5% of our total investment income and approximately 2.4% of our total portfolio with the majority of our portfolio investments representing less than 1% of our income and our assets. The diversification of our investment portfolio continues to improve as we grow the portfolio and we believe that this diversification provides significant benefits to our shareholders.

Additional details on our investment portfolio at quarter-end are included in the press release that we issued yesterday, but I'll touch on a few highlights. Our lower middle market portfolio included investments in 69 companies at quarter-end representing approximately $809 million of fair value, which is greater than 23% above the cost basis. Consistent with our investment strategy, approximately 70% of our lower middle market portfolio at cost was in the form of secured debt investments and approximately 90% of those debt investments held a first lien security position. As Vince mentioned, we hold equity positions in 96% of our lower middle market portfolio companies with an average fully diluted equity ownership position of approximately 36%.

At the lower middle market portfolio level, the portfolio is median net senior debt-to-EBITDA ratio was a conservative 1.7 to 1.0 or 2.0 to 1.0 including portfolio company debt, which is junior in priority to our debt position. As a complement to our lower middle market portfolio and our middle market portfolio, we had investments in 85 companies representing approximately $657 million of fair value. And in our private loan portfolio, we had investments in 36 companies representing approximately $236 million in fair value. Our middle market and private loan investments provide significant portfolio diversification and generate additional net investment income to fund our dividends.

The total investment portfolio fair value at June 30 was approximately 109% of the related cost basis and we had four investments on non-accrual status, which comprised approximately 0.3% of our total investment portfolio at fair value and 3.1% at cost.

In summary, Main Street's investment portfolio continues to perform at a high level and continues to deliver upon our long-term goals of sustaining and growing our dividends as well as generating meaningful growth in our net asset value per share. With that, I'll turn the call over to Brent to cover our financial results and liquidity position.

Thanks Dwayne. We are pleased to report that our total investment income increased by 18% for the second quarter over the same period in 2014 to a total of $41.3 million. Interest income increased by approximately $4.8 million and fee income increased by approximately $1.7 million when compared to the prior year. The net amount of non-recurring or one-time income related amounts were consistent with the second quarter of 2014.

This quarter included decreased interest income of $1.1 million related to accelerated prepayments or re-pricing activity offset by increased fee income of $1.2 million relating to such activity and other one-time transactions. Second quarter 2015 operating expenses excluding non-cash share-based compensation expense increased by $2.1 million over the second quarter of the prior year to a total of $12.4 million. The increase was primarily the result of a $2.2 million increase in interest expense due to the issuance of our investment grade notes in November 2014 and approximately $0.6 million relating to compensation and other general and administrative expenses.

These increases were partially offset by an increase of $0.7 million in the cost allocated to our External Investment Manager. The ratio of our total operating expenses excluding interest expense as a percentage of our average total assets, which we believe is a key metric in evaluating our operating efficiency was 1.4% on an annualized basis for the second quarter and continues to compare very favorably to other BDCs and other investment options.

Our increased total investment income and the continued leverage of our efficient operating structure resulted in an 18% increase in distributable net investment income for the second quarter of 2015, to a total of $28.9 million or $0.58 per share, exceeding our recurring monthly dividends paid for the quarter by over 10%.

Our External Investment Manager's relationship with the HMS Income Fund benefited our net investment income by $1.7 million in the second quarter of 2015 [through a $1.2 million reduction] of our operating expenses for costs we charged with External Investment Manager for services we provided to it and $0.5 million of dividend income from the External Investment Manager. Based on the HMS Income Fund's current fundraising efforts and activities, we currently project this relationship will contribute approximately $0.03 to $0.04 per share of net investment income per quarter during the second half of 2015.

We recorded a net realized loss of $5.6m during second quarter primarily relating to the sale and restructuring of certain middle market and private loan debt investments. And as Vince discussed, we recorded net unrealized appreciation on the investment portfolio of $14.3 million in the second quarter primarily relating to $16.7 million of appreciation on our lower middle market portfolio and $5.1 million of appreciation relating to our External Investment Manager partially offset by unrealized [appreciation] on our private loan portfolio and other portfolio. Additional details for the change in our net unrealized appreciation can be found in our earnings release.

