Business Context and Reporting Period
Main Street Capital Corporation (MSCC) is an internally managed business development company (BDC) and Small Business Investment Company (SBIC) focused on providing customized debt and equity financing to lower middle market (LMM) companies. This Form 10-Q covers the quarterly and six-month periods ended June 30, 2011.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Investment Income | $29.5 million | $15.8 million |
| Net Investment Income | $17.0 million | $7.9 million |
| Net Realized Gain (Loss) | $0.25 million | ($1.4 million) |
| Net Change in Unrealized Appreciation | $14.0 million | $7.3 million |
| Net Increase in Net Assets from Operations | $28.1 million | $18.3 million |
| Net Asset Value (NAV) per Share | $14.24 | $12.21 |
| Total Assets | $617.3 million | $448.9 million (Dec 31, 2010) |
| Total Liabilities | $282.6 million | $198.9 million (Dec 31, 2010) |
| Cash and Cash Equivalents | $14.1 million | $22.3 million (Dec 31, 2010) |
| Dividends Paid per Share | $0.77 | $0.75 |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased 86% year-over-year, driven by an $11.1 million increase in interest income and a $2.3 million increase in dividend income due to a larger portfolio and higher average debt levels.
- Expense Increase: Total expenses rose 59% to $12.5 million, primarily due to higher interest expense ($2.1 million increase) from additional SBIC debentures and Credit Facility borrowings, and increased operating expenses.
- Portfolio Expansion: Total portfolio investments at fair value grew from $348.8 million at year-end 2010 to $471.7 million at June 30, 2011. The company funded $116.1 million in new portfolio investments during the period.
- Capital Raising: In March 2011, MSCC completed a public offering of 4.025 million shares, raising approximately $70.3 million in net proceeds.
- Debt Capacity: In June 2011, the Credit Facility was expanded from $100 million to $155 million, with maturity extended to September 2014.
Outlook, Risks, and Management Commentary
- Dividend Policy: The company declared monthly dividends of $0.13 per share for the third quarter of 2011. In August 2011, dividends for the fourth quarter were declared at $0.135 per share, representing an 8.0% increase over the prior year's fourth quarter.
- Portfolio Quality: The weighted average investment rating of the portfolio improved to 2.1 (on a 1-5 scale) from 2.3 at year-end 2010. Two investments remain on non-accrual status, representing approximately 1.6% of the total portfolio at fair value.
- Liquidity: As of June 30, 2011, the company held $134.4 million in cash, marketable securities, and idle funds. It maintains compliance with all financial covenants, including an asset coverage ratio of at least 2.5 to 1.0.
- Risks: Risks include the illiquid nature of LMM investments, potential deterioration in portfolio company performance due to economic conditions, and the reliance on fair value estimates for a significant portion of assets.
- Recent Activity: In July 2011, the company completed a $6.5 million investment in SYNEO, LLC, facilitating a merger between two existing portfolio companies.
Investor Verification Checklist
- Verify the sustainability of the 86% year-over-year increase in investment income given the higher leverage costs.
- Confirm the status of the two portfolio investments currently on non-accrual status and potential impact on future income.
- Review the utilization of the expanded $155 million Credit Facility and the company's ability to maintain the 2.5:1 asset coverage ratio.
- Assess the impact of the $3.2 million deferred tax provision on net assets, noting it is a non-cash expense related to taxable subsidiaries.
- Monitor the company's ability to continue issuing shares above NAV, as the stock price ($18.95) significantly exceeded NAV ($14.24) at period end.