Main Street Capital Corporation — Q3 2022 Form 10-Q Summary
Business context and reporting period
Main Street Capital Corporation is an internally managed business development company and regulated investment company focused on customized debt and equity financing for lower middle market, private loan and middle market companies. The unaudited filing covers the quarter and nine months ended September 30, 2022, with comparison to the corresponding 2021 periods and December 31, 2021 for balance-sheet data.
Financial performance and condition
| Metric | Three months ended September 30, 2022 | Nine months ended September 30, 2022 | Comparable change |
|---|---|---|---|
| Total investment income | $98.4 million | $263.0 million | +28% and +27% |
| Net investment income | $62.4 million; $0.83 per share | $169.4 million; $2.31 per share | +27% and +29% |
| Distributable net investment income | $65.8 million; $0.88 per share | $177.5 million; $2.42 per share | +26% and +27% |
| Net realized gain | $5.0 million | $3.3 million | Lower than prior-year periods |
| Net unrealized appreciation/(depreciation) | $(10.1) million | $(19.9) million | Prior-year periods had appreciation |
| Net increase in net assets from operations | $55.3 million; $0.74 per share | $135.3 million; $1.84 per share | $(28.6) million and $(101.1) million |
Investment income growth was led by interest income, which increased 49% in the quarter and 42% for the nine months, reflecting a larger debt portfolio and higher floating-rate indices. Dividend income declined 16% in the quarter and 9% year to date, primarily because certain prior-period dividends were less consistent or non-recurring. Fee income increased 19% in the quarter and 38% year to date.
Total expenses increased 31% to $35.9 million in the quarter and 24% to $93.6 million for the nine months. Interest expense rose 44% in the quarter and 29% year to date due to higher borrowings and rising rates. Net investment income represented approximately 63% of quarterly investment income and 64% for the nine-month period.
At September 30, 2022, total assets were $4.135 billion, including investments at fair value of $3.973 billion. Net assets were $1.979 billion, or $25.94 per share, compared with $1.789 billion and $25.29 per share at December 31, 2021. The portfolio comprised 75 LMM companies with $1.911 billion of fair value, 87 private loan companies with $1.477 billion, and 33 middle market companies with $354.3 million. Approximately 96% of total assets were investment portfolio assets, and substantially all investments were Level 3 fair-value measurements.
Cash and cash equivalents were $61.2 million. For the nine months, operating activities used $257.3 million of cash, primarily due to $911.3 million of portfolio investments, while financing activities provided $285.9 million. Net cash increased $28.5 million to $61.2 million. Cash interest paid was $51.3 million and taxes paid were $4.9 million.
Debt, liquidity and distributions
- Total debt at recorded value was $2.038 billion, consisting of $561.0 million under the Credit Facility, $500.0 million of 3.00% notes due 2026, $450.0 million of 5.20% notes due 2024, $350.0 million of SBIC debentures and $185.0 million of 4.50% notes due December 1, 2022.
- The Credit Facility had $920.0 million of commitments, $561.0 million drawn and $359.0 million of unused capacity at September 30, 2022. It matures in August 2027 and had an interest rate of 4.5% at quarter-end.
- Main Street reported compliance with Credit Facility and note covenants. Its BDC asset coverage ratio was 216%, above the applicable 150% requirement after stockholders approved reduced asset coverage.
- Regular monthly dividends paid were $0.215 per share for each month of the third quarter, or $0.645 for the quarter. A $0.10 per-share supplemental dividend was also paid during the quarter.
- During the nine months, Main Street raised $139.2 million net through its ATM program and approximately $55.1 million net through an August public equity offering.
Material changes versus prior comparable periods
- Net investment income increased substantially, but total operating results declined because 2022 included net unrealized depreciation of $19.9 million for the nine months versus $117.1 million of unrealized appreciation in 2021.
- Net asset value per share rose from $25.29 at year-end 2021 to $25.94 despite the depreciation and dividend distributions, helped by accretive equity issuance above NAV.
- The investment portfolio expanded materially: fair value increased from $3.562 billion at December 31, 2021 to $3.973 billion at September 30, 2022, while the number of LMM and private loan companies increased.
- Non-accrual investments increased to 11 from nine at year-end 2021, representing 0.8% of portfolio fair value and 3.7% of cost, versus 0.7% and 3.3%, respectively.
- Unfunded commitments totaled $294.9 million, including $270.4 million of loan commitments and $24.5 million of equity commitments.
Outlook, commentary, risks and unusual items
Management highlighted continuing risks from inflation, supply-chain disruptions, labor and material constraints, higher capital costs, geopolitical events, COVID-19 effects and potential recession. These factors may impair portfolio-company earnings, debt-service capacity, distributions and investment valuations. Management stated that the duration and magnitude of these effects could not be predicted with certainty.
The portfolio is predominantly floating-rate on the asset side: 76% of debt investments at cost had floating rates, while 73% of debt obligations were fixed-rate. The filing estimates that a 100-basis-point increase in base rates would increase annualized net investment income by approximately $17.5 million, or $0.23 per share, assuming no changes in portfolio or borrowings. Main Street had no interest-rate hedges.
Fair values rely heavily on management judgments, projected results, discount rates, EBITDA multiples and expected principal recoveries. The filing cautions that realized values may differ materially from reported fair values. PIK interest and cumulative dividends are non-cash sources of income that may still need to be distributed to maintain RIC status; PIK interest represented 1.3% of nine-month investment income.
Subsequent to quarter-end, Main Street declared a $0.10 per-share supplemental dividend payable in December 2022 and regular monthly dividends of $0.225 per share for January, February and March 2023, totaling $0.675 per share for the first quarter of 2023. The filing reports no material changes to previously disclosed risk factors and no current litigation expected to materially affect financial condition or results.
Important facts for investors to verify
- Ability to refinance or repay the $185.0 million of 4.50% notes due December 1, 2022 and manage the $450.0 million of notes due 2024.
- Trends in non-accrual investments, credit quality, principal recoveries and the $294.9 million of unfunded commitments.
- Sustainability of net investment income and dividends as borrowing costs rise and non-recurring dividend and fee income changes.
- Sensitivity of NAV and earnings to Level 3 valuation assumptions, including discount rates, EBITDA multiples and recovery percentages.
- Actual effects of inflation, recession, supply-chain and labor pressures on portfolio-company performance and fair values.
- Availability and cost of future debt and equity capital, including unused Credit Facility capacity and ATM issuance capacity.
- Final taxable income and distribution tax attributes, which the filing identifies as estimates until the annual tax return is completed.