Our operating results for second quarter of 2015 resulted in a 36% increase in our net increase to net assets of $40.8 million or $0.82 per share. On the capital resources front, our liquidity and overall capitalization remained strong. At the end of the second quarter, we had $41.6 million of cash, $8.9 million of marketable securities, and $371.5 million of unused capacity under our credit facility.

Today, we have approximately $43 million of cash, $9 million of marketable securities, and $300 million of unused capacity under our credit facility. As we look forward to the third quarter of 2015, we currently expect that we would generate third quarter 2015 distributable net investment income of $0.56 to $0.58 per share. This estimate is $0.035 to $0.055 per share above our previously announced dividends for the third quarter at $0.525 per share and would result in a third quarter dividend payment at less than 95% of our expected third quarter distributable net investment income. With that, I will now turn the call back over to the operator so we can take any questions.

(Operator instructions). Robert Dodd, Raymond James.

First one on the contribution of the appreciation -- how broadly that is coming from the lower middle market portfolio and the median on the appreciation. You didn't give us a median or a kind of concentration metric though for the dividend income, just you know, 30 companies are contributing. Can you give us a ballpark like 50% of the dividend income comes from 10 companies, 15 companies. I mean, can you give us a kind of metric on how concentrated that is given you gave us a concentration for the appreciation side?

Yeah, Robert, Thanks for the question. When you look at it, I don't have an exact number for you, but I would say that your metric of 50% of the total dividend income from the lower middle market your coming from the Top 10 companies is a pretty good metric and we can get that number and provide additional details on it on the next quarter, but the companies that do well, do generate higher levels of dividend income and appreciation, which is why we thought that the median number is a better metric than an average number but similar to the diversity we see in the appreciation, we do believe that the dividend income is well diversified, which we obviously think is a big positive.

Robert or Bob, as we've discussed in the past about close to 80% of our equity investments are deliberately structured as investments and flow through LLCs for tax purposes and we have a contractual right for dividends at a minimum equal to a normal tax rate [times the level times tax quick sometimes] our percentage and so, it's much more broadly based than you would think as a results of the tax related distributions.

And then just the second one on, obviously, I know realized gain already in the third quarter, but we're hearing it as valuations and you've talked about it before at the analyst and in prior calls that again valuations in some segments of the lower middle market are very healthy, let's put it that way, so can you give us any color on how broad is the discussion amongst quite obviously managers not necessary, you driving it, or unless -- of basically selling out, I mean is it still very focused to a few companies in the highly valued subsectors or is that spreading with multiples generally in the lower middle market seem to be getting (multiple speakers).

It's kind of all over the board, Robert, I mean there is one catalyst is the investment banking community is calling on our company's, it's kind of independent of us, informing them of the valuations they can obtain should they choose to sell. It's of no interest to a lot of them, it is of some interest to some of them and that is happening and that's probably -- it is probably a 10% of our portfolio that kind of gets regularly solicited by intermediaries saying, you may be eligible to get a double-digit EBITDA multiple for your company and that type of thing. So that's part of accounts, but I would say it's about 10%. Wouldn't you agree Dwayne?

I agree.

And you know, the exit that we had was a mid-teen EBITDA multiple. I mean we've never seen anything like it but if you're in an attractive sector that certain private equity firms have targeted, they're out there transacting at really multiples that are almost higher than you see in terms of their public company comps and you're seeing public companies pay higher than their -- than the multiples they're trading at for companies that have a lot of strategic value to them. Its pretty amazing.

Got it. Thank you. And then one final one if I can, I got to ask, obviously energy exposure -- indirect exposure to Texas with the oil getting back down low, I mean any changes, particularly are you noticing any impacts on the energy services side or anything like that or is it in fact you switching around now and then starting to look at more opportunities on that side?

