Main Street Capital Corp (MAIN) 2015 Q4 法說會逐字稿

Greetings and welcome to the Main Street Capital Corporation fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Jenny Zhou. Thank you. You may begin.

Thank you, Christine, and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation fourth-quarter and full-year 2015 earnings conference call. Joining me today on the call are Chairman and CEO, Vince Foster; President and Chief Operating Officer, Dwayne Hyzak; and Chief Financial Officer, Brent Smith.

Main Street issued a press release yesterday afternoon that details the Company's fourth-quarter and full-year 2015 financial and operating results. This document is available on the investor relations section of the Company's website at mainstreetcapital.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 March 4. Information on how to access the replay is included in yesterday's press release.

We also advise you that this conference call is being web -- broadcast live through an internet webcast that can be accessed on the Company's webpage. Please note that information reported on this call speaks only as of today, February 25, 2016, and therefore you are advised that time sensitive information may no longer be accurate at 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 the result of risk, uncertainty 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. 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 will turn the call over to Vince

Thanks, Jenny. And thank you all for joining us today. I'll comment on the performance of our investment portfolio, discuss our recent dividend announcement and conclude by commenting on our investment pipeline.

Following my comments, Dwayne Hyzak, our President, and Brent Smith, our CFO, will cover our operating performance in more detail and comment on our fourth-quarter financial results and originations and exits, our recent announcements, our current liquidity position and certain key portfolio statistics and our expense ratio, after which we will take our questions. Take your questions.

Our investment portfolio delivered solid operating results during the fourth quarter. Our lower-middle market investment portfolio, our primary focus, appreciated by $11 million on a net basis with 18 of our investments appreciating during the quarter and 17 depreciating. Our middle market loans depreciated by roughly $24 million during the quarter on a net basis and our private loans depreciated by $5 million during the quarter. We finished the quarter with a net asset value per share of $21.24, a sequential decrease of $0.55 a share over the third quarter. We estimate that at least 40% of our middle markets depreciation during the quarter was technical in nature rather than due to Company specific credit our industry issues. The various leveraged loan indices experienced similar declines in valuation.

Excluding this impact and the impact of our $0.275 a share semiannual supplemental dividend paid in December, our net asset value-per-share would have ranged from being flat to slightly down during the quarter. Our lower middle market companies, with nearly $132 million of cash on their balance sheets, continue -- excuse me, collectively continue to exhibit highly conservative leverage ratios on a relative basis, which Dwayne will cover in greater detail.

Earlier this week, our Board declared regular monthly dividends for the second quarter of $0.18 a share for each of April, May and June of 2016, maintaining our first-quarter dividend payout amounts. The ex-dates for these dividends are March 17, April 19 and May 8 respectively. These dividends represent an increase of 3% over the monthly payout of $0.175 a share in the second quarter of last year.

As I referenced earlier, last December we paid a semiannual supplemental dividend of $0.275 per share. 2015 represented our fourth consecutive calendar year of supplemental dividends beginning with the 2012 dividend declared in the fourth quarter of that year. We continue to expect that we will pay supplemental dividends in addition to our regular monthly dividends as long as we are in a significant undistributed taxable income position. We therefore currently expect to ask our Board to declare a semiannual supplemental dividend in June in the range of $0.25 to $0.30 a share.

As of today, I'd characterize our investment pipeline as normal. However, for the first time in recent memory, we are seeing improved pricing and structures across the board in the lower middle market private loan and the middle market areas. We continue to seek and receive significant equity participation in our lower middle market investments and as of quarter-end we hold an average of a 36% fully diluted equity ownership in a 96% of these investments in which we currently have equity exposure. We continue to create financing capacity for our new lower middle market and private loan investments with exit proceeds for our middle market portfolio.

On a cost basis, our middle market portfolio declined by about 8% in the fourth quarter relative to the third quarter. We expect that this trend will continue depending upon the relative opportunities we're seeing in these three areas. As of today, we have number of lower middle market investments in various exit discussions, some at valuations materially in excess of our carrying values. Of course, none may result in completed transactions. Our Officer Director Group has continued to be regular purchasers of our shares, investing approximately $800,000 during the fourth quarter.

With that I'd like to turn the call over to Dwayne to cover our portfolio performance in more detail.

Thanks, Vince, and good morning, everyone. We are pleased to report another quarter and another year during which we generated distributable net investment income in excess of our recurring monthly dividends and continue favorable performance from our lower middle market portfolio. We believe that our unique investment strategy focused primarily on the underserved lower middle market combined with our efficient operating structure provide a unique value proposition that differentiates Main Street from most yield-oriented investment options and has generated the premium total returns realized by our shareholders.

At this year-end period we would like to take a few minutes to look back at our history and recap the benefits that our unique investment strategy and efficient operating structure have enabled us to deliver to our shareholders. Since our IPO over eight years ago, our investment strategy and operating structure have resulted in operating performance that has allowed us to grow our recurring monthly dividends per share by 64% and pay cumulative dividends to our shareholders of almost $17 per share, or greater than 110% of our IPO price of $15 per share. Our shareholders have also benefited from stock price appreciation of over $13 per share, or an additional return in excess of 85%.