Well, it's a pretty dynamic situation. I think things were kind of stabilizing prior to the most recent leg down in at least oil prices and we'll have to kind of wait and see if that stays, what impact that might have, but the way we're managing the portfolio now to take some discipline, but if we see an opportunity in the energy space generally, we're telling our guys that you have to -- someone's got to get off the bus to make room for the new passenger.

You're going to have to let one go and maybe take a loss if you want to add to the energy exposure. So, while we'd like to add to it just opportunistically for various reasons including the banks in our credit facility, et cetera, they don't want to see any more energy exposure than we have, so we're being pretty disciplined about it. We're watching it carefully. We do benefit particularly in the lower middle market from not having, I mean from being the lender and we have a lot more flexibility that way.

We're really not in any significant jeopardy of having a third-party lender cut off liquidity and us having to respond to it or get blocked or anything like that. It's much like how the recession was with the overall portfolio, we really benefit from being a lender and having very little reliance on third-party financing. So, basically what's happening is the energy exposure that we have is absorbing a lot of the appreciation that naturally occurs in the rest of portfolio. Unfortunately we're still able to eke out net appreciation, which is what happened in the second quarter and based on how we perceive things right now, we continue to expect that to be the case.

(Multiple speakers). I think, you covered it well.

Bryce Rowe, Robert W. Baird.

Thank you. I wanted to, Vince or Dwayne, just wanted to ask about ongoing yield compression within the lower middle market and obviously any of the one line you closed this quarter came at a lower yield but just wanted to get a sense for if you're continuing to see or if you're starting to see a slowing in yield compression with the spreads haven't widened out here recently?

You are talking of lower middle market price, I'm sorry? I just wanted to --

That's right.

So, sure. Yes, I mean, I think the way to look at it, you know, our average EBITDA, which is probably pretty close to meeting EBITDA and lower middle market is a $6 million sized company. And what we're seeing in the market is historically that size company had limited access to less expensive senior cash flow financing.

Maybe the top quartile of those companies that were of interest to sponsors could access that type of financing. What we're seeing now is probably the second quartile if there's reasonable growth prospects with respect to the business and we see the sponsors moving into maybe the second quartile and they're bringing with them access to senior cash flow financing.

The cheaper financing is generally hard to get unless a sponsor comes in, generally the change control transaction puts a bunch of equity in. That's the kind of the catalyst for it. So we're seeing the change in the market is the second quartile companies are now having access to that company.

The third quartile companies and fourth quartile companies and I'm ranking them in terms of growth prospects, continue to not really have that access and that's kind of been where we've been transacting but in a competitive process, if we want to engage in the second quartile or certainly first quartile company in terms of growth, those yields are coming down to the high-single digit and that's kind of the reality that we're seeing. We were just discussing that the other day.

I think it's important to note that when we do accept a lower yield on the debt, Bryce, it's going to be in conjunction with an opportunity on the equity side that we really like. I don't think you'd see us do a lower middle market deal, get only and chase the yield down, but if we're really excited about the company and the equity opportunity, that's where you'll see us accept a yield that maybe lower than what we would have done a couple of years ago.

The most recent one I think you're referring to that had somewhat of a lower yield in this floating rate, it was about a $15 million EBITDA company roughly. So it was a much larger company. It had gone through a process to attract a sponsor and while the process was successful in generating bids, they were inadequate from the owner standpoint and so we came in with a non-control recap to get impartial liquidity.

And so what drove that is really, it almost had triple the EBITDA of our normal companies, but we liked the company, we liked the situation. Again, it wasn't sponsored other than us being the sponsor if you will and we like the asset, we like the management, so we went ahead and did that opportunistically. That's kind of our type of deals where -- if the sponsors weren't able to deliver the result of that the seller wanted, we came in and provided a customized solution.

Yes, got it, okay. Then on a different topic, Vince, we've seen some movement with the [SDA] legislation through the house, just wanted to and since on your own kind of the forefront of any kind of movement from an [SDA] perspective, wanted to just get any update that you have of potential movement here this year with the family of funds or the leverage fees?

Well, I got an in-depth briefing from our lobbyist two days ago when the Senate was adjourning. They come back I think on September 9 and what's happening in the Senate is the activity is in the Small Business Committee, because of kind of a domino effect of one member left and then his committee vacancy ended up being filled by the Small Business Committee person that left a vacancy in the Small Business Committee et cetera et cetera.

When the smoke cleared, we have new leadership at least in terms of the ranking member the Small Business Committee and so what we're trying to do is achieve a bipartisan movement of the legislation out of the Small Business Committee and there is a little bit of work to do in terms of achieving that. It's not so much that SBIC bill is controversial, it's -- to achieve a bipartisan solution, we might need to attach some other legislation with it and it could kind of get bogged down and that's kind of where the discussion is. I know that's very granular, but there is a lot of activity and hopefully when they come back in September, there can be a resolution in terms of moving our bill through, whether it's with a companion bill or not, but that's kind of what's happening. So there's lot going on in real-time.

Doug Mewhirter, SunTrust.

Hi, this is actually Matheya on for Doug. I was wondering if you could give us a little more detail on your pipeline into the third quarter?

Our pipeline doesn't have a lot of volatility in it in terms of the companies we're looking at. We've got four little lower middle market teams and I've been getting them focused on lower middle market pipeline right now. The four lower middle market teams have divided up the country. Each of them has always looking at a handful of deals and so the pipeline, if each is looking at three deals, we have 12 deals we're looking at.

Where the uncertainty comes in, in terms of handicapping what actually gets closed and booked is trying to handicap the diligence process which of those 12 transactions make it through diligence, documentation, et cetera. This is an unaudited environment. You never know what the diligence is going to produce and you never know if the counter-party is going to be reasonable in terms of the pretty tough documentation we insist on. Sometimes it can go over 12. We can conceivably go 12 for 12. I kind of handicap it at about 75% kill rate during diligence and if we can deliver 25% of that backlog in terms of completed deals, that's kind of how I handicap it, that's about what we normally do but it could easily be none and it could easily be more but in terms of the dozen or so prospects that we kind of chronically seek, if that's about all the teams can handle, they're busy or out there in the field trying to get these things done and it's kind of business as usual, which is why I think we're approximately on target on a year-to-date basis, our backlog is about or our pipelines is about average that's why I made the comment about hitting our target. We're not going to probably exceed it, we're probably not going to fall short of it.

Okay, I understand. And then I (inaudible) net originations seem to be for invested overall portfolio seemed a little light in the quarter. Would you say like that's sort of timing and when you're able to get all that due diligence documentation done, would you?

Yes, absolutely it's -- we really don't have any visibility as to a given quarter what we are going to originate particularly in lower middle market. You get involved in vacations in the summer and all kinds of stuff. So we don't really get too worried about a light quarter here or there. We can have a lower middle market team go a year without originating and another one end up having four or five deals get done. So, we do think on an annual basis we're comfortable forecasting an amount and again, I think we're on track to do it on an annual basis, but it doesn't [cauterize] itself very well. It never has.

Christopher Nolan, MLV & Company.

Brent, what is the spillover income?

It's approximately $39 million.

Again Chris, just to clarify. Spillover is a tax term and when you try to estimate what it is, we have most of the lower middle market companies haven't given us K1s yet, a lot of them have, but a lot of them haven't yet for calendar 2014. So it's a rough estimate in terms of -- where you are for 2015. So $39 million, it could be -- I wouldn't be too precise there but that's our best estimate.

Great. And then Vince on the capital management focus is given the shelf offering, is the plan to do an institutional debt offering some time in the second half of the year? What are the thoughts around that?