As we discussed in prior quarters, we believe that the primary driver of our long-term success has been and continues to be our focus on the underserved lower middle market and specifically, our investment strategy of investing in both 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. Over the last few quarters we provided some highlights of different contributions from our lower middle market companies to demonstrate the significant benefits of our unique investment strategy.

This quarter we would like to highlight several reasons why we believe that our structure as a publicly traded BDC with the significant benefits of permanent capital is a perfect match with our focus on investing in the lower middle market. First, we believe that our permanent capital structure allows us to be an ideal partner for owners of privately held businesses that are seeking a liquidity event as we can represent a permanent substitute partner for a retiring business partner or family member, eliminating the concerns typically associated with the limited holding periods required by traditional private equity fund structures.

This flexibility allows us to compete for transactions based upon beneficial structure considerations as opposed to solely on price, generating what we believe are highly attractive investment opportunities. Second, our long term expected holding period has generated a diversified portfolio of mature companies with reasonable leverage, providing these companies the ability to work through negative economic cycles and take advantage of opportunities as they arise.

Our long term holding period also provides for less frequent portfolio turnover resulting in improved portfolio diversity each quarter and providing opportunities for increased dividend income as the portfolio companies continue to mature. A long-term approach is best demonstrated by the fact that we currently have 13 companies that have been in our investment portfolio for greater than eight years.

We believe that the benefits of our lower middle market strategy are the key to our historical and future success. Consistent with prior quarters, the contributions from our lower middle market portfolio continue to be well diversified with 46 of our 68 lower middle market equity investments having appreciation as of December 31, and with 29 companies in our lower middle market portfolio, or approximately 67% of our investments in flow-through entities for tax purposes, contributing to our dividend income over the next 12 months. We believe that the diversity of our lower middle market portfolio is very important when analyzing the benefits of our lower middle market equity investments and we believe that this diversity provides visibility to the recurring nature of these benefits in the future.

As Vince previously mentioned, we continue to have ongoing exit activity discussions on several lower middle market companies given the nature of our large and diversified lower middle market for portfolio. We were pleased that as a result of these activities, in early January we were able to announce another favorable exit of a lower middle market investment to the exit of our investments in Southern RV.

This exit resulted in a realized gain of $14.4 million and a cumulative internal rate of return of approximately 46% on our combined debt and equity investments. Without our unique investment focus on a combination of senior secured debt with meaningful direct equity investments, it would be very difficult to deliver these types of returns and benefits to our shareholders. Now turning specifically to our investment portfolio at year-end and our investment activity in the fourth quarter, we are pleased to report that our overall portfolio performance remains strong.

Our investment activity in the fourth quarter included total investments in our lower middle market portfolio of approximately $36 million, primarily as a result of our investments in two new portfolio companies, which after aggregate repayments on debt investments and return of invested equity capital, resulted in a net decrease in our lower middle market portfolio of approximately $10 million. As Vince previously referenced, we had a net decrease in our middle market portfolio of approximately $59 million and a net decrease in our private loan portfolio of approximately $5 million. As a result, at year-end we had investments in 197 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 represents approximately 2.9% of our total investment income and approximately 3% of our total portfolio fair value with the majority of our portfolio investments representing less than 1% of our income and our assets. Additional details on our investment portfolio at year-end are included in the press release that we issued yesterday but I will touch on a few highlights. Our lower middle market portfolio included investments in 71 different companies at year-end representing approximately $863 million of fair value which is greater than 25% above the cost basis.

At the lower middle market portfolio level, the portfolio's median net senior debt-to-EBITDA ratio was a conservative 2.3 to 1 or 2.4 to 1 including portfolio company debt which is junior in priority to our debt position. As a complement to our lower middle market portfolio, in our middle market portfolio we had investments in 86 companies representing approximately $587 million of fair value. And in our private loan portfolio, we had investments in 40 companies representing approximately $248 million in fair value.

The total investment portfolio at fair value at December 31, was approximately 108% of the related cost basis and we had six investments on non-accrual status, which comprised approximately 0.4% of the total investment portfolio fair value and 3.7% at cost. In summary, Main Street's investment portfolio continues to perform at a high level and continues to deliver on our long-term goals. With that, I will turn the call over to Brent to cover our financial results and liquidity position.

Thanks, Dwayne. We're pleased to report that our total investment income increased by 12% for the fourth quarter over in the same period in 2014 to a total of $43.5 million. Interest income increased by approximately $5.3 million, dividend income increased by approximately $0.1 million and fee income decreased by approximately $0.5 million when compared to the prior year. The amount of income that is less consistent on a recurring basis was approximately $1.3 million or $0.03 per share in the fourth quarter of this year, which was lower by $0.02 per share compared to the fourth quarter of 2014.

Fourth quarter 2015 operating expenses excluding non-cash share-based compensation expense increased by $2.1 million over the fourth quarter of the prior-year to a total of $13.3 million. The increase was primarily the result of a $1.5 million increase in interest expense due to a higher average outstanding balance under our revolving credit facility and the issuance of our investment grade notes in November, 2014, and approximately $1.1 million related to compensation and other general and administrative expenses.