We did the institutional -- we did investment grade debt offering just because we wanted to -- we wanted to get ourselves introduced to the market and the market introduced ourselves and we learned a lot. We most importantly, you really want to do a quarter billion dollar deal or more because of various indices that they have and the way the managers get evaluated et cetera. So, the lesson learned is we probably won't do that again until we have a quarter million dollar type of need and in the near-term, it's very expensive because it's a couple of hundred basis points more expensive [or 250 basis points right now higher] than our revolver. So I don't expect we do anything absent something really strange the last half of this year. We will be able to call our baby bonds on the fifth anniversary which is probably what, two and a half years from now?

April of 2018.

So that's an upcoming need. So there'll probably be a catalyst for something like that. So, we deliberately have a lot of excess capacity in our revolver. We continue to grow that. We continue to add banks. So that's the primary funding source and then the SBA program, there's a good shot that it gets expanded as well and we'd obviously try to use that. So I don't see much near-term [neat] issue term debt.

With respect to the ATM that I made reference to, several institutions have told us, we can particularly, you know, we're starting to be owned in Canada and in Europe, by these institutions and they can't, because of time zone changes and other regulatory issues, you can't call them to do an overnight deal at 4:00 PM Central Time. They can't respond to it and so we try to figure out a way that we can use the shelf, allow them to do their work and try to provide a vehicle other than that an overnight offering to provide them the equity exposure that you're looking for.

So we're going to see how that goes. That's the only reason we're doing it. If for some reason that doesn't get utilized, we'll do another follow-on equity offering as the pipeline turns into completed deals.

Great. So for the near-term, the plan is just to utilize the credit facility for incremental liquidity and so forth?

Yes.

Quick question, on the new business opportunities, I know in past calls there's sort of been a discussion about areas that you guys might explore or enter into? Any update you can provide on that?

Yes, we have one that has that are approved by our Board and it's been approved by our counterparty's board and as of today, it should be, in spite of the SEC to achieve -- to get there, it's not necessarily an approval, it's kind of negative insurance as I understand it. We run the structure by them and they say, we don't see any issues with it and that takes a few weeks. So I would expect, -- unless something goes [awry with] SEC, I expect we go live with that during the third quarter and we'll be able to talk more about it in the fourth quarter. It's not in our next conference call. It's not very large, but it's very significant to our organization because it does add another dimension to the third-party asset, I wouldn't necessarily call it third-party asset management but dealing with a party in addition to the Heinz organization. So we're pretty excited about it.

Vernon Plack, BB&T Capital Markets.

Most of my questions have been asked but Vince, if you could give us your current thoughts on the BDC modernization bill?

So, I've been pretty involved with that as well. The latest update is that it looks like if anything is going to happen there, it's going to come out of the relevant House Subcommittee that would generate a bill. We don't have a bill that's been sponsored yet or proposed but we do have a draft in draft legislation that was a subject of a subcommittee hearing. I represented at the hearing and testified on behalf of the small business or the SBIA and provided testimony and then there were three or four other witnesses who provided testimony, just on there with respect to their organization as opposed to with respect to the industry. My take on the subcommittee hearing was that there was more or less bipartisan consensus that this thing made sense, particularly the simplification part of it and the draft legislation is not much different than legislation that's been proposed in prior sessions of Congress.

We have a new Congress so everything starts over again. There is some debate around a few of the more aggressive position such as preferred stock, such as if there is more leverage that's permitted, how do we go about getting -- being fair to the shareholders, is it subject to shareholder approval, is it subject to kind of cooling off period, if you will.

So shareholders who invest it under one statutory regime have a chance to rotate out and if that's the case, what do we do about the non-listed BDCs that are illiquid and how do those shareholders get a chance? That's kind of the one sticking point and I think that I might have referenced that in prior calls and again, that was discussed generally at the subcommittee hearing. So, I think the committee went well. The testimony was well received. It was very well attended by the members and also some members that weren't members of the subcommittee. So, I think we're all very pleased as an industry as to how it went and I expect that there will be some movement on it, but it has a long way to go.

And by long way, do you mean that it’s certainly not this year.

Yes, I would think the consensus would be certainly not this year but possibly this Congress, possibly next year.

Mickey Schleien, Ladenburg.