These increases were partially offset by an increase of $0.5 million and 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 fourth quarter and continues to compare very favorably to other BDCs and other yield-oriented investment options.

Our increased total investment income and the continued leverage of our efficient operating structure resulted in a 10% increase in distributable net investment income for the fourth quarter of 2015, to a total of $30.2 million, or $0.60 per share, exceeding our recurring monthly dividends paid for the quarter by over 11%. Our external investment manager's relationship with the HMS Income Fund benefited our net investment income by approximately $1.9 million in the fourth quarter of 2015.

Through a $1.2 million reduction of our operating expenses for costs we charge to that external investment manager for services we provided to it and $0.7 million of dividend income from the external investment manager. We recorded a net realized loss of $12.3 million during the fourth quarter primarily relating to the restructuring of a private loan debt investment and the exit of a lower middle market investment.

As Vince discussed, we recorded net unrealized depreciation on the investment portfolio of $19.5 million in the fourth quarter primarily relating to $24.2 million of net depreciation on our middle market portfolio, $5.2 million of net depreciation relating to our private loan portfolio and $5 million of net depreciation relating to our external investment manager primarily due to that external manager market comparables trading down during the quarter.

This net depreciation was partially offset by net appreciation relating to our lower middle market portfolio of $10.9 million and $4 million relating to our other portfolio. Additional details for the change in our net unrealized appreciation can be found in our earnings release. Looking forward to the first quarter of 2016, we wanted to provide an update regarding the market movement relating to our middle market portfolio.

The overall market from the middle market debt investment has continued to trade down during the first quarter. Based on our static middle market portfolio as of December 31, 2015, not taking into account any new investments or sales or repayments during the first quarter and based on quoted market prices for our underlying middle market debt investments, our middle market portfolio has incurred approximately $14 million to $15 million in net unrealized depreciation to this point in the first quarter. This level of market movement is generally in line with the loan market indices during that time period.

Our operating results for the fourth-quarter of 2015 resulted in a net increase to net assets of $7.5 million, or $0.15 per share. On the capital resources front, our liquidity and overall capitalization remains strong. At the end the fourth quarter we had $20.3 million of cash, $3.7 million of marketable securities and $264 million of unused capacity under our credit facility. Today we have approximately $17.4 million of cash, $3.7 million of marketable securities and $279 million of unused capacity under our credit facility. We were also pleased that during the fourth quarter be were able to extend our credit facility by one year to maintain a five-year maturity and lower the pricing to LIBOR plus1.875%.

As we look forward to the first quarter of 2016 with more visibility than we typically have due to the later timing of this year-end conference call and considering that impact from the general seasonally lower first quarter originations and lower middle market, and the impact from two significant lower middle market debt repayments in late fourth-quarter and early first-quarter, we currently expect that we would generate distributable net investment income of $0.56 to $0.57 per share during the quarter. This estimate is $0.02 to $0.03 per share above our previously announced monthly dividends for the first quarter of $0.54 per share. With that, I will now turn the call back over to the operator so we can take any questions.

(Operator Instructions)

Bryce Rowe, Baird.

Thanks, good morning.

Good morning.

Vince, I just wanted to follow up on some of the prepared remarks. You talked about having a normal pipeline now and that you could potentially continue the strategy of seeing the middle-market portfolio shrink like it did in the fourth quarter. So, curious how you think about managing capital, managing the balance sheet, given the recent weakness in BDC stock prices? And then, how it also relates to new potential capacity with the SBA legislation that passed at the end of the year.

Sure. I will deal with the last part of the first, Bryce. I was going to cover the SBA third licensing process, but it gets a little long so I will see if I can provide an executive summary. We have begun the process for a third license. Normally, you start that by filling out a management assessment questionnaire. We did not have to do that this time for various reasons. So we went ahead and provided some preliminary information that should result in a green light letter next month. That starts a three- to six-month licensing time frame. It can be done as quickly as three months if there's no questions but there's always questions -- about your business plan, et cetera, et cetera. So, we are looking at probably a six-month time frame before we get the license.

We would intend, probably, to go ahead -- depending on what SBA wants us to do -- and capitalize a new drop-down entity with up to $75 million in equity so we can access 2 times that in SBA-guaranteed debentures. We've got about $225 million out now and the limit would be $350 million, so we couldn't quite use all the $225 million but -- all the $150 million, but it would be close. We want to go ahead and get started on that and we have gotten started on it. We're just really happy about the process and the relationship and everything we have with the officials we are working with. Obviously, what that does, and it has the effect of terming out more of our revolver. Because as we get financing down there, it's fixed-rate tenure, lower-cost financing. It would free up capacity in the revolver. The timing is great for us.

We look forward to moving through that process. In terms of overall balance sheet management in this environment, like I mentioned last quarter, Bryce, what we intend to do is take both the natural exit proceeds from our middle-market portfolio as companies naturally de-lever, repay, get acquired, go public, what have you. The average -- Nick's in here -- Nick Meserve's in here with us. Nick, the average middle-market life, historically, has only been a couple of years, right?

Yes. Somewhere between two and four years. Call it three years on average.

So, we are always getting proceeds coming in and, obviously, we can't really control the timing of the proceeds, and what we intend to do is deploy those proceeds and, in addition, if we have an opportunity to exit a name at around our costs or a little higher, we would be inclined to do that, too. And, between those two streams of cash, we should be able to adequately fund lower middle-market opportunities as they arise. And we want to keep substantial room under our revolver now. I think we've got about, what, $275 million out on it?

Yes, we have about $279 million of unused capacity.

Unused. Okay. So, that is what we intend to do. We don't want to be in a position where we have to raise equity at prices that we don't consider attractive. We are always taking an opportunistic approach there. So that is kind of what we are doing.

We feel really good about that because, based on the origination budget, I give the lower middle-market teams and the amount of projected middle-market exit activity that we have, we could go probably two or three years by rotating middle market into lower middle market and not have to raise any equity. So we're not -- we like the optionality that we have and that is what we intend to do.

But we don't intend to do, and what we can't control, is unnecessarily taking middle-market loss with respect to a name that we believe is going to repay us at par just because the loan market is trading it down generally because of mutual fund outflows. We are not -- we're disinclined to take a loss to fund a lower middle market investment. We would rather use the revolver. Or potentially the new SBA -- SBIC license.

I hope that answers your questions. That's how we look at capital allocation these days.

That's helpful. Maybe just one follow-up then. I understand you give your lower middle-market teams a budget for the year. Curious how you feel about maybe net potential growth in that lower middle-market portfolio given some of the discussions that you've mentioned around potential lower middle-market exits and even with the one that you saw earlier this year.

So, we really -- we don't have much choice but other than to focus on gross originations in the lower middle market. And we hope and expect to originate in the $250 million range in lower middle market on a gross basis in 2015. Some of that because of our exemptive relief and our subadvisory relationship with HMS will go to HMS. So, if we have gross originations on our balance sheet of a couple hundred million, that's $50 million gross per our four lower middle-market teams -- that's very consistent with what they've been able to do in the past, what we expect we'd do in the future -- and they can be selective and take their time underwriting and put good deals on the books, and that's what we expect to do there.

And on the net originations, Bryce, like SRV as an example. A guy showed up there on premises offering to buy it. It was not for sale. We weren't running a process. We were disinclined to sell it. We told him a number that would interest us in maybe transacting. He met the number and he closed, and Management wanted to sell. And, in those circumstances, if Management wants to exit and everyone feels like it's a nice valuation, we will exit. And we really can't control that.

Correct me if I'm wrong, Dwayne, but we're not initiating any exit activity or processes. They are almost always a result -- not always, but almost always a result of a third-party solicitation. Or sometimes an investment banking group coming in with one of our larger lower middle-market companies and saying, guys, you know, you can get a double-digit multiple for this particular company because it is in demand by the following strategics or private equity firms or what have you. And if that resonates with our Management we tend to go along, because generally we're not in control.

That's accurate. It will be either Management or other shareholders or a third-party that is inquiring about the opportunity which obviously puts us in a pretty good position in relation to valuation expectations and then the subsequent negotiations.

That's great. I will jump out of queue and follow up if I have more questions. Thanks.

Thanks, Bryce.

Christopher Nolan, FBR.

Hey, guys. Can you give a little color in terms of how you're seeing the economy down there developing for your lower middle-market companies? I think one of the questions I get from investors talks about how you're carrying the lower middle markets at such a premium to cost. And for this quarter we are seeing an increased divergence between the fair value and the cost. I'm trying to get some color in terms of what's driving that and what the overall environment is like down there.

I'll start. As a technical matter, when we are structuring our lower middle-market deals, Christopher, we put in, we invest equity and we invest debt. And, over time, as that debt gets repaid, $1 of repaid debt -- assuming EBITDA stays flat and assuming no multiple expansion, if things stay flat -- every dollar of repayment increases the equity value. And so, through de-levering over time, we would expect our equity to appreciate, and that is, in fact, what's happened.

When Dwayne mentions 13 companies that have been in the portfolio for over eight years, there generally -- they will have de-levered by then or brought in a bank or something else. And we expect to get equity appreciation up to the enterprise value that we had transacted at, over time, and when you have a long-enough holding period, you are having companies as far back as 2003 that have had 13 years to de-lever in, so you're -- by just mathematically, you're going to get divergence above your cost.

We are fortunate to have some companies grow their EBITDA. We are fortunate to have companies experience multiple expansion, if we were fortunate to transact it four times. We have to mark to what we think we can sell the companies at, if we were to run a process and sell the company. And so sometimes you have some appreciation with respect to multiple expansions, sometimes growth in EBITDA, and sometimes -- and almost all the time through de-levering. And sometimes the companies don't de-lever because they're growing rapidly and they're incurring CapEx or increasing investments in working capital, et cetera, or other plant sites or what have you, in which case you're generally growing the underlying EBITDA and that causes appreciation, too. Do you add anything to that, Dwayne? In terms of first part of the question? In terms of the local economy?

The only thing I would add onto that, and use Southern RV as the example, if you look at how we -- the level at which we exited southern RV, it was a significant premium to our 9/30 mark. So we were about $4.4 million. The actual transaction was in excess of our fair value at September 30. And that's evidence of a company that's in the geography you talked about. It's in Louisiana and Texas. But its business is benefiting, as we've talked about in the past, from lower oil and gas commodity prices. That, complemented by a third-party that approached the Company and really found that asset attractive, yielded a result from an actual transaction that was well in excess of how we had it valued just four months prior to that.

So I think that is evidence of some of the things we've talked about, about how we approach these companies from a valuation standpoint, but also how the -- an actual exit transaction can compare when you find a buyer out there that finds the asset or the company really attractive.

Thank you. As a follow-up, I know Brent mentioned that year-over-year dividend income increased by $0.1 million. In the press release, there is a reference to a decrease of dividend income of $0.7 million. Was there a decrease in dividend income in the quarter?

That reference in the press release is just to what we would consider the less-recurring dividend income. In total, the difference was $0.1 million, but we -- in the fourth quarter of 2014 we had approximately $700,000 of what we kind of characterized as a little bit unusual or nonrecurring, and that did not recur in the fourth quarter of 2015. That is all the press release was explaining there.

Okay. So, given the growth in the portfolio, and you are seeing $0.1 million increase in dividend, are you seeing less dividend payouts from your lower middle-market companies?

No. I think we will continue to see it grow. In fact, back to your original point in the question, if you looked at it on a normalized basis, if you will, it's really up by -- it was really up by $600,000 because, again, the fourth quarter had that unusual $700,000 dividend. So, no, we're actually seeing the dividend income continue to be strong and grow as portfolio companies mature.

And, Christopher, I mentioned this on prior calls, too. When you are investing primarily -- although not exclusively, but primarily into LLC structures, when the companies have free cash from cash flow, they will generally de-lever as opposed to pay a dividend, but they need to pay a dividend equal to roughly 40% of their taxable income so that the limit the LLC members can cover their tax liabilities on the K-1 income they get from the LLC.

So, that is a lot of the dividend income that we get. So it's really a function of the taxable income of the entity and if they buy a piece of equipment that they can expense for tax purposes, it goes down. So, taxable incomes -- booking comes hard enough to forecast, taxable income is even harder to forecast, but that is the bulk of the income -- of the dividend income that we see and we expect to continue to see. Now, if we go through a cycle where we're investing in a lot of C Corps, it will absolutely go down because you lose the tax component of the dividend income stream.

Okay. Thank you for the clarification. Thanks for taking my questions.

Robert Dodd, Raymond James.

Hi, guys. Just going back to the SBA for a second, has there been a conscious decision by your part to apply for the third license and put all of the incremental leverage in that? Because, obviously, is that a function of fund lives, or what was the decision versus putting a bit more money into SBIC II, which obviously could --?

That's a great question, Robert. What's happening as a policy matter is -- at least as it's been communicated to us by our contacts, is there has yet to be a decision made with respect to a group like us whose two current licenses, which is, as a practical matter, what you need to access the full family of funds limit of the old one at $225 million. When you have two licenses and one is a 2002 vintage and the other is a 2006 vintage, your most recent license is 10 years old.

Typically, when you're applying for a license, you give them a 10-year financial model and a 10-year business plan. And to go back now and say, oh by the way, I want additional leverage for my 10-year-old fund, forgetting about the 14-year-old fund, it raises a policy question for them that they need to resolve because it came about as a result of the legislation. So, they see kind of the unfairness with respect to a group that is younger than us: why should a group with a 2008 and a 2012 pair of licenses in terms of vintage years be able to get the additional leverage now, where someone like us can't because we've been in the program longer?

I don't think they want to penalize older groups. They have to come up with a policy decision: are they going to retroactively allow you to extend your business plan because of this unforeseen legislation, certainly unforeseen at the time you filed your business plan in 2006? And what they told us specifically, Robert, was, we're not saying you can't, but if you ask the question now -- can I get more leverage on your second fund -- before we resolve the policy issue, we might not have any question but to say no to you. And you are better off -- not having us officially said no -- you are better off either waiting or going to work on your third license, which you're eventually going to need anyway.

So that is our best understanding of what's happening. And we expect it to be resolved. And if it gets resolved favorably, since we haven't officially asked yet, we will go ask, and we'll accelerate the process and get some more leverage on our second fund.

Perfect. Really helpful. Moving on to -- on the equity values, you've pointed out for a couple of quarters now that some segments of your lower middle-market portfolio, the multiples are quite high. Obviously, with Southern RV, for example. The offers are coming in.

Is -- are you seeing, given the last few months in the equity markets, obviously the public equity markets, are you seeing any cracks in that and any beginning of perhaps maybe backing away from multiples that were being hinted at in some occasions or anything like that? Is there any stratification by industry in terms of where multiples are staying high versus starting to slip? Any color there?