Mickey, do we have you? Maybe we go on to the next one.

Christopher Testa, National Securities Corporation.

Thanks for taking my questions. I know you touched on this a little earlier in the call, but just with the lower middle market and middle market spread has really narrowed pretty sharply since the first, second quarter of 2014. Just what do you see as kind of the catalysts that are going to turn this around? Are you starting to see more and more competition kind of, pull back from the lower middle market, just any color you could give there it'd be appreciated?

Well, yes, I mean, first of all that, the two are pretty largely uncorrelated. The lower middle market companies when they're out transacting, looking for debt, looking for equity, they are really not eligible for an institutional placement. The larger ones, if anything, are eligible for maybe a group of institutions that might club together that might provide some financing but the ones we're largely focused on are just really going to be dealing with us and to put a perspective, our average EBITDA [in the economy company with is your average EBITDA in the middle market is what]?

I think it's best [score is around $96 million].

So, Nick's roughly at $100 million in terms of his portfolio average EBITDA, and we're at [$600 million]. So the two markets don't really have anything to do with each other. So I think you should have -- you have one's fixed, one's secured, the others floating, could be generally secured sometimes unsecured. They're really quite a bit different and were not really looking at in terms of convergence or not again, I think the lower middle market opportunities in terms of if you -- in terms of higher yields are going to be in the less popular transactions, the non-sponsored transactions where the company doesn't have a lot of growth, the company is smaller, has less alternative to access and there's more risk associated with those companies, you can get higher yield. Again, we've probably been focused a lot on the second quartile type growth prospect companies and those yields have dropped.

I think our strategy is to look at companies that are more unique, have less alternatives, have fewer growth prospects and that's kind of our strategy to maintain the yield. I don't expect, you know, we'll look at terms of convergence, I'm just looking at lower middle market yields themselves. We don't expect them to change a lot or to continue to really kind of drop and we're managing to keep them stable. We can't really control what the middle market yields are.

Yes. No, that's very helpful. Thank you. Can you give any detail on the non-accruals, I know you that have four companies. Were there any new companies put on there?

There were no new companies. One of the non-accruals from last quarter was one of the realized losses in the quarter. That's why it changed from five companies on non-accrual to four companies on non-accrual. Outside of that, there was no movement.

Okay, great. And just your general thoughts on the Southwest economy given the oil price declines and layoffs in that industry. Just general things you've been hearing from your clients?

We really haven't seen a lot of evidence of a contagion coming from oil prices to other parts of the economy in the Southwest. The housing market is still reasonably strong, employment figures are still reasonably strong, and remember too, I've kind of said this in the past, Houston's probably -- into the Houston economy and possibly Texas in general, is as interested in gas prices or more than they are in oil prices. If I sit around and talk to my energy counterparts in Houston, they're much more likely to be talking about gas and basis differential based on where the gas is being produced and the transportation bottlenecks and stuff like that.

So, we really haven't seen a lot. Obviously, it's going to get worse if we stay at $45 oil and wherever it is right now for a sustained period of time because when you look at the cost of production across all the different basins, there is not too many places you can continue to produce at those prices and so you would expect supply and demand to balance out particularly when some of these shale plays around here, they have such high production. Some people call it mining rather than producing and when you stop, the production falls off very quickly. So I think the sense is that the cure for low prices are low prices and that's maybe how you recover from where we are but there's a lot that goes into it, but as of right now, our companies don't really impact and again as we've said in the past too, our restaurant companies, our jewelry companies, our transportation companies thrive in terms of low fuel prices. So there's that counterbalance as well.

Mickey Schleien, Ladenburg.

I think we're having some technical difficulties with Mickey here today. Mickey, if you can hear us, we'll be available if you want to call us back after the call.

Okay, management, it looks like there's no other questions at this time. Would you like to make any closing remarks?

I thank everyone again for joining us and we look forward to talking to you again in November.

This concludes this morning's teleconference. Thank you for your participation. You may disconnect your lines at this time.