I think what's definitely happening is when there is a more challenging credit environment, private equity, you know, buy-out firms that utilize leverage as part of their fundamental business plan, are either going to have to look for alternative sources of credit or bring the valuations down.

And what we're seeing now -- what we're being told now, it is very interesting, that probably would not have been the case three or six months ago -- is, with respect to this company that we are looking at and we would really like to buy it, and we're going to give you a really nice multiple for it that has not come down, gee, we would really like you to help finance that. In other words, provide a staple or something like that. And that is something that is a relatively new phenomenon.

At the same time, we're having household name private equity funds call us to join their bank group -- their first lien bank group, which historically we haven't done because the yields haven't been that attractive. When they are reaching out to BDCs to do the Term A -- well there's a revolver maybe it's technically it's a Term B, but when the private equity funds are reaching out for us to join what was typically a bank group, and these aren't huge funds, these are mid-size funds, that is something that we have not really experienced. Not in recent memory. We would have to go all the way back to 2009.

So, yes, I think credit is becoming more challenging. It is getting more expensive. And that has to ultimately precipitate in lower multiples. We haven't seen it yet but I would expect it.

I'm trying to make you answer the hard part of the question. When these multiple cycles get up, and they tend to be cycles, how long is the -- and obviously it changes by industry, group, et cetera, et cetera, and one might come when the other one's coming down, but how long is an average period for one of these high-multiple cycles within a given industry?

I'm just focused on the LBO firms, the strategic that aren't necessarily using leverage, I think what's going to happen is the strategics are going to displace the financial buyers and when leverage gets tight they really have a -- not only they have competitive advantage of being a strategic buyer with synergies but they don't have as much of an issue with leverage where -- our size companies, right? -- where a $5 million EBITDA might have grown to a $10 million EBITDA and it might attract a 10 times multiple and you're talking at the higher end of $100 million, strategic can write a check, no problem, and what we just discussed doesn't even impact them. So, that would be -- that's probably who you would be marketing to if you insisted on getting that same high valuation.

Obviously, things are going to get less competitive when the financials aren't competing with the strategics and that's how you get your highest valuation. Dwayne, would you?

No, I'm good.

You're in the middle of a couple of these now, would you?

I think you covered it well in an overall economy and industry standpoint. I do think that there still are several pockets of industries that are still very, very hot, and you continue to see high valuations there. And instances where we have seen those firms looking at LBOs, the debt availability or capacity is still very, very healthy.

So I think what you are starting to see more as some of the financing dries up a little bit, is you are starting to see further bifurcation between the haves and have-nots, as it relates to industries or types of companies and the related valuations for those different subsets.

Right. I appreciate that color a lot. Looking at the dividend income, going back to it, you mentioned the bulk of it is basically tax distributions. If I go -- that's the question, is will you give us a little bit more of a round number? I would say half looking from 2008 to 2009, which now is not yet that kind of [center], but given an income got cut in half, basically down to minimum distributions, which are the tax distributions, and the Company seemed, as you indicated back then, to hoard every other bit of cash that they didn't have to distribute.

Is a fair to say that right now maybe half of, or is it half, two-thirds, three-quarters of those dividends are kind of the minimum distributions versus, there's obviously some room where they could pull back if they get more stressed about the economic environment?

I would say that it's approximately half. We haven't really run that math. There are companies that do better and generate significant cash, and their distributions would not be limited to solely the tax distributions. There is a healthy part of that dividend income that is purely, as Vince said, a contractual tax-distribution-related activity as opposed to something that's excess distributions.

For example, the 13 companies Dwayne referenced that have been in the portfolio for eight years, it is fair to assume dividends coming from them have a fair amount of non-tax because they've de-levered. And they're taking their free cash flow and, if I think about it, we haven't really had the question but, our biggest dividend payers are the companies that have long ago de-levered and are distributing their free cash flow. They tend not to be acquisitive for whatever reason. Those are the biggest dividend payers. And virtually all the younger vintages are companies that dividends are tax-related, because they still have their debt.

It is important to note that those companies largely have either very limited debt, or, in several situations, no debt. So what we do -- and that is one of the highlights that I tried to provide earlier, with our permanent holding period in these companies, what happens over time is we convert from interest income on our debt to dividend income through our meaningful equity participation as they de-lever, because the cash flow is still there, so it is going to come out to the participants in the capital structure in one form or another.

You know, initially, for us, interest income and, to a lesser extent dividend income. And then, over the life of the investment as it matures and de-levers, that interest income is converted into dividend income.

Got it. One final one if I can. Not talking about the south really, just overall economy-wise, and obviously you've got companies operating all over the country, not just there. Are you seeing any areas at all of weakness -- and that is relative, right, whether it is coming in slightly below what they were expecting before -- is there any kind of geographic region where that is more of an issue? Or industry sector where -- other than oil, obviously?

The companies that have been most impacted are those that are having unforeseen difficulties due to the strong dollar. These are not multinational companies. All of a sudden their domestic competitors have been supplemented with foreign competitors that they have not had in 10 years, if ever.

Or some of the work they have been doing in Canada -- you don't consider them really a multinational, some of the work they're doing in Canada, your cost of goods sold are dollar denominated and your revenues are Canadian-dollar denominated and your -- huge impact to some of these companies that's really dollar driven that we have not experienced before and I doubt that they have either. So that has tended to be the most pronounced area, rather than geographic or industries per se. It's running through the impact of the strengthened dollar, and how quickly it happened, and what, if anything, they can do to adjust.

I appreciate it. Very helpful. Thanks a lot, guys.

(Operator Instructions)

Vernon Plack, BB&T.

Thanks very much. Was the spill-over income, did you give an estimate of that? Or could you give an estimate of that?

I didn't. What is it, Brent?

It's approximately $39 million, or $0.77 per share at the end of the fourth quarter.

When we -- Vernon, one of the issues about using LLC investments, they have a lot of positives, but one negative is you generally have to hold them in blockers. And SRV was held in a blocker, so its gain, is down in the blocker and did not increase our spillover unless and until -- maybe we pay a dividend out of the blocker, et cetera.

So the spillover has -- is probably gone down a little bit since the last time we talked about it. But it's in that $40 million range. There's probably visibility of three to four, two years -- roughly two years of supplemental dividends in the amount that we have now.

Okay. And, Brent, you said distributable net investment income of $0.56 to $0.57 is your thoughts in terms of Q1?

That is correct.

Okay. Thank you very much.

Doug Mewhirter, SunTrust.

Hi, good morning. I guess most of my questions have been answered. I have one follow-up. You had an unfortunate restructuring in one of your private-market deals. I'm sure the market in general was in a little bit of turmoil. Have you maybe adjusted your -- or have you changed your appetite for those private-market deals? Or maybe adjusted how you structure them or anything related to that? Either your specific experience or related to what's going on in the market now?

And maybe, as a very closely related follow-up, I know the middle market is a facility where you kind of park your money to generate sustainable dividends. But I'm sure that the market quotes have come way down and I don't know if there is any impetus to actually getting, ironically, a little more aggressive there because of where the quotations have gone.

That's a great question. In terms of the lessons learned, and I'll -- let me try to answer that because if I didn't learn the lesson, we haven't accomplished too much. I think the experience we had in some of the -- what we're calling the private loans club-type deals that are more attractive in terms of structure and rate than the middle market, they tend not to carry equity because they are in bigger deals.

And the market just doesn't -- at least maybe until recently, the market doesn't permit it. The lesson learned primarily is that we are probably going to be shying away from, or less enthusiastic -- substantially less enthusiastic about nonsponsored deals in the private loan area. Where we have had the problems -- or where it was not a unsponsored deal but it was with legacy founders, shareholders' families, et cetera, and there wasn't the institutional support or that someone had just written a nice equity check into the capital structure, that's going to be more inclined to support the company than a non-private equity sponsor deal. So I think that's the primary lesson learned.

Nick, do you have any other lessons learned?

There's a lot there. I think that's the main one is, what private loans are you looking at and making sure you do the same level of work on those deals as you would a lower market deal or a regular --

Stated another way, we would expect a nonsponsored deal to carry significantly better economics. The next part of the question, yes, absolutely. When we have -- we had a lower middle market -- we had a middle market exit yesterday. I forget, $10 million or $12 million, unforeseen, the company I think just got bought or something. The company got bought.

Yes, absolutely. If we don't need that money in the lower middle market it is very tempting to -- with some of the names that we like, we have been familiar with and they're marked down, we are absolutely reinvesting -- considering reinvesting some of those proceeds in some of the names we like that are beaten down that we don't think have credit issues. And in fact there's a lot of examples of names quoted under par whose credit has been improving. They've been de-levering and it just doesn't make any sense.

So, yes, we're inclined to do that but, for example, the way I think about it is, if we had $12 million come in, we might reinvest $8 million. And gradually take the portfolio down because we might make as much as the $8 million that we did on the $12 million that came in. So, that's been our attitude as opposed to taking the $12 million and reinvesting maybe the whole thing.

Okay. Thanks, that's all my questions.

Mickey Schleien, Ladenburg Thalmann.

Yes, good morning, gentlemen. I want to follow up on what you just said about some of these marks not making sense. I agree. I've been really struggling trying to understand what the markets are telling us because we've seen this dramatic weakness in the more liquid credit markets and in the equity markets.

But companies like yours and your competitors generally are saying that borrowers are doing relatively well and -- very big picture, if we think about it notwithstanding the impact on your neck of the woods, the decline in the price of oil is a net positive for the US economy and the slowdown in China in and of itself does not seem to -- wouldn't seem to have a meaningful impact on US companies that you lend to. So, I like your thoughts on where we are in the credit cycle. And are the markets telling us something that we don't know or is this just not a very appealing opportunity?

Well, Mickey, I think the biggest impact, at least that we can figure out is, we get a report -- you might, as well -- we get a report every day from S&P's LCD service loan, loan commentary and data service, about the estimates from other sources mutual loan, mutual fund out flows -- you know these are open-end funds where you can redeem every day at NAV and they have been running about $150 million a day --

Give or take.

-- almost every day, probably for 190 out of the last 200 days. It's a phenomenal exit in those -- so those loan fund managers, as I understand it, don't hold a bunch of cash for redemptions. So they've got to sell liquid names to raise the cash to fund redemptions. It kind of is reminiscent of the credit crisis with hedge fund redemptions or, et cetera. And then, at the same time you might have some CLOs if you have pressure, having to sell certain names based upon ratings actions or something like that.

And so, if they all tend to be selling at the same time and there aren't buyers, that's the technical supply/demand imbalance and I think that's what's causing the marks. There isn't any buyers when there are net sellers to raise funds to redeem and I think, ultimately, that provides more and more opportunity. The more interesting question to me is, where are the retail invest -- I mean what advice are they getting to sell floating-rate senior secured loans and buy high yield that is fixed rate in an increasing -- generally increasing rate environment.

People think -- I mean, I don't understand the advice but they're doing it and they've been doing it consistently. And that capital is going elsewhere or sitting on the sidelines or something. But that's what's driving down the marks, rather than credit-specific issues. And that's why you're getting the inconsistency among the [help] -- the fundamental credit metrics of the companies versus what the loan market is -- the mark-to-market is telling you.

Appreciate that, Vince. Just a couple more straightforward questions. Can you give us your view on the Department of Labor decisions regarding fiduciaries and its impact on the growth at Heinz?

My last question is, given the valuation of Main Street relative to the group, can you talk about your appetite for potentially using your stock as a currency to go out and perhaps buy a portfolio of loans that are probably, based on what we just talked about, a pretty decent portfolio but the valuations don't reflect that?

Sure. The first part of the question was --

Department of Labor.

Absolutely. So, I had to learn about this the hard way when I was testifying for the industry for the SBIA at the House committee that deals with the BDC. We had thought we were testifying on the BDC legislation and I'm getting questions from the members about this Department of Labor. I had talked to some of our brokerage firms like yours about the impact of this on our shareholders -- in other words, are we widely held by 401(k)s and IRAs, et cetera. And we're not, to any material degree.

And so, it could impact the publics, and I was inquiring about that six, nine months ago. As part of it, too, I learned a lot more about the typical shareholder of a non-traded BDC on the retail side tends in fact to be, or which some kind of a qualified retirement plan, and this will absolutely impact them if these Labor Department regulations or rules come out and prohibit a commissioned product being sold to a retirement plan by someone that ends up having to act as a fiduciary.

If that provision, which I think has been proposed, if that stays and doesn't get modified or sub some kind of sunset provision or what have you, that will absolutely impact the non-listed industry, be it REITs, BDCs or anything else that is in that industry. They are very concerned about that. A lot of lobbying is going on. I think there is even a bill in the House introduced, if not passed, to try to prevent that rule from becoming -- from going effective. So, yes, it is very problematic to the non-listed industry. As I understand it.

Christopher Testa, National Securities Corporation.

Hi, good morning. Thank you for taking my questions. Just with the fee income this quarter, how much of that was related to the prepayment?

I want to say that was approximately $1.2 million of our total investment. Is that right?

That's right.

Okay. And, with the (multiple speakers). I'm sorry?

I was going to say that's our total investment income. Kind of the accelerated prepayment, so some of that, a little bit of that, is interest and some of it is fees but that's the general number for the total.

It's not huge. It's not one investment.

No. Absolutely.

It's all activity.

All activity, absolutely, across the portfolio.

And I think I missed this at the beginning of the call. How much of the unrealized marks were from technical depreciation from spreads widening?

We are estimating at least 40%. And, if you think about it, if it is a credit-related issue where the loan should be quoted at 80% under a normal market, it's probably quoted at 60%, so even half of that it's probably technical, if you follow me. So our 40% number doesn't even really consider that, so that's why I said at least 40%.

Okay. And the ones, the roughly 60% that is not technical, is that primarily being impacted on the middle market loans?

No, that would be companies that have deteriorating credit metrics. Their EBITDA is declining --

No, I understand. I meant -- but is most of that where you're seeing the negative EBITDA trends, is that in the middle market, the lower middle market? Where are you seeing the majority of that coming from?

It was almost all middle market.

All middle market. Okay. And just, Vince, you had mentioned you were seeing better structures with the investments. If you could give some color on what exactly you're seeing, whether they want lower attachment-point leverage, you're able to get more covenants and cash flow sweeps, just any color there would be appreciated.

Well, generally we are looking at -- we're being able to charge a higher rate and also we're able to put less leverage on the company so we're loaning not as far into the enterprise value and receiving compensation for that exposure that is increasing. It's the best of both worlds.

And that's generally been the case with the real small companies. It is now the case with even the larger companies. And, in our pipeline, we have some reasonably large companies, for us, where the price talk is up 100, 200 basis points or higher from what it might've been six or nine months ago. And the leverage is maybe a turn less, Dwayne?

I think that's right.

It's a great environment to have permanent capital. That's the problem with the industry. What's bad for your balance sheet is good for your income statement, and vice versa.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the floor back over to Management for closing comments.

Again, thank you for joining us today. We will see you again in a couple months. Bